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Debt Rattle Jan 2014: In Debt We Trust

Does the Chinese alphabet have a question mark? If not, this would be a good time to get one. After writing again yesterday about the enormous amounts of leveraged debt in the country, that threaten to bring down investment products closely linked to the shadow banking system, which at the same time is fast becoming a huge political force just through its sheer size, here’s another question about China. How is manufacturing really doing? A private survey of manufacturers can at least potentially be expected to not only be party propaganda, something that can’t be said for any of the official numbers.

HSBC’s January index not just indicates poor growth, it even shows contraction. It is truly time to seriously worry about China. Ironically, the HSBC spokesperson says that “the policy focus should tilt towards supporting growth”. How, pray tell? Issuing more money/credit/debt through the PBOC? We saw yesterday that M2 went up 1000% since 1999. Pouring on ever more may not be the cure here. Or does he mean: loosen the strings for the shadow system? That would increase leverage even further, and raise risk to even higher levels. Is it maybe time to work towards less growth, instead of more?

• Weak China manufacturing reading rattles Asia (FT)

Asian equities and the Australian dollar fell after a closely watched private survey of Chinese manufacturers suggested industrial activity in the world’s second-biggest economy is contracting. HSBC’s preliminary Purchasing Managers’ Index slipped to 49.6 in January from 50.5 in December, just below the 50 mark that separates growth and contraction.

HSBC analysts said the PMI survey might convince the Chinese government to embark on another round of stimulus spending. “As inflation is not a concern, the policy focus should tilt towards supporting growth to avoid repeating growth deceleration seen in [the first half of] 2013,” HSBC’s Qu Hongbin said. [..]

Ambrose talks about China as well, and also writes about the need to pour more money into the system. He does mention something hardly anyone else has: the velocity of money is very low in China. So no, indeed, inflation is not the biggest concern. But again, Beijing has poured in so much already, and let the shadow banks do even more, that you need to question whether that is the real answer. The risks would only grow that investments blow up, and who wins when that happens?

• Trying to deleverage China without blowing up the system (AEP)

China is walking a tightrope without a net. There is an acute cash crunch. Credit at a viable cost is being fiercely rationed. Foreign buyers with money in hand can – and are – buying up nearly completed buildings from distressed developers for a song.

The shadow banking system has risen to 30% of all lending from 20% in barely more than a year. The growth generated by each extra yuan of credit has fallen by three quarters from 1.0 to 0.25 in five years, evidence of credit exhaustion.

“They are trying to deleverage without blowing the whole thing up,” said CITIC’s Zhang Yichen. “The M2 money supply is 120 trillion RMB but that is still not enough cash because velocity of money is very slow, and interest rates are going up.”

Britain’s in a bind that the BOE gave no forward guidance for: the government lending schemes (yes, more credit, more debt) have been so “successful” that they have to make true on what they did “forward guide”, raising rates when unemployment got to 7%. Well, it has, as temporary as that may be, but the BOE, like the Fed, is smart enough to understand that fulfilling the forwarded promises is a self-defeating action. How will they spin this one? Stay tuned …

• Bank of England seeks to ease rate hike fears as pound soars (Independent)

City traders sent the pound soaring following a shock fall in unemployment and the first explicit signal from the Bank of England on how it would handle a hike in interest rates. The fall in unemployment to 7.1% in the quarter to November brings it to the brink of the Bank’s 7% threshold for considering rate hikes under the forward guidance regime introduced only last summer.

The figures — showing a far steeper fall than predicted by City economists — pushed the pound up to a year high of 1.2220 against the euro and up 0.7 cents to $1.6552, also triggering a sell-off in gilts as the UK’s 10-year cost of borrowing rose by five basis points to 2.88%.

One of the main effects of a central bank rate hike, both in the US and UK, would be to seriously risk blowing up the illusionary housing recovery. Illusionary, because it’s been bought with debt.

• Interest rate rises will hit British households hard (Guardian)

Interest rate rises would tip millions of already-precarious households into financial disaster, according to economists, who warn it would cost the average family nearly £3,000 a year in extra mortgage payments if rates returned to levels that were typical before the credit crunch.

The Resolution Foundation thinktank has forecast that about 1 million households would face perilous debts if Bank of England base rates rose to 3%, with 2 million forced to spend more than half of their income on servicing a mortgage if rates returned to the 5% level common before the onset of the financial crisis in 2007.

British households remain among the most indebted in the world, warned the Trades Union Congress, and with wages falling in real terms they have struggled to pay off loans taken on during the boom. “We will start seeing really serious stress on household budgets if [Bank of England base] rates rise to 3.5-4%,” said a TUC senior economist, Duncan Weldon.

Australians too have binged on debt. Which seemed so cheap to do. Until it won’t be. Among overvalued housing markets, Oz is only 5th, behind Canada, New Zealand, Norway and Belgium. Good luck all of you.

• Australians in Record Loan Spree as House Prices Soar (Bloomberg)

Australian homebuyers are borrowing at the fastest pace in four years amid record prices, straining debt levels already among the developed world’s highest as interest rates are set to climb. The value of new mortgage approvals jumped 25% in November from a year earlier, the fastest annual pace since September 2009, to a record A$26.9 billion ($23.8 billion), according to the statistics bureau.

Consumers from Canada to Scandinavia are on a borrowing binge, taking advantage of cheap credit that in Australia has pushed mortgage rates to a four-year low and underpinned a rally in home prices to unprecedented levels. Australians’ preference for variable-rate loans and investor demand for rental properties is setting the stage for delinquencies to rise as interest rates climb.

Australia’s housing market was the fifth-most overvalued among countries in the Organization for Economic Cooperation and Development relative to rents, the International Monetary Fund said in a December report. The leader is Canada, followed by New Zealand, Norway and Belgium.

Ex-Bundesbank Axel Weber can finally say what he pleases. Turns out, he understands it all after all. That doesn’t mean EU bank stress tests will be honest in their findings. That would be too risky, and expensive. Still, it looks certain that a number of banks will be closing their doors, but it’s an exercise in futility. Maybe the European elections this spring can conjure up some truth serum in Brussels and Frankfurt.

• Crippled eurozone to face fresh debt crisis this year (AEP)

A top panel of experts in Davos has poured cold water on claims that the European crisis is over, warning that the eurozone remains stuck in a low-growth debt trap and risks being left on the margins of the global economy by US and China.

Axel Weber, the former head of the German Bundesbank, said the underlying disorder continues to fester and region is likely to face a fresh market attack this year. “Europe is under threat. I am still really concerned. Markets have improved but the economic situation for most countries has not improved,” he said that the World Economic Forum in Davos.

Mr Weber, now chairman of UBS, said the European Central Bank’s stress test for banks in November risks setting off a new sovereign debt scare, reviving the crisis in the Mediterranean countries. “Markets are currently disregarding risks, particularly in the periphery. I expect some banks not to pass the test despite political pressure. As that becomes clear, there will be a financial reaction in markets,” he said.

Harvard professor Kenneth Rogoff said the launch of the euro had been a “giant historic mistake, done to soon” that now requires a degree of fiscal union and a common bank resolution fund to make it work, but EMU leaders are still refusing to take these steps. “People are no longer talking about the euro falling apart but youth unemployment is really horrific. They can’t leave this twisting in wind for another five years,” he said. [..]

Mr Rogoff said it would be much easier for Europe to cope if the euro exchange rate was $1.10 to the dollar rather than $1.35, up 8pc in trade-weighted terms in the last 18 months. Mr Weber retorted that the euro will come down to earth as the tightening by the US Federal Reserve and other central banks leave Europe as the odd man out. “The ECB has an easing bias. Fast forward another year or two, and relative monetary policy will become obvious to everybody,” he said.

Oh no, not again. Not the debt ceiling. For g-d’s sake, blow up the thing already! Let’s move on.

• U.S. Likely To Hit Debt Ceiling Sooner Than Believed

The country’s next fiscal crisis will come sooner than advertised.

Treasury Secretary Jack Lew on Wednesday sent a letter to House Speaker John Boehner (R-Ohio) warning that the country would likely exhaust the extraordinary measures used to stay beneath the debt limit by late February. In a previous letter to Boehner, Lew had projected the deadline might not be hit until early March. “While this [new] forecast is subject to inherent variability, we do not foresee any reasonable scenario in which the extraordinary measures would last for an extended period of time,” Lew wrote.

In the deal reached in mid-October to end the government shutdown, lawmakers extended the nation’s debt limit into the first week of February. It was always understood that Treasury could take extraordinary measures to extend the deadline even further. But in his note to Boehner, Lew made clear that those tools weren’t as potent as they have been in previous debt limit crises, partly because of limits on borrowing capacity and partly because of financial constraints that are unique to the month of February.

If after the demise of mankind more intelligent (how hard can that be?) life evolves, they will remember us as the species that poisoned itself to extinction. And wonder how that was ever possible. Wonder why we thought it was smart to first poison ourselves and then think we could “cure” it all right after. What are we thinking? To make money, we need to inject toxins in our bodies, and to make more money, we need to find a way to get rid of them. It is so stupid as a concept, there is no way it will ever succeed. Nor should it. Then again, how about seeing it in a positive way: we found the perfect antidote to overpopulation!

• Toxic Chemicals Driving Up Health Care Costs (HuffPo)

Health care spending in the U.S. has surged more than eightfold since the 1960s. Skyrocketing in that same time: Rates of chronic disease, use of synthetic chemicals, and evidence that many of these widely used substances may be wreaking havoc on human health. “We know that these chemicals are reaching people. We know that chemicals can cause disease,” said Dr. Philip Landrigan, chairman of the department of preventative medicine at the Mount Sinai School of Medicine in New York. “Those diseases cost money,” Landrigan added.

New research published on Wednesday offers an example of this financial burden, widely overlooked in the health care debate. The use of bisphenol A, or BPA, in food and beverage containers, according to the study, is responsible for an estimated $3 billion a year in costs associated with childhood obesity and adult heart disease. “One could argue that’s absurdly conservative,” said Leonardo Trasande, an associate professor in pediatrics, environmental medicine and health policy at New York University’s Lagone Medical Center and author of the study.

Trasande’s calculations didn’t take into account other health issues that studies have begun linking to BPA exposure, such as prostate and breast cancers, asthma, migraine headaches, reproductive disorders and behavioral problems.

37.2% seems high for a US unemployment number, and just about everyone will discard it. But all Wall Street consiglieri David John Marotta wrote in what – probably – was not meant for publication is that “it does describe how many people are not able to, do not want to or cannot find a way to work“. Or, in other words, people of working age who do not have a job.

• Actual US unemployment 37.2%, record number of households on food stamps(RT)

Perhaps the most worrying yet least reported aspect of the so-called US recovery involves the national labor picture. Although the official US unemployment rate is 6.7 percent, this figure obscures the reality, according to an influential Wall Street adviser. In a leaked memo to clients, David John Marotta calculates the actual unemployment rate of Americans out of work at an astronomic 37.2%, as opposed to the 6.7% claimed by the Federal Reserve.

“The unemployment rate only describes people who are currently working or looking for work,” he said. “Unemployment in its truest definition, meaning the portion of people who do not have any job, is 37.2%. This number obviously includes some people who are not or never plan to seek employment. But it does describe how many people are not able to, do not want to or cannot find a way to work,” he and colleague Megan Russell reveal in their client report, which was leaked to the Washington Examiner.

Contrary to expectations, a drop in the unemployment rate, Marotta argues, is presently a sign that the unemployed are simply dropping out of the job market. The “officially-reported unemployment numbers decrease when enough time passes to discourage the unemployed from looking for work,” said Marotta and Russell. “A decrease is not necessarily beneficial; an increase is clearly detrimental.”

“A committee has been set up to consult on improving the fixing”, this says. Say no more. That’s all we need to know.

• London seeks to reform 100-year-old ‘gold fix’ (RT)

Pricing probes have forced London’s biggest banks to consider a systemic overhaul of the dated practice of “fixing” gold prices, which sets spot pricing for the world’s $20 trillion physical gold market.

A committee has been set up to consult on improving the fixing, which is set twice a day by five banks – Barclays Plc, Deutsche Bank AG, Bank of Nova Scotia, HSBC Holdings Plc, and Societe General SA, Bloomberg News reports, citing an anonymous inside source who wasn’t named because the review is not yet public.

The practice dates back to 1919 and helps determine the price of the precious metal on exchanges worldwide. The ‘fixing’ method has come under fire from US, UK, and European regulators who say it lacks transparency. Representatives of the five banks set the benchmark gold price in a teleconference call, and either recommend a higher or lower price to meet supply with demand. The prices are then used as a guide for miners, jewelers, as well as traders that sell securities tied to metals prices.

This article addresses just one of the many issues discussed in Nicole Foss’ new video presentation, Facing the Future, co-presented with Laurence Boomert and available from the Automatic Earth Store. Get your copy now, be much better prepared for 2014, and support The Automatic Earth in the process!