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Saturday, September 2, 2023

2023-09-02

** denotes well-worth reading in full at source (even if excerpted extensively here)

Economic and Market Fare:

Rates markets have begun to accept the higher-for-longer mantra from central bankers. But it may soon come undone if economies are nearer to recession than surface data implies.

.... The market is buying the higher-for-longer mantra for now. But such tight conditions are about to collide with more recessionary-looking economies, testing central bankers’ resolve to keep rates elevated. Poor PMIs in Europe and the UK are a reminder that economies are very fragile. The problem with growth being so near to zero is that it doesn’t take much for the economy to be flipped into a recession. Recessions happen suddenly, and typically when things look superficially OK. Take the US. ...











.......... Only time will tell if this is an existential economic crisis for China or just a very unpleasant blip. But the reality is that a crisis is inevitable for any country pursuing an unbalanced growth model – i.e. by focusing on investment and exports over domestic/consumer led growth. This is baked into the standard model – and the Chinese are fully aware of this, and have been since at least the 1980’s and 1990’s  when I started following (from afar) the Chinese economy from a development economics perspective. Back in the 1990’s the Chinese devoted very significant resources to studying the Japanese late 80s collapse, later the 1990s Asian crisis, and the multiple crashes which foiled numerous countries over the past century or more from crossing the threshold from upper-developing to developed country status. There is a line of thought among some China analysts that Xi was selected and given extraordinary powers specifically to deal with what was foreseen to be a very difficult transition from a the current development model to ‘developed’ status, which has always overtly been the holy grail for the CCP.

I don’t think there is much doubt that the current situation in China is very serious. In my opinion, the housing crisis is a symptom, not the cause of the current problems (in reality, the Chinese economy started showing signs of strain even before Covid). The core problem being several decades of internal debt build up and chronic mal-investment along with an overdependence on rising property values to underpin spending at a local level. But the housing issue alone is gigantic – by any objective measurement it is vastly greater as a proportion of the economy’s size than the Irish and Spanish crashes of 2007-9. When you add in demographic issues and climate induced strains, this is potentially much more than just a cyclical downturn.

It is highly unlikely for there to be a financial crash as the Chinese banking and finance model is very different from in the west, or for that matter, most other Asian economies. In simple terms, Beijing has plenty of tools to stabilize the finance side of the economy, and not having external debt is a huge advantage ......

The irony to me is that having studied the Japanese crash intensively, the Chinese may somehow manage to replicate exactly the mistakes the Japanese made. There appears to be a lot of pressure to go for yet more concrete pouring and refinancing of debt as a ‘solution’. This will risk deflation, zombification and/or a greater crisis further down the line. .....



Vid Fare:








Quotes of the Week:

Joel Prakken, Chief U.S. Economist at S&P Global Aug '22: “Scholarly research suggests that when these two measures differ by a lot, eventually it’s GDP that gets revised in the direction of GDI and not the other way around.”


optimist vs realists:
Mark Zandi: The August jobs report couldn’t be much better. Job growth is solid but slowing. Unemployment rose, but for that right reason - more labor supply as participation jumped. Wage growth continues to moderate and hours worked rose. The report has soft landing written all over it.

&
Larry Summers: These (jobs) numbers are consistent with very optimistic scenarios. There are all sorts of things that could have been alarm bells in today’s numbers that didn’t ring.

vs 

Don Johnson: I always hesitate to jump on calling data releases a con game - but with 7 straight large (not small, 50+% slashes) to the jobs data - how can anyone believe the trash being put out? 

They’re keeping stocks propped up on a ‘reality’ that’s not even real.
&

KKGB Kitty: NFP August added 187 K that’s great right? Well, as I’ve been saying for months, you’re into backward revisions territory here. 60% of this (110 K) were down revised from prior 2 months. UR is 3.8%. This is the part of the cycle where you better have your own models to track data, coz what’s coming from the ministry of truth is inexploitable.
&

Michael Green: Dropped on his head as a child... "We're growing insanely fast -- look at all the jobs added over the last 42 months!" with zero consideration for what a normal 42 months job growth looks like... not to mention using NFP (which will be revised lower) instead of household.

& 

Rosie: Temp agency jobs down in each of the past 7 months by a cumulative -119k. We’ve never seen this before without the economy heading into recession. After all, when the headhunters are chopping off their own heads, what does that mean for the rest of us?


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Thread of the Week:



Charts:
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Investor Intelligence:




 

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