Sunday, December 25, 2016

Avoiding a Cash Crunch

China’s central bank said the country needs to be careful to avoid creating an artificial liquidity crisis. Regulation is needed to avoid excessive borrowing and lending and the speculative bubbles that can result. Rules that were too broad, though, could cut off legitimate lending forcing businesses to slow down operations in a cash crunch. The comments came in an op-ed published today.

Wednesday, December 21, 2016

US Auto Furloughs

A slowdown in US auto sales is another sign of decline in global manufacturing. US automakers are furloughing thousands of workers for the next few weeks as they face 2017 with excess inventories not seen since the bankruptcy year of 2009. Auto sales are down from 2015 in most of the world, but spiking in China as consumers buy before the expiration of a tax incentive.

Thursday, December 8, 2016

Shadow Banking Hides Bank Loans

Shadow banking is in focus again as banks try to hide loans from regulators. Large business and real estate loans by Chinese banks have come under heightened scrutiny with regulators and central planners trying to rein in a two-year credit binge. Banks have responded by setting up shadow companies in order to disguise some $2 trillion in loans as investments. In this scheme, the bank records its interest as an investment in a shadow banking fund or company. The fund, in turn, holds the loans to real estate developers, factories, importers, and other borrowers. It’s a mechanism for banks to get around reserve requirements by reclassifying loans as investments. This is laid out in detail in the Fortune story “China’s Credit Binge Has Driven Its Banks to Hide $2 Trillion in Loans” [ ]. The off-balance-sheet risks make the financial system more brittle at a time when the central bank has promised there won’t be any bailouts.

Tuesday, November 29, 2016

Mortgage Lending Continues, Say Banks

Mortgage loans are so hard to get in some cities in China that there are rumors that larger banks have suspended mortgage lending in those areas. The People’s Bank of China and other officials deny those rumors in reports published today. Bank lending has fallen, not just in mortgages but in most categories. Mortgages make up roughly half of all lending in China. Local governments have taken steps to reduce real estate speculation that has driven up property values above what most observers think are sustainable levels. A real estate bubble makes it harder for banks to finance real estate purchases, since the real estate itself may not serve as effective collateral for the loan.

Saturday, November 26, 2016

Black Friday Shopping Shows Decline

If the world is losing interest in manufactured goods, that might show up first in U.S. retail statistics for Black Friday. The unofficial shopping holiday is focused more than any other day of the year on consumer products, most of them manufactured in countries in Asia. The Christmas shopping season got off to a slow start in November with the distractions of the political seasons, so it was hoped that shoppers would make up for that when Black Friday, the peak shopping day of the season, rolled around. Unfortunately, observations of retail traffic showed that Black Friday retail traffic was down slightly from 2015. Now preliminary sales statistics suggest that sales were down more sharply than they appeared. In-store sales on Thanksgiving and Black Friday combined were down 11 percent from the year before. Most or all of that decline was seen on Black Friday morning, with retail traffic said to be down about one third from the year before. Online sales were up 18 percent but are still much smaller than in-store sales, so total sales must be down substantially for the season do far.
The slow sales are especially a concern for retailers that stocked up in a big way anticipating an increase over last year’s results. Among major U.S. retailers, Walmart was the only one to go all-out this season, describing its plans as a 50 percent increase in inventory levels. If sales at Walmart did not increase as planned the retailer will be left with an enormous inventory overhang. This is bad news for Chinese manufacturing, as Walmart, besides being the largest U.S. retailer, is also the one most noted for carrying Chinese-made products. Walmart’s inventory reorders will have to be smaller in the months ahead.

Wednesday, November 9, 2016

U.S. Optimism Fades, China Steady

On election night in the United States it is North American currencies declining as election-day optimism fades. Mexico’s currency has fallen to a record low but the U.S. and Canadian dollars have also fallen off sharply with fears of a prolonged U.S. recession. China’s markets and currency have held relatively steady today but will eventually be affected by reduced opportunity for exports to the three Nafta countries.

Tuesday, November 8, 2016

U.S. Election Linked to Yuan Decline

The U.S. election is affecting China’s currency reserves. Optimism about the U.S. election has boosted U.S. currency but partly as a result, China’s currency has fallen. The yuan is also hurt by continuing decline in manufacturing and by capital flight. Much of the capital flight is a response to the currency decline. At the same time, with global demand for manufactured goods barely holding steady, there is little incentive to invest in China’s already overbuilt manufacturing sector. China may not be able to support its currency much longer because of its declining currency reserves. Reserves fell 1.4 percent last month to their lowest level in five years.

Saturday, October 29, 2016

Yuan Hits All-Time Low

China’s currency is almost the lowest it has ever been in comparison to the U.S. dollar, and no one is quite sure why it has fallen so much. These are some of the theories that have been proposed:

  • The Chinese central government and central bank want to slow the decline but aren’t able to.
  • Some speculators thought a Trump victory in the U.S. presidential election could boost trade (though the proposed mechanism was not well explained), and a Trump win now seems highly unlikely.
  • With exports level or declining, there is less demand for Chinese currency.
  • Real estate investors are buying more foreign real estate.
  • The Chinese central government and central bank are allowing the currency to decline to support exports and the stock market bubble.

Friday, October 14, 2016

Which Matters More: Exports or Imports

China’s exports might be down more sharply, but imports are also down, and some analysts believe imports are a better indication of factory activity. Almost anything manufactured in China requires a range of imported inputs, so the decline in imports show that less manufacturing activity is taking place. You would expect a slight decline in inputs as manufacturing efficiency and yield increase over time, but imports into China are going down faster than that.

Thursday, October 13, 2016

China Data Drags Global Stocks

Economic data continues to paint a discouraging picture of manufacturing in China. A 10 percent decline in Chinese exports for September, a bigger decline than expected, is contributing to a decline in U.S. stocks today.

Wednesday, October 5, 2016

US Truck Orders Plummet

U.S. orders for heavy trucks were 30 percent lower in September than the year before. Trucks have been in a slump for most of the year. Partly this is because trucks are becoming more durable, but the low demand for trucks mainly reflects excess capacity in moving manufactured goods. While the dollar value and various unit counts of manufactured goods sold in the U.S. show an increase, the total weight, volume, and shipment count show a decline. Perhaps there are fewer returns, but it must also be that manufactured goods are smaller than they were last year with changes in designs and packaging.

Tuesday, September 27, 2016

Anxiety in New Merger Rules

Vague and draconian new ethics rules for mergers and acquisitions are another sign of economic anxiety in the Chinese central government:

Under new rules unveiled by China's State Council, or cabinet, last month, managers will be held accountable if they "fail to, or incorrectly, perform their duties" with respect to deals that result in a loss of state assets.

The story at Reuters:

Wednesday, September 7, 2016

Bank Staffing Falls

Giant banks in China cut staffing by 1.5 percent in the first half of the year, an unusually large decline that might be a sign that the sector got overextended in the last few years.

Thursday, August 11, 2016

Macy’s Closes 100 Stores

U.S. retail giant Macy’s announced plans to close 100 stores, mostly after the Christmas shopping season. That’s in addition to the nearly 100 stores it has already closed in the last seven years. The retailer describes its move in terms of consumers buying more clothing online, but it can also be seen as part of a trend in which consumers are buying more selectively. Macy’s says it will put more emphasis on high-end exclusive brands in its stores that remain, pointing toward a strategy of selling fewer items but at a higher markup. Stock investors were cheered by the move, sending the stock up 16 percent even though Macy’s is cutting its operating expenses by only about 10 percent and could lose most of the $1 billion in annual revenue that came from the closed stores.

Bank Bailout Map

A map shows recent bank capital provided by local governments. Note that every province is included, a sign that the bank bailout regime is centrally coordinated.

Tuesday, August 9, 2016

Regulators Close Hedge Funds

China’s crackdown on dodgy investments is looking more serious as time goes on. Today regulators shut down 10,000 hedge funds, with a statement that noted that many funds were not properly disclosing their activities and some were funding criminal organizations, such as unlicensed factories and smugglers. Already most of the “wealth management product” sector had been shut down with a similar set of complaints.

Wednesday, July 13, 2016

EU Warns China on Steel Dumping

While China cuts back on steel production, it is selling some of the excess at a loss in Europe, pushing steel prices there down 30 percent this year. The EU has warned of tariffs and other measures in response. This suggests that China’s planned cuts in steel production may not go far enough or may not be happening fast enough to adjust to a global decline in demand for steel.

Saturday, July 9, 2016

As Seen From China, a “Grim” World

While there are notes of caution about the global economy from various sources, only China seems to view the world through the lens of of an economic depression. Note the comparative language in this Reuters story on the G20 meeting:

Given China’s world-leading position in manufacturing, the difference in perspective makes sense if the manufacturing sector is going into a multi-year decline globally. The transition away from manufactured goods would create challenges in many places, but would pose the threat of a depression only in a country as heavily invested in manufacturing as China is.

Tuesday, July 5, 2016

Don’t Look Now, But the Yuan Is Down

The yuan, which briefly stabilized last month while the British pound was declining, is falling again, down another 1 percent against the U.S. dollar in the last two weeks after declining 2 percent in the previous two months. Many currencies are declining as investors move funds into dollars, perceived as a low-risk currency during shaky times. The distraction of Britain might also be taking away some of the pressure on China to support its currency while the news is focused abroad.

Wednesday, June 29, 2016

Fiscal Gap Exceeds 10%

Reanalysis by two groups of economists put China’s effective fiscal deficit between 9 and 10 percent in 2015 and 10 and 12 percent in 2016 — numbers far higher than the 3 percent gap in the official budget. Fiscal measures such as local bond issues to finance real estate projects are boosting economic growth, but at tremendous cost and in a pattern that obviously can’t be sustained for two more years.

Friday, June 24, 2016

Stocks Down After U.K. Vote

The U.K. vote to leave the European Union has led to declines in stocks worldwide, but China has held up better than most, revisiting but not falling through its lows for the month. Some forecasters expect a recession in the U.K. and some adjustments in the euro zone and in international banking, but that would imply little direct impact on China.

The greatest market turbulence today has been in currency markets, which have seen the widest ranges in a decade.

Tuesday, June 21, 2016

Bad Training

How bad is training in banks? A short video that shows a bank trainer beating bankers with a stick in the northern Chinese province of Shanxi suggests that bank managers and trainers are not always taking training very seriously. Regulators suspended two executives at the bank when the video came to light.

Sunday, June 19, 2016

Slowing Trade

Chinese imports are down 4% compared to last year, and it’s a bigger drop in Japan with imports down 13%. More attention is being paid to Japan’s exports, down a surprising 11%. The decline is being attributed to slower spending by consumers, especially in China and developing countries, but also seen in Japan and some countries in Europe.

Saturday, June 11, 2016

IMF Warning on Corporate Debt in China

An IMF official warned about the high level of business debt in China and said the solution includes better corporate governance, especially in state-owned enterprises. Reuters story:

Tuesday, June 7, 2016

China’s Currency and Reserves Decline

It’s hard to find two experts who agree on what’s happening with China’s currency which continues to decline in value. I believe to understand the exchange rates you have to look at currency reserves. China’s stock of foreign currency is declining sharply, and that suggests to me that there is not much more China can realistically do to support its currency.

Wednesday, June 1, 2016

Manufacturing Growth, But Just Barely

The China manufacturing PMI indicated the slightest degree of growth for the second month in a row. There was similarly optimistic indicators from Australia and the United States, but these were balanced out by notes of caution in data from Japan and Europe. Continuing the trend from last year, it looks like the world is moving away from manufacturing, but the move is not fast enough to trigger a recession.

Tuesday, May 31, 2016

Debt Strategy

China plans to boost government debt to help reduce the load of business debt, but don’t expect any sudden changes. The country’s total debt is 2.5 years of GDP and is expected to grow to 3 years of GDP in the next four years despite incremental policy changes. The high levels of business debt in China are worrisome to ecoomists, and debt is growing faster than the economy is growing, leading some to describe the Chinese economy using colorful phrases like “debt-fueled binge.” While the problem is obvious enough, the solution is not, and policymakers are taking a cautious approach.

Monday, May 23, 2016

Fiscal Push to Keep China Going

While not increasing government budgets, China will accelerate spending and make an effort to fully spend local government budgets in an effort to boost the economy in the next two quarters.

Thursday, May 5, 2016

A Warning on Debt Troubles

Is China borrowing too much for unneeded make-work projects? That’s the opinion of a Wall Street money manager, Stanley Druckenmiller. The CNNMoney story by Matt Egan:

China is in the midst of an "extremely rare and quite dangerous" explosion of debt, argued Druckenmiller, whose fortune Forbes estimates at $4.4 billion. He compared the situation with "subprime mania" in the U.S. . . .

He specifically warned about an overhang of real estate development in China.

As for the U.S., Druckenmiller worries that persistent low interest rates have created a speculative bubble in securities, with the Fed now stuck in a position of trying to prevent a near-term global stock market crash.

Friday, April 29, 2016

A Return to Local Real Estate Projects

China has turned again to real estate projects financed with local government loan guarantees as a way to boost its economy. That strategy worked reasonably well six years ago but left a worrying loan overhang that has caused some instability in the financial sector that continues to the present. There were also some boondoggles, projects built 20 years or longer ahead of any realistic need. The new projects are generally more practical. The first category I think of is parking lots. With more vehicles in China, there is an immediate need for parking spaces in some places. On the other hand, there are also projects like housing construction, a worrying trend after many of the larger residential buildings built five years ago remain vacant, or in some cases, unfinished. In a make-work program like this, the quality of execution is everything. If the boondoggle ratio is low enough and the loan performance is strong enough, the real estate projects will be seen as a practical way to boost a sluggish economy. If the reverse is true and the bad loans crash the economy, the program will be judged as the height of folly.

Thursday, April 28, 2016

Phone Sales Drop

Mobile phone sales are down from last year for the first time in the smart phone era. News headlines have focused on the decline in Apple sales, consumer resistance to the oversized form factor of the iPhone 6 and 6S, and declines in mobile phone units in the U.S. and China, but there is more to it than that. The decline in phone sales is a global trend not limited to Apple, smart phones, or the two biggest smart phone countries. Designs have become more sturdy and durable, reducing the number of phones that must be replaced because they are broken. At the same time consumers have become more skeptical of the need to upgrade and are expecting the devices they already have to last longer.

Thursday, April 14, 2016

China Ends Subsidy Program

China is ending its most controversial export subsidies, according to a Reuters article that cites U.S. sources, “U.S. says China to end export subsidies in seven sectors.”

. . . China had agreed to end a program known as its "demonstration bases-common service platform" . . .

The Chinese industries that have received the subsidies under the program include textiles, light industry, specialty chemicals, medical products, hardware, agriculture and advanced materials and metals, including specialty steel and aluminum products . . .

Export subsidies can help to increase capacity and employment in specific sectors, but at the same time they put downward pressure on wages. They are generally harmful to an economy if carried on for an extended period or on too large a scale. Export subsidies can also fail if other countries enact retaliatory tariffs, and this becomes more likely than not if subsidies are carried on beyond an initial year or two.

Wednesday, April 13, 2016

Largest Coal Producer in Bankruptcy

The bankruptcy today of Peabody Energy, the world’s largest coal producer and a dominant force in international coal trading, was partly the result of the ongoing downsizing of the global steel industry. Since 2002, U.S.-based Peabody has made major acquisitions in Australia, mainly in metallurgical coal, and in the last two years these operations have failed to produce the profits needed to cover payments on the huge loans taken out to make the purchases. Much of the coal from eastern Australia was shipped to steel producers in China, but China’s steel production is being trimmed by a third in a government-led restructuring initiative, leaving Australian mines nearly idle. Steel production cuts are occurring elsewhere in the world at the same time. China was the least efficient global steel producer, using more coal to produce steel than any other country, so its cutbacks have a disproportionate effect on coal production. Peabody Energy coal mines are still operating during a restructuring process. The restructuring in bankruptcy could see the U.S. coal mines sold at auction.

Coal from Peabody Energy supplies 2 percent of the world’s electricity. One possible scenario is that electric utilities that operate coal-burning power plants could be forced to buy coal mines (at a low price, but still with considerable financial risk) in order to be sure that coal production continues.

Saturday, April 2, 2016

Steel Trade War Likely

It looks like a trade war in the offing with China selling steel at a loss worldwide while at the same time imposing a 46 percent tariff on imports of steel from Europe. The new tariff puts more pressure on European governments to withdraw the favorable treatment steel from China gets in Europe. That’s a move that trade unions and industry groups have been pushing for in Europe for three years.

Wednesday, March 30, 2016

Steel in Europe

It is not just China that is cutting back on steel production. Demand is down worldwide and Tata Steel says it may sell off its U.K. steel operations. According to this morning’s CNNMoney story on steel production, steel plants have been closing across Europe, and “European officials say as many as 40,000 steel jobs have been lost in recent years,” the result of Chinese steel producers selling steel at a loss.

Monday, March 21, 2016

Car Sales Dip to 2012 Levels

The auto industry in China started 2016 with a sharp decline in retail units sold. Auto sales are volatile by nature, so two months do not indicate a trend, but this was the biggest two-month decline ever recorded with the pace of sales declining by almost half. Viewed on a time scale the data does not look quite so awful. The current pace is roughly that of 2012 and above that of any year before 2012. Still, the abrupt decline in sales is sure to cause some hand-wringing when put together with other indications of slower manufacturing and a sluggish consumer economy. The sales reports were not all bad — sales of electric vehicles were up from last year even as sales of fuel-burning vehicles declined.

Friday, March 4, 2016


China holds huge, mostly secret, stockpiles of basic commodities and sometimes doesn’t know what to do with them. Accounting rules prevent authorities from selling at a loss, so they may bend rules or restrict imports to make sales possible. Some of China’s stored corn is three years old and feared to be moldy. The government is preparing to sell a large amount of it without disclosing the volume or the buyers. Supposedly the corn will go to manufacture basic industrial material such as starch and ethanol, but there are fears that some of it might secretly end up in industrial food products such as corn syrup and corn starch. There are similar, if less serious, problems with selling old rice. Meanwhile, global cotton prices are holding steady in spite of dry weather in key growing areas because of the expectation that China will temporarily bar cotton imports in order to sell off parts of its huge cotton stockpile.

It is a different story with copper, which China is buying to guard against future price increases on the global market. Copper stockpiles can be estimated with some confidence because most of it is registered with exchanges. For the first time that anyone can remember, China has the largest stockpile of finished copper in the world.

Monday, February 29, 2016

1.8 Million Job Cuts

The announcement of the cut in banks’ reserve requirements made a general reference to economic restructuring. The move does not seem so large when you put it up against the specifics announced today: 15 percent across the coal and steel industries, or 1.8 million workers, which I believe qualifies as the largest single layoff announcement in history. Coal and steel are closely connected in China because so much of coal production feeds into steel production. The Reuters report at The Guardian:

This announcement was unexpected because coal and steel are far from the heart of the overcapacity in China’s industrial economy. The excess capacity in construction, for example, is surely greater than 3 million workers. Nevertheless, it all ties together. Cuts in construction, industrial equipment, or any of a dozen other industries would necessitate cuts in steel, which in turn requires cuts in coal. Reducing capacity in coal and steel might as well come first.

The nature of the adjustments points to past imbalances in the economy as the central government pursued glamour over substance in economic development. In solar panels, for example, central government policy supported solar manufacturing strictly for export, even though domestic need for solar capacity was and remains greater than that of the countries factories were trying to export to. Surely China’s economy could be more balanced if practical and domestic needs were not so subservient to marquee export categories.

The drastic cuts in steel point to quality issues. China for the past half century has been known for cheap steel — low prices, but also the lowest quality of any steel producer in the world. Product quality scandals in a wide range of categories have made it a challenge for China to keep exporting.

One of the latest scandals involved laminate flooring which U.S. retailer Lumber Liquidators had custom-manufactured in China. Tests shows illegal levels of industrial solvents in the products. Chemical levels were so high that the Centers for Disease Control (CDC) estimated the cancer risk of a person living with the tainted flooring to be not much less than 1 in 100, and other less serious diseases were far more likely. Lumber Liquidators could go bankrupt because of the scandal, and it has responded by banning all Chinese-made laminate products from its stores. This story at USA Today:

This is just the latest example of how an entrenched indifference to quality can make it difficult to maintain a market position. In a world that is becoming more product-conscious, China will have to make that adjustment as well. Other U.S. retailers pulled similar products, and at least a generation will have to pass by before Chinese-made laminate flooring can get a second chance at the U.S. market.

For these and other reasons, the 1.8 million job cuts announced today for the coal and steel industries are just the tip of the iceberg, and it is hard to imagine that the industrial restructuring can get very far before more monetary easing is forthcoming.

Reserve Requirement Cut to 17 Percent

The People’s Bank of China is cutting the reserve requirement for banks from 17.5 percent to 17 percent effective tomorrow. Detailed context and analysis from Pete Sweeney at Reuters:

In theory a reserve requirement cut makes banks more active and profitable but less stable. The move makes it easier for banks to make new loans. It also makes it easier for banks with stock market loans and other problem loans to extend those loans even though the borrower may not soon be in a position to repay them. In a similar way, it makes it easier for the central bank to leave financial troubled banks standing a little longer.

Friday, February 26, 2016

Central Bank Governor Emphasizes Stability

China’s central bank governor Zhou Xiaochuan held a press conference today only to say that the central bank wasn’t doing or seeing anything particularly new and different in China’s national economy. Zhou said stability remains the key objective of the central bank and rejected any suggestions of using monetary gimmicks to prop up exports or any segment of the economy. He offered an optimistic assessment of the national economy. The story at Xinhua:

For the U.S., Fewer Goods Means Fewer Trucks

In the United States there are mass layoffs in factories that produce medium-sized trucks, ones roughly 7 to 14 meters in length. Orders for trucks in this size range have almost come to a stop in some regions. Indirectly, this is bad news for manufacturing in general. These are the trucks of the distribution system, the ones that move manufactured products from factory to warehouse to store to home. There is no need for more of these trucks this year because U.S. consumers are purchasing a smaller total volume of goods, a trend that is expected to continue into next year.

Wednesday, February 3, 2016

Could the Scale of the Banking System in China Force a Rescue Effort?

Has the Chinese banking system grown too large?

CNBC interviewed a fund manager, Kyle Bass, who is betting that it has.

The premise of Bass' bet goes like this: China's banking system has grown to $34.5 trillion, equal to more than three times the country's GDP. The country is due for a loss cycle . . . central bankers will have to dip into China's $3.3 trillion of foreign exchange reserves to recapitalize the banks, causing a significant depreciation in the value of the yuan . . .

For comparison, the U.S. banking system is around 1 times annual GDP, making it considerable smaller than that of China. The United States pursued deeply inflationary policies for years (though the economy proved resistant to inflation) after 2007 to rescue its banking system. After just a few large-scale shocks such as failed real estate or energy projects or natural disasters, China’s banking system could be weakened enough that China may be forced to follow a similar path. If that were to occur, there is no guarantee that the Chinese economy would resist the subsequent inflation.

Sunday, January 31, 2016

Materials and Japanese Interest Rates

The headlines tell the story of the three-year decline in oil prices, but it is not just oil that is declining. Metals and a wide range of materials have seen prices erode over the same period. Of course, materials of all kinds serve as input to manufacturing, so if manufacturing is barely holding its own, it makes sense that demand for materials would be soft. Mining is especially affected, with mining stocks down sharply. “There is a global fire sale of copper and coal mines,” writes Matt Egan at CNN.

Japan is the latest country to go to negative interest rates. The central bank lowered rates on excess reserves from 0 to -0.1 percent. The negative interest rate doesn’t mean much (as summarized by Shan Li at Los Angeles Times) but should help encourage consumers to spend sooner when they can, and large businesses and banks to complete payments earlier and faster. Both effects tend to encourage economic activity, though the speed-up may be too small to detect.

Saturday, January 30, 2016

China to Lower GDP Target, Citing Global Economy

Reuters says Chinese central government insiders have told it the government is likely to lower its growth target to a range below 7 percent. A range of 6.5 percent to 7 percent annual growth in GDP is the current thinking, but there is still time for revision before the new target is formally introduced. Worries about the global economy could prompt leaders to choose a lower range. If there is a decline in global demand for manufactured goods, China cannot realistically expect to expand its exports this year.

Thursday, January 28, 2016

Durable Goods Tumble

U.S. statistics released this morning show a surprising decline in factory durable goods orders in November and December. From USA Today:

Orders for manufactured durable goods such as autos, computers and electrical equipment tumbled 5.1%, far more than the 0.7% decline economists expected. And November's flat reading was revised to a 0.5% drop.

It is a similar story in South Korea, which exports manufactured goods especially to China and the United States. From a closer look at the statistics it is clear that businesses and households alike in multiple countries are cutting back on purchases of most kinds of manufactured goods, and mostly not out of a sense of austerity, but in an adjustment to the changing nature and purpose of manufactured goods.

U.S. December activity was affected by mild weather, which dampened demand for winter items and Christmas gifts.

The U.S. durable goods report comes after four straight down days in China stocks which has seen the Shanghai Composite fall 10 percent.

Tuesday, January 26, 2016

Stocks Slide Less than 7%

Stocks were down again, but less than 7 percent on the Shanghai Composite Index. The 6.4 percent decline is a long one-day drop for stockholders, but there are two good things about the decline. Stocks are now within 25 percent of a sustainable level, making a panic less likely. Having the afternoon slide stop before 7 percent (even if state intervention was required) makes the removal of the market circuit breaker look like a success.

Wednesday, January 20, 2016

Ikea Talks “Peak Stuff”

Ikea says the Western world has hit “peak stuff,” or “peak curtains” as some are calling it. The term, in either case, is meant to be analogous to peak oil, but does not refer to the world’s limits in creating the raw materials for furniture and housewares. Rather, Ikea’s chief sustainability officer was talking about saturating demand for home furnishings, so that consumers are not interested in buying more new home furnishings in 2016 than they did in 2015. Most home furnishings last for decades, and people will use what they have or buy used furnishings in many cases, so that the demand for newly made items will begin to decline. To stay relevant, Ikea plans to find ways to repair and recycle some of the items it sells, areas of work it had never taken an interest in before. A skeptical summary by Sean Farrell at Guardian Business:

Ikea won’t talk about this angle, but many Western homes simply don’t have any spare space to put more stuff, and the previous reaction of buying ever-larger houses seems to have run its course seven years ago. With limited space, consumers can buy new stuff only if it is so improved that they can justify throwing away something old, and this cycle of product improvement also has its limits. It is certainly a difficult challenge for the factory sector: how do you sell consumers more stuff when the stuff they have already is good enough and there is no room for more? It is not as if people will stop buying stuff, but they may slow down, and that is what both Ikea and the global manufacturing sector seem to be seeing now.

Monday, January 18, 2016

Q4 GDP in Line

China’s official government read of fourth quarter GDP was up 6.8 percent from the year before. The full-year GDP growth was 6.9 percent, the first time in 25 years that GDP growth has been below 7 percent. The report was in line with expectations and official policy, but it was not enough to spark a stock market rally. Stocks were narrowly mixed in the first two hours of trading, a sign at least that volatility might be less after the report met expectations.

Monday, January 11, 2016

Circuit Breakers Gone, Stock Slide Continues

The down market today should be enough to wipe away the theory that the presence of stock-market circuit breakers was the cause of the stock market declines. In six sessions so far this year the Shanghai index has been down four times for an average decline of 4.9 percent. The two up days have averaged 2.1 percent. Stock market technicians are probably correct in saying that the market circuit breakers added to volatility,but there is not much evidence of that either. Stocks should be at sustainable levels when the Shanghai index is near 2200, so nearing that value should in theory diminish volatility. That too is a theory that is hard to support in the data, in spite of closing a third of that gap this year. Another credible theory about the circuit breakers is that regulators didn’t like them because they gave individual investors a better chance of keeping up with the stock market action. If the thought is starting to sink in that Beijing doesn’t really like individual stock investors, that too will change the dynamics of the market. That may be what we are seeing if the more superficial policy changes meant to reassure the markets seem to fall on deaf ears.

The stock market audience Beijing would especially like to impress is well-funded foreign investors, and there, the past seven years of hype seems to have worn off last year with little hope of bringing the audience back to the theater anytime soon. One problem there is that manufacturing for export is one of the most verifiable business activities, an important factor in a country where economic results are exaggerated on a daily basis. If the manufacturing game is starting to fade, is it possible to lend the same kind of credibility to other business categories — and if so, how?

Thursday, January 7, 2016

After a Second Circuit-Breaker Session, Rule Suspended

Despite a flood of government money, the Chinese stock market fell 7 percent today for the second time this week, triggering the new circuit breaker and closing trade early for the day. At the end of the day word came that regulators are suspending the market circuit breaker. Absent any word of how long the suspension will last, I assume it is for a matter of weeks.

Circuit breakers are a double-edged sword. If they are almost never triggered, they provide something of a safety net for traders. But if every trading session opens with the question, “Will we trigger the circuit breaker today?” it changes the dynamic of trading. Sellers want to sell early in the session if waiting for later means they could miss their chance. The traditional stock-trading question of up or down may give way to the question of circuit breaker or not, creating a mentality of high volatility and rapidly declining prices that can be hard to shake. That appears to be the thinking behind suspending the circuit breaker rule, but after two shortened sessions out of the first four sessions of the year, it will be hard to create a back-to-normal feeling.

There is special concern because thousands of stockholders who were restricted from selling for most of last year can now start selling. These stockholders obviously would like to sell at the current elevated levels, but risk being hauled off to jail, despite the nominal rule changes, if they try to close their position in a short time, such as a couple of weeks. They will be testing the waters to find out how much selling they can get away with. The uncertainty of the rules combined with the new selling pressure will create unusual volatility.

At the same time, the Chinese government is starting to run out of money it can use to support the stock market without triggering a broad increase in prices. Regardless of details, the central government has to balance the demands of defending China’s influential position in the world and defending the price of stocks. In the short run it probably cannot do both.

There is continued talk of a U.S. recession, with forecasts calling for a 0.2 percent decline in production hitting bottom around July, then recovering before the end of the year. As I have said before, I believe forecasters and analysts are being misled by the decline in demand for factory output, specifically, manufactured consumer goods, excluding automobiles and food. Analysts are also treating the recent 0.25 percent increase in interest rates as if it were a 3 percent increase, leading to exaggerated fears of a slowdown.

Some analysts are repeating a meme from last month, saying that China can’t be blamed for a decline in demand from U.S. consumers. I believe that message is also a mistake. Demand is a two-way street. It is based not just on the financing and desires of the buyers, but also on the relevance and quality of the products. To say the same thing in more extreme terms, if a factory is making products that no one wants to buy, is it reasonable to say that the factory is not responsible? To the extent that it is true that consumer tastes are changing, all suppliers must adapt accordingly, and there is no logic in exempting China from this rule of markets.

Monday, January 4, 2016

Stock Market Circuit-Breakers Work

Well, that didn’t take long. Circuit breakers went into effect on China’s stock markets today and cut short the first trading session of the year after a 7 percent decline. Investors were unsettled by the latest PMI report, which shows a small but faster-than-expected decline in manufacturing in China. Hostilities between Saudi Arabia and Iran are another global concern, and closer to home, the detention of several more media figures in China is sign of systemic breakdown.