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.