U.S., China, Japan And Vietnam

by: Enzio von Pfeil

US Economic Data

US manufacturing has expanded for the third consecutive month in May. The Institute for Supply Management's manufacturing index rose to 51.3 in May from 50.8 the month prior, easily beating economists' forecasts of a reading of 50.3.

The Fed's Beige Book shows economic activity improving modestly in the US but notes tightening labour markets in nearly all regions and modestly rising wages.

Bond manager PIMCO has now added its voice to calls for caution following BlackRock's (NYSE:BLK) warning on overvalued global markets and risks yesterday. PIMCO strategists warn that exploding debt levels along with central bank policies - zero and negative interest rates and trillions of dollars' worth of money printing - threaten to upset global stability. They go on to warn of "monetary policy exhaustion" and say loose monetary policy has lost its bite, threaten the global recovery and "the costs of unconventional policy are rising."

  1. Framework

    America's Economic Time keeps improving in cyclical fashion: her previous "excess supply of goods" is morphing in to an "excess demand for goods." That begets inflationary fears of "too much money chasing too few goods", so the Fed wants to tighten or - in the jargon of our Economic Clock - to morph the previous excess supply of money into an excess demand for money.
  2. Inflationary Pressures Are Anachronistic

    I remain unconvinced that the old "too much money chasing too few goods" really holds. Thus, whether wages really MUST become inflationary:
    1. First, thanks to MNCs & technology, the global supply curve is infinite: stuff can be produced literally anywhere, so that
    2. Secondly, the US domestic labour force's bargaining power falls off, and
    3. Thirdly, tech means productivity gains. So that even if wages rise, unit labour costs fall, courtesy of higher productivity.
  3. PIMCO The New Moody's?

    PIMCO is voicing concerns that the market has voiced for months. Has PIMCO lost touch - like Moody's, S&P and Fitch? These three musketeers merely parrot what the market has been saying for months…

China Economic Data

Three separate surveys of economic activity in the mainland have raised doubts about the strength of the recovery there. The official May manufacturing Purchasing Managers' Index came in at 50.1, unchanged from April. New orders were weaker and business activity expectations dropped to 4-month lows. In the steel sector, new orders had their biggest monthly fall on record.

The private Caixin manufacturing PMI index slipped to 49.2 in May, from 49.4 in April. A reading below 50 indicates contraction and this is now the 15th consecutive month of contraction.

In a third survey, activity in China's services industry dropped to 53.1 in May, from the previous month's 53.5 reading.

In response, the PBOC set the yuan fixing at a 5-year low for the third day in a row.

  1. Shonkynomics

    China deals in false precision, so pointing to the false precision of PMIs' "definite" numbers is shonky.
  2. Fuzzynomics

    Better just to stick with Hayek's pattern predictions, especially in China. Her Economic Time is characterised by an
    1. Excess demand for money, and an
    2. Excess supply of goods.
    3. This means that

i. There is little spare money left for investing in the stock market, and

ii. There is little incentive to invest in stocks when that excess supply of goods points to a shonky profits outlook.

  1. Pattern Predictions

    This suggests that Beijing will seek to loosen FISCALLY even more!
    1. Keynes can do. Contrary to the West, Keynes works in China, where the population at large still is willing to don picks and shovels in order to build roads, bridges, belts and other accoutrements…
    2. Monetary policy ineffectual. But to loosen monetarily won't work: banks are leery of lending when the Economic Time suggests an excess supply of goods already. Bankers will ask themselves: how can loans be repaid if profits are not growing on account of this excess supply of goods?


The Nikkei-Markit manufacturing purchasing managers' index for Vietnam rose to 52.7 in May, a rise of 0.4% from April. Factory output rose and new orders hit a 12-month high.

  1. Economic Time

    looking good: excess demand for goods implies improving profits outlook, so buy the market
  2. Addition, Not Replacement!

    Having looked into what motivates direct investment, it is clear to me that the key driver has to be to "stay close to the customer."
    1. China. Well, China has had her fill of FDI in the basic industries; besides, rising incomes means that she gradually is transitioning to a services economy.
    2. Vietnam. Here, per capita incomes and thus living standards are still way behind, as they are for so much of SE Asia (SEA)….so Vietnam offers a cheap and cheerful manufacturing springboard to focus on the demand for all of SEA.

    3. And-and. Thus, think in terms of "and-and", not "either-or" when it comes to FDI… It's, therefore, China AND Vietnam, NOT "China OR Vietnam!"

Japan Sales Tax

Japanese Prime Minister Shinzo Abe has decided to delay an increase in the country's sales tax until October 2019 in order to aid the economic recovery. The consumption tax was due to rise from 8 to 10% in April next year. The news sent the yen 1% higher and the Nikkei 225 index of Japanese stocks 1.6% lower.

  1. Abe Was Stupid

    He was stupid even to consider raising the sales tax (ST); his experience of a couple of years ago should have averted such stinking thinking.
  2. Or Was He?

    Perhaps he put that ST out there as a red herring, as a bargaining chip that he could forfeit in order to get other favours off the Diet?
  3. Reform Mausoleum

    Just like Europe is a welfare museum, Japan is a reform mausoleum: labour markets remain incredibly closed, as do goods markets… so how can the place grow without competition?


  • Year to date the world's best performing asset classes in USD terms are;

WTI (+33%), Brazilian equities (+23%), Brent (+19%), Russian equities (+19%), Silver (+15%), Gold (+15%) and Corn (+13%)

  1. Gold

    See gold as an insurance policy - not as an investment!

Geo-political tensions. With all of that global muck going on in the defence theatre (Middle East, South China Sea, East China Sea, migrants, Russia goading NATO in Turkey….) - gold's outlook is good

Stronger dollar. But the stronger dollar means that some non-dollar demand for gold will get dented.

Outlook. Gold is a buy - especially for dollar investors.

  • The world's worst performing asset classes YTD are not good news for us here;

Shanghai Comp (-19% USD terms), Italian equities (-12% USD), European banks (-12%) and the Hang Seng Index (-5%)


    China is not performing because of her debilitating Economic Time. And HK is the water skier off the back of the Chinese speed boat: if China slows, so do we.

Outlook. Do not touch China/HK until China's Economic Time improves later this year….

You can listen to the radio show podcast here. Enjoy!