Economic Outlook

As the Eurozone Stalls, China Cuts the Red Tape

Forty-four percent. That’s the alarming unemployment rate for those aged 15 to 25 in Italy, where I traveled recently to 35597 ameet with other global chief executives and business leaders.

The reason for Italy’s high youth unemployment? Tortuous red tape, high taxation and thuggish unions. Many of the CEOs at the event I attended noted that Italy is mired in unionization. This has created a restrictive jobs market that crowds out well-educated, aspirational young people, many of whom are forced to flee their homes and seek work elsewhere.

But “elsewhere” within the European Union is currently not much of an improvement. Even in Germany, the EU’s most reliable economy, train and airline unionists have gone on strike, bringing the country to a near-standstill. Incredibly, both Italy and France–where the youth unemployment rate stands at 24 percent–want the EU to foot the bill for their joblessness woes. Global investors’ patience has been stretched thin as European Central Bank (ECB) President Mario Draghi and German Chancellor Angela Merkel continue to bicker over how to resolve the region’s slowdown.

As I told CNBC Asia’s Bernie Lo, the EU’s default policy is to tax anything that moves. Led by pro-taxation economists such as France’s Thomas Piketty, Europe’s policies have become a sort of contagion resonating throughout the rest of the world. The eurozone countries have an imbalanced approach to jumpstarting their economies, relying only on monetary policy but failing to address fiscal issues such as punitive taxation and over-bloated entitlement spending.

You can see how disastrous the results have been: France and Germany’s industrial production has turned down recently. Their purchasing managers’ index (PMI) numbers are below the 50-mark line, indicating contraction. This trend is especially worrisome because Europe is a bigger trading partner with China than the U.S. is.

So what’s the solution?

The EU would do well to look east, specifically to China.

China Handing over Its Economy’s Keys to Capital Markets

Last week senior Chinese officials met in Beijing to resolve the sorts of problems the EU can’t seem to fix, let alone acknowledge. On the chopping block were regulations–hundreds of them. According to Premier Li Keqiang, 416 lines of red tape have allegedly either been abolished or eased in order to facilitate business growth in important sectors such as transportation, logistics and telecommunications. In June, Li vowed to slash an additional 200 measures.

The Chinese government also plans to relax oversight of key areas such as utilities and natural resources, land and the pricing mechanism of money. Gone is the government’s control over shale gas, coal bed methane and imported liquefied natural gas (LNG). The mining sector’s tax code has been reformed. And for the first time, private companies have been granted the license to ship crude oil.

It appears as if China is starting to see the light. They’re introducing competition back into their capital markets instead of strangling it, as the eurozone has done. Between January and September, 10.97 million new jobs were created in China, exceeding the government’s goal of 10 million in 2014 and beating the benchmark by an entire quarter, according to China’s National Bureau of Statistics (NBS).

As you can see below, new business start-ups in China have skyrocketed.

35597 b

These red tape-cutting measures, coupled with fiscal stimulus, are needed now more than ever. As promising as Premier Li’s promises are, China still faces deflation and declining real GDP growth. The Asian country’s economy is currently headed for its slowest expansion since 1990, the main culprit of which is the struggling real estate market.

Other problems also continue to hold China back, many of them deeply-rooted and systemic. The Ease of Doing Business Index ranks China 158 out of 189 economies in the “Starting a Business” category and an almost-dead-last 185 in the “Dealing with Construction Permits” category. According to the World Economic Forum’s most recent Global Competitiveness Report, the two most problematic factors for conducting business in China are access to financing and corruption, another issue Chinese officials are addressing this week.

These issues can’t and won’t be fixed overnight. But unlike the EU, China acknowledges them and is seeking innovative solutions. One of the only benefits to having a one-party system, as China does, is that you can’t shuffle off a set of problems to another party and then lay the blame at their feet when they go unresolved. You must think long-term.

Constructive Manufacturing News

Last week we were relieved to learn that China’s flash PMI came in at 50.4. Anything over 50 indicates growth in the manufacturing sector, but as I’ve discussed on numerous occasions, what really matters is that the one-month reading crosses above the three-month moving average. Such a “cross-above” historically means that commodities and commodity stocks perform better in the coming months. Based on our research, three months following a cross-above, there’s a 73 percent chance that the S&P 500 Index will rise more than 2.4 percent and a 55 percent chance that the S&P 1500 Energy Index will rise more than 0.7 percent.

As you can see, this crossover did indeed occur, the first time it’s done so since May.

35597 c

Of course, flash PMIs are merely preliminary, and we won’t know the final results until later. But for now this is certainly positive news.

Emerging Asia Wins with Cheap Commodities

One of the reasons why Chinese manufacturing is picking up steam might be the recent collapse in commodity prices. Low commodity prices undeniably hurt certain stocks in the space, and we’ve felt the pain in some of our funds. The silver-lining, though, is that these low prices have helped non-Japan Asian companies get ahead, a tailwind for our China Region Fund (USCOX). Because labor continues to be relatively cheap in Asia, commodities tend to be the single-largest company expenditure.

35597 d

Lower steel and aluminum costs benefit machinery, automobile and equipment manufacturers, as well as homebuilders, shipbuilders and oil and drilling equipment suppliers; falling corn and wheat prices are welcomed by food and beverage producers; cheap copper is good for construction and engineering, utilities and electrical equipment.

Then there’s oil and gas. Since June, Brent crude has corrected itself over 25 percent. Again, this is a headwind for petroleum companies and large net-oil-exporting nations such as Russia and Mexico, but cheap energy equates to huge savings for emerging Asian countries.

35597 e

One final bellwether of economic growth I want to touch upon is accelerated electricity generation and usage. In the past, Chinese Premier Li Keqiang has cited this as one of the more reliable indicators of economic activity because electricity is not easily stored and the data is difficult to manipulate. This month, energy production improved 4.1 percent year-over-year–not a huge cause for celebration, but a step in the right direction nonetheless.

35597 f

China Is a Long-Term Story

35597 g

Compared to many eurozone nations, China is relatively young. Whereas the median age in Italy is 43 years, in China it’s 35. There’s huge growth potential in this region, especially now that Premier Li has resolved to cut red tape and balance monetary and fiscal policy. In 10 years’ time, the 35-to-45 cohort, a well-educated group with good salaries and credit, will expand dramatically.

Consider this: of the 1.35 billion Chinese citizens, about 618 million, nearly half, have access to the Internet. Of those, 302 million, nearly half again, shop online. These numbers will continue to grow, and with them, greater investment opportunity. Name one Western European company that, in recent years, has achieved the sort of success Alibaba, Tencent or Baidu has. Not in a Piketty economy.

Why The Business Cycle Is Failing

Since WW2 economic theorists have posited that demand in the economy could be stimulated by a combination of deficit spending by the government and by suppressing interest rates. The separation of demand from production was promoted by Keynes and interest rate management of the economy by monetarists, though there is considerable overlap between the two. Yet no progress in economic management has been achieved: instead we appear to be on the brink of a major economic dislocation.

Far from banishing the business cycle, it has become worse. To understand why it’s worth looking at the reason the concept is failing.

Without government intervention, the economy clears its goods and services at prices determined by the consumer. All production in free markets is aimed to satisfy consumer demand. Equally, the consumer has to earn in order to spend, so his efforts are directed at producing goods and services others are prepared to buy. An economy so based carries uncertainty for the individual which he offsets by saving some of his surplus income, and through financial intermediaries his savings are leant to businesses for investment in the means of production.

If only the world was so simple. Instead we have government, which in modern times increasingly intervenes. We are all familiar with attempts from the pharaohs onwards to divert economic resources towards projects not designed to satisfy human consumption. What is less understood is intervention by manipulating the cost and quantity of money.

lowerinterestratesIf a central bank forces lower interest rates on the market, this falsely alerts the businessman to a savings glut, the result of a reduction in consumption. His first response is therefore to cut his costs so that he can lower his prices to protect his profits. When interest rates remain low he begins to think about investing in more efficient means of production, so that he can keep his prices low and compete in difficult markets. And when he finds that interest rates still remain low he becomes more confident about the future and plans for expansion.

So far the objectives of the central bank are being achieved. The recession has been stopped and modest growth restarts. Furthermore some businesses are cautiously hiring people again. In a nutshell, this describes the current position in the US and UK economies, where there is patchy evidence of capital spending and increasing employment. But then we run into a roadblock: the businessman finds that all other businesses have fallen for the monetary trick, and everyone is chasing the same rainbow. Normally price inflation results, interest rates rise and before very long the businessman is forced to cut his losses. Then the cycle starts over again.

Only this time, the final act of the business cycle is ending differently. The accumulated burden of debt has become too great for consumers and even governments themselves to bear. Financial reality is finally intervening, and consumption simply cannot grow as the Keynesians and monetarists intended. What was originally an economic problem, believed to be solvable by deficit spending and interest rate management has become a financial problem.

The truth of this statement appears to be finally dawning on bond and equity markets, with a rush into the safe haven offered by the former and an aversion to the risks in the latter, a process that having just started has a long way to go.

….also from Alasdair:

 

 

 

About Alasdair MacCleod

Alasdair became a stockbroker in 1970 and a Member of the London Stock Exchange in 1974.

His experience encompasses equity and bond markets, fund management, corporate finance and investment strategy.

After 27 years in the City, Alasdair moved to Guernsey. He worked as a consultant at many offshore institutions and was an Executive Director at an offshore bank in Guernsey and Jersey.

 

Crashing Oil Prices Portends Unspeakable Horrors

This article expands on Michael Campbell’s Tues commentary about the importance of predicting Oil Prices HERE
 

Crashing Oil Prices Portends Unspeakable Horrors

OK, so how about that for a headline?  And no, we’re not exaggerating as the charge toward global depression, war and hyperinflation is exploding out of control, like terrified wildebeest pursued by a den of lions.  We wrote last week that the only difference between 2008 and today – aside from tens of trillions of debt and historic geopolitical tensions – was the PPT’s ability to manipulate equity markets higher.  However, “Economic Mother Nature” is decidedly asserting herself; and consequently, TPTB are massively losing control of paper financial markets.  Eventually, the physical gold and silver markets will be liberated as well, ending the Cartel’s disgusting, 15-year masking of reality.  And with just $50 million of silver inventory on the Shanghai exchange, and U.S. Mint sales on pace for one of their best months ever, it’s just a matter of time before the Financial System’s Achilles Heel destroys it – permanently.  Now, more than ever, it appears “it” has commenced – i.e., the “Big One.”

Frankly, we could write entire articles on no less than a dozen “horrible headlines” this morning, including…

  1. Greek stock and bonds collapsing as a 2015 default appears certain
  2. The collapsing French government, as Hollande has lost political support
  3. Plunging German growth estimates
  4. The growing Italian movement to secede from the Euro monetary system
  5. Growing support of Catalonian secession
  6. This morning’s horrifying plunges in U.S. Retail Sales, the Empire State Manufacturing Index and Mortgage Purchase Originations
  7. Wells Fargo reporting yesterday that mortgage activity has plummeted to 2008 Lehman levels
  8. The all-out global commodity crash, highlighted in today’s article
  9. Exploding currency volatility – i.e., the “single most bullish precious metals factor imaginable
  10. Unmitigated Western bond yield crash as the “most damning proof yet of QE failure” exposes a collapsing global economy.
  11. Exploding U.S. debt about to eclipse $17.9 billion due to the “unreported” $100 billion spent on Iraq, Syria and the Ukraine
  12. Last night’s absurd stock repurchase admission by Intel – likely, marking the painful end of one of QE’s most hideous shareholder-destroying practices.  It is estimated that 95% of all 2014 U.S. corporate earnings were plowed into buybacks – often supplemented by new debt – at historically high valuations, whilst average property, plant, and equipment averaged 22 years of age, its oldest level in 60 years.
  13. A new study purporting the largest “TBTF” banks may require $900 billion of capital to remain solvent

However, we don’t have time – so suffice to say, this morning’s burgeoning global market crash may well constitute the beginning of what could be a very, very rapid end.  The U.S. 10-year yield closed last night at 2.21%; but as I write, is down to an astounding 1.93%, in perhaps its largest daily move ever – en route first to ZERO, and subsequently INFINITY, when the upcomingimminent (yes, I said imminent) announcement of QE’s 4, 5 and 6 emerges.  Frankly, if the PPT can’t pull a rabbit out of its hat and “save” the world with unprecedented market manipulation, we think it likely the Fed will not only cancel the “taper” at its October 29th meeting but hint at reversing it entirely.

If we really get a sustained, disinflationary forecast … then I think moving back to additional asset purchases should be something we should seriously consider.

– John Williams, SF Fed President, October 14, 2014

In other words, the “countdown to the Yellen reversal” has commenced”; and if it occurs this Fall, we may well see the long-awaited collapse of the gold Cartel.

This morning (Oct 15th), WTI crude prices are down another $1+ to $81/bbl., whilst Brent Crude has plunged to $84/bbl.  The carnage on energy industry equities is catastrophic, as all energy-related sectors have broken down to multi-year lows, portending a horrific 2008-style crash.

(Chart from 5:20am today)

Screen Shot 2014-10-16 at 5.25.03 AM

….continue reading HERE

IMF Says Markets Could Experience ‘Widespread Disruption’

35379 aWorld Economic Outlook

The International Monetary Fund (IMF) published their most recent outlook for the global economy Tuesday. While most of the headlines covered the IMF’s relatively tame outlook, the report also warned investors about financial excess. From the IMF:

Easy financial conditions, and the resulting search for yield, could fuel financial excess. Markets may have underpriced risks by not fully internalizing the uncertainties around the global outlook. A larger-than-expected increase in U.S. long-term interest rates, geopolitical events, or major growth disappointments could trigger widespread disruption.

How Concerned Should We Be?

The charts below show the S&P 500 weekly during Tuesday’s session (middle), the S&P 500 in 2008 (left), and the S&P 500 in 2009 (right). While the market can find its footing at any time, the present day market is telling us to “pay closer attention to risk management” in the coming weeks. The charts below are described in more detail in a October 3 video clip.

35379 b

Investment Implications – The Weight Of The Evidence

As noted in recent weeks, our market model has already called for a significant reduction in equity exposure based on the evidence we have in hand. Since it is not possible for stocks to drop for several weeks or several months without first taking out the S&P 500 levels shown below, we can use them as bull/bear guideposts in the coming sessions.

35379 c

If the S&P 500 closes below last Thursday’s closing level of 1946, we will consider cutting our exposure to stocks (SPY) again. If the markets can respond favorably to the Fed minutes or Fed speakers this week, while remaining above 1946, we will try to exercise some “let’s see how things play out” patience.

 

About  Chris Ciovacco

Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC.

UK Joins U.S. Bombing, Courting Danger

UnknownOn September 26th, the English Parliament voted to join the U.S.-led bombing of ISIL, at least in Iraq. The news was received with relief by most in the Anglosphere world and throughout Europe. However, very little regard has been paid to the relative benefits and costs. The military actions that the UK has committed herself to conduct will have a low probability of achieving the stated objective of “degrading and destroying” ISIL. However, there is a much higher likelihood that air strikes from the UK will increase ISIL’s stated objective of projecting fear and terrorism deeper into the West. If that were to occur, the resulting implications for business will be difficult to project.

Despite apparent successes in very different conflicts in Libya and Kosovo, air power alone is unlikely to dislodge ISIL from its dominant position in Western Iraq and eastern Syria. The strategy is like trying to engage a boxer by throwing apples from outside the ring. It may bruise your opponent, but it will not result in victory. It may even cause retribution outside the ring, where the Queensbury rules do not apply. This is particularly apparent when one considers how the parliamentary authorization only applies to territory in Iraq, not Syria. If ISIL does not respect 20th Century borders, why should the West?

The U.S.-led air war appears set to achieve only limited degradation of ISIL’s capabilities. To succeed, air strikes would have to be coupled with a strong, organized, dependable and politically aligned ground force. That half of the equation is not available in Iraq or Syria. ISIL’s brutal “take no-prisoners” policies have been too much for the local, poorly motivated ground forces to confront. An air campaign can certainly be expected to slow ISIL’s progress but it should also be expected to heighten the likelihood of terrorist attacks, particularly within the U.S. and UK. Given the fragility of current markets, such an outcome could be financially catastrophic.

 

Why, therefore, did the British agree eventually to participate? This answer is far more complex than most care to admit.

The British approved of their government supporting the Allied cause in Gulf War I, which was seen as a legally justified reaction to Saddam Hussein’s invasion of Kuwait. But unlike Americans, the British public approved of George H.W. Bush’s decision to leave Saddam Hussein in place, after he was forced out of Kuwait.

Gulf War II, however, was a very different story. The British saw it as illegal and unwise to conduct an unprovoked attack on Iraq merely to replace a strong regime with sectarian chaos. Further, they feared the price in terms of blood and pointless military expenditures. Despite this, the need to preserve the Anglo-American ‘Special Relationship’ as the crucial tenant of UK defense policy proved more important to many British elites. But an already wary public turned away sharply when the WMDs could not be found and the invasion turned into a quagmire.

The aversion to further Middle Eastern adventurism came to the fore in August 2013 when the English Parliament voted by a majority of 13 not to join the U.S.-led bombing of Syria. Interestingly, the mainline media missed completely the crucial fact that this defeat was due largely to a rebellion by Conservative eurosceptic MPs who were angry with Cameron for failure to follow through on his “cast-iron guarantee” of an EU referendum.

Another ‘no’ vote could have been disastrous for Cameron’s political authority. So this time around his party whips took time to ‘bend’ the votes of malcontent MPs. As September is a period of Parliamentary recess and party conferences, this added to delays.

It also meant that Cameron needed to keep the bill highly focused, preventing Britain from joining the U.S.-led bombing outside of Iraq. In desert terrain, however, who will know whether British bombs are dropped on Syrian territory? Doubtless, British and even Australian Special Forces are already, or soon will be, working with Americans in Syria to identify strike targets.

Thanks to the ‘open-door’ immigration policies imposed on the UK by the EU, British civilians now are exposed irresponsibly and dangerously to Jihadist terrorism. Already, in some sectors within certain UK cities, sharia law rules, de facto. Mob scenes in Britain regularly depict banner hate that if shown or spoken by the native English would result in jail sentences. It is no accident that the bloodthirsty Jihadist responsible for beheading the British and American citizens spoke with an accent that grew up in immigrant communities within the UK.

British military probably warned their political leaders against an illegal, ineffective air war with the implication of a massive increase in domestic terrorism. However, in order to preserve the Special Relationship, likely they were overruled politically after delays.

Now, British and American civilians, with wide open borders and none of the personal protections granted their political masters, must face the threat of greatly increased, even horrific domestic terror.

Hopefully British and American politicians will decide eventually to spend on the effective policing of their borders and the physical protection of their people rather than wasting billions of dollars in pounding illusive targets on the enemy’s choice of ground-distant, near empty sands!

John Browne is a Senior Economic Consultant to Euro Pacific Capital. Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff. 

Subscribe to Euro Pacific’s Weekly Digest: Receive all commentaries by Peter Schiff, John Browne, and other Euro Pacific commentators delivered to your inbox every Monday! 

Martin Armstrong: Hello Deflation!

74% of all Municipals want to raise Taxes. Municipal governments are going broke everywhere. This entire structure of government would never have been designed even by a moron. In Germany. a survey of 300 municipalities shows that 74% are planning to raise taxes. Now 27% plan to increase their cemetery fees, 25% want to demand more money for attending daycare or day schools. 21% plan to increase the property tax assessment rate, and 13% intend to raise the dog tax. (see latest German survery)

We are headed into this Sovereign Debt Crisis and Western Society as we know it cannot POSSIBLY exist. The problem with politicians is they just look at the people as a bottomless-pit of revenue to be taxed at will. They have no grand plan nor have they ever contemplated the long-term viability of such a system with no fiscal restraints whatsoever. They never see themselves as part of any problem – it is always the cheating people who do not hand them everything they demand.

Screen Shot 2014-09-18 at 6.07.37 AM

This is the source of the civil unrest we see coming everywhere. Governments do not respect the people nor do they really care about our future. This is now all about them and they only see raising taxes rather than downsizing or reform.

In the United States, the resistance toward raising taxes to pay for repairs in infrastructure has the Obama Administration pitching the pension funds to join in and invest in an “infrastructure fund”. They are soliciting pension funds because they will benefit from tolls etc and that will be more palatable than watching you toll dollars go to bankers. The idea is this will be salable to the public. California’s pensions Capers is on board and have already announced they will liquidate $4 billion from hedge funds. They have not announced where they will shift that money, but it appears they are getting ready for another Obama star project up there with Obamacare.

Taxation-Deflation

State and local government cannot print money. This is the DEFLATIONARY aspect that first impacts society. Courts begin to rule only in government’s favor and you then see the collapse of investment and society as a whole when the rule of law vanishes. The higher they raise taxes, the lower the disposable income, the lower the economic growth, and the higher we will see unemployment. Government wastes money – they consume capital and are incapable of producing anything worthwhile to contribute the economic growth. This is why government MUST be restricted to defined percentages of GDP to prevent it from growing like corporations until they become so big, they are unable to function.

Detroit-Bankruptcy-Unions

Public unions are already advocating just taking money from other sectors to pay them. This is precisely the same trend that unfolded in Rome setting in motion the decline and fall. When Rome could not fund its pensions to the military, they began numerous revolutions and that justified sacking cities that opposed their wishes.

Click image for larger view

Roman-Inflation

As Rome could not pay the troop pensions, they tore the empire apart at the seams. This is what lowered the defenses allowing the Barbarians to finally invade. Rome fell from within for the same faulty structure of fiscal mismanagement. The inflation (debasement) in the currency was NOT the cause of the fall of Rome, it was the symptom that followed the corruption.

populationofrome

So pay attention. It is the DEFLATION that comes FIRST. Inflation NEVER appears first with nothing driving it. It has always been the expansion of government that unfolds FIRSTthat later manifests in inflation only when you cross that point of no return in PUBLIC CONFIDENCE. As taxes were raised on property, people began to vacate the cities. The population of Rome collapsed as property values fell due to rising taxes. Sound familiar? Only with rising taxation did people just start to migrate away from Rome.

Roman Passport

PASSPORT-ROMAN

The Roman Emperor Diocletian (284-305AD) introduced passports. Not to travel from one country to another, but to be able to travel at all AFTER you were verified that you owed no taxes. Today, the US has introduced a law that if you owe the government $50,000 in taxes, they can revoke your passport until you pay. Wonderful how history repeats.

Ed Note: Another great article by Martin about the Stock Market HERE