There can be few fields of human endeavour in which history counts for
so little as in the world of finance. Past experience, to the extent that it is
part of memory at all, is dismissed as the primitive refuge of those who do not
have the insight to appreciate the incredible wonders of the present.
The
week past was mostly a global stock market rout tied to failing China and the
collapsing price of crude oil. Of course, no one in main stream media, or stock
promoting bubblevision saw it coming. How could they, of course? Down markets
are totally unfathomable in our new age of central bankster driven casino stock
markets. Who knew that the Fed’s Plunge Protection Team could be beat? Well the
Fed’s team at the Atlanta Fed for one. Their GDP Now model has been collapsing
towards a new US recession arriving for weeks. Just no one bothers to report
it in Main Stream Media.
GDP Now.
The growth rate of real gross domestic product (GDP) is a key indicator of economic activity, but the official estimate is released with a delay. Our new GDPNow forecasting model provides a "nowcast" of the official estimate prior to its release. Recent forecasts for the GDPNow model are available here. More extensive numerical details—including underlying source data, forecasts, and model parameters—are available as a separate spreadsheet.Latest forecast — January 15, 2016
The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2015 is 0.6 percent on January 15, down from 0.8 percent on January 8. The forecast for fourth quarter real consumer spending growth fell from 2.0 percent to 1.7 percent after this morning's retail sales report from the U.S. Census Bureau and the industrial production release from the Federal Reserve.
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Now back to the growing crisis over
China and crude oil. A tsunami of bankruptcies come next.
“But
it [the boom] could not last forever even if inflation and credit expansion
were to go on endlessly. It would then encounter the barriers which prevent the
boundless expansion of circulation credit. It would lead to the crack-up boom
and the breakdown of the whole monetary system.”
Ludwig von Mises.
Emerging-Market Rout Worsens With China Bear Market; Zloty Sinks
January
15, 2016 — 3:24 AM GMT Updated on January 15, 2016 — 9:43 PM GMT
Emerging-market stocks posted a third straight weekly decline, slumping to
the lowest since 2009 as Chinese equities fell into a bear market and
oil’s slide below $30 a barrel sapped energy producers. The zloty fell the most
since 2011 as Standard & Poor’s cut Poland’s credit rating .The Shanghai Composite Index decreased more than 20 percent from its December high as volatility in the yuan and a report that some banks have stopped accepting shares of smaller listed companies as collateral further eroded investor confidence in China’s markets and economy. Gazprom PAO and Lukoil PJSC each fell at least 4.2 percent in Moscow. Nigerian equities retreated for a sixth day as Brent crude posted a 13 percent weekly decline. The zloty tumbled 2 percent against the euro.
---- No asset class has been spared the selloff this
year, with the premium investors demand to hold emerging-market debt over U.S.
Treasuries widening 12 basis points on Friday to 468, according to JPMorgan
Chase & Co. Indexes, bringing the weekly increase to about 31 basis points.
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Is It Over Yet? Two Weeks In, 2016 Feels Like Year of the Bear
January
15, 2016 — 11:39 PM GMT
Not even the pessimists on Wall Street thought things would go so wrong so
fast in 2016.For the first time in 12 years, oil is below $30 a barrel. China is struggling to prop up its slowing economy and calm its volatile stock market. For the moment, the bears have the upper hand -- and January is only half over. As the Dow Jones Industrial Average sank 391 points on Friday, investors the world over seemed to be groping for any good news. While most money managers kept their cool, few offered assurances the U.S. market would bounce back soon, as it did after a similar bout of turmoil last August.
The selling has been intense, and European stocks officially entered bear market territory on Friday when the Stoxx Europe 600 Index closed down 20 percent from its record high in April. Now global equities have lost more than $14 trillion, or 20 percent, since June. The pace of the drop has been so fast it’s unraveled about half of the rally since a low in 2011. Investors have fled into the U.S. Treasury market, and pushed the yield on the 10-year note below 2 percent for the first time in months.
The triggers for the upheaval are familiar -- China and oil -- and the anxiety is the usual one.
“It comes down to one basic fear, which is the global economy,” said Russ Koesterich, global chief investment strategist for BlackRock Inc., which manages $4.5 trillion. “What people are afraid of is this isn’t investors overreacting, but reflects a fundamental deterioration in growth.”
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China Stocks Enter Bear Market, Erasing Gains From State Rescue
January
15, 2016 — 1:56 AM GMT Updated on January 15, 2016 — 10:32 AM GMT
Chinese shares fell into a bear market for the
second time in seven months, wiping out gains from an unprecedented state
rescue amid waning confidence in the government’s ability to manage the
country’s markets and economy.
The Shanghai Composite Index sank 3.5 percent to 2,900.97, falling 21 percent from its December high and sinking below its closing low during a $5 trillion rout in August. Friday’s decline was attributed to persistent investor concerns over volatility in the yuan and a report that some banks in Shanghai have halted accepting shares of smaller listed companies as collateral for loans.
The selloff is a setback for President Xi Jinping’s government, which has been intervening to support both stocks and the yuan after the worst start to a year for mainland markets in at least two decades. As policy makers in Beijing fight to prevent a vicious cycle of capital outflows and a weakening currency, the resulting financial-market volatility has heightened concern that the deepest economic slowdown since 1990 will worsen.
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The Simple Truth About China’s Market
It’s not just clumsy trading rules that have made the mainland’s stocks so risky.
January
14, 2016 — 8:39 PM GMT
“This is
insane,” said Chen Gang, chief investment officer for Shanghai Heqi Tongyi
Asset Management, on Jan. 7, the day stock trading in China lasted only 29 wild
minutes before market circuit breakers shut it down. Unlike some would-be
sellers that day, he says he unloaded all his firm’s equity holdings by the
time the exit door closed. The circuit breakers, put in place just a few days
before, called for an all-day trading halt if shares dropped 7 percent.
Those
rules have taken much of the blame for China’s latest market chaos. The China
Securities Regulatory Commission said they had a “magnet effect”—as shares
fell, people may have rushed to get sell orders in while they still could,
pulling prices down to the trigger point even faster. (Announcing last call to
a bar full of drinkers tends not to encourage moderation, either.) The focus on
poorly designed trading curbs may, however, distract from a less exotic source
of risk: speculation.
The
median stock on mainland exchanges still trades at about 57 times earnings—at
least twice as expensive as any other major market. (Leading China stock
indexes don’t look nearly so pricey but are weighted to financial companies,
which tend to carry lower valuations.) In spite of currency instability and
concerns about slowing economic growth, investors are treating the typical
Chinese company as if its potential is somewhere between that of Google and
Facebook.
A boom in
initial public offerings made parts of the stock market look more like a
lottery. Shares of Beijing Baofeng Technology, a developer of online video
players, soared 4,200 percent in 55 trading days after going public on the
Shenzhen stock exchange in March. (The stock then dropped 31 percent
before suspending trading in October.) With the market crowded with novice
retail investors, other companies simply renamed themselves to look like tech
stocks, recalling the 1960s “tronics” and 1990s dot-com booms in the U.S.
“There are stocks that are basically junk, but they’re trading at outrageous
valuations because there’s a lot of market manipulation,” says Jian Shi
Cortesi, a money manager at GAM Investment Management in Zurich. “The way down
is always very volatile.”
China’s
stock market didn’t used to be so exciting. Under President Xi Jinping’s
administration, articles in state-run media encouraged people to invest,
fostering a belief that the government would make sure everyone profited. The
benchmark CSI 300 index climbed 150 percent in the 12 months before
the market slide that began in June, and it’s still up 53 percent from the
start of that run. The nation has more than 90 million individual
investors, compared with 87.8 million members of the Communist Party.
Now
retail investors are having doubts. Hua Jie, a 56-year-old retiree in Sichuan
province, says she hasn’t been this downbeat on the nation’s stock market since
she began investing more than a decade ago. “I no longer want to play this
game,” says Hua, a former saleswoman at a consumer electronics store in
Chengdu. “I’ve lost faith in the regulators.”
Many
institutional investors, too, have been quick to bail as markets turn south.
Hedge funds often have agreements with investors requiring liquidation if their
holdings drop below a certain value. That may have helped accelerate the early
January rout.
China’s
securities commission suspended the circuit breakers after the Jan. 7 shutdown.
Policymakers need to “gradually explore, gain experience, and make adjustment”
to the system, commission spokesman Deng Ge said in a statement. Former U.S.
Treasury Secretary Nicholas Brady, who’s credited with implementing circuit
breakers in the U.S., says the problem is that China didn’t allow stocks to
fall enough. In the U.S., trading is halted temporarily after declines in the
Standard & Poor’s 500-stock index of 7 percent and then again at 13
percent; trading is suspended for the day only if losses reach 20 percent. “The
right thing to do is widen their band,” says Brady.
----Xi’s administration is likely to keep trying. The state-controlled investment funds that the government directed to buy shares last summer—nicknamed the National Team—probably spent more than $200 billion on equities in three months, according to analysts at Goldman Sachs. Officials even bought stocks to project stability in the days before a planned 12,000-soldier parade in September to commemorate Japan’s World War II surrender, according to people familiar with the matter.
Market
interventions resumed in January, with buying focused on shares in companies
with large weightings in benchmark indexes, the people say. Regulators also
extended restrictions, which were just about to expire, on share sales by major
stockholders. Even so, on Jan. 11, with the circuit breakers removed, stocks
plunged an additional 5 percent. “They’re trying to prop the market up above
sustainable valuations. That’s the fundamental problem,” says Patrick Chovanec,
New York-based chief strategist for Silvercrest Asset Management Group.
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The Chinese Are Converting Their Cash to U.S. Dollars
January
14, 2016 — 9:00 PM GMT Updated on January 15, 2016 — 8:06 AM GMT
Karen Chou, a 32-year-old bank worker in Beijing, had a New Year’s
resolution: sell yuan, buy dollars.“I’m not optimistic about China’s economy,” she said, after rushing to exchange some of her savings for U.S. currency as part of heightened demand at some Chinese bank branches in the first weeks of 2016.
Chou first made her call on the yuan after a surprise devaluation in August last year. Renewed dollar purchases by the likes of Chou highlight China’s struggle to restore confidence in the currency -- and further swell a record build-up of foreign-currency holdings by Chinese citizens.
The risk for the central bank is that households’ currency stashes may join outflows of capital that threaten to destabilize the economy as businesses and individuals bet against the yuan, which is forecast to further devalue this year. The Shanghai Composite Index slid into a bear market on Friday, closing lower than during last year’s rout.
More than $840 billion exited China in the first 11 months of last year in an unprecedented exodus, according to a Bloomberg gauge. Suspicious patterns in export and import data for December, released this week, fueled speculation that money is flowing out disguised by phony trade invoices, a practice that has happened before.
The “game changer” will be if China suffers broad-based capital outflows, including from households, rather than tactical moves such as companies reducing their dollar liabilities, said Jean-Charles Sambor, Asia-Pacific regional director at the Institute of International Finance. “This would be a significant problem for China and the rest of the world."
While citizens are officially limited to converting $50,000 per person a year, a range of tools exist for getting around that restriction, from pooling quotas to transactions through so-called underground banks.
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http://www.bloomberg.com/news/articles/2016-01-14/warnings-flash-for-china-money-exodus-after-record-2015-outflows
"Indeed the temporary breaks in the market which preceded the crash were a serious trial for those who had declined fantasy. Early in 1928, in June, in December, and in February and March of 1929 it seemed that the end had come. On various of these occasions the [New York] Times happily reported the return to reality. And then the market took flight again. Only a durable sense of doom could survive such discouragement. The time was coming when the optimists would reap a rich harvest of discredit. But it has long since been forgotten that for many months those who resisted reassurance were similarly, if less permanently discredited.”
J. K. Galbraith. The Great Crash: 1929.
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