Sunday, 15 April 2018

Wages bouncing following tax cuts

Wages bouncing again following a turgid H2 last year Seems the tax cut is being passed through but so far companies very cautious about paying up and shrinking margins

Part time/ maginally attached workers seeing some initial catch up as well

Friday, 13 April 2018

Venezuela prepares to hard default after May's elections?

Could Vene hard default after the Presidential elections on 20th May? 

Oil production is around 1.5mmbpd and forecast to go to 1.1mmbpd later this year and lower in 2019 

But they use 425k bpd domestically and pay JV partners including China and Russia 550k bpd. 

So at 1.1mmbpd production there is basically nothing to pay for imports, bonds or increased maintenance capex 

Something has to give and with the potential for more sanctions, blaming a hard default on sancitons is a way to keep going 

Having moved the military into manage oil production could also be a sign they are preparing to hard default; they want to keep control, maximise graft and manage the hard default scrario vs creditors

Thursday, 12 April 2018

Hong Kong real estate pops on rising USD Libor?

I have written a few blogs on monetary inflation post-08 and how as its power wanes the crashes get closer to the source the sources being the Fed and PBoC.

Well, there are signs that global prime residential is rolling over; London, Manhattan, Toronto are all off 'bigly' with much further to go in my view, Dubai is grinding lower partly on high supply, partly the lower oil prices. Some other markets seem to still be powering higher, notably San Fran and Hong Kong.

Always hard to time the top but the rise in Libor in USD is hurting the pegged currencies. Dubai seems to mainly be a local cash second home market, but Hong Kong is clearly leveraged up the wazoo.

Now the HKMA is starting to intervene to maintain the peg. The only problem is there is almost an unlimited amount of forwards than FX traders can sell and all the HKMA can do is shrink the private sector money supply to maintain the peg. Genuine capital outflows face the same problem, they cause a shrinking domestic money supply as HK$'s in the money supply get given to the HKMA in exchange for USD$ reserves held by the HKMA. That has to cause a credit crunch in the same way that inflow caused credit expansion on the way up.

I'm not sure what mechanisms the HKMA could use to try and sterilize these effects but either way the market seems to be witnessing a ridiculous blow off top phase. If the HKMA just expands private credit at the rate of interventions, then presumably it could face a Black Monday type event were outflows beget outflows.

China is also curtailing credit expansion and may see to limit capital flight more going forwards.

An article on residential property and some relevant charts below:

I don't have time to dig into the components behind the numbers but at a headline level since end-2008:
  • National income is up about 30%
  • GDP is up about 47%
  • M3 money supply is up ~130% 
  • M3 is now circa HK$14Tn vs GDP of 2.7Tn, so 520% of GDP
  • Bank balance sheets are up a similar % amount as M3
  • Loans to the private sector are up from HK$3.3Tn in Jan 08 to HK$9.5Tn, almost tripling with many priced in foreign currencies.
  • Construction as a percent of GDP is about 4.4% and has doubled since the crisis vs an economy that is up a lot less than that
  • House prices are up 140% from 2009 to Dec 17

What could possibly go wrong?

Monday, 9 April 2018

Chinese FX deval coming up?

China runs a CA deficit with the world ex-EU and US. If as part of Trade Wars it wants to export more to these countries, or do more bilateral trade as part of OBOR, then it probably needs a cheaper REER, as CNY/CNH is highly valued on a REER basis vs these countries.

So far this year the USD has been weak and CNH roughly flat vs EUR and JPY.

Using very rough numbers China is running a $375bn surplus with the US and a $422bn number overall. Its running a EUR180bn surplus with the EU and a $175bn or so sized deficit with the rest of the world.  If it loses say $150bn of sales to the US, or over 1% of GDP, it needs to find customers elsewhere for that.

The EU and Japan are the only large economic blocks which can absorb that much in sales in the short run, and implementing OBOR and related
exports will take time.

We also still have not seen what Trump plans for the EU/ Germany which it ran a $151bn and $64bn deficit with respectively in 2017.

If they dont devalue then they need to absorb the sales internally, which involves getting the savings rate down, reinflating the credit bubble, or risking deflationary forces push prices down. One pressure release valve domestically could be to cut interest rates. PBOC rates are above inflation which is about 1.5%-2% depending on which indicator you use vs an inflation target of 3%.

Thursday, 5 April 2018

Russel Napier on the Fed balance sheet unwind

My views:

Bank credit growth stalled in Feb as banks liquidated Treasuries and other securities but it has continued its slow growth path in March.  Maybe the rise is Libor vs OIS is part explained by foreign banks and some of their overleveraged customers being hit with duration or other losses. The next shoe to drop in my view is probably people long USD duration; so principally leveraged prime real estate, and leveraged USD borrowers. 
We are already seeing prime residential in places like New York, London, Toronto more or less in freefall.

Next up, downwards rent reviews for offices.

But for the domestic US economy rates are still low and the Fed has not reduced that much of its balance sheet.

As such I think we are still in the transition phase of the last cycle having more or less ended and the new cycle not having started and avoiding a recession in between via low interest rates.

Sunday, 25 March 2018

QE unwind, Libor and credit demand

For the most part in the West the governments have been the big borrowers in this cycle and the leveraged lenders to them have been banks; commercial and central. The Fed is now selling and that is acting as a transmission mechanism to tighten funding conditions and raise yields in some areas of fixed income. 

The problem some banks have now is negative carry assets and duration losses. DB as of last Dec, for example, seems to have a TSY/ agency portfolio yielding 1.4%, over EUR180bn of fixed-rate loans and overall a EUR630bn financial markets balance sheet. 

The Central Banks have a looming problem, perhaps in 2019 for the Fed, if they go to a neutral interest rate for the real economy they hike the interest bill on the host government (about $150bn cash interest I believe for every 100bps on sub-$4Tn Federal revenues) and cause duration losses for leveraged and real money holders of debt, including pensions and state pension systems. If they dont hike enough rates are still very loose for the real economy. 

Overall I expect them to let rates creep up and Fed balance sheet to shrink until something goes bang. I think that is when Fed funds are over 3%. Then the Fed will be stuck and I think the market sees the 'LBO Whitehouse' for what it is later this year or early next year; keep rates low and grow nominal GDP to get debt/ GDP down and wages as a % of GDP up while avoiding a bad recession at all costs. You can grow nominal GDP over 150% in a decade if you really want to...

Trump's recent spending bill has probably injected $500bn or so of extra demand into the economy at a time of full employment. I think initially that will support demand and corp profits, and looking above at the 1970s, initially, equities rallied. But ultimately wages go up, and when margins fall equities fall; the Wiltshire index above fell about 50% in its bear market and never really performed well vs inflation after that until Volker hiked interest rates to kill inflation in the early 1980's.  

It is interesting that the Fed tax cuts and spending bill have come at a time when demand for bank credit has stalled or even started shrinking: 

So far the first to shrink has been marketable securities, obviously. But business credit is hardly growing, the consumer is holding up so far though.

They really need the wage inflation to come through to support the economy from here, otherwise the hiking cycle will end in a recession when corporates cut back. After a good start last year, the last 9 months have been really subdued for wages though. 

Saturday, 24 March 2018

Cold war defense spending

The new deficit heavy spending bill increases significantly big ticket, set-piece conflict type item spending. Someone on twitter remarked it was like we are back to 1986.

The truth is we are in 1986, except we are the Russians fighting the Muj in the mountains, there is no real threat from large standing armies.

None of the big ticket items are designed to fight asymmetric warfare. Asymmetric warfare calls for more drones, robots and better armour and more equipment to the on the ground local allies. You wonder how much of the R&D money will go on that type of equipment.

Here is a summary of the big-ticket items:

The Department of Defense is set to gain $61 billion more than last year's enacted funding for a top line of $700 billion.

The funding will be spread over the Pentagon's base budget of $589.5 billion and $65.2 billion for the overseas contingency operations, or OCO, budget. The remainder of the $700 billion is appropriated to other defence-related programs outside the Department of Defense.

The omnibus allocates $144.3 billion for military equipment procurement, including big-ticket items such as:
  • $23.8 billion for 14 Navy ships
  • $10.2 billion for 90 F-35 fighter jets
  • $1.8 billion for 24 F/A-18 fighter jets
  • $9.5 billion for the Missile Defense Agency
The defense-friendly bill also provides $238 billion for operations and maintenance, $89.2 billion for research and development, and $137.7 billion for personnel pay – a 2.4 percent increase from fiscal year 2017.
Source CNBC

So basically its equipment to menace Russia, challenge China and threaten North Korea and Iran. There is $45bn or so there for the Navy to bomb standing armies with.

Russia in my view is no real threat. China has zero intention of intervening anywhere. North Korea is a weak paper tiger. Iran could be attacked from ground bases and is likely better off boxed in and isolated than attacked.

In terms of China's influence, they are expanding their influence via OBOR across Asia, Africa and Central Asia. And they are exporting heavy industrial, infrastructure, clean energy and cheap finished goods.

What does America export to these countries? Generally services, branded goods, IP, some high-end industrial goods.

Put simply China and the US are not directly competitive anyway.

The only real way to explain this is a mix of boondoggle waste for the military-industrial complex, paranoia in the deep state about China and Iran and a generalised effort to stimulate manufacturing related industries. 

What would Bernie have spent $45bn on? Clean energy, EV, energy storage, efficiency technologies, education, supporting exports to EM perhaps?  Or just not spent the money.