Disinformation In The Land Of Oz - Part 2

by: The Nattering Naybob


In Part 2 we examine: Chinese CPI/PPI.

Effect of CNY-US dollar "peg" on global Forex.

Increasing Asian debt/GDP ratios.

Effect of BoJ policy (Abenomics) on Japan and the Yen.

This four part series involves an examination of the global impacts of: recent CB (central bank) responses to systemic economic distress; CB econometric utilisation and the media economic narrative; the U.S. Dollar as a global fiat currency; and the perception of the CB structure as a public good.

Peg This

PBoC stats indicate September Chinese PPI -1.8%; October -2.2% making 32 consecutive months of deflating PPI prices. The Economist cites the PBoC , since 2011 [Chinese] CPI inflation has come down from over 6% to under 2%. That is below the PBoC target of 3.5%. But has the lower CPI stemmed from softer food inflation?

Perhaps through the rising peg to the dollar? The last six months, June 1 - Nov. 30, 2014 - CNY vs. KRW +9; EUR +10%; vs. JPY +15%.

The last two-and-a-half years, June 1, 2012-Nov. 30, 2014: CNY vs. KRW -3%; EUR/USD/HKD +3%; JPY +53%.

As of 2012... Top five export destinations for China: United States (19%), Hong Kong (11%), Japan (8.3%), Germany (4.4%), and South Korea (3.7%)

Top five import origins of China: Japan (10%), South Korea (9.3%), Other Asia (8.1%), United States (8.0%), and Germany (6.0%)

Above, Japan is China's largest import partner at 10% and 3rd largest export partner at 8.3%. Since June 2012, Chinese import prices from Japan are down an average -30% while export prices to Japan are up an average +25%.

With a rising dollar, global commodities' input prices are falling. With a rising dollar and falling yen, Chinese import prices are falling, while export revenues are rising. A nudge towards lower prices, the global effect or affect (ahem), of secular stagnation has real income declining along with spending.

One must be cognizant that the "advertised" food inflation is in the 2 - 4% range, which anyone shopping in a Chinese supermarket might take issue with. Factor in the rising cost of other Chinese inputs. YOY factory output +7.7% resulting in Q3 2014 YOY urban incomes +9.3%, growing faster than the overall economy.

The Claims Upon Them

David Stockman on China:

"The fact is, China is a colossal house of cards, and so are the satellite economies which have fed raw materials into the maws of its overheated industrial furnaces."

Stockman on mis-perception:

But at some point--even the Cool Aid drinkers have to start wondering about the ever widening disconnect between struggling real economies and the soaring valuations of the financial claims upon them."

What is that cryptic (to some) reference, "the financial claims upon them"? 2004-2014 PBoC debt has gone from $1 trillion to $25 trillion.

Standard Chartered thinks total PBoC debt has reached 250% of GDP (see below). This is roughly $26 trillion, the same size as the US and Japanese commercial banking systems put together. In 2013, China spent $5 trillion on Capex, as much as the Eurozone and U.S. combined. Exponential growing debt levels and capex expenditures, does this seem like a country going through deflation?

Since 2008, Asian debt levels (ex-Japan) have grown from 147% to 207% of GDP. So despite "advertised" deflation, Asian debt to GDP has risen? Is this not what is "claimed" to be happening in the Eurozone? See chart below for debt/GDP ratios since 2003 and note the ECB pre QE "hard money" policy drop. And if you thought the Fed or BOE were bad, have a gander at the BoJ and PBoC rising debt/GDP ratios.

Oh! well, everyone's got "something to hide (except for me and my monkey)", and that's why it's all fun and games until the flying monkeys attack. Speaking of flying monkey attacks...

A Yen For Abenomics

Jeffrey P. Snider aptly points out Japanese wage inflation is tame while price inflation is not:

"The effect of "inflation" on wages is trivial compared to that on prices so far, largely due to the disastrous acceleration of Japan's trade deterioration. As nominal wages rise ever so slightly, "real" wages sink Japanese households further and further."

David Stockman expands calling out the BoJ, while advising that their policy is globally portable:

"Slash the global purchasing power of the yen by 35% since early 2013, causing Japan's bill for imported energy, industrial materials and manufactured components and consumer goods to soar. Japan's soaring import prices and cost of living, coupled with the utterly necessary increase in its consumption tax last April, have cause real household incomes to shrink by 6%. The Keynesian priesthood has invented an utterly groundless deflation ogre in order justify rampant monetary expansion in the vain hope that financial bubbles will levitate the real economy. In just 22 months Japan's stock market has doubled, but its real GDP is back where it started and real household incomes have been pushed into the drink. Keynesian fiscal policies and central banking regimes have buried the public sectors of most major economies in unsustainable debt. The Keynesian apparatchiks have created a straw man that suits the purposes of their political masters on the fiscal front by monetizing endless amounts of public debt. The phony "deflation" theory underlying the financial madness of Kuroda and Abe is readily portable. It has already been embraced by European policy-makers and will be arriving in the North American precincts soon."

The last six months, June 1-Nov. 30, 2014 - JPY vs. KRW/AUD -6%; THB/SAR/USD/CNY -13%.

The last two-and-a-half years, June 1, 2012-Nov. 30, 2014: JPY vs AUD -24%; THB -30%; SAR/USD -33; CNY -35%; KRW -37%

As of 2012, Top 5 Export destinations for Japan: China (19%), United States (18%), South Korea (7.8%), Thailand (5.4%), and Other Asia (4.7%)

Top 5 Import origins of Japan: China (22%), United States (8.5%), Australia (6.2%), Saudi Arabia (6.0%), and South Korea (4.9%)

Since June 2012, China is Japan's largest import (22%) and export (19%) trading partner. Japanese export prices to China are down an average -30% while Japanese import prices from China are up an average +25%. Over the period, top 5 partner Japanese import prices are up an average +20% while top 5 partner export prices are down an average -20%.

In only 22 months, this epic negative 40% economic broom sweep, flame-out and meltdown explains a $200 billion trade balance decline, the soaring cost of imports and a double digit inflated cost of living. Yet the BoJ insists that they are below their 1.5% inflation target and deflation is an imminent danger?

Following a quarter where GDP fell -7.3%, BoJ economists had forecast an increase between +2.2% and +2.5%. The latest quarterly BoJ GDP release -1.6%, prompting BoJ QE on the grounds of deflationary dangers? What did they do?

The BoJ announced a QE plan to purchase massive amounts of GPIF's [state pension fund] bonds. Normally this would result in plunging bond prices and rising interest rates, but no... much like other CB QE bond purchases, the BoJ's backstop will artificially sweeten the bid (unnatural guvmint additives) and destroy honest price discovery in their own bond market. What happened?

The announcement jump started the Nikkei up +5% to a 7 year high and sent the yen slumping to a 7 year low vs the dollar. This seems more like a recipe for currency debauchery and inflation. I suppose the BoJ exported its "deflation" to China, which in turn exported it to the Eurozone and US?

From these variate discussions, a rational and reasonable person might observe the obvious disconnect and ask the wizards, err, central bankers: What planet are they living on? If the models were wrong then, why are they still using them now? Are they fools, liars, both or none of the above?

Please watch this entertaining animation from Malekan titled "Federal Reserve for Dummies".

More to come in Part 3 where we examine:

  • Fed origins, structure and charter
  • CB policy effect on savers and pension funds
  • CB utilisation of econometrics
  • real job and wage growth, the growing GINI gap
  • economic narrative of the media
  • investor perception of inflation vs deflation

These global economic policy developments could affect numerous markets, sectors, indexes, commodities, Forex, bonds, mutual funds, ETFs and stocks.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.