Monday, March 17, 2014

Has the Wile E. Coyote Moment Been Triggered by China and Russia?

I have been pounding on the table that the current bubble dynamics will evolve from the periphery-to-the-core sequence. Despite denials by the mainstream that there will be no contagion from the recent emerging market meltdown, I keep pointing out that changes in prices will affect people’s preferences, knowledge and economic calculation and thus eventually expressed through the allocations of resources. And the impact of such derivative actions would be to reverberate on prices, thus the slomo or gradual transition or the market’s time consuming process. Politics is just one avenue expressive of the response from the recent emerging market crisis.

I share fund manager Doug Noland opinion[1] that emerging markets, who had been last shoe to drop in the 2007-8 global crisis, has become the US crisis equivalent of the global subprime.

Here is what I wrote about the potential transmission link from Emerging Markets to Developed economies[2].
Even when the exposure would seem negligible, if the adverse impact of emerging markets to the US and developed economies won’t be offset by growth (exports, bank assets and corporate profits) in developed nations or in frontier nations, then there will be a drag on the growth of developed economies, which would hardly be inconsequential. Why? Because the feedback loop from the sizeable developed economies will magnify on the downside trajectory of emerging market growth which again will ricochet back to developed economies and so forth. Such feedback mechanism is the essence of periphery-to-core dynamics which shows how economic and financial pathologies, like biological contemporaries, operate at the margins or by stages.
I recently pointed to the ongoing slowdown in exports of major exporting nations as reinforcing signs of a significantly slowing global economy[3]

More importantly the biggest emerging market, the Chinese economy has been showing signs of fatigue from credit based economic inflationism. Aside from the February export collapse, recently the growth rate of Chinese retail sales (slowest pace since 2004), fixed asset investment (13-year low) and industrial production (weakest start since 2009) has fallen significantly[4].

In addition, prices of Dr. Copper have recently crashed and so with signs of renewed weakening of the Baltic Dry Index. Meanwhile the Chinese yuan continues to weaken vis-à-vis the US dollar, this should continue to put pressure on firms with US dollar indentures.

When I said that the bubble bust process will undergo first, financial market disruptions, then liquidity squeeze and lastly either we see economic crisis trigger a financial crisis or vice versa, we can see this progression in China.

From Bloomberg[5]:
Chinese steel companies, the world’s largest, helped drive a regional industry benchmark index to a seven-month low as concern builds that some mills face financial difficulty amid a government credit squeeze…

Closely-held steel mills in China are struggling to get funding at the moment and that’s led to panic selling of iron ore, according to Morgan Stanley. The nation’s top banking regulator said yesterday strict credit guidelines will be imposed on mills that were big polluters and users of energy.
The sharp reduction in the access of credit will magnify on China’s credit problems. On the other hand, amplified credit problems will mean a spreading of losses in companies and more defaults which should translate to a pronounced economic slowdown. For an economy that has been horribly distorted by both inflationism and myriad of political interventions or financial repression, I doubt if the transition to clear such existing credit excesses will be orderly. 

The Shanghai composite lost 2.6% this week but this would have been even deeper whereas not from the growing expectations by mainstream that the Chinese government will be conducting a stimulus. China’s stock market rallied as Premier Li spoke in the annual meeting of the National People’s Congress[6]. This reaction is pure Pavlovian. The mainstream has been so desperate as to fail to recognize that China’s current debt problem has been an offspring of the 2008 stimulus.

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If you see in the above charts, the German Dax has broken two support levels. UK’s FTSE seems headed in Germany’s path and the Nikkei crashed 6.2% this week.

A note on Japan. I wrote that “a bet on the Nikkei is a bet on the direction of stimulus”[7]. Japan’s sales taxes is about to come online in April. I believe that this will backfire on the struggling Japanese economy also heavily distorted by interventions and inflationism. The market seems to recognize this, but has latched on to the Bank of Japan for short term panacea. This week, the Bank of Japan refused to accommodate[8] their expectations for expanded stimulus and thus the 6.2% crash. The reaction is pure Pavlovian

And out of desperation to raise wages, the Japanese government has embarked on ridiculing or putting to shame on public, companies that refuse to hike pay[9].

Such reaction reminds me of former US President Franklin D. Roosevelt’s response to the Great Depression by implementing the New Deal which forced companies to pay salaries higher than should be.

In a study by two UCLA professors Harold L. Cole and Lee E. Ohanian they discovered that artificially elevated wages then resulted to substantially higher employment[10].
President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension reducing employment and demand for goods and services. So he came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies.
So China won’t just be the culprit to more financial tremors, expect Japan’s added role post-sales tax April.

Yet today’s pressures come from another front: the standoff by Russia and the West via the Ukraine political crisis.

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The US Federal Reserve reported a record $104.5 billion plunge in US government bonds held in custody by them in favor of foreign central banks and other overseas investors. Rumors have floated that the Russian government, in fear of economic sanctions by the West, may have initiated a move out of the US Federal Reserve[11].

On the other hand, other reports say that out of the same fear of economic and financial sanctions, Russian investors have been pulling out of Western banks[12]. So aside from the impact of China, possibly part of the ongoing market liquidations may have emanated from Russians bailing out of Western markets and banks. 

So has China and Russia triggered the spreading of the Wile E. Coyote moment?

We will see.

Yet by the second quarter, Japan may play a bigger role in the unfolding saga.

So if my suspicions will hold true then we are likely to see permeation and intensification of financial market jitters and economic earthquakes on a global scale as time goes by.

It seems time to batten down the hatches.



[1] Doug Noland EM, Hedge Funds and Corporate Debt Credit Bubble Bulletin February 7, 2014 PrudentBear.com



[4] Bloomberg.com China Data Show Economy Cooling March 13, 2014



[7] See Japan’s Ticking Black Swan February 24, 2014




[11] Wall Street Journal Money Beat Blog Did Russia Just Move Its Treasury Holdings Offshore? March 14, 2014

Friday, March 14, 2014

Ireland’s Parallel Universe

By parallel universe, I imply of a wide chasm in the performance between the economy and the financial markets.

First economic performance.

Ireland’s economy has been stagnating.

From the Irish Times:
The Irish economy unexpectedly shrank last year on the back of a sharp fall-off in net exports linked to the so-called pharma patent cliff.

Preliminary figures from the Central Statistics Office (CSO) showed gross domestic product (GDP) contracted by 2.3 per cent in the fourth quarter and by 0.3 per cent for the year as a whole.

Published on the same day as the State’s first full return to the bond markets, the figures represent something of a setback for the Government’s recovery plans and reflect the volatile nature of Ireland’s post-bailout economy.

The Department of Finance had predicted GDP growth of 0.2 per cent for 2013 on the back of a surge in employment growth which saw the creation of 60,000 new jobs.

Gross national product (GNP), which screens out the effects of multinational operations, however, increased by 3.4 per cent last year and by 0.2 per cent in the final quarter.

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Here is the Q-on-Q GDP chart

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And here is the annualized GDP chart 

Whether q-q or y-y, Ireland’s economy has been laboring her way out of the recession.

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Meanwhile, Ireland’s Non Performing loans stood at 18.7% of overall bank loans in 2012 according to the World Bank. For 2013, credit ratings agency the Fitch estimates Ireland’s NPLs at 17%.

The point of the above is to exhibit that there has hardly been any material economic recovery and that Ireland still has a significant debt burden.

But financial markets says ‘don’t worry be happy’.

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Yields of Irish 10 year bonds has been in a collapse since 2011. This means bonds have rallied strongly in the face of rising NPLs.

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And Irish stocks, as measured by the Irish Stock Overall Index,  have not only been ascendant rising from 2012, current gains have been accelerating. This comes even amidst a stagnating economy.

More proof of that global financial markets have been a central bank sponsored Truman Show.

Thursday, March 13, 2014

Thai Central Bank Hopes that More Bubble Blowing will Solve Political-Economic Woes

Thailand’s politics has been in a mess since the last semester of 2013

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But politics has only been an aggravating factor to what has been a slowing statistical economy for Thailand (annualized). 

Except for the anomalous one time spike, Thailand’s economy has been largely performing below the average at 3.77% (calculated by tradingeconomics.com based from 1994 until 2013) from 2012-2013. The World Bank says that Thailand economy grew by only 3% in 2013 

So given the growing slack in the economy worsened by a political crisis that has rendered the incumbent government paralyzed, what recourse has the Bank Thailand recently taken to provide cushion to her economy?


After holding policy steady for months as the country’s disintegrating political situation took its toll on the economy, the Bank of Thailand finally reached its breaking point Wednesday, cutting overnight rates by a quarter-percentage point in a close vote.

Wednesday’s decision takes the benchmark rate to 2.0% from 2.25%, and comes as the BOT said economic growth won’t even reach the central bank’s 3% target this year – after it was forecast at 4% as recently as November. Economic growth already has slowed from 6.5% in 2012 to 2.9% in 2013, bottoming out at just 0.6% in the final quarter of the year.

That illustrates the depths to which Thailand’s economy has sunk as massive demonstrations seeking the overthrow of Prime Minister Yingluck Shinawatra enter their fifth month.

Price pressures were seen as one reason the BOT remained on hold in preceding months: While inflation wasn’t high enough to warrant a rate increase as in India or Indonesia, it wasn’t quite benign enough to allow the central bank to ease policy either.

As I pointed out in January 2013, Thailand has a credit bubble.

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And to give you an update on what Thailand’s low interest rates regime have engendered aside from a stagnating economy…

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Loans to the private sector continues to massive inflate. In my estimates, through 2013 until January 2014 credit growth ballooned by about 9%

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Such rate of growth has likewise been reflected on money supply growth. Thailand’s M3 jumped by an estimated 9.8% over the same period. 

Thailand credit and money growth has been thrice the rate of the economic rate of growth. So the question is where has all these money creation been spent or invested? 

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I have no updates on the Thailand’s housing statistics. But the World Bank figures gives some clues.  Growth in the construction growth sector remains positive but may be on a seminal downtrend. 

On the other hand, note that growth in real investment and equipment has been on a decline since the 4Q of 2012 and has turned negative during the 2nd Q of 2013. In other words, Thailand’s economy has been materially slowing even prior to the outbreak of the political crisis. 


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Additionally while growth in housing loans appear as slowing down, % of housing loans relative to the economy remains at near the record 80% level. 

And the more important factor has been the surge in Non-performing loans (NPL) from 2012-2013.

And Thailand’s slowing exports as I noted earlier, has only swelled her balance of trade deficit and shrank her current account surplus. And this implies that part of her trade deficit may have been financed by the growth in private sector debt.

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And it is not just the private sector, Thailand government’s external debt has ballooned by about 35% since January 2012 through the 3rd Q of 2013.

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The other possible channel for excess credit growth and money creation has been to balloon a massive denial rally in Thailand’s stock market as measured by the SET (stockcharts.com) since the post New Year crash of 2014.

In sum, Thailand’s central bank intends to prevent a surge in NPLs from becoming a systemic risk by keeping interest rates low. The Thai central bank may also be desiring to keep the construction boom (or even the stock market boom) afloat in order to maintain the picture of positive statistical growth.

The question is how feasible and lasting will this be? Without productive growth, there will be lesser resources generated to pay for existing liabilities. Worst, zero bound rates will induce more borrowing, which should add to Thailand’s debt burden.

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Thailand’s currency, the baht, vis-à-vis US dollar has recently been rallying and so as with her bonds whose yields have reached the lows of post-taper turbulence in June 2013. 

The rallying baht and sinking yields has given the impression of a relief in “inflation” pressures, thus justifying the trimming of official rates.

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But my guess is that Bank of Thailand (BoT) may have partly used her foreign currency reserves to attain such picture of calm. The BoT’s forex reserves has shrank from July 2013 which adds to the earlier decline.

In short, the BoT applied financial band aids to what has been a debt cancer.

Nonetheless with even more borrowing for households to speculate, which will be also manifested in her elevated money supply figures, the pressures on the baht will resurface in the near future, and so will such be reflected on the inflation data as well as in her bonds via rising yields.

And Thai’s debt problem will be further exposed by higher bond yields in the developed economies or even by a slowdown or a meltdown in China.


As one would note, like all the rest of her peers, the Thai central bank thinks that policies that promote and support debt will solve their nation's economic problems. The problem is these officials keep applying the same panacea without generating the desired results, so they keep on adding more. Either this or they are just kicking the proverbial can down the road.

Yet the problem with “kick the can” policies is that this only increase the imbalances in the system that magnifies the potential harm from a blowup. 

For central banks, one must provide more alcohol to solve the problem of alcoholism.


Quote of the Day: The artificiality of today’s markets is pure Truman Show

Welcome to “The Truman Show” market. In the 1998 film by that name, actor Jim Carrey is ignorant of the fact that his life is a hugely popular reality show. His every action, unbeknownst to him, is manipulated while being broadcast to millions of TV viewers worldwide. He seemingly lives in an idyllic seaside community where the manicured lawns are always green and the citizens are always happy. These people are, of course, actors. The world Truman inhabits turns out to be phony: a gigantic sound stage created for a manufactured “reality.” As Truman starts to unravel the truth, his anger erupts and chaos ensues. 

Ben Bernanke and Mario Draghi, as in the movie, are the “creators” who have manufactured a similarly idyllic, if artificial, environment for today’s investors. They were the executive producers of “The Truman Show” of 2013. A global audience sat in rapt attention before this wildly popular production. Given the U.S. stock market’s continuing upsurge, Bernanke is almost certain to snag yet another People’s Choice Award for this psychological “thriller.” Even in “The Truman Show,” life was not as good as this for investors. 

But there is one fly in the ointment: in Bernanke’s production, all the Trumans – the economists, fund managers, traders, market pundits – know at some level that the environment in which they operate is not what it seems on the surface. The Fed and the Treasury openly discuss the aim of their policies: to manipulate financial markets higher and to generate reported economic “growth” and a “wealth effect.” Inside the giant Plexiglas dome of modern capital markets, just about everyone is happy, the few doubters are mocked and jeered, bad news is increasingly ignored, and markets go asymptotic. The longer QE continues, the more bloated the Fed balance sheet and the greater the risk from any unwinding. The artificiality of today’s markets is pure Truman Show. According to the Wall Street Journal (12/20/13), the Federal Reserve purchased about 90% of all the eligible mortgage bonds issued in November.

Like a few glasses of wine with dinner, the usual short-term performance pressures on most investors to keep up with the market serve to dull their senses, which makes it a bit easier to forget that they are being manipulated. But what is fake cannot be made real. As Jim Grant recently noted on CNBC, the problem is that “the Fed can change how things look, it cannot change what things are.” According to John Phelan, a fellow at the Cobden Centre in the U.K., “the Federal Reserve has become an enabler of the financial havoc it was designed (a century ago) to prevent.”  

Every Truman under Bernanke’s dome knows the environment is phony. But the zeitgeist so so damn pleasant, the days so resplendent, the mood so euphoric, the returns so irresistible, that no one wants it to end, and no one wants to exit the dome until they’re sure everyone else won’t stay on forever. 

A marketplace of knowing Trumans seems even more unstable than the movie sound stage character slowly awakening to reality. Can the clued-in Trumans be counted on to maintain their complicity or will they go off-script? Will Fed actions reliably be met with the desired response? Will the program remain popular? Could “The Truman Show” be running out of material? After all, even Seinfeld ended. 

Someday, the Fed’s show will be off the air and new programming will take its place. And people will debate just how good it really was. When the show ends, those self-deluded Trumans will be mad as hell and probably broke as well. Hopefully there will be no sequels.
(bold mine)

This is from investing guru Seth Klarman in his Baupost Group's latest letter as excerpted by the Zero Hedge

And that someday, bubble worshipers will be asking "how did it come to this?"

Record US Stocks Drive Wealth Inequality

According to a recent poll, US stocks at record levels seems like a nonevent for the average Americans.

From Bloomberg: (bold mine)
More than three-quarters of Americans say the five-year bull market in U.S. stocks has had little or no effect on their financial well-being, according to a Bloomberg National Poll.

Seventy-seven percent of respondents dismissed the 176 percent rise in the Standard & Poor’s 500 Index (SPX) since its March 9, 2009 financial crisis low, according to the poll, taken March 7-10. Barely one in five -- 21 percent -- said the market’s gains have made them “feel more financially” secure.
Divergent distribution of equity ownership equals asset based wealth inequality, from the same article.
The poll’s findings reflect the concentration of financial assets among better-off Americans. About half of Americans own stock, either directly or through retirement accounts, according to the Fed’s 2010 Survey of Consumer Finances.

Stock ownership that year fell to levels not seen “since the late-1990s,” the Fed said. Even those who participate in financial markets through 401(k) retirement plans often have only modest sums invested. Half of Fidelity Investments customers have less than $25,600 in their 401(k) accounts, according to Michael Shamrell, a spokesman…

The wealthiest 10 percent of families earn 11 percent of their annual income from capital gains, interest and dividends, according to the Fed. The poorest three-quarters get less than 0.5 percent of their income from such sources.

“Many moderate- and middle-income households have seen little benefit from recent stock market gains and are still grappling with the implications of home prices that, despite recent progress, remain well below their previous highs,” the White House economic team wrote in a March 10 blog post.
Main street sentiment versus Wall Street:
The poll also found continuing unhappiness with the direction of the country and ebbing optimism about the recovery’s staying power. By 62 percent to 30 percent, respondents say the nation is headed in the wrong direction.
Wow. The above dynamics, from the redistributive “inequality” effects from a central bank engineered stock market-real estate boom to the gaping divergence of public sentiment (main street sees little economic benefit as against Philippine version of Wall Street’ worship of bubbles) loudly resonates on the Philippines. 

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Yet booming stocks in the US has led to a record rise in household assets. 

Austrian economist Joseph Salerno at the Mises blog remarked “total net worth of U.S. households has set an all time record in 2013 in terms of both nominal and constant dollars. In 2013 alone , total net worth climbed by $10 trillion from $70.86 to $80.66 trillion, the largest annual increase in household wealth in U.S history. More to the point, in 4Q 2013 household wealth adjusted for inflation — i.e., the constant-dollar value of financial assets plus the value of residential real estate net of all debt owned by U.S households–shattered the old record set in 1Q 2007 at the height of Greenspan’s bubble economy.”

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As noted in poll, only about half of US households have exposure on US stocks, yet level of ownership has inequitably distributed. Based on US census data as of 2007, the bigger the income bracket the larger the scale of stock market ownership (red arrow). The lowest 3 percentile, with about 35-39% in stock ownership echoes on the Bloomberg poll where “stocks has had little or no effect” on them .  

Yet record stocks have not only has “failed abysmally to stimulate consumer spending, job creation, and economic growth via the “wealth effect” beloved by Greenspan and Bernanke. Ironically, what Fed policy under Bernanke has done is to put the U.S. economy in the improbable position where another financial crisis appears likely to occur without first producing even the illusion of prosperity and economic growth among the average American” according to Professor Salerno, but also driven the wedge of the wealth gap even wider, “Last week it was reported that the 167,669 ultra-high net worth individuals (UNHWI), a category covering those people who have accumulated over $30 million in net assets excluding their principal residence, experienced an increase in their combined net worth to $20.1 trillion in 2013, up from $19.5 trillion in 2012. In 2013, the UHNWI, most of whom are from Asia or the Middle East, were busy plowing their wealth into global commercial real estate. They spent a combined $11.2 billion on hotels, office buildings, warehouses, and shops, up from $7 billion in 2012. The average price of an office property rose from $63.9 million in 2012 to $162.7 million in 2013. The latter price is more than double the price of an office property at the height of the bubble in 2007.”

And not only has the Fed subsidy benefited the wealthy asset holding class, this has supported Wall Street through above average pay and fat bonuses, where the latter has reached 2007 levels. 

'Fat Bonuses" from Reuters:
The average bonus on Wall Street jumped 15 percent last year to the highest level since the 2008 financial crisis and was the third largest on record, New York State's budget watchdog said on Wednesday.

The cash bonus pool swelled to $26.7 billion in 2013, pushing the average cash bonus to $164,530, a post-2008 high in a industry shrunk by the financial crisis, according to the New York state comptroller's annual estimate.

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The Zero Hedge notes (bold mine) that the “Average compensation for securities industry professionals in New York City ($360,700) were 5.2 times greater than the rest of the private sector ($69,200).” [bold original]

So Fed policies have been funneling money from the main street into the asset markets and Wall Street which underscores the redistributive wealth effects from the non-asset holders (debased currency holders and savers) to the asset holders, the latter financed by debt.

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And more signs of déjà vu in the context of pre-crisis mania, as IPOs with negative earnings soar to its highest since Feb 2000, again from Zero Hedge.

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And like all mania anchored on “this time is different” as I pointed out last week, add to this the record levels of penny stocks traded.

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And this as leverage loans flies to the moon (from Acting Man). Phenomenal.

Record credit used to push up stocks to record levels. 

Unfortunately phony booms that has inspired by policies that has driven a massive wealth divide will eventually morph into a bust. 

The boom bust cycle as described by the great the dean of the Austrian school of economics, Murray N. Rothbard:
bank credit expansion under fractional-reserve banking (or "creation of counterfeit warehouse receipts") creates price inflation, loss of purchasing power of the currency unit, and redistribution of wealth and income. Euphoria caused by a pouring of new money into the economy is followed by grumbling as price inflation sets in, and some people benefit while others lose. But inflationary booms are not the only consequence of fractional-reserve counterfeiting. For at some point in the process, a reaction sets in. An actual bank run might set in, sweeping across the banking system; or banks, in fear of such a run, might suddenly contract their credit, call in and not renew their loans, and sell securities they own, in order to stay solvent. This sudden contraction will also swiftly contract the amount of warehouse receipts, or money, in circulation. In short, as the fractional-reserve system is either found out or in danger of being found out, swift credit contraction leads to a financial and business crisis and recession. There is no space here to go into a full analysis of business cycles, but it is clear that the credit-creation process by the banks habitually generates destructive boom-bust cycles
Since the bank credit fueled asset bubbles has been globalized, we should expect a periphery to core dynamic where the reversal of emerging market bubble cycles will eventually land in the shores of the US.

But again in a bust, the wealthiest will most likely be bailed out. This implies of a furthering of the wealth divide which may fuel unrest via the deepening of political polarization.

Wednesday, March 12, 2014

EM Contagion: Based on Exports, Global Economic Growth appears to be Downshifting Fast

I have pointed to the recent collapse of exports by China and by Japan as potential harbinger of a substantial downshift in the growth rate of the global economy. 

Signs are that the world will be faced with a dramatic decline in the rate of growth if measured in exports. 

First of all here is the list of the top 15 exporting countries as provided by wikipedia.org
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These countries, whose estimated US dollar priced exports at $13.885 trillion for 2013, constitute a substantial share in the (non-fixed) pie of global exports.

I have no figures for total world exports in 2013. So while this would be apples to oranges, if I use the above to compare with 2011 global export data then the top 15 countries would account for about 78% of global export share. A WTO report says that the share of the top 5 exporters represents 36% in 2012 almost equal to the trading volume of regional trading blocs. The point is to show the importance of the share of the above exports relative to the total.

Now aside from China and Japan here are the export trends of the other top 15 exporters
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Eurozone exports have been in a sharp decline over the past (3 months) quarter.

But Eurozone performance have been unequal. Seen in the context of some of the Eurozone members within the top 15 ranking, German exports (ranked 3rd in the world) remain buoyant although markedly down from September highs. French exports (ranked 5th) have stagnated through most of 2013 compared to 2012 level. Spanish exports have substantially declined over the past 3 months while Italian exports marginally slowed over the same period.
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Meanwhile US exports have been slightly down
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South Korean exports have also been in a substantial downtrend. February exports plummeted by 5.7%. February data signifies a decline of 8.5% from October highs

Netherland exports fell sharply down by 5.3% in December (no latest updates yet)
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Russia’s exports, ranked 8th in the world, have collapsed last January! Russian exports cratered by 19.8% (m-o-m), and have essentially mirrored China. 

Meanwhile Hong Kong exports have been marginally down.

Ninth largest exporter, the United Kingdom broke the 5 month declining trend with a 2.1% (m-o-m) gain last January. Has this been a quirk or a recovery?

11 spot Canadian exports has also shown a marginal decline over the past 5 months. 

13th ranked Singapore exports posted a modest increase (2.86% m-o-m) in January but the gains have been far off from the highs of October. 

Saudi Arabian exports have been strong as of the third quarter of 2013
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15th spot Mexican exports tanked by 15.73% (m-o-m) in January! 

To have a better view of emerging markets where we can see the extent of the recent damage, let us take a look at the export data of the other majors. 

Brazil’s exports have stagnated in February following a 23% crash in January.

India’s export trend has been in a moderate decline over the past 5 months.  

In Southeast Asia, Malaysia’s exports though posting a marginal decline in January, has remained robust relative to most of 2013.  

Meanwhile Thailand’s exports have fallen sizably over the past 5 months.  

And after a spike in December exports, Indonesia’s January data plunged by 14.63%. Indonesian exports collapsed in August 2013 but recovered until December.  

Following September and October highs Philippine exports have moderately declined over the past 3 months

In sum, for the top 15 only Saudi Arabia, Germany, UK and Singapore have shown recent export (marginal to modest) gains, whereas the export declines have been pronounced in emerging markets (e.g. Russia, Mexico, South Korea). And this has become even more evident with the inclusion of Brazil, Indonesia and Thailand.

The dramatic fall in Japan, the marked slowdown in the Eurozone and the recent downshift in US exports may be signs of the deepening emerging market contagion. 

Emerging market financial market disruptions seem to have now been manifesting real economic effects through the global economy.

Yet the current rate of decline in exports of emerging markets seems alarming. 

[As a side note, this is a treatment of aggregate exports without delving into their details]

And they seem to be reinforcing my fears and suspicions. As I wrote early February
If emerging markets has been attributed by some as having pulled out the global economy from the recession of 2008, now will likely be the opposite dynamic, the ongoing mayhem in emerging markets are likely to weigh on the global economy and equally expose on the illusions of strength brought upon by credit inflation stoked by inflationist policies.
All these comes as major stocks markets seem to be in various stages of a mania (either from record highs or for those bourses fighting off the bear markets with violent denial rallies).

It is interesting to see if there will be a collision course between global real economy and the steroid dependent stock markets hoping for a sustained economic recovery.

P.S. Thanks to the wonderful tradingeconomics.com for all the charts and the very helpful data they provide.

Monday, March 10, 2014

Japan’s Exports Plunge, Trade and Current Account Deficit Balloons

The popularly held mercantilist view is that weak currency equals strong exports.
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Well the above chart is just an awesome unmasking of the mercantilist myth.

Abenomics via the massive debasement of the yen has led, not to an increase in exports, but instead to a sharp decline. January exports retraced by about 15% (m-o-m). Japan’s exports have now reached pre-Abenomics level. Nonetheless Japan’s exports is still up about a measly 9.5% (y-o-y). After all the yen’s debasement, this has been what remains of export growth?

The steep drop in Japan’s exports seem to mirror China’s exports collapse in February. 

I’ve read some excuses by the mainstream bubble worshiping zealots alleging that China’s export drop has been cyclical and due to a supposed “overinvoicing”. But even if there have been some truth to this, none of this explains the degree or scale of the drop. Why 18% and not 5 or below 10%? Why the huge drop? 

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And of course if we look at Japan’s top trading partners, it looks like neighboring China has been instrumental in providing substantial external trade. 

Unfortunately, both countries have been playing with geopolitical fire, being engaged in a territorial squabble over some small islands called Senkaku.

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And the sharp contraction in Japan’s export growth can likewise be seen in Japan’s exports to China.

I am in doubt if such has been about geopolitics. 

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That’s because Japan’s export to Australia has also been shrinking.

And guess the common denominator between Japan and Australia? 

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Well the answer is China. China represents Australia’s largest trading partner, where Japan comes only second and the US third.

What does all the above suggest? They imply two things; one China appears to be meaningfully slowing down and second there has also been a significant downshift in the global economy

Going back to Japan. The substantial export decline has only exploded…

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…Japan’s trade deficits

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as well as her current account deficits

This means that Japan will need foreigners to plug on these or that she will have to draw down from her dwindling domestic savings (18.6% 2012 from 24.6% 2007) or expatriate her externally located capital (NIIP) or…

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…even borrow more to compound on her debt yoke. The above table from global finance reveals that Japan’s private and government debt load as of 2011 is at 512% (!!!) of GDP.

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And don’t forget the above deficits will add to the ballooning government deficits.


The above conditions looks like the present emerging market dilemma (weak currency, weak current and trade accounts). Nonetheless given Japan’s policy direction, they seem to be headed that way via a Black Swan event.

But don’t worry be happy. Japan’s stock markets will likely ignore this because bad news has really been good news. All these for Japan’s Wall Street means more easing from the BoJ in order to expand “Abenomics”.