Debt Deflation Hits Reflationists?

I am not sure who leads in the current episode - stock prices or money supply. Or is there a causality at all? However, BNP Paribas writes in its "Daily Economic Spotlight" today:

China earlier this year was engaged in a massive explosion in money and credit that went way beyond the conceivable needs of the real economy. Excess money creation in China has few outlets. It took those that were available and so we saw a turnaround in house prices, a boom in the stock market (up by over 90% in 2009 by early August) and leakage into commodity markets. The Chinese government clearly thought that 6-month annualised rates of growth of credit and money were excessive and so signalled their disquiet. They began selling sterilisation bonds and further measures later on are to be expected.

Just the question of causality remains open?

China's "inflationary sins" are miles ahead of US, but who is worrying about the inflation risks in the US? Pimco? Buffett? Of course, bank trading rooms are much more forceful than Main Street.

Saut's Call For This Week: "Caution Please?!"

Jeffrey Saut, the legendary investment strategist at Raymond James, has a missive this week as follows (written yesterday):

As we said in last Tuesday’s verbal strategy comments before leaving for a road trip, “If past is prelude something BIG will happen in the equity markets during our sojourn.” Accordingly, the next day the equity markets rallied sharply, only to give back much of that on Friday’s shockingly bad consumer sentiment figures. And this morning Friday’s Fade continues as world markets worry about the durability of the economic recovery. As one particularly bright money manager notes:

“In studying the charts I noticed the MACD on the daily chart of the Dow has crossed to the downside for the first time since the rally off the July low. This is another sign the rally is running out of steam. The support, short-term, is the 9200 area and if broken then a more substantial decline could get underway. One of my indicators on the daily chart, however, hints that this decline will be shallow and we will see a final surge over the next few weeks to the 9700 – 10,100 area. The ability of the market to continue to rally with volume continuing to decline does not mean it cannot go higher short term, but tells me that the calls for a new Bull Market are certainly suspect. If I am correct, the current pullback will only last until options expiration starts this week then the final rally will begin. Watch the 9200 area for clues for the market direction over the next few weeks.”

Watch out!

JSaut_090817 -

FED Senior Loan Officer Opinion Survey

The Federal Reserve Board published "The July 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices", and here are the key messages with my emphasis:

In the July survey, domestic banks indicated that they continued to tighten standards and terms over the past three months on all major types of loans to businesses and households, although the net percentages of banks that tightened declined compared with the April survey. Demand for loans continued to weaken across all major categories except for prime residential mortgages. The fractions of domestic banks reporting additional weakening in demand in this survey were slightly lower than those in the April survey for C&I loans and home equity lines of credit, approximately the same for commercial real estate (CRE) and nontraditional residential mortgages, and slightly higher for consumer loans.
In response to a special question, domestic banks pointed to decreased loan demand and deteriorating credit quality as the most important reasons for declines in C&I lending this year. In response to a second special question, most banks reported that they expected their lending standards across all loan categories would remain tighter than their average levels over the past decade until at least the second half of 2010; for below-investment-grade firms and nonprime households, the expected timing is later, with many banks reporting that standards for such borrowers will remain tighter than average for the foreseeable future.

There are more or less fair commentaries, in my view, by bank analysts, like these from Danske Bank and BNP Paribas. However, couple of them are forcing to raise the eyebrows.

Tobias Levkovich, the US Equity Strategist at Citigroup, has a clear bull's message (my emphasis):

The Federal Reserve Board survey generates more predictive recovery evidence. The senior loan officers’ survey continues to show that tightening trends are easing back, with the just released July polling data finding that a net 31.5% of large banks are tightening their lending criteria versus a net 83.6% last October. Moreover, the survey data has often led credit market conditions, arguing for some further narrowing of spreads which often move in tandem with equities. Historically, this survey has been a strong lead indicator for business activity with a nine-month lag, supporting renewed investment in human, physical and working capital well into 1Q09; and in kind this should support earnings trends.

Errr ... "tightening trends are easing back"! Think twice of "trends" to be sure you get it right that "net 31.5% of large banks are tightening their lending criteria..."!

Whatever, but the economists at Societe Generale brought the "killer note", click to enlarge, my marks.


Do I get it wrong? Well, let's read once again. This sentence is the killer:

"The latest survey, covering the period from May to July, showed an across-the-board improvement in lending terms."

ISEE Index Alert 14 August

ISEE Index hits new 52-week high on 14th August.
That's very bullish reading, in a down day, but in an upwards trending stock market ...It is not easy to measure the sentiment in the markets.

Nomura On China's FDI

I read the "New York Morning Comment" by Nomura today, and this comment on China's FDI (Foreign direct investment) is somewhat disturbing:

China's FDI inflows fell 20.3% y-o-y in Jan-July to USD48.3bn, after a 17.9% drop in the first six months of this year. In the month of July alone, FDI was down 35.7% y-o-y, marking the tenth straight month that FDI has fallen from year-earlier levels. Not only in China, but across Asia, FDI inflows have weakened, reflecting substantial overcapacity in the global economy.

Let's go for some additional investments in capacity?

Bylov: Weekly Global Intermarket Perspectives

Jan Bylov, chief analyst at Nordea Markets, is a "rare specie" among analysts, as he is looking himself at all asset classes and uses inter-market approach in analyzing the markets. He writes in the summary today:

Stocks – China alters the odds

The Chinese growth and stock market revival has been at the forefront of peoples’ minds since the global recovery in financial assets began back in March. As a consequence of this lead the last two week’s sudden correction in Chinese stocks – contrary to western bourses – does suggest that the odds of the next global risk aversion period has returned to balance! This more balanced probability of the next major market move remains countered by: 1) Western bellwether bourses still haven’t experienced any significant technical pattern deterioration and 2) sentiment surveys at neutral readings and 3) macro statistics (see page 3) are still generally supportive. Consequently, the China event suggests that it is now prudent to be tactically bearish and structurally bullish i.e. buying protection appears wise while we wait for market confirmation or disconfirmation.

Bonds – Friendly reallocation ahead

The environment has been hostile to bonds since March when market perceptions turned constructive towards cyclical sensitive markets like stocks, commodities and emerging markets in general and not least augmented by the constant hefty supply of sovereign bonds. As we have been stating in recent weeks the latest yield rise towards the June highs should not blind us to the fact that real bonds yields are soaring with inflation so benign and central bankers having informed us that they will not commit the Japanese mistake of the -90ies, i.e. caution about when to implement their “exit plans”. In this light two interesting observations can be made: 1) strong bond buying has in recent days commenced close to the June yield highs for a second time and 2) the leading recovery story since March has centred on China and Chinese stocks has been falling for two weeks by now. Consequently, we can now observe initial signs that the global risk recovery begins hesitating, and this could easily lure investors to initiate a reallocation back towards bonds… confirmed if yields break below the July lows! Overall, we maintain that the yield direction within expected overall ranges will be guided by the two transient investment themes: 1) “supply fear and economic recovery” and 2) “real yields and central bank responses to protect a fragile global macro economy”.

Commodities – Is oil faltering near $75?

Lots of classic recovery potential in metals have already been attained and oil prices appear unable to maintain – let alone extend – the recent break above $75. While no real pattern deterioration has yet occurred odds for a further substantial commodity recovery now appears to be fast disappearing – not least judged in light of the global Chinese recovery story faltering (stocks falling fast). Commodity exposure is now witnessing increased risk!

Currencies – AUD appears in particular sensitive to risk aversion

Global short USD positions were reduced by 1/3 as of last Tuesday (re. CFTC) and it appears that cyclical sensitive AUD is in a very sensitive position should risk aversion return. And odds of a new risk aversion period appears right now to be rising as the lead story of the global recovery has centred on China and Chinese stocks have now been falling for two weeks. An extreme large speculative long gold position appears a further risk to AUD too. Consequently, it seems that the dominating “US dollar collapse theory” took a hit with the US job report and with the lead recovery story (China) evaporating building strategies with short AUD exposure appears to offer some attractive opportunities.

Chinese growth story by:
Shanghai Stock Exchange Composite Index
Baltic Dry Index
Copper
Crude Oil

yeap, and these boys at trading desks may be of some relevance too!

ECRI vs BNP Paribas

Economic Cycle Research Institute (ECRI) released its Weekly Leading Index for U.S. last Friday

August 14, 2009 (Reuters) - A U.S. future economic growth gauge rose in the latest week, as its yearly growth rate surged to a 26-year high, suggesting that recovery will commence at the briskest pace in decades, a research group said on Friday.
The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index rose to a 47-week high of 123.9 in the week to Aug. 7 from a downwardly revised 121.7 the prior week, which was originally reported at 121.8.
Meanwhile, the index's annualized growth rate leapt to a 26-year high of 13.4 percent from last week's five-year high of 10.4 percent, which ECRI originally reported at 10.5 percent. It was the index's highest yearly growth rate reading since the week to Aug. 26, 1983, when it stood at 13.9 percent.
"With WLI growth surging, the odds are rising that the early stage of this economic recovery will be stronger than any since the early 1980s," said Lakshman Achuthan, Managing Director at ECRI.
Achuthan recently told Reuters that the national recovery would be stronger than many expect, though signs of such strong growth will not be apparent until sometime next year.
"Next year, looking back you'll see that GDP, industrial production, sales, and even non-manufacturing jobs growth -- where 91 percent of Americans work -- began rising as recovery took hold," Achuthan said.

Some charts and data available here. However, one may wish to have more behind the reasoning of consumer recovery, as it is told here.

On the other side of the opinion spectrum we find credit strategy team at BNP Paribas. In their recent "Credit Driver" they are arguing the following:

If this severe deflation dynamic is allowed to continue, sooner rather than later, not just equities but AAA corporates and treasuries will also come under pressure due to rapidly shrinking revenues and tax receipts. Recapitalising the financial system is of the essence here. Investors betting on restocking of inventories to drive growth will be disappointed to know that the underlying dynamics simply do not support that argument.

Firstly, we note from Chart 2, that there has been no building up of inventories in Q2. Secondly, just because inventories have come down by a large dollar amount, it does not imply that restocking has to take place because sales have declined faster than inventories.
Also, restocking will only take place when sales begin to stabilise, which is yet not apparent and can be seen in the significant fall in retail sales for July, despite the Cash for Clunkers programme. Importantly, the restocking will also be smaller than usual, as final demand from the consumer is likely to be very weak due to rising unemployment, falling wages, rising energy prices and lack of credit availability.
For those who are unconvinced about this argument, it is all there in the FOMC policy statement, where the Fed states that, “businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales.” What we are really concerned about is how businesses will manage to restock without the availability of credit.

So, you know that you don't know really ... Let's hope that the wealthy pull the rest out of slump!

What Is This? Run And Read ...

Felix Salmon attacks "insolvent banks" that "are worth billions"?

Does Mass Production Requires Mass Consumption?

Emmanuel Saez, the professor of economics at University of California at Berkeley, has updated data on income inequality in the U.S., full summary here (HT Paul Krugman). Click on chart to enlarge.

I am keeping in mind the reasons of global crisis ... and marginal propensity to consume.

Mass consumption is not maintained via borrowing, so the ability to consume is impaired ...

Let's pray for wealthy to pull the rest, and supply side economics will do the miracle?

Buying Halt Just For A Nanosecond?

Supply side economics marches on. The US Retail Sales were worse than expected, and Bloomberg reports:

Aug. 13 (Bloomberg) -- Sales at U.S. retailers unexpectedly fell in July as a boost from the cash-for-clunkers automobile incentive program failed to overcome cuts in other spending.

The 0.1 percent decrease in sales, the first drop in three months, followed a revised 0.8 percent gain in June that was larger than previously estimated, Commerce Department figures showed today in Washington. Purchases excluding automobiles fell 0.6 percent, also more than anticipated.

Today’s report underscores the threat to spending from the continued deterioration in the job market; a separate government report today showed more Americans than forecast filed claims for unemployment insurance last week. Retailers such as Wal-Mart Stores Inc. and Macy’s Inc. are cutting costs and inventories to bolster profits as households cut back on non-essential items.

The table from Nomura is rather interesting (click to enlarge), with a full comment here.


The commentary by BNP Paribas available here.
Non-bank commentators like Ritholtz or Calculated Risk are somewhat dovish...

Initial weakness in equities used to buy on dip ... so far today.