An already jittery market …

Overnight Chinese markets dropped some 7%, after news that Chinese manufacturing contracted for a 10th straight month.

Some analysts now suggest China – who reportedly contributes between 0.5% to 1% of global GDP – will now drive a global recession in starting in Q2 2016.

Ok, that has looked to me to be the case for a while as the global economy has been slowing for several years. But why might Chinese share prices have dropped so precipitously? One possible explanation (that I personally favour) is heavy handed government intervention during previous sell-offs. The chart below shows the Shanghai markets over the past year. Specifically of interest is the sharp drop of some 32%, from a high on June 5th to July 8th, when regulators banned “large” investors from selling for six months, suggesting they “would deal severely “ with transgressors.

And that ban expires January 8th. Some expect as much as $185 billion of shares to possibly hit markets in due course.

Markets always find a way. And heavy handed government manipulation always backfires.

Oh well, at least in America’s free markets, we have The Plunge Protection Team, who are very, very active in supporting — whoops! stablising, yes stablising the markets.

Ha ha ha, you say tomayto I say tomawto.

Could get exciting.


Working to Live or Living to Work?

The US economy is starting to feel wage pressure, with American median incomes (finally) back to levels last seen before The Great Recession.

So a happy end to 2016, eh? Not really. Even as incomes are rising so are expenditures. The chart below shows how much Americans spend on Health Care and Housing, divided by wages. Effectively, how much from each paycheque goes for the essentials. I’ve calculated this from recession to recession — the vertical gray bars across the horizontal (time) axis.

Its pretty clear that over the past twenty years or so life has been getting more expensive for Americans. Currently some 55% of their pay is going to the essentials; compare to the period immediately BEFORE The Great Recession and you’ll see it was some 50% and before that recession some 46%.

The chart also shows the effect of strong disinflationary forces in the commodity sector across the past two years, with a modest decline. Specifically, in 2011 the essentials cost Americans some 56% of their pay, 2012 55%, 2013 55% and 2014 54%.

Keep in mind health care inflation is running at an eight year high, roughly 5%, with a total cost of about $9K for per person in America.

Do you any money left over at the end of the month?

Depression era crisis in farming?

In spite of stereotypes about the scale and pervasiveness of factory farming, in The United States some 99% of all working farms are family farms, and most farms have annual incomes of less than $350K.

Incomes that are rapidly collapsing, by as much as 50% according to some sources.

Why? The chart below shows the 2015 year to date performance of several agricultural commodities, specifically coffee (-27%), hogs (-27%), wheat (-19%), soybeans (-15%), cattle (-15%) and corn (-9%).

Keep in mind farms may have high fixed costs, perhaps loans used to build infrastructure, that must be paid even as prices and revenue fall.

Low agricultural commodity prices, welcomed by consumers, are helping to drive American farmers into bankruptcy; .

Farmers were the first group to be impacted during the 1930s depression. Is it happening again?

Higher government spending leads to slower growth

ok so US Q3 GDP just revised down to 2.0% from the flash number of 2.1%,. We expect GDP to further disappoint into Q4 2015 and 2016. Why?

The chart below shows the annual change in US real GDP (red line) compared to US Government Expenditures (aka, “spending”) divided by US real GDP (black line). In other words, how much government is spending as a percentage of GDP. Vertical grey bars are periods of US economic recession.

You’ll notice pre-financial crisis while government spending as a percentage of GDP ranged from 24.86% to 29.52%, real growth in GDP averaged 2.6% and 2.7% respectively.

Post financial crisis government spending, as a percentage of GDP, has surged, averaging 37.83%, while read GDP growth has averaged a mediocre 1.2% – yup.

Its pretty simple and illustrated here: increased government spending doesn’t automatically translate into higher economic growth. Rather the contrary. Something we already know and have known, for a long time. When will government catch on?

Well, it gets down to fooling some of the voters some of the time.

Relaunch

and now for some blogging !!
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In Q4 2013 a client asked to stop blogging and give them (sell, actually) exclusive rights on the content I’d been creating at DaveCoker.info. I was perfectly happy to directly monetise content, even if it meant changing structure somewhat. The paying client wanted weekly not daily updates, sorta larger, and also changed the blog’s focus somewhat.
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Fast forward to Q4 2015 and the client’s interests have changed, so they’re not renewing their exclusivity contract. That means once again I’m free to blog (for free! *sigh*) and will begin regularly publishing over the next few weeks.
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Changes: I’ve fallen out of the daily blogging routine, so will likely update less frequently going forward. Also they had be writing some 5K words a week; my “usual” updates are much smaller, so we’ll see how this shakes out.
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But overall: a relaunch of DaveCoker.info

Mixed picture on global inflation

Inflation in New Zealand, inflation in Dubai, low, inflation in Vietnam, low, inflation in India, low, little inflation in China, low inflation in Denmark, low inflation in Australia, low Indonesian inflation, and seemingly low inflation in The United States.

But what about American inflation – can we look deeper? The chart above shows US inflation, first monotonically then broken up as follows: first, overall inflation (CPIAUCSL, black line), compared to Medical Care inflation (CPIMEDSL, blue line), Food and Beverage inflation (CPIFABSL, red line) and Energy inflation (CPIENGSL, yellow line) from June 1st, 2007 – the start of the Credit Crunch – to the present. All series have been based line at the start, the data is captured monthly, Seasonally Adjusted

Across the board, since the onset of The Credit Crunch inflation is relatively subdued, overall running at 3.96%, with medical inflation the highest (7.90%), followed by food (7.28%) and a fall in energy prices of -3.96%. Just ain’t no inflation to be seen.

Most agree that inflation is coming; its just a question of who will be impacted and to what extent, with at least one analyst suggesting ” a 30 percent increase in consumer prices over the next 10 years.” couldn’t be ruled out.

Now you know what I’m holding onto my gold.

Where are the manufacturing jobs?

Lots of happy news in the US media recently about manufacturing in The United States, some suggesting we are the cusp of resurgence, arguing building goods in China no longer makes sense , others suggesting that as the trade deficit is lowered somehow US Manufacturers are “gaining ground”.

However few addressed the real reason why manufacturing jobs are needed – to provide stable, middle class jobs. If there is a “resurgence” where are the jobs? The chart above shows two series – Manufacturing Hires (JTS3000HIL, black line, left axis) and Manufacturing and Trade Industries Sales (CMRMT, blue line, in real dollars, right axis), over the period January, 2000 to July, 2013 with each series captured monthly.

Manufacturing sales are most definitely increasing and have almost rebounded to 2007 levels. However manufacturing employment is moving in the other direction – down. How will it all end?

Not well I suspect. We most definitely are seeing some degree of manufacturing returning to The United States, however this driver of employment is being countered by the rise of robots, with unskilled labor jobs robots performing many unskilled jobs previously held by more expensive – and demanding – humans.

Economist had a great article on robots, particularly on how they are being adapted to work with rather than fully replace humans.

Regardless, any Robotic / Human interaction is subject to European Safety standards, specifically ISO 10218-2:2011, Robots and robotic devices — Safety requirements for industrial robots

Not a taper tantrum but something

Properly used, Corporate Bond ratings are effective tools helping marketing participants to understand risk and return. Simply put, as riskier assets will have lower ratings, and must provide an increase return to investors to entice them to purchase the assets. In other words, “the higher the risk the higher the return”.

The chart above two series, both provided by BofA Merrill Lynch. The black line (BAMLC0A1CAAAEY) tracks the yield of AAA rated corporate debt, while the blue line (BAMLC0A2CAAEY) tracks the yield of AA rated corporate debt. Each series is captured daily for the period September 6th 2012 to September 6th 2013.

On the left side of the chart you’ll see the expected relationship; AA rated debt (blue line) yield more then AAA rated debt (black line); all good. However on the right hand side the relationship is clearly violated, with AAA rated debt yielding more than AA debt. The table below shows both Moody’s and S&P ratings for a variety of borrowers. What’s going on?

Bloomberg offered a fairly detailed explanation, with one analyst suggesting “Investors have been grabbing credit risk over interest rate risk, so there’s more desire for lower credits and a little bit less desire for the AAA credits,”

Forbes suggested the difference in yields reflected little more than a difference in average maturities; i.e., AAA bonds (in their study at least) had a longer maturity and thus reflected higher risk to investors capital. Specifically, “At present, the average AAA has 13.63 years to go before it matures,versus 8.92 for the average AA. The difference, 4.71 years, is unusually large. “

A couple of cogent explanations for a genuine anomaly. Of course I’d suggest that Federal Reserve participation in the debt markets – currently purchasing $85B a month but likely to be reduced – is having an unpredictable effect.

Watch out for taper tantrums in the market as The Fed withdraws.



Is the housing recovery over?

In spite of happy news regarding US housing, I have been pretty negative about the sector’s overall prospects and it now seems the markets are corroborating this view. The chart above shows three series directly related to the US housing market; XHB, the SPDR S&P Homebuilders Index, $DJSHMB, the Dow Jones US Select Home Construction Index and $DJUSHB, Dow Jones US Home Construction Index. Each series is captured daily since May 13th, 2013. Each series demonstrates sharp falls over the period considered, specifically XHB -9.07%, $DJSHMB -18.63% and $DJUSHB -26.45%.

Homebuilders are generally considered a leading indicator of future house prices. If the share price of homebuilders are falling then it seems investors are pricing in a decrease in future sales. Markets can be considered effective predictors, due the fact they integrate the views of large numbers of disparate investors into specific prices.

And we’re seeing three other factors that collectively indicate housing prices are due to slow, and perhaps even reverse in the near term.

First, much of the activity is being driven by individual investors and hedge funds.

Second, spot prices of key commodities – copper and lumber – are falling. In a sustained recovery we’d expect to see the basic building block of housings – copper and lumber – rising not FALLING as demand increases.

And third, as illustrated in the chart below, interest rates are beginning to rise, potentially impacting any further increases in home prices. Over the period in question we’ve seen mortgage rates increasing by roughly 1%, from 3.51% to 4.57%. While this increase might appear modest a one percent rise appears to be just the start.

Summer holiday

The four bedroom brick monster

The four bedroom brick monster

Due to a combination of summer holiday and a series of PhD deadlines I won’t be able to consistently update until Monday, September 2nd Monday, September 9th. I may be able to find time for sporadic updates and will certainly do so if the opportunity. presents.