A Bit Of Worry on China Economics

There’s been talk of a collapse of Chinese real estate for a while now. I’ve generally ignored it, as it has no impact on me. I have zero invested in China and really don’t see any reason to go there.

But sometimes big things slop over to other countries. And China is really big now. Besides, where else can we the $Trillion we need this year (and every year to come…) just to avoid our government collapsing?

I first heard this on CNBC World. China has had another drop in Real Estate. About 6% in this last quarter.

http://marketrealist.com/2015/05/chinas-real-estate-climate-index-drops-april/

hina’s Real Estate Climate Index Drops in April
By Mark O’Hara • May 20, 2015 8:23 am EDT
China’s real estate climate

We’ve already seen how land area purchased by real estate developers for future construction has fallen steeply in the first four months of 2015. Building sales in China have also declined for 14 consecutive months. Now we’ll look at the April reading for China’s real estate climate index.

China’s real estate climate index measures the aggregate business activity for land and real estate. The index helps investors analyze trends in the Chinese real estate industry. Figures above 100 indicate economic growth. Readings below 100 indicate a slowdown in China’s real estate market.
[…]
A negative sign

The decline in China’s real estate climate index is another indicator that construction activity has slowed down in China (FXI). China’s real estate sector is a key driver of global steel demand. China’s construction industry accounts for more than a quarter of global steel consumption. A slowdown in the Chinese real estate industry is a negative for the global steel industry.

Then tonight they reported that Iron Ore prices were way down again. This matters a lot to places like Australia, who supply a lot of Iron Ore.

http://www.indexmundi.com/commodities/?commodity=iron-ore

Has an interactive chart where you can pick length of time. Even the 5 year chart looks dismal, though the last 2 years are the worst.

Since Iron is the stuff of skyscrapers, trains, cars and trucks, factories and oil pipelines, that low a demand is a bit of a worry. In the context of China real estate being off, it is more so. In the context of darned near every large Central Bank handing out money like chocolate and setting interest rates at near zero (or below!); it is a very significant worry.

There’s an awful lot of TALK of a recovery, but it sure isn’t showing up in demand for iron and steel.

Copper vs Gold, Silver, Bonds, Oil ETFs

Copper vs Gold, Silver, Bonds, Oil ETFs

To me, this chart looks like copper has started up. That does imply some kind of economic upturn. It also has silver looking like it has made a bottom. Not particularly in an up-run yet, but the down has ended and there was a spike about January that looks like shorts covered. So neutral at this point. Probably an OK place to park money, but not making much or anything. Gold is about the same.

Now given that this is all priced in $US, and that these are ETFs (so have a certain ‘shrinkage’ in long term holding), for folks not in $US, those prices likely are moving up some. (IFF you are in Ukraine, with 60% / year inflation, they look like a great alternative!).

I also note in passing that Greece said it can’t repay the IMF (again) this week. While that ought to cause some kind of panic somewhere, we also have “the usual EU suspects” moaning and saying that they might maybe somehow find a way to keep the wolf just one more week or three away. So this next week is a Greece Watching Week as the EU tries to decide if it really wants to just let it sink, or wants to be on the hook for whatever Greece demands. While I keep thinking that eventually one of these immutable deadlines will actually mean something, so far the Germans have been unable to accept a failed Greece. So maybe they can pony up a few more €Billions for the next week…

I also note that since last January, long term T-Bonds have had a bit of a wobbly down run. There is ongoing anticipation that eventually The Fed just must raise rates. When that happens, existing bonds will take a big hit. Given that we are headed into an election cycle, and that the US Economy is still not great shakes (and the EU is worse), and with deflation fears still in many places; I’d not expect The Fed to move much, or soon. So while I’d not hold a large bond position, or would at least shorten the maturities, I’m just not seeing it likely that anything big will happen fast.

Finally, oil fell off a cliff, did the Dead Cat Bounce thing, and now has a “higher high” after that point. It is likely time to revisit the Oil Patch as a bottomed move. Consider, too, that we effectively have Libya, Iran, and Iraq out of the oil market. (And not likely to be entering in size any time soon). Even with that, price is down. IF the wars in the region spread, oil could spike up. Recently there was a bomber hit a Shiite group in Saudi Arabia. Generally the House Of Saud keeps things quite and orderly there, but if it starts to lose that grip, oil could be very volatile to the upside. (And if, miraculously, peace breaks out across the region it could drop more, but don’t bet on it…)

Given the mixed (but reduced) picture on Arab region production, that low price also hints at low global demand (and thus low growth).

In Conclusion: It looks to me like “trying times” and like the global economy is not in “boom times”, nor even in “good times”, and only barely in “it isn’t so bad is it?” times… And it looks like keeping an eye on China domestic issues and Russian political moves are worth the time right now.

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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12 Responses to A Bit Of Worry on China Economics

  1. Richard Ilfeld says:

    In all of the failures, the common thread is the government mis-allocating capital–all governments, and all with borrowed money. Its bad enough that high taxes are a brake on economic activity as government takes the money needed for productivity reinvestments;its worse that debt in a low growth environment pretty much guarantees this will be worse in the future….high taxes plus higs taxes to pay the debt,or gross inflation to neutralize it. Everything the washingtidots “invest” in, from bullet trains to bird cookers er solar collectors, that the “market” wouldn’t have,is another major drag on the productivity that might make life better for ordinary people;the folks who can buy 70’s NASA level computing power for $500,or an Amtrack hamburger for $22.50 that still needs a subsidy.

  2. Clay Marley says:

    Seems to me that modern Euro-socialism really hates bankruptcies. So my guess is the EU will find a way to kick the Greece can down the road yet again.

    As for the House of Saud, they suffered two embarrassments last week. The ISIS bombing of the Shiite Mosque, and an attack by Ansarullah fighters (Houthis) on a military base in Saudi Arabia near Tuwayliq.

    I suspect the Saudi military is as dysfunctional as the Iraq military, though they do have good air power. But in Yemen they are discovering a bit late what Obama should have discovered, that air power alone doesn’t solve anything.

  3. Alan Poirier says:

    Oil prices are marching in step with the silent decline in other commodities. That reflects the weakness of western economies and that, in turn, is hurting China whose economy relies so heavily on exports. So long as the Chinese savings rate (30 per cent of disposable income) remains so high, internal demand will remain low and the world will dip into another recession — a nasty one at that.

  4. Larry Ledwick says:

    I think the fundamental issue is that thanks to bottomless credit the world industrialized countries have hugely over built capacity. You could nuke any 2 major industrialized country to a smoking hole and the the rest of the worlds capacity could easily fill true demand. They simply cannot build any more true productive capacity because there is no market to sell its output too. That is why they are building boondoggles as fast as they can. It creates superficial cash flow that keeps the gears oiled enough to avoid collapse, but the debt keeps rising. The bad news is most of the worlds wealth is in electronic form and not “real wealth”. That means that there is no physical limit on how fast that wealth can evaporate. In a physical wealth economy you can only pull physical cash out of the bank so fast, to cover margin calls. In a 99.5% electronic economy with the exception of circuit breaker type holds on electronic activity you could dump trillions of dollars of assets in just hours. I worry more about that there literally is no safe haven for wealth, short of the intrinsic value of items people really need to survive. We saw a hint of this in the Russian collapse when you saw stories of old ladies standing on the street corner trying to sell their grand daughters dolls to buy food.

  5. Pouncer says:

    How big is the risk that Chinese investors in both their domestic real estate, and US bonds, will try to cover losses in the former by early calls for repayment of the latter? That is, are there many US corporate bonds that generally “roll over” from term to term that might, this time, NOT roll over but suddenly be payable?

  6. E.M.Smith says:

    @Pounce:

    US bonds are not typically subject to ‘call’ at all. Some corporates are, but then only by the issuer. Buyers recourse is simply to sell the bond. China has taken a more interesting approach, with trading blocks of bonds directly to other countries or large companies for assets. IIRC they traded a huge block to Brazil for oil deliveries over time.

    THE big risk is just that they stop buying. From where else do we get $1, 000, 000, 000, 000 this YEAR for our required spending? Only really via printing or The Fed out of thin air with inflation…

  7. E.M.Smith says:

    @Larry Ledwick:

    That is essentially the thing that has me in the early stages of worry. All the central banks have prettymuch “shot their wad” and there isn’t a whole lot more they can do. (Yet there is some, so may yet avoid The Fall).

    The basic issue (that I’ve thought of writing up in a posting .. but not done as it’s a chunk of work…) is that there is a disconnect between the real economy and the paper economy, yet all the levers of power only move the paper economy. Interest rates, loose money policy, etc.

    The basic notion being that monetary policy can’t fix broken fiscal policy and broken regulatory policy long term. (Short term it can act like a stimulant drug … but eventually you habituate, so need to have gone through rehab before you need another round…)

    As long as fiscal policy is too imbalanced, debt increases until you
    ‘grind to a halt’.
    As long as regulatory policy is too restrictive, business slows until you
    ‘grind to a halt’.
    At that point, too much loose monetary policy trying to fix it just causes
    bubbles and burst, until…
    After that point, it just causes inflation and debt as you
    ‘grind to a halt’…

    We’ve seen this movie a few dozen times now (hundreds?) yet we don’t learn from it.

    It isn’t new knowing either. That is WHY the constitution says “only gold and sliver”. It’s been known for hundreds of years. And why there was no central bank (and central bank debt) in the original country design. The old wisdom was “cash and carry” and don’t even think about gaming the currency.

    Now we have “Modern Monetary Theory” that believes it’s own bullshit and thinks there is no limit to what can be done with a rubber monetary ruler and infinite debt. The sad thing is that it does work, for a little while, until it crashes horridly… but that ‘little while’ is just long enough that the folks who remember last time are mostly also dead by the next time…

    Oh Well.

    Maybe “this time will be different!” ;-)
    /sarc;

  8. Larry Ledwick says:

    Bottom line a fiat currency economy is a confidence game. No matter how bad the numbers, if enough fools think all is smiles and sunshine, the economy will keep lurching along some how. But the moment a significant fraction (and it only needs to be 5%-10%) of the players in the game lose confidence in the game, it becomes a rush to the exits, and the whole tent comes down as all the lines are cut faster than the powers that be can repair them.

    As you point out with your /sarc tag, it is never “different this time” only appears that way due to wishful thinking. Historically there is a practical guarantee the wheels will come off. Like an asteroid strike, it only is a question of when and what the proximate cause is that breaks the confidence of the players.

    Might be next week, could be next year, might be in 20 years, no way to know because it depends on irrational factors and the beliefs of large numbers of people and their accumulated experience and situations. It is concerning to me that the wisdom of the crowds is causing lots of people to pull in their chips and cash out (paying down credit cards avoiding discretionary purchases etc.) That in itself is a sign of diminished confidence in the economy. People sense that the numbers are bogus and are responding to that nagging little voice that whispers in the night.

    http://dailyreckoning.com/fiat-currency/

  9. E.M.Smith says:

    @Larry Ledwick:

    http://historysquared.com/2012/06/26/fiat-currencies-trend-towards-their-intrinsic-value-often-rather-quickly/

    “Paper money eventually returns to its intrinsic value – zero.” (Voltaire, 1694-1778) Often Rather Quickly

    They go on:

    The value of fiat currencies is entirely based on faith. When I wrote this, as others have, I had no idea just how quickly this process takes place. As Stephen Johnston relays:

    According to an interesting study of the 775 fiat currencies that have existed 599 are no longer in circulation. The median life expectancy for the defunct currencies? Fifteen years. Perhaps the author was being unfair by focusing solely on the failures. Sadly no, the average life expectancy of all fiat currency is running at a truly underwhelming 27 years. Only a select few have managed anything approaching old age. The British pound sterling is one such example at over 300 years and counting. Before we get too excited by this apparent example of longevity, at inception the pound was defined as 12 ounces of silver. The pound is now worth less than 0.5% of this original value and of course there is no silver involved anywhere. In other words, the most successful currency in existence in terms of life-span has lost more than 99% of its value.

    The study also found that 1 in 5 fiat currencies have failed outright through hyper-inflation – a percentage that I must admit surprised me as I was under the impression that hyperinflation was a much less common occurrence.

    So at least 250 years we’ve known this…

    During my lifetime the USA went off the gold standard. Since then, the $US has lost about 90% to 95% of the original value (based on a personal basket of memorized prices from that date. Stamps were 3 &cent’ rising to 5 ¢ while a rib steak dinner cost $1.85 in our restaurant and gasoline was 25 ¢ / gallon. etc.) So call it 90% evaporated in about 40 years. About the target Fed inflation rate of ‘a little over 2% / year’. Compound that’s a bitch…

    That’s also why I don’t carry large currency holdings for any length of time. Almost all my assets are in non-currency forms. ( I found out my house “went up in value” by more than I’d earned while living in Florida… that really meant that the currency dropped faster, as the house is still what it always was… though needing more repairs now…) The Fed is trying to reflate like crazy while thinking they can avoid a re-bubble in the process; net is just that paper assets are inflating (stocks et. al.) while home prices rise back to bubbleicious land (that was not stable nor real then, so now is better how?…) and wages / purchasing power in real terms decline. THEN they wonder why folks are not buying as much?! Because they can’t. (But since the folks in charge only talk to other folks in the 1% income range, and their portfolios and bonuses let them buy more, they think it makes no sense… they need to talk to burger flippers with a 10 year old car…)

    Sigh. If only it didn’t take decades for all this to play out.

  10. R. de Haan says:

    Wave coming too large to duck under. a very nice interview with Warren Pollack, watch the video.
    http://usawatchdog.com/wave-coming-too-large-to-duck-under-warren-pollock/

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