China is leading markets once again. But, different from the start of the year, this time it’s not guiding markets down. Peace and quiet on the CNY front and improving Chinese macro data are giving investors comfort. China’s GDP (reportedly) grew 6.7% in the first quarter, matching expectations. Not that this is healthy growth, of course. Bank lending is going crazy again. China just can’t give up on its credit-driven growth model. Corporate credit growth topped GDP growth every single year.
#China's credit-driven growth model in one chart! Corporate credit growth outpaced #GDP growth every single year. https://t.co/mvwudZ79Nl
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jeroen blokland (@jsblokland) April 15, 2016
#China's credit-driven growth model in one chart! Corporate credit growth outpaced #GDP growth every single year. https://t.co/mvwudZ79Nl
—jeroen blokland (@jsblokland) April 15, 2016
But don’t let that spoil your opportunistic state of mind. Chinese exports recovered in March and are now growing again. Industrial production, retail sales and fixed asset investment all surprised on the upside. What a couple of percentage points of devaluation won’t do for you.
In case you are wondering why stock markets are so upbeat. #China's exports are growing again. https://t.co/ZQOH7MLq5w
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jeroen blokland (@jsblokland) April 13, 2016
In case you are wondering why stock markets are so upbeat. #China's exports are growing again. https://t.co/ZQOH7MLq5w
—jeroen blokland (@jsblokland) April 13, 2016
If it wasn’t already obvious, China is very much in easing mode. This was confirmed by the massive growth of M1 money supply, which topped 22% in March. This is the fastest pace of money supply growth in over five years.
If you were wondering if #China is easing. M1 money supply growth is the fastest in more than 5 years! https://t.co/XzmFK0xaQB
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jeroen blokland (@jsblokland) April 15, 2016
If you were wondering if #China is easing. M1 money supply growth is the fastest in more than 5 years! https://t.co/XzmFK0xaQB
—jeroen blokland (@jsblokland) April 15, 2016
One thing is still missing from the Chinese growth story, though. Earnings! Earnings of companies included in the Shanghai Composite Index have not grown for four years. Since China could really use some equity inflation, to push debt-to-equity ratios down, earnings seem mandatory.
ICYMI! Earnings of companies included in the #Shanghai composite index have not grown for four(!) years. #China https://t.co/LROg0AFPI7
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jeroen blokland (@jsblokland) April 12, 2016
ICYMI! Earnings of companies included in the #Shanghai composite index have not grown for four(!) years. #China https://t.co/LROg0AFPI7
—jeroen blokland (@jsblokland) April 12, 2016
China was among the very few countries that got an IMF growth upgrade this week. For the global economy, however, the IMF, again, lowered its GDP forecast. For 2016 it now equals 3.2%. But, other than some really cool graphs, the World Economic Outlook should be taken with a grain of salt. The IMF is just not that great in forecasting GDP growth.
The #IMF lowers global #GDP growth forecast to 3.2%. Add dot below. IMF is lousy at forecasting (@ReutersJamie) https://t.co/b1RvExyk0n
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jeroen blokland (@jsblokland) April 12, 2016
The #IMF lowers global #GDP growth forecast to 3.2%. Add dot below. IMF is lousy at forecasting (@ReutersJamie) https://t.co/b1RvExyk0n
—jeroen blokland (@jsblokland) April 12, 2016
What is perhaps less difficult to forecast is the debt-to-GDP ratio. Because it tends to go up, all the time!
Never in the post-WOII era was the global debt-to-GDP ratio this high! (ht @Schuldensuehner) https://t.co/4JmC9xzekG
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jeroen blokland (@jsblokland) April 13, 2016
Never in the post-WOII era was the global debt-to-GDP ratio this high! (ht @Schuldensuehner) https://t.co/4JmC9xzekG
—jeroen blokland (@jsblokland) April 13, 2016
More debt is problematic for banks. We understand that ever since the Lehman crisis, right? Banks have been pretty poor investments, especially in Europe.
BAD BANKS! https://t.co/QyYIrlKQYA
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jeroen blokland (@jsblokland) April 11, 2016
BAD BANKS! https://t.co/QyYIrlKQYA
—jeroen blokland (@jsblokland) April 11, 2016
In fact, it seems that two European countries are stuck in a ‘financials race to the bottom.’ In both Greece and Portugal the stock market value of financial companies has evaporated completely.
ICYMI! #Greece and #Portugal are in the wrong kind of race to the bottom. #Financials meltdown! https://t.co/odn3tZ8ZJ7
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jeroen blokland (@jsblokland) April 13, 2016
ICYMI! #Greece and #Portugal are in the wrong kind of race to the bottom. #Financials meltdown! https://t.co/odn3tZ8ZJ7
—jeroen blokland (@jsblokland) April 13, 2016
One particular dire case is the fall of the world’s oldest bank, Italy’s Banca Monte Dei Paschi di Siena.
Classic #Italy chart. Banca Monte dei Paschi, the world's oldest bank, is down 99.3% since December 2007. https://t.co/Z0WijaPej6
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jeroen blokland (@jsblokland) April 12, 2016
Classic #Italy chart. Banca Monte dei Paschi, the world's oldest bank, is down 99.3% since December 2007. https://t.co/Z0WijaPej6
—jeroen blokland (@jsblokland) April 12, 2016
Over to the U.S., where GDP forecasts have come down considerably in recent weeks. The Atlanta Fed GDPnow nowcast (difficult combo) suggests the American economy almost stagnated in Q1, making a recession more likely. For investors earnings could be a much bigger threat, however. Earnings recessions have often coincided with equity bear markets. And since Q1 S&P 500 Index earnings growth is expected to be way below zero, this is one to keep in mind.
#Earnings #recession = #bearmarket! Well, most of the time. https://t.co/ea0TyRJBoz
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jeroen blokland (@jsblokland) April 13, 2016
#Earnings #recession = #bearmarket! Well, most of the time. https://t.co/ea0TyRJBoz
—jeroen blokland (@jsblokland) April 13, 2016
Meanwhile, defaults keep rising. Especially in the commodities space. US commodity-related HY bonds are now defaulting at a 15% pace. Still, back in February spreads suggested 50% of HY energy companies would go bust, so we are still kind of ‘ok’ here.
The US high yield #commodity-related #default rate now tops 15%! via @creditsights https://t.co/iLWiimRIB0
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jeroen blokland (@jsblokland) April 14, 2016
The US high yield #commodity-related #default rate now tops 15%! via @creditsights https://t.co/iLWiimRIB0
—jeroen blokland (@jsblokland) April 14, 2016
Employment keeps powering ahead. While Fed people have made a habit of selectively overlooking employment data, things are actually looking pretty strong. Initial jobless claims fell to the lowest level since 1973. I think that warrants at least a couple of rate hike, don’t you Ms. Yellen?
US Initial Jobless Claims fall to lowest level since 1973! Sure no rate hikes. https://t.co/XujCR3ZUG7
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jeroen blokland (@jsblokland) April 14, 2016
US Initial Jobless Claims fall to lowest level since 1973! Sure no rate hikes. https://t.co/XujCR3ZUG7
—jeroen blokland (@jsblokland) April 14, 2016
Two to go! First, if you think London’s property sector is crazy, try Hong Kong. That’s just nuts!
If you think #London is crazy, check out house price appreciation in #HongKong. Great chart by @RBS_Economics https://t.co/eEnzIEuQ05
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jeroen blokland (@jsblokland) April 12, 2016
If you think #London is crazy, check out house price appreciation in #HongKong. Great chart by @RBS_Economics https://t.co/eEnzIEuQ05
—jeroen blokland (@jsblokland) April 12, 2016
And talking about ‘nuts.’ Check out Japan’s little QE game. The Bank of Japan owns a third of all outstanding Japanese government debt. Hello!
In case you did miss it. The Bank of Japan owns a massive one third of all outstanding Japanese government #debt! https://t.co/MEMQuvGNTQ
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jeroen blokland (@jsblokland) April 14, 2016
In case you did miss it. The Bank of Japan owns a massive one third of all outstanding Japanese government #debt! https://t.co/MEMQuvGNTQ
—jeroen blokland (@jsblokland) April 14, 2016