Sunday, February 26th, 2012
Emerging Markets Radar (February 27, 2012)
- To spur lending, China cut the amount of cash that banks must set aside as reserves for the second time in three months. Reserve requirements will fall by 50 basis points effective February 24, the People’s Bank of China stated on its website, freeing up approximately RMB 400 billion. Experts have found out that China will further cut reserve rate depending on the direction of the Purchasing Manager’s Index (PMI) and Consumer Price Index (CPI). The required reserve ratio is lowered to 20.5 percent for large banks and 18.5 percent for medium and small banks.
- China’s Central Huijin aims to be an active investor in institutions it takes holdings in and ensure the smooth development of those companies, the official Xinhua News Agency reported on Tuesday.
- The China HSBC Flash PMI is 49.7 for February, improving 9 basis points from 48.8 in January.
- Xiangshan County in China’s eastern province of Zhejiang canceled restrictions on buying homes starting this year, National Business Daily reports, citing an unidentified source from the local property industry. Just last week Shanghai Securities News reported that Shanghai had eased some restrictions, and subsequently the city denied it was a new measure, claiming that it had always been on the books. This is the pattern in China now where the local governments don’t like the headline news saying they have relaxed housing curbs.
- Poland sold a further stake in the country’s largest power utility, raising the most from asset sales in eight months to help finance the budget deficit. The budget deficit in 2011 was 25.1 billion zloty, much lower than the projected 40.2 billion, due to lower government spending and higher revenues.
- Malaysia’s inflation appears to have peaked, with the CPI falling slightly to 2.7 percent year-over-year in January from 3 percent in December. RGE Monitor is predicting that slow GDP and demand growth will keep inflation subdued throughout 2012, despite higher food prices.
- China’s January home prices recorded their worst performance in at least a year, with none of the 70 cities monitored by the government posting gains, as Premier Wen Jiabao reiterated his determination to maintain property curbs. Nevertheless, the market expects the government to relax curbs in some ways after Liang Hui, the two annual congressional conferences.
- Thailand’s fourth quarter GDP shrank 9 percent, the first contraction in more than two years. The median Bloomberg estimate was for a decline of 5 percent, due the flooding last fall. However, this is one-off event and the country is in the process of recovery.
- Taiwan’s fourth quarter GDP was up 1.89 percent, closely in line with the estimated 1.9 percent.
- Singapore’s industrial production declined 8.8 percent in January, falling the most in eight months due to reduced electronics demand and overall lunar New Year effects.
- Liquidity measures announced by the Hungarian central bank are aimed at alleviating the ongoing credit. The two-year lending facility will provide support for sovereign debt prices, but RGE Monitor expects only limited pass-through to household and corporate credit due to higher risk aversion and sluggish growth.
- According to Brazil’s monthly activity indicator, the economy grew 2.7 percent year-over-year in 2011, short of Roubini’s 3 percent forecast. This can be attributed to the combination of Brazil’s business cycle, tighter macroeconomic conditions (both fiscal and monetary) and a depressed global economy, which has made the deceleration much sharper than originally expected.
- McKinsey Global Institute highlighted in its latest quarterly piece that in order for Vietnam to continue on a strong GDP growth trajectory, the country faces a number of challenges. According to official Vietnam statistics, growth in the country’s labor force will probably decline to about 0.6 percent per year over the next decade, down from 2.8 percent between 2000 and 2010. The larger challenge long-term for the country is that the robust growth, which stemmed in the past from a young, growing labor force and the transition from agriculture to manufacturing and services, will be challenged as Vietnam needs new sources of growth to replace them. The demographic tailwind responsible for driving a third of Vietnam’s past growth is slackening. Some companies already report labor shortages in major cities, and by 2020, the share of the population aged 5 to 19 is projected to drop to 22 percent, from 27 percent in 2010 and 34 percent in 1999.
- South Africa will report fourth quarter GDP on February 28. Stronger output data in the fourth quarter suggests that growth expanded by 3.1 percent in 2011 overall, driven mainly by domestic demand.
- The chart below shows an increasing number of cities that see home prices declining. Many believe declining home prices are the triggers for the Chinese central government to ease the housing restrictions.
- While earnings for 2012 are estimated to be 37 percent higher than they were in 2007, the Russian equity index is 25 percent below the 2007 level – the largest gap among emerging markets.
- As of February 20, big 4 banks’ new deposit in February was CNY 310 billion, 150 billion lower than that of February 10, which indicates a cash outflow at banks in the past ten days which is causing tight liquidity.
- Riding a populist wave, Russian Prime Minister Vladimir Putin suggested that rising loan rates are fanning inflation and ordered his finance minister to intervene. VTB’s CEO Andrey Kostin responded through an article in the Financial Times stating that without additional liquidity from the central bank, VTB will stop increasing its loan book.
Tags: Agriculture, Asset Sales, Bank Of China, Basis Points, Budget Deficit, Consumer Price Index, Eastern Province, government spending, Index Cpi, Local Governments, National Business, Purchasing Manager, Reserve Ratio, RGE Monitor, S Central, Shanghai Securities News, Smooth Development, Unidentified Source, Xiangshan, Xinhua News Agency, Zhejiang
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Wednesday, August 26th, 2009
Nouriel Roubini’s RGE Monitor has just published a report examining China’s direct and indirect influences on global asset markets, and particularly equity, commodity and forex markets. Although the full report is only available to RGE’s subscribers, the abridged version nevertheless provides useful insight as reported in the paragraphs below.
The Shanghai composite index has fallen almost 20% from its August 4 peak, putting it within the traditional definition of a bear market. Thus far this year, however, the index has risen over 50%, and it has surged even more since its low in late 2008. Yet Chinese equities remain vulnerable given the liquidity outlook and the challenges of using relatively blunt tools to guide asset markets.
Correlations between Chinese and global equities (especially emerging market equities) have increased since 2007. Economies most reliant on Chinese investment, or on the commodities consumed by China, tend to show the most significant correlations. Yet even the markets of Central and Eastern Europe have shown greater co-movements. While Mainland markets are dominated by domestic investors and foreign investment is heavily restricted, they have vaguely led global markets, being among the first to begin to fall from overheated heights in early 2008 and the first to climb in late 2008 following China’s stimulus announcement.
China’s linkages with global markets, to the extent that they exist, seem more macro than financial. The same government policies designed to avoid bubbles and limit further misallocation of capital – including the slowing of credit extension currently underway – could not only restrain frothy Chinese equities, some investors worry, but also suggest that the Chinese and global recovery will be weaker.
Thus steps taken to “fine-tune” Chinese monetary policy and cool overheating in some sectors of the economy, could contribute to more global market volatility. A burst Chinese bubble could reduce Chinese demand and prefigure poor performance in other markets as liquidity is withdrawn. While markets in the US and Europe seem more likely to take their cues from local trends–particularly the corporate earnings and economic growth outlooks than Chinese markets, a slowdown in Chinese demand, could give pause. An increase in exports to China is among factors supporting European exports in Q2.
Chinese equities were looking very bubbly in July and early August, and in our most recent economic outlook, we highlighted developing asset bubbles in China’s property and equity markets as one of several potential risks of China’s stimulus. Chinese liquidity has begun to be less loose, even if it is not yet tight and inflows to Chinese equity markets have slowed from July onwards. Several trends which supported equity markets in H1 2009—record bank lending with few restrictions, the improvement in consumer confidence, the deferral of IPOs—are no longer supportive. Inflows to the Chinese equity market slowed in July 2009 as bank lending slowed and government regulators suggested a closer look would be taken at the allocation of funds. Meanwhile price/earnings ratios are no longer as cheap, having almost doubled from their late 2008 lows. Corporate earnings may stay weak given the difficulty in passing on higher production costs. All of these factors suggest that Chinese equities might have farther to fall.
On the plus side, further correction might have only a limited effect on the Chinese economy, given lower wealth effects than in developed markets. Market capitalization is a much smaller share of GDP and equity investment is a much smaller share of savings. Sentiment is affected. New accounts opened by Chinese retail investors have fallen since their late July peak. The reluctance of retail investors to incur losses could contribute to a boom and bust cycle, negatively affecting Chinese and global asset markets.
Chinese commodity demand
Record commodity imports, particularly of metals, contributed to the commodity price climb in H1 2009 (pumped up by the ample liquidity from zero interest rate policies and quantitative easing). A sustained reduction in Chinese imports of commodities is perhaps the biggest risk to global commodity markets, particularly metals. In fact there is some preliminary evidence that the extensive stockpiling that contributed to the record volumes of commodity imports early in 2009 may be slowing as prices rise. The volume of imports of key metals like copper, tin and aluminum has slowed in either June or July 2009. While this reduction may reflect seasonal trends, with stockpiles filled and costs high, a further slowdown should not be ruled out.
Chinese imports of commodities, especially base metals, grew sharply in the first half of 2009 as China sought to restock depleted reserves and build up new stockpiles. Even the infrastructure-heavy stimulus likely absorbed only some of the imports, suggesting that China might be on the verge of a commodity glut Further purchases, particularly later in Q2, may have extended beyond the official stockpiling to include investors who took physical delivery as a hedge.
Yet, not all of the increased demand is due to stockpiling. Metal processing has been a key part of China’s fiscal stimulus – with any excess production purchased by the government. There have been reports that some of the state metal and grain reserves became net sellers domestically, suggesting the pace of imports might slow. The Baltic Dry Index, a measure of shipping costs that reflects demand for bulk commodities, has fallen from its 2009 highs. Import volumes of several key metals fell in June and July 2009. Should they fall further, and should global stock piles grow, commodity prices could correct from their current levels.
Chinese commodity purchasers are in part price-sensitive. In 2008, Chinese producers made due with cheaper alternatives to expensive ores. Purchases of scrap copper and aluminum rose in July 2009 even as the imports of higher-grade ore and materials fell. While the continued demand for scrap metal does suggest some underlying metal demand from Chinese consumers, they have their price.
Despite China’s role as the largest consumer of many commodities, it has had limited success as a price setter despite its influence as one of the largest demanders of most commodities. Unwilling to accept the 33% negotiated by Japanese companies and their ore suppliers for bulk shipments, China held out for 40-50% reductions – a concession suppliers were reluctant to give. Only one – Fortescue, a relatively small producer, agreed to a 35% price cut.
Unlike metal ore imports, whose volumes have doubled and in some cases tripled from 2008 levels, oil imports have only recently topped 2008 levels. Chinese oil imports did report a sharp increase to 19 million tons in July, well above recent levels, perhaps due to demand from new refineries. Yet end user demand in China and globally has not climbed much even as supply has inched up again – OPEC members have been increasing production. Worse than expected macro news, meanwhile, would likely contribute to a correction, to the $50 range more in line with supply/demand fundamentals.
Yet, liquid financial conditions and the improving “less bad” macro climate may keep commodity prices in their current US$ 70 range, despite weak demand and an increase in storage Should oil prices keep climbing, they could put a damper on the economic recovery and on the revival of energy demand. Yet over the next few years, supply constraints supply, limited investment and high production costs for the new supplies that are entering the market could keep prices elevated and a damper on global growth, especially among the oil importers like China, India and the US
Source: RGE Monitor, August 26, 2009.
Tags: Asset Markets, Bear Market, Central And Eastern Europe, Chinese Investment, Commodities, Correlations, Domestic Investors, Emerging Market, Emerging Markets, Fine Tune, Foreign Investment, Forex Markets, Global Equities, Global Markets, Global Recovery, Government Policies, India, Indirect Influences, Market Volatility, Misallocation, oil, RGE Monitor, Sectors Of The Economy, Shanghai Composite Index
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Tuesday, August 18th, 2009
The following article is a guest contribution from RGE Monitor, and Nouriel Roubini’s Project Syndicate, August 16, 2009.*
Where is the US and global economy headed? Last year, there were two sides to the debate. One camp argued that the recession in the US would be V-shaped—short and shallow. It would last only eight months, like the two previous recessions of 1990-1991 and 2001, and the world would decouple from the US contraction.
Others, including me, argued that given the excesses of private sector leverage (in households, financial institutions and corporate firms), this would be a U-shaped recession—long and deep. It would last about 24 months, and the world would not decouple from the US contraction.
Today, 20 months into the US recession—a recession that became global in the summer of 2008 with a massive recoupling—the V-shaped decoupling view is out the window. This is the worst US and global recession in 60 years. If the US recession were—as is most likely—to be over at the end of the year, it will have been three times as long and about fives times as deep—in terms of the cumulative decline in output—as the previous two.
Today’s consensus among economists is that the recession is already over, that the US and global economy will rapidly return to growth and that there is no risk of a relapse. Unfortunately, this new consensus could be as wrong now as the defenders of the V-shaped scenario were for the past three years.
Data from the US—rising unemployment, falling household consumption, still declining industrial production and a weak housing market—suggests that the US recession is not over yet. A similar analysis of many other advanced economies suggests that, as in the US, the bottom is quite close, but it has not yet been reached. Most emerging economies may be returning to growth, but they are performing well below their potential.
Moreover, for a number of reasons, growth in the advanced economies is likely to remain anaemic and well below trend for at least a couple of years.
The first reason is likely to create a long-term drag on growth: Households need to deleverage and save more, which will constrain consumption for years.
Second, the financial system— both banks and non-bank institutions—is severely damaged. Lack of robust credit growth will hamper private consumption and investment spending.
Third, the corporate sector faces a glut of capacity, and a weak recovery of profitability is likely if growth is anaemic and deflationary pressures still persist. As a result, businesses are not likely to increase capital spending.
Fourth, the releveraging of the public sector through large fiscal deficits and debt accumulation risks crowding out a recovery in private sector spending. The effects of the policy stimulus, moreover, will fizzle out by early next year, requiring greater private demand to support continued growth.
Domestic private demand, especially consumption, is now weak or falling in over-spending countries (the US, UK, Spain, Ireland, Australia and New Zealand, etc.), while not increasing fast enough in over-saving countries (China, other Asian countries, Germany and Japan, etc.) to compensate for the reduction in these countries’ net exports. Thus, there is a global slackening of aggregate demand relative to the glut of supply capacity, which will impede a robust global economic recovery.
There are also now two reasons to fear a double-dip recession. First, the exit strategy from monetary and fiscal easing could be botched, because policymakers are damned if they do and damned if they don’t. If they take their fiscal deficits (and a potential monetization of these deficits) seriously and raise taxes, reduce spending and mop up excess liquidity, they could undermine the already weak recovery.
But if they maintain large budget deficits and continue to monetize them, at some point—after the current deflationary forces become more subdued—bond markets will revolt. At this point, inflationary expectations will increase, long-term government bond yields will rise and recovery will be crowded out.
A second reason to fear a double-dip recession concerns the fact that oil, energy and food prices may be rising faster than economic fundamentals warrant, and could be driven higher by the wall of liquidity chasing assets, as well as by speculative demand. Last year, oil at $145 a barrel was a tipping point for the global economy, as it created a major income shock for the US, Europe, Japan, China, India and other oil-importing economies. The global economy, barely rising from its knees, could not withstand the contractionary shock if similar speculative forces were to drive oil rapidly towards $100 a barrel.
So, the end of this severe global recession will be closer at the end of this year than it is now, the recovery will be anaemic rather than robust in advanced economies, and there is a rising risk of a double-dip recession. The recent market rallies in stocks, commodities and credit may have gotten ahead of the improvement in the real economy. If so, a correction cannot be too far behind.
©2009 / PROJECT SYNDICATE
Nouriel Roubini is chairman of Roubini Global Economics and a professor at the Stern School of Business, New York University.
Tags: Commodities, Consensus, Contraction, Economic Recovery, Economists, Eight Months, Emerging Economies, Emerging Markets, Excesses, Financial Institutions, Global Economy, Global Recession, Household Consumption, Households, Housing Market, India, Leverage, Nouriel Roubini, oil, Private Sector, Project Syndicate, Recessions, Relapse, RGE Monitor
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Friday, July 17th, 2009
The following is a statement from Dr. Nouriel Roubini, chairman of RGE Monitor and professor at New York University’s Stern School of Business, on the US economic outlook:
“It has been widely reported today [Thursday] that I have stated that the recession will be over ‘this year’ and that I have ‘improved’ my economic outlook. Despite those reports – however – my views expressed today are no different than the views I have expressed previously. If anything my views were taken out of context.
“I have said on numerous occasions that the recession would last roughly 24 months. Therefore, we are 19 months into that recession. If as I predicted the recession is over by year end, it will have lasted 24 months with a recovery only beginning in 2010. Simply put I am not forecasting economic growth before year’s end.
“Indeed, last year I argued that this will be a long and deep and protracted U-shaped recession that would last 24 months. Meanwhile, the consensus argued that this would be a short and shallow V-shaped 8 months long recession (like those in 1990-91 and 2001). That debate is over today as we are in the 19th month of a severe recession; so the V is out of the window and we are in a deep U-shaped recession. If that recession were to be over by year end – as I have consistently predicted – it would have lasted 24 months and thus been three times longer than the previous two and five times deeper – in terms of cumulative GDP contraction – than the previous two. So, there is nothing new in my remarks today about the recession being over at the end of this year.
“I have also consistently argued – including in my remarks today – that while the consensus predicts that the US economy will go back close to potential growth by next year, I see instead a shallow, below-par and below-trend recovery where growth will average about 1% in the next couple of years when potential is probably closer to 2.75%.
“I have also consistently argued that there is a risk of a double-dip W-shaped recession toward the end of 2010, as a tough policy dilemma will emerge next year: on one side, early exit from monetary and fiscal easing would tip the economy into a new recession as the recovery is anemic and deflationary pressures are dominant. On the other side, maintaining large budget deficits and continued monetization of such deficits would eventually increase long term interest rates (because of concerns about medium term fiscal sustainability and because of an increase in expected inflation) and thus would lead to a crowding out of private demand.
“While the recession will be over by the end of the year the recovery will be weak given the debt overhang in the household sector, the financial system and the corporate sector; and now there is also a massive re-leveraging of the public sector with unsustainable fiscal deficits and public debt accumulation.
“Also, as I fleshed out in detail in recent remarks the labor market is still very weak: I predict a peak unemployment rate of close to 11% in 2010. Such large unemployment rate will have negative effects on labor income and consumption growth; will postpone the bottoming out of the housing sector; will lead to larger defaults and losses on bank loans (residential and commercial mortgages, credit cards, auto loans, leveraged loans); will increase the size of the budget deficit (even before any additional stimulus is implemented); and will increase protectionist pressures.
“So, yes there is light at the end of the tunnel for the US and the global economy; but as I have consistently argued the recession will continue through the end of the year, and the recovery will be weak and at risk of a double dip, as the challenge of getting right the timing and size of the exit strategy for monetary and fiscal policy easing will be daunting.”
Source: RGE Monitor, July 16, 2009.
Tags: 19 Months, Consensus, Contraction, Economic Growth, Economic Outlook, Economy, GDP, New York University, Nouriel Roubini, Occasions, Recession, RGE Monitor, School Of Business, Stern School Of Business, Three Times, Year End
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Monday, June 22nd, 2009
This post is a guest contribution by Rebecca Wilder*, author of the of the News N Economics blog.
Consumption spending is the “wild card” for the economic outlook in many developed economies (and developing, too, i.e., China). Massive wealth loss has increased saving around the world; and in countries like the US, I still see a very big question mark as to how discrete will be the shift in saving behavior. Or better yet, how far will the deleveraging process go? Will saving remain at its current 5.7% of disposable income? Go to 7%? Or 10%?
The answer is that nobody really knows. Nevertheless, the effects of increased saving and/or reduced consumption on economic growth to date have been devastating. In the US, consumption took -2.75% and -2.99% from overall growth in Q3 and Q4 2008, respectively (see the BEA’s contributions to GDP growth table).
The drag coming from consumption is global. Below are several regional illustrations of the average annual retail sales growth rate (per month) for 2008 and 2009 to date. Out of the 27 countries listed below, 18 posted a positive average annual growth rate in 2008, while just 5 saw the same in 2009 ytd. Note: I do not have access to “good” data for Latin America. I urge you to visit Vitoria Saddi’s blog, Latin America and Brazil – On Economics and Politics; she recently wrote a nice piece summing up the expansionary monetary policy across Latin America.
Note: For each graph below, the month listed in parenthesis next to the country name indicates the latest data point for retail sales. 2008 is the average annual growth rate spanning the months January to December. 2009 is the average annual growth rate January to date.
Retail Sales in Asia: Australia and China holding on
Retail Sales in Western Europe: Ireland and Greece give the rest of Europe some perspective
Retail Sales in Emerging Europe: Latvia suffers, and Poland just barely holding on. The RGE Monitor had a nice article about Latvia and Emerging Europe not too long ago.
Retail Sales in the US and Canada: US consumers dropped off the map; both countries are showing signs of stabilization (the “not falling as quickly” story).
Looks bad – no wonder the consumer outlook is key to many economic futures.
Source: Rebecca Wilder, News N Economics, June 21, 2009.
* Rebecca Wilder is an economist in the financial industry. She was previously an assistant professor and holds a doctorate in economics.
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Tags: Asia Australia, Bea, Brazil, Canadian Market, Consumption, Disposable Income, Economic Growth, Economic Outlook, Emerging Europe, Expansionary Monetary Policy, GDP, GDP Growth, January To December, Latin America, Massive Wealth, Q3, Q4, Question Mark, Retail Sales Growth, RGE Monitor, Western Europe, Wild Card
Posted in Brazil, Markets, Outlook | 1 Comment »
Tuesday, June 16th, 2009
Nouriel Roubini, of RGE Economics, declared at a Reuters Summit Tuesday that Oil and Gold are not reflecting their fundamentals and have come too far too soon.
Reuters: Oil and gold are overvalued at current prices, which do not reflecting their market fundamentals, economist Nouriel Roubini said at the Reuters Investment Outlook Summit on Tuesday.
Roubini, who is known for having predicted the financial crisis that rocked the global economy in the past two years, painted an economic backdrop of deflationary risks and warned that if oil keeps climbing toward the $100 level it would deal an “economic shock” similar to the one last seen in 2008.
The recent rally in oil, which sent prices to an eight-month high above $73 per barrel, was “too high too soon,” Roubini told the Reuters Investment Outlook Summit in New York.
U.S. crude oil reached a record high near $150 per barrel in July 2008 based on overly bullish global demand expectations, but prices have since more than halved with the global economic slowdown.
Roubini, who is chairman of economics research firm RGE Monitor, said the current price of gold looks overextended as deflation is likely to outweigh any risks of inflation in the near term.
“For the next two years, deflationary pressure is going to be dominant, and it is going to become a time bomb down the line if and when we keep monetizing large deficits. It may be too soon to hedge with gold,” he said.
“Unless we have high inflation, or…other risks like depression, gold looks toppy,” he said.
Gold could spike again whenever there is rising risk aversion, he said, though noting that bullion prices had declined after the Lehman Brothers debacle in September last year.
Source: Reuters, June 16, 2009
Tags: Bullion Prices, Crude Oil, Current Price Of Gold, Debacle, Deflation, deflationary pressure, Economic Backdrop, Economic Shock, Economics Research, Global Demand, Global Economic Slowdown, Global Economy, Gold, Gold Bullion, Investment Outlook, Lehman Brothers, Market Fundamentals, oil, Price Of Gold, Reuters, RGE Monitor, Risk Aversion, Time Bomb
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Thursday, April 9th, 2009
This post is a guest contribution by Nouriel Roubini*, RGE Monitor.
Today we take a closer look at the economic outlook for China, a preview of our global economic outlook which will be made available to advisory level clients in the coming weeks. China, the world’s second largest economy by purchasing power parity, contributed over 10% to global economic output in 2007 and 2008 and is thus a key part of any recovery of the global economy.
As Nouriel Roubini notes in a recent report following a mid-March trip to China (available to RGE Monitor’s Premium Subscribers), it is clear that China faced a severe deceleration of growth in H2 2008 based on a number of indicators: GDP which was close to zero on a q/q basis, industrial production, production of electricity, PMI, weakness of auto sales, fall in residential home sales, manufacturing data, falling imports and exports. In fact, calculated on a q/q basis like most other countries, Chinese growth (which is reported only on a year on year basis) was practically zero and even negative by some private sector estimates.
However, there are greater signs of economic recovery in March from the depths of Q4 2008 and most forward looking indicators suggest that Q2 2009 through Q4 2009 growth will accelerate relative to the dismal Q4 of 2008 and weak Q1 of 2009. In particular, economic data for China (including loan growth, the PMI, recovery in residential sales volume – if not prices, and public investment) do point to a stabilization or even slight improvement but we at RGE Monitor still see risks that Chinese growth will be well below the government target of 8% and even below the 6.5% level that the IMF and World Bank are predicting – a figure of 5-6% seems more likely. The more optimistic outlook for Chinese growth would require a recovery in the global economy, especially the U.S. in the second half of 2009, a development that seems more likely to come in 2010. It seems too soon to point to an economic recovery, particularly in the absence of a rebound in demand from the G3 economies (U.S., EU and Japan) which absorb most of Chinese exports.
There are other risks to this scenario. First, the Chinese policy stimulus could turn out to be insufficient and further stimulus could be delayed. Second if a drugged recovery – via easy money, loose fiscal policy and easy credit – leads to further over-capacity (of which there is some evidence), it could result in rising non-performing loans, falling profits or rising losses.
Given the collapse of external demand, the exports are now in free fall while the policies that will eventually lead to greater consumption have been woefully slow to be implemented. The job of lifting domestic demand is mostly in the hands of an aggressive (“pro-active” in their term) fiscal policy and a more easy (“moderately easy” in their terms) monetary and credit policy. Although government-linked investment rose sharply beginning in February 2009, private sector capital expenditure (mostly financed via retained earnings) is likely to stay weak in 2009 given sharp profit declines. Furthermore, although indicators of private consumption like retail sales have remained relatively robust, they are growing at a slower pace compared to H2 2008. The extent of job losses and falling incomes as well as negative consumer confidence may slow consumption further going forward, particularly in urban areas, despite government incentives.
Despite the fact that China’s aggressive policy response included monetary easing, scaling up of bank lending and a particularly aggressive scaling up of government investment to offset the contraction in private demand, there is an increased risk that China will grow only in the 5-6% range year on year in 2009, about half its average growth of the previous five years, and well below potential. Such a growth rate would increase pressures on China’s government as the hard landing has been accompanied by job losses and factory closures as well as implying that Chinese commodity demand could continue to be lower than recent trends.
There are signs that the government is increasingly front-loading its investment and backstopping bond issuances of cash-strapped regional and local governments who are being expected to provide their own contributions. And although implementation has been slow, the government has tweaked its spending to increase that allocated to social welfare programs. China is also taking the time to allocate spending to meet longer term goals including increasing the share of renewable fuels in its energy mix. However, the finance ministry’s implicit 3% of GDP bound for its fiscal deficit mean that revenue shortfalls might limit additional spending should it be needed in 2010. Nonetheless, China’s domestic savings, its low debt, and the fact that it is still attracting FDI, albeit at a slower pace than 2008, imply that it is better positioned than many of its EM peers, in part because it can raise funds domestically to finance its deficits.
The structural reasons for high Chinese savings rates still persist. And with the Chinese yuan having returned to its implicit peg to the U.S. dollar, Chinese reserve accumulation and purchase of U.S. assets could again be quite strong in 2009. However, lower net hot money inflows could contribute to keep the pace of reserve accumulation below the one displayed in 2008.
But the gap between a very weak U.S. and global economy and the Chinese growth target of 8% for 2009 is wide and given the sluggish outlook for the U.S. and global economy, China may continue to grow below potential in 2010. There is also another important caveat: even once the U.S. economy recovers, it will rely less on consumption and imports and more on an improvement in net exports. The world where the U.S. was the consumer of first and last resort – spending more than its income and running ever larger current account deficit – and where China was the producer of first and last resort – spending less than its income and running ever larger current account surpluses – is changing.
*Nouriel Roubini is Professor of Economics at the Stern School of Business at NYU and Chairman of RGE Monitor.
Tags: Chinese Growth, Deceleration, Economic Data, Economic Output, Economic Recovery, Global Economic Outlook, Global Economy, Imports And Exports, Loan Growth, Mid March, Nouriel, Optimistic Outlook, Production Of Electricity, Public Investment, Purchasing Power Parity, Residential Home Sales, Residential Sales Volume, RGE Monitor, Roubini, Slight Improvement, Stern School Of Business, Target, Trip To China
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Sunday, February 22nd, 2009
By RGE Monitor
Bank rescue via TARP funds, the bailout of the GSEs and two fiscal stimulus packages have put severe pressure on the US fiscal deficit since 2008. Despite having little bang for the buck in the short-term, the recently passed $787 bn fiscal stimulus package will have a bill of $185 bn in FY2009 and $399 bn in FY2010 (based on Congressional Budget Office estimates), adding to the US governments financing needs.
Given further downside risks to growth and bank losses, another stimulus package and more funds for bank recapitalization will be required during 2009-10.
After a deficit of $455 bn in FY2008, these expenditures will push the US fiscal deficit to $1.6-1.8 trillion in FY2009 (already $569 bn in Oct 2008-Jan 2009) and over a trillion in FY2010. This along with plunging individual, corporate and investment related tax revenues imply the country’s target to balance the budget by 2012 might not be achieved. The Congress has already raised the ceiling for national debt to $12 trillion while the govt debt/GDP ratio is expected to exceed 85% in FY 2009.
The financing needs of the US government will thus be very high in 2009 and 2010, leading many to question how these needs will be met, particularly as the reduction in commodity prices and capital inflows to emerging markets has slowed central bank reserve accumulation. Treasury yields have already been rising from their November 2008 lows on concerns of increased supply. Suspicions that the interventions will raise Treasury debt issuance could exacerbate the sell-off in longer-dated Treasuries – the benchmark 10-year note broke above 3% on February 9 for the first time since November 2008.
There are several stumbling blocks ahead for treasuries. Despite some recent climbs, yields are still near record lows, leaving little scope for further capital gains from price appreciation. The low or negative carry of US treasuries over sovereign debt elsewhere plus the long-term downtrend in the dollar erodes the relative appeal and total return of treasuries to their foreign holders.
Meanwhile US retail investor purchases of savings bonds have been declining for the past 20 years.
Foreign central bank purchases of US debt to build up FX reserves may wane as export receipts fall on a contraction of global trade. Foreign treasuries are turning their spending inwards to stimulate their own slumping economies which may reduce their purchases of US assets. Middle Eastern oil exporters, for example, are absorbing most if not all of their now much lower oil revenues at home. Saudi Arabia’s foreign assets fell in December in what could be the start of a trend.
Crowding in the world market for government debt could intensify the competition for buyers. While Treasury issuance will reach unprecedented levels this year, other governments around the world are in similar predicaments and will pay higher yields to absorb their debt supply increases.
Although the scale of increase in treasury issuance is quite extensive, there is reason to believe that demand will hold up. Risk aversion, debt monetization, deflation, deleveraging, and USD funding shortages abroad as corporates seek to refinance their debt may cap the rise in treasury yields. Uncertainty over the effectiveness of the government’s interventions may keep risk appetite fragile and the preference for liquid assets high as corporations, especially in the emerging world, seek to refinance their debt and governments provide capital to the banks.
The lack of a quick fix to the financial crisis adds support to treasuries as investors may continue to shift from risky assets to fixed income especially Treasuries even if the flight to the shortest-term assets may wane.
Like the Treasury, the Federal Reserve is considering using old tools to solve current problems. At the last FOMC meeting on January 28, the Fed announced it was prepared to buy longer-term treasuries to keep long-term market interest rates low. Debt monetization may fail to keep treasury yields low though, if markets believe quantitative easing will fail.
Strong deflationary headwinds (such as anemic credit growth) could pare the premature climb in inflation expectations seen so far this year.
Finally, as the US savings rate increases back to its decade ago average of 6%, Americans may start plowing any money left over from debt repayment into savings bonds.
Risky assets had rallied recently but the continued deterioration in economic fundamentals around the world suggests the dollar will once again enjoy its safe haven status once investors flee back to Treasuries. Deleveraging of cross-border USD-denominated liabilities is still providing juice for the dollar against G10 currencies (except the yen and swiss franc), though with less vigor than in Q4 2008. Against the euro, the US dollar will likely strengthen a little further in the near-term on expected ECB rate cuts, intensifying Eastern European financial turmoil and eurozone sovereign credit downgrades. Later on though, rate differentials may tip the overvalued dollar into a correction if ECB easing looks likely to trough at a higher level than the Fed.
Against the yen, the US dollar will likely gain briefly in the near-term as markets focus on Japan’s deteriorating economic fundamentals before speculation over end-March yen repatriation and waxing risk aversion reclaim the dollar.
In general, the dollar will benefit in the short-term from US government interventions if they appear to put the US ahead of the curve in fighting the recession compared to Europe and Japan.
In the near term, the need for liquid assets, the lack of global alternatives (the European bond market is fragmented and under stress from macroeconomic divergences) and the depth of liquid assets in the US may keep attracting capital from both foreign and US investors.
GCC countries, which aside from Saudi Arabia were once the most risk tolerant of sovereign investors, are now seeking out more liquid assets to meet spending and financing needs.
Furthermore, with the global economic outlook being weak and trade contracting, countries like China may keep intervening to keep their currencies weaker in the hope of export competitiveness, keeping them buying US assets. The recent uptick in risk appetite in China and somewhat optimistic economic indicators may increase inflows into China even if hopes of an economic turnaround seem as yet, premature. China and Japan, the largest holders of US debt, are wary of a collapse in dollar assets which would reduce their past holdings – avoiding such an outcome might keep purchases on stream, if at a more subdued pace.
Furthermore other assets, including perhaps corporate bonds could also benefit from inflows as they did in December 2008, In short, it seems the US dollar still has some tricks left up its sleeve before it capitulates to a long-term downtrend.
Treasuries and the US dollar are not the only instruments benefiting from risk aversion. Gold could be considered an even safer ’safe haven’ if it weren’t for its susceptibility to speculative excess. But that didn’t stop strong demand for a safe haven and a store of value from pushing gold up to the $950/oz level on Comex as of February 12, 2009 – 25% above its fair value assayed by physical supply and demand. Uncertainty over the global economic outlook continues to send investors running for cover in cash-like instruments.
But as sovereign credit risk rises around the world due to sharp increases of public debt, some investors are scurrying towards apolitical cash-like instruments. Gold fits the bill as it is not tied to any particular country’s asset quality. In addition, rising inflation expectations (in the longer-term) have spurred demand for gold as investors worry massive government spending and possibly debt monetization will be inflationary, which would have deleterious effects on currencies as a store of value.
Despite likely pullbacks in the gold price this week as incoming data signals deflation, analysts believe gold will reach $1000/oz within 3 months due to ongoing uncertainty over the outlook for the global economy, inflation, sovereign debt and currencies. Yet if there is a reduction of risk relating to sovereign defaults, gold could soften in the mid-term especially if central banks keep inflationary pressures under control once the economic recovery begins and the velocity of money picks up.
Source: RGE Monitor, February 17, 2009.
Tags: Bailout, Capital Inflows, Commodity Prices, Congressional Budget Office, Debt Issuance, Downside Risks, Fiscal Deficit, Fiscal Stimulus, Gdp Ratio, Govt Debt, Gses, Monitor Bank, Price Appreciation, Record Lows, RGE Monitor, Roubini Global Economics, Sovereign Debt, Stimulus Package, Target, Treasury Yields
Posted in Bonds, Credit Markets, Economy, Emerging Markets, Energy & Natural Resources, Gold, Markets, Oil and Gas, Outlook | Comments Off
Wednesday, February 11th, 2009
I am spending the next few days in Europe on a short business trip. First stop is Dublin where the temperature is icy, the mood is dour, property prices are plunging, the queues for jobless claims are five hours long, the soon-to-be-unemployed are holding protest strikes, and the banks are on the edge of a financial precipice. Yes, it may be a movie with different actors, but the plot is the same as in many other countries.
Meanwhile in the US, Treasury Secretary Timothy Geithner yesterday disappointed the markets with the lack of detail on the administration’s Financial Stability Plan. After all, he did say a few days ago (paraphrasing): ” We are not going to put out the details of our plan until we get it right.” (Please click here for RGE Monitor’s discussion on whether the plan will work.)
The US stock market indices plunged as investors gave a thumbs-down to the announcement, with the S&P 500 Index losing 4.9% and the Dow Jones Industrial Index 4.6%. All market sectors were in the red with Financials (-10.9%) leading the sell-off, with trading volume on the NYSE the highest since mid-December and advances beating declines by seven to one.
According to Lowry’s reports, Friday was a 90% up-day, only to be followed yesterday by a 90% down-day. “Panic on the upside, then panic on the downside – this is one dangerous market,” said venerable Richard Russell (Dow Theory Letters)..
Bill King (The King Report) commented as follows on the bank rescue package: “Geithner and Team Obama have been furiously polling private equity and Street titans to gauge their interest and participation thresholds in various bailout plans. Geithner’s lame plan implicitly indicates that few people wanted to participate in the leaked/proposed plans.
“Private investors know toxic paper remains incalculable with open-ended liability. The market understands that no bank bailout has been announced because there is no plan, barring an outright gift, that will fly with private investors. And an outright gift will infuriate taxpayers. Geithner asserted, ‘We will have to try things we’ve never tried before.’ You mean like telling the truth about the quantity and quality of toxic assets?”
Back to the stock market, key resistance and support levels for the major US indices are shown in the table below. All the indices are trading below the 50-day moving averages and the Industrials and Transport have also breached the December 1 lows. The critical November 20 lows are now within close reach and must hold in order to prevent considerable technical damage.
Where to now? As pointed out before, the primary trend is still bearish. The chart below shows the long-term trend of the S&P 500 Index (green line) together with a simple 12-month rate of change (ROC) indicator (red line) and the RSI oscillator (brown line). Although monthly indicators are of little help when it comes to market timing, they do come in handy for defining the primary trend. An ROC line below zero depicts bear trends as experienced in 1990, 1994, 2000 to 2003, and again since December 2007. Having said that, the levels of both the ROC and RSI are massively oversold.
At this juncture, short-term movements are almost impossible to predict, although 90% down-days are usually followed by two- to seven-day bounces. Seven out of the eight most recent 90% down-days were followed by rallies, according to Richard Russell. Having said that, my belief is that traders will simply have to wait for Mr Market to show his hand, especially as far as the November 20 lows are concerned.
And while we wait, I am trying to capture a leprechaun and find the “hidden treasure” on the Emerald Isle.
Tags: Bank Bailout, Bill King, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Index, Dow Theory Letters, Financial Stability, Jobless Claims, Market Sectors, Obama, Outright Gift, Precipice, Private Investors, RGE Monitor, Richard Russell Dow Theory, Short Business, Stock Market Indices, Thresholds, Us Stock Market, Us Treasury Secretary
Posted in Markets, US Stocks | Comments Off
Tuesday, February 10th, 2009
While on the road in Europe, I am posting a thought-provoking video featuring Nouriel Roubini, professor of economics at New York University and chairman of RGE Monitor, and Nassim Taleb, author of The Black Swan. The discussion deals with how to predict a financial crisis and the five signs of a bear. They also convey important knowledge on how to cope with the crisis, both on a structural and personal level.
Click here or on the image below to view the video
Source: CNBC, February 9, 2009.
Tags: Black Swan, Cnbc, Dr Doom, Economics, Europe, Financial Crisis, Five Signs, Image, Nassim Taleb, New York University, Personal Level, RGE Monitor, Swan, Video Source
Posted in Markets | Comments Off