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China's Problems Continue To Mount
Although many still view China as the miracle that will keep on giving, they don't quite get the fact that China cannot sustain itself economically and politically. A recent audit revealed that "Local government debt skyrockets in China," a condition that will magnify as time goes by and will run its obvious course.
In addition, "Off-balance sheet financial items risky for China's banks," as banks provide a variety of financial products to the unsuspecting public.
In Europe the dance continues and European Central Bank President Mario Draghi stated that the ECB "would not use its yet-to-be-activated bond-buying programme to save profligate countries from insolvency, but only to preserve the euro." But here's the other side, according to Draghi.
I understand the difference, but "profligacy" at this juncture is irrelevant. However, the ECB "defended its bond-buying program in a German courtroom on Tuesday, arguing that the scheme many credit with saving the euro from collapse was within its mandate and had not spawned unlimited risks." Meanwhile, yields have been moving up since May, with Greek 10-year up two points to 10% and Portuguese 10-year up one point and going for 6.5%. Spanish 10-year is now above 4.6% and the Italian 10-year trades at 4.35%, both above the 4% mark seen in May.
Then the World Bank cut global growth to 2.2% from the 2.4% forecast in January citing "a deeper-than-expected recession in Europe and a recent slowdown in some emerging markets." Apparently they didn't get the memo that the global economy will not improve any time soon.
Average Daily Risk Exposure: 38.9% of Capital
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Wholesale inventories rose 0.2% in April, and excluding autos inventories were flat. Business inventories rose 0.3%, and sales declined 0.1%. U.S. Treasury had a budget deficit of $139 billion in May, $15 billion higher than May 2012. The deficit is running 26% lower thus far in 2013 due to higher tax receipts. Retail sales rose 0.6% in May, with core sales rising 0.3%. Import prices decreased 0.6% in May, while export prices declined 0.5%.
PPI rose 0.5% in May, the first increase in three months, with the core reading up 0.1%. Both the PPI and the core rate are up 1.7% on an annual basis. The current account deficit rose to $106 billion, with "the increase in the current-account deficit was accounted for by a decrease in the surplus on income and an increase in outflows of net unilateral current transfers, such as government grants, government pensions, and private remittances."
Industrial production was unchanged in May, and capacity utilization declined to 77.6% from 77.8% and still weak. The Thomson Reuters/University of Michigan's preliminary consumer sentiment index declined to 82.7 in June, down from 84.5 in May.
China's annual CPI registered 2.1% in May, down from 2.4% in April. PPI declined 2.9% year-on-year. New yuan loans declined to CNY667.4 billion from CNY792.9 billion in April, and fixed asset investment increased 20.4% annually. Industrial production was up 9.2% and retail sales increased 12.9%. Japanese GDP was revised to show 1.0% growth in Q1-2013, and annualized growth rate of 4.1%.
The Greek And Euro Dilemma
Finger pointing is always the end result of incompetence and the IMF's admission that serious mistakes were made regarding the Greek bailout drove the European Commission to inform us that they will produce their own report. We can hardly wait! The main issue is that the IMF sees the bailout as a mechanism to defend the euro, not fix Greece, but that is not news because everything the Eurozone's bureaucrats have done, and will do going forward, is designed to ensure that the euro will not fall apart.
The Greek economy contracted for the 19th consecutive quarter, with GDP dropping 5.6% year-over-year, and despite all the smoke and mirrors, Greek debt could be - will be - restructured as early as 2014. The future looks bleak and "Markets Ignore Eurozone's Only Choice, And Growth Isn't It."
While the IMF is accepting that the end game is near, the reality on the ground is that Greece is only the beginning and will be the first of many, and somebody will be very unhappy with the losses that must be digested.
The truth remains that "the Troika recoiled from the standard IMF policy of debt restructuring for Greece in 2010 because it was 'politically difficult' for countries (France? Germany?) whose banks held Greek bonds." Accountability cannot be enforced because everyone is trying to save the economic stupidity of years past, although "European Central Bank President Mario Draghi said the region's economy should recover this year." Super Mario is trapped in a game of fantasy!
Japan's political and economic awakening is a bit disturbing because desperation has set in, and although the war on deflation is what grabs the headlines, anything goes at this juncture.
In addition, "Prime Minister Shinzo Abe pledged to raise incomes by 3 percent annually" as if he has any control. When will politicians, all politicians, lose their complex of superiority and stop the nonsense?
The Fed's beige book indicated that the economy is experiencing "modest to moderate" growth, a replay of the usual mantra. However it appears that some clarity has been achieved, and according to Vincent Reinhart, a former director of the Fed's Division of Monetary Affairs, Bernanke "needs to see four months of job growth averaging at least 200,000 to justify reducing the pace of asset purchases." Some have taken the formula as gospel but there's no confirmation and I'm treating it as pure speculation.
Average Daily Risk Exposure: 38.5% of Capital
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The ISM PMI dropped to 49.0 in May from 50.7 in April, with new orders declining to 48.8 from 52.3 and employment moving slightly down to 50.1 from 50.2. ISM Non-manufacturing PMI rose to 53.7 in May from 53.1 in April. Factory orders rose 3.3% in April, and without transportation orders were up 1.3%. Construction spending increased 0.4% in April to an annual rate of $860.8 billion. Nonresidential construction increased 0.7% and residential declined 0.2%, with construction spending running 4.3% higher on an annual basis. Total vehicle sales registered an annual rate of 15.31 million units, a 3% increase from April.
The trade deficit rose to $40.3 billion in April, with exports increasing 1.2% and imports rising 2.4%. Productivity increased at an annual rate of 0.5% during Q1-2013, while unit labor costs declined 4.3%. Over the last four quarters, productivity rose 0.9% and labor costs increased 1.1%. The unemployment rate rose to 7.6% (declined to 11.9% per CXA Markets) and 175,000 new jobs were created. Revisions for March and April resulted in a net loss of 8,000 jobs. Consumer credit expanded by $11.1 billion with the usual auto and student loans carrying the load. Credit card debt rose a very slim 1.0%.
German factory orders declined 2.3% in April on a monthly basis, while industrial production increased 1.8%. German trade surplus was €18 billion, with exports up 8.5% and imports up by 2.3% year-over-year. France showed a €4.52 billion trade deficit in April with exports rising 4.1% and imports gaining 3.8%.
China's Non-Manufacturing PMI declined to 54.3 in May from 54.5, and the HSBC PMI declined to 49.2 in May from 50.4 in April. China's trade balance registered a surplus of $20.4 billion in May, with exports growing only 1.0% and exports decreasing 0.3%.
Federal Reserve Should Be Like CIA
I was paying close attention to all the speeches and interviews given by Federal Reserve members, and an interesting idea crossed my mind. What if the Fed functioned like the CIA, and employed undercover monetary operations to prove to the world that their tactics and techniques actually work. No need to rely on influencing markets through words, but rather manipulate the economy through stealth and well placed monetary policy tools. What would be the result if nobody knew that Quantitative Easing actually had taken place?
The meeting between the Federal Advisory Council and the Fed highlighted how "The Fed's aggressive purchases of 15-year and 30-year MBS have depressed yields for the 'bread and butter' investment in most bank portfolios; banks seeking additional yield have had to turn to investment options with longer durations, lower liquidity, and/or higher credit risk." The current view is that the Fed is now an "integral to the housing finance system," and that is not good news. The only reason why we have access to this information is because "Bloomberg had obtained the minutes of the last Federal Advisory Council in February through a Freedom of Information Act request, prompting the central bank to decide to release the minutes of future meetings."
The St. Louis Fed informed us that we are actually poorer than what we thought, and before we start spending like we can afford it, a quick check is in order.
According to the ECB, "the euro zone's messy bailout of Cyprus caused a mini-run on banks in many of the currency union's 17 members in April, exacerbating a decline in lending to the real economy." However it appears that the money didn't go very far, and countries like "Germany, Belgium, Austria, Estonia, Slovakia and, most of all, France all registered net increases in deposits." The largest decline took place in Spain, where deposits dropped €23 billion. Merkel and Hollande met and delivered a lot of the same - blah, blah, and then more blah!
Italy sort of floats to the surface and then manages to submerge itself and stay out of view, but "bad loans exceed 130 billion euros and are expected to keep rising throughout the year, though recent figures from Italy's two biggest lenders, UniCredit and Intesa Sanpaolo, showed a slowdown in the first quarter of 2013," while the country's condition is best illustrated by the fact that "gross domestic product is more than 7 percent below its level at the end of 2007, households' disposable income is down by more than 9 percent, industrial output is down by a quarter and hours worked are down 5.5 percent."
Japan has now become the hot potato and all of a sudden nobody wants to hold it. It was reported that "Bank of Japan Governor Haruhiko Kuroda said the country's financial institutions have sufficient buffers against losses they may incur from rises in bond yields, as long as the market moves are driven by prospects of an economic recovery."
In the BRIC world the story continues to unfold as expected, defying the experts' call for the globe to be saved by these "potent" economies, and Brazil's dependency continues to manifest itself.
Brazil's economy is not holding up well, and "the overall activity picture was even weaker than what the headline growth figure suggests as it shows softening growth in the service sector and a significant loss of forward momentum in private consumption," said Alberto Ramos, economist at Goldman Sachs. In addition, India's GDP growth for the full year ended March 31 came in at 5%, the weakest rate of expansion in a decade.
Average Daily Risk Exposure: 39.1% of Capital
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The S&P/Case-Shiller home price index rose 1.4% in March, the largest increase since July 2012, and was up 10.9% from the same period in the prior year. Despite recent gains, house prices are still 28% below the 2006 peak. Pending home sales increased 0.3% in April, weaker than the 1.5% gain in March.
The Conference Board's consumer confidence index jumped to a five-year high of 76.2 in May from an upwardly revised 69.0 in April. The Thomson Reuters/University of Michigan's consumer sentiment's final reading also jumped to 84.5 form 76.4 in April. Richmond Manufacturing index improved to -2 from -6, with shipments gaining seventeen points to 8, new orders decreasing two points to -10, and the jobs index losing six points and dropping to -3.
GDP second revision for Q1-2013 showed growth at 2.4%, slightly down from the original 2.5%. Consumer spending was revised up to a 3.4% gain from 3.2%, while inventories were revised down to an increase of $38.3 billion vs the previous $50.3 billion. Government spending declined 4.9% instead of 4.1%. Export growth was revised down to 0.8% from 2.9% and import growth was reduced to 1.9% from 5.4%. Adjusted corporate profits, meanwhile, fell by $43.8 billion in the first quarter after a $45.4 billion increase in the fourth quarter. Inflation as measured by the PCE index increased only 1.0% annually or by 1.3% excluding food and energy. Personal income was unchanged in April and disposable personal income decreased 0.1%. Personal consumption dropped 0.2%, and the price index for PCE declined 0.3%. The PCE price index, excluding food and energy, rose less than 0.1%.
Germany's import prices declined for the fourth consecutive month in April, dropping 3.2% annually. Export prices declined 0.4% year-on-year. German unemployment climbed by 21,000 people to 2.96 million, with the rate holding at 6.9%. Retail sales in Germany increased 3.2 % in nominal terms and 1.8 % in real terms compared with the corresponding month of the previous year. French household consumption of goods decreased by 0.3% in April. UK retail sales fell at their fastest rate in 13 months, with the CBI Realized Sales index dropped to -11 from -1.
Retail sales in Japan were down 0.1% in April on an annual basis. The Japanese Markit/JMMA PMI moved up to 51.5 in May from 51.1 in April, while industrial production increase 1.7%. Japanese core CPI dropped 0.4% in April from one year ago, unemployment was unchanged at 4.1%, and household spending rose 1.5% on an annual basis. China's official PMI rose to 50.8 in May from 50.6.