Latest economic trends: U.S., Eurozone, China

This was recently presented to a major wealth management group in New York City.
Presentation

_________________________________________________________________________

Sign up for our daily newsletter called the Daily Shot. It's a quick graphical summary of topics covered here and on Twitter (see overview). Emails are NEVER sold or otherwise shared with anyone.
_________________________________________________________________________

From our sponsor, Fitch Solutions: Sign-up for Inside Credit - a weekly wrap-up of noteworthy Fitch content delivered every Friday.

SoberLook.com

By insisting on a rate hike the Fed has "imported" some of the global slowdown

Economic data out of the United States remains lackluster. We now see more evidence that a strong dollar can be quite damaging to US growth, as manufacturing employment in the US unexpectedly shifts into contraction mode.

Source: ISM, Investing.com

With this miss in the Friday's ISM PMI report (which was generally weaker than consensus), the Bloomberg Economic Surprise index hit the lowest level since early 2009.

Source: @MktOutperform

Some argue that this economic soft patch is driven mostly by seasonal effects, as Americans increasingly tend to "hibernate" over the winter.

Source: Scotiabank

If so, will we see an improvement in Q2? There is quite a bit of debate around this topic, but so far a number of high-frequency indicators point to a softer than expected start to Q2. The ISM manufacturing report discussed above is one of them. Moreover, regional manufacturing inventory levels seem to support that data.

Source: @Not_Jim_Cramer

We also have the Atlanta Fed US GDP tracker - which correctly predicted poor GDP performance in Q1- pointing to growth that is substantially below the "blue chip" consensus.

Source: Atlanta Fed

Note that this model has been shown to be quite reliable in predicting the initial GDP releases in recent quarters.

Source: @Not_Jim_Cramer

The Fed officials seem to have gotten the message that it's not the slightly higher interest rates in and of themselves that would impede growth. While the US economy on its own can easily withstand higher short-term rates, it is the dollar's strength, driven by higher rate expectations, that could be damaging. The chart below shows the increased focus on the dollar.

Source: @M_McDonough

While the rest of the world is easing policy, the US central bank can't begin tightening without negative consequences. And the global monetary policy is in a rapid easing mode. Except for Brazil, Ukraine, and a couple of other nations that have been desperately trying to defend their currencies, we've had over 30 individual rate cuts by central banks globally this year alone.

There is another way to think about this effect. The chart below shows the global nominal GDP growth (measured in US dollars) - which is projected to decline in 2015 for the first time since 2009 (see write-up). By swimming against the world's monetary policy tide, the US risks "importing" some of that global slowdown. And that is indeed what the the Fed has done by telegraphing a hike this summer.

Guggenheim

_________________________________________________________________________

Sign up for our daily newsletter called the Daily Shot. It's a quick graphical summary of topics covered here and on Twitter (see overview). Emails are NEVER sold or otherwise shared with anyone.
_________________________________________________________________________

From our sponsor, Fitch Solutions: Sign-up for Inside Credit - a weekly wrap-up of noteworthy Fitch content delivered every Friday.

SoberLook.com

Time for a contrarian view: Eurozone's economy is turning the corner

The take-up of the ECB's TLTRO program announced back in June was materially lower than expected. About €83bn worth of cheap long-dated loans was picked up by the area's banking system. Many had expected €150bn and even greater. Part of the reason is that banks that are not quite ready to deploy the funds don't want to sit on cash with negative rates. As a result some have concluded that the Eurozone's credit contraction will worsen from here and economic conditions will deteriorate further.

As views of doom and gloom envelop the Eurozone, it may be time time for a contrarian view: the euro area's economy is turning the corner. Yes, it's difficult to imagine such a thing and we are sure to get numerous angry emails and comments. Ultimately it's about the data.

First of all we start with the Eurozone's inflation expectations which continue to fall. That combined with a weaker than expected TLTRO take-up will keep the ECB highly active in its easing efforts, potentially even considering QE.

Market-implied inflation expectations 5 years out (source: DB)

It's important to keep in mind that the ECB is trying to replace at least in part the 3yr LTRO and MRO loans that banks have been repaying. These repayments have resulted in an unprecedented reduction in the central bank (Eurosystem) balance sheet since the beginning of last year.

Eurosystem (central bank) balance sheet (source: ECB)

Without a strong take-up in the TLTRO, the ECB will consider other options to expand the balance sheet. The planned ABS purchases will hardly make a dent because the new Basel Accord has all but destroyed that market. Therefore there will be pressure on the ECB to do something else in order to stem the decline in its balance sheet. Plus we are already seeing EU institutions calling on the BIS to loosen regulatory capital rules for structured credit issuance. All of this is positive for the Eurozone banks and will likely expand liquidity in the system. That's in part why we've had a nice pop in euro area bank shares recently.

FTSEurofirst 300 Banks Index Index Price (source: MarketWatch)

Interestingly, a number of analysts have been pointing out that the Eurozone bank deleveraging is over. Credit contraction in the area is ending. One can see glimpses of this in the area's money supply measures which have stabilized recently.

Euro area M3 money supply (source: ECB)

To some extent Mario Draghi has already generated some degree of stimulus for the area's economy by repricing the euro (via negative domestic deposit rates). This is a gift for German and other exporters who can now more effectively compete on the international markets.

EUR/USD (source: TradingView)

We may already be witnessing the impact of weaker euro, as German trade balance jumped recently, resulting in better than expected German industrial production report.

Source: Investing.com

Improved German exports (see chart) combined with several other factors have resulted in higher than expected growth in industrial production for the Eurozone as a whole.

Source: Investing.com

There is no question that the Eurozone's economy continues to struggle. Issues such as the recession in Italy, manufacturing stagnation in France, and massive unemployment across the area are not going away anytime soon. China's economy and the situation in Ukraine continue to pose risks. Surveys still show worsening business and consumer sentiment. But the expectations around the area's performance have been so bad lately, surprises to the upside are increasingly likely (see example). The ECB's aggressive easing stance as well as stronger trade and industrial activity data tell us that for now the worst of the euro area slowdown may be over.


_________________________________________________________________________

SoberLook.com

Sign up for our daily newsletter called the Daily Shot. It's a quick graphical summary of topics covered here and on Twitter (see overview). Emails are distributed via Freelists.org and are NEVER sold or otherwise shared with anyone.


From our sponsor:

4 economic indicators signal that US growth is off to a weak start for the quarter

Those hoping for the US economy to accelerate in the second half - and many economists made that call early in the year - will be disappointed. While employment metrics seem to show steady improvements, putting the Fed on the "taper path", the economy is facing some increasing headwinds. Here are four indicators signaling a tough road ahead.

1. The rate of improvement in the housing sector is slowing. Weak new home sales number was the first indication that not all is well with US housing (discussed here), but now home price increases (HPI) have leveled off. This trend may actually take MBS off the table for the Fed's taper, leaving the central bank to focus on cutting back only the treasury purchases.

Source: TD Economics

TD Economics: - To make matters worse, the rapid recovery in the housing market seems to have hit a snag. Rapidly rising mortgage rates resulting from taper-talk may already be showing up. Both new and pending home sales have declined in July. Moreover, measures of home price growth failed to accelerate in June, although it remains unclear whether due to higher rates or increasing inventory of properties for sale.

2. Personal income growth remains weak.

NY Times: - After rising 0.3 percent in June, income was held back in part by steep government spending cuts that reduced federal workers’ salaries. Overall wages and salaries tumbled $21.8 billion from June, with a third of the decline coming from forced furloughs of federal workers.

3. Growth in consumer spending (which represents over 70% of the GDP) has slowed as well.

WSJ: - A paltry increase in consumer spending in July showed the U.S. economy starting the second half of the year on a bumpy path, creating another risk to growth along with overseas turmoil and Washington budget battles.

U.S. personal spending on everything from cars to clothing rose a mild 0.1% in July from a month earlier, the weakest since April, the Commerce Department said Friday. Overall incomes improved slightly, but wages and salaries fell 0.3%, pushed down by federal spending cuts that spurred furloughs across the government.

Americans' willingness to open their wallets has been a key driver of the recovery for years, despite still-high unemployment and stagnant wages. Better-than-expected growth in the second quarter—the economy expanded at a 2.5% annualized pace—was largely due to strong consumer spending, which represents more than two-thirds of demand in the U.S. economy.

But the latest data showed that consumers entered the third quarter with a thud.

4. As discussed earlier (see post), consumer confidence has peaked in the second quarter and has been declining steadily since. What's particularly troubling is that according to Gallup polling right before this weekend, economic confidence index suddenly dove to the lowest level since the sequester went into effect in March. The uncertainty related to the Syrian crisis and potential US military involvement is one potential explanation.

Source: Gallup

Add to this the potential shock associated with another fiscal showdown brewing in Washington and we are looking at subpar growth in the United States in the second half of the year.

SoberLook.com

From our sponsor:

Major economies out of sync

Investment advisors pitching actively managed accounts, funds, and other products will often draw a sine wave to represent the global economic cycle and discuss what actions they would take at different points on the cycle. The problem of course is that it's nearly impossible to tell where a nation's economy is on the "sine wave" until years later - making it hard to take some of these proposals seriously. Yet it's an exercise worth doing - if anything, just for discussion purposes. Here is how some of the largest economies could potentially be mapped onto the economic cycle curve.

1. BRIC and other key emerging market nations fall into the category of slowing economies. Of course there is plenty of dispersion among them. Russia, India, and Brazil are struggling with growth, while some argue that China's growth has bottomed out (highly debatable, given the real estate and credit issues). Saudi Arabia on the other hand is doing quite well. The overall composite however is showing a slowdown, with the EMG PMI index at the lowest level since the Great Recession.

Source: Markit

2. We've discussed Australia (see post), where the economy is definitely slowing.

3. The Eurozone is clearly beginning to recover (see post).  PMI measures across the board are showing improvements, including France, Spain, and Italy. Even Greece is beginning to stabilize.

Greek manufacturing PMI (source: Markit)

Of course we are still in the early stages of recovery and the Eurozone has a long way to go. Here is what the composite looks like for euro area as a whole.

Source: Markit

4. The UK recovery is accelerating. The latest measures show a strong rebound across multiple sectors, particularly in service industries.

UK service PMI (source: Markit)

5. It's difficult to say where the US is on the cycle. The recovery has been going on for some time - certainly longer than in the UK or the Eurozone - but it has been quite tepid. Is it about to accelerate or continue at its current pace? There is a great deal of debate about that.

6. Japan is a wild card. We've seen a sudden jump in industrial activity and exports, but more recently things have not looked that great (see post). Given Japan's short economic cycles, it's not clear if we are still in the early stage of the recovery or if growth has peaked. Much of course will depend on government policy such as the implementation of the new sales tax proposal (see story).

Based on these generalizations, here is a very rough picture of where the various economies are on the cycle. Note that this doesn't say anything about how deep the slowdown has or will be or how fast the recoveries are. This is just about where we are on the the "sine curve" (each nation's cycles could be quite different in amplitude and frequency).

One can have long debates about the relative placement of these boxes. It is a fact however that major world economies are all over the place in terms of their economic cycle. It seems that we are witnessing the long-awaited global decoupling, although it may not be exactly what some had in mind (see WSJ story).

SoberLook.com

From our sponsor:

This 4th of July let's celebrate all the economic improvements in the US

As we approach the 4th of July weekend, there are plenty of reasons to celebrate all the economic improvements we've witnessed in the US recently. After all, the Fed is talking "taper" because economic conditions are so much better than they were a year ago when the current round of quantitative easing was launched. Among other things, the nation is undergoing a manufacturing Renaissance. Except we ran into a bit of a "soft patch" this spring.

Chris Williamson, Chief Economist, Markit [June Manufacturing PMI]: - Manufacturing clearly down-shifted a gear between the first and second quarters, and is at risk of losing further momentum as we head into the second half of the year.

Output growth remained well down on the robust pace seen at the start of the year and persistent weak order book growth suggests the sector is at risk of stalling. Domestic demand is far from lively, but it is a deteriorating export scene that is causing the real problems. Export orders are being lost at the fastest rate since the height of the financial crisis in mid-2009.

Firms are responding to the increasingly worrying order book trend by pulling back on recruitment. The employment picture from the survey is the weakest for almost three-and-a-half years, consistent with roughly 30,000 jobs being lost per month in the manufacturing sector. We will need to see a swift turnaround in this employment trend if the Fed’s projection of a drop in the unemployment rate to 7.0% by the end of the year is to be achieved.

Right, the old order book, which is the key forward looking indicator for manufacturing, seems to show some pull-back.

Let's just ignore this Markit PMI measure for now. Instead we want to focus on the ISM Manufacturing index, which did in fact show an improvement in June - all thanks to the Fed's securities purchase program.

Finding it a bit difficult to hang your hat on this June "turnaround"? No worries. Manufacturing represents only a fraction of total US output and hiring. After all, it's a service economy. So let's take a look an the latest non-manufacturing indicator.

Bloomberg: - Service industries in the U.S. unexpectedly expanded in June at the slowest pace in more than three years, indicating widespread progress may elude the world’s largest economy even as manufacturing improves [?].

The Institute for Supply Management’s non-manufacturing index dropped to 52.2 last month, the lowest reading since February 2010, from 53.7 in May, a report from the Tempe, Arizona-based group showed today. The median forecast in a Bloomberg survey called for a rise to 54. A reading greater than 50 indicates expansion in the industries that make up almost 90 percent of the economy

Oops. Maybe this ISM measure is a lagging indicator and things will improve going forward. All this QE has to go somewhere. Let's see what the forward-looking indicator, the order book, shows for the US service economy.

Source: Institute for Supply Management

It's actually the worst reading in 4 years. An economic improvement from a year ago? Maybe not so much. But that's OK - we always have beer and BBQ (for now). Enjoy the holidays.

SoberLook.com

From our sponsor:

Spooky Halloween surprise from Goldman

The Goldman Sachs Analyst Index (GSAI) hit a new post-recession low this month. The index is a composite of corporate outlook by industry from Goldman's company research. In the past, the index generally fell in line with other economic activity indices such as ISM Manufacturing - but not recently. While the ISM index is showing a slight expansion (though we don't yet have the October ISM number), GSAI is pointing to the sharpest contraction across US industries since 2009. Sales, shipments, new orders - all came in weak. This indicates that the positive economic numbers in September (see discussion) may have been an aberration.

GS: - The Goldman Sachs Analyst Index (GSAI) tumbled to 32.9 in October from 44.1 in September. Underlying components also fell across the board, suggesting depressed business activity from the bottom-up.
...
In addition to the headline index, most of the underlying components of the GSAI also fell sharply. The sales index gave back its gain in September, falling 12 points to 36.4 in October from 48.4, registering the fifth consecutive month below the 50 mark. Similarly, the new orders index fell 15.4 points to 26.3 from 41.7, contributing 4.6 points alone to the headline drop. The inventories index saw the lone gain, rising 1.6 points to 43.3. Consequently, the orders-inventories gap fell back into negative territory at -17.0 versus flat in September. The sharp reversal in the sales, new orders, and orders-inventories gap measures suggest that the broad improvement in September was likely transient, and that activity and demand will likely remain depressed despite tight inventories.

Source: GS

This points to significant downside risk to the ISM Manufacturing number that comes out tomorrow (Thursday). Another troubling indicator from GS is the GSAI Employment Index - a component of the overall GSAI measure.

Source: GS

GS: - The employment index fell for the second consecutive month to 39.3 from 45.3 in September. This is the lowest index level since February 2010, and—similar to weakness in the employment component in the Empire State and Philadelphia Fed surveys—continues to point to a slow recovery in the labor market. While the September employment report showed encouraging improvements particularly from the household side, the pace of improvement is unlikely to sustain; we expect only a moderate gain of 125,000 in nonfarm payrolls in the October employment report on Friday.

Based on the GSAI indicators, we could be looking at a series of negative economic surprises as October economic numbers are released next month. Economic activity and corporate earnings in Q4 may in fact end up being far less rosy than many expect.

SoberLook.com

The 5yr treasury yield hits a record low

The recent compression in US treasury yields has been nothing short of extraordinary. Driven by the full realization that we are in a global slowdown, the 5-year hit a record low today of just under 0.6%, following a decline that has been ongoing for decades.

US 5yr treasury yield

WSJ: - U.S. Treasury yields fell to the brink of new all-time lows [the 5-year is in fact at an all-time low today, but the WSJ reporter seems to only track the 10yr] as concerns about a U.S. economic slowdown spurred demand for financial safety, extending the market's rally this month.

The benchmark 10-year note yielded as little as 1.440% midday, a hair away from its 1.437% record low set on June 1 after a weak employment report. The yield on five-year notes sank as low as 0.577%, a new record for that maturity. Bond yields fall when prices rise.

A retail industry report early Monday showed sales falling for the third consecutive month in June, stoking fears about a snag in the U.S. recovery. Consumer spending, a crux of the U.S. economy, remains constrained by high unemployment and households' efforts to work off debt.

"Clearly things are slowing down, more so than most had expected," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. "For a while, everyone was focused just on Europe. Now we're seeing the slowdown here and in China—major drivers of global growth."

SoberLook.com

Recent US government spending cuts dampened recovery - further "austerity" may risk recession

In this week's economic report, the IMF described the US recovery as tepid and highly vulnerable to global shocks. This is nothing particularly surprising, but the report discusses in some detail sources of risk to the economy.

IMF: - The U.S. recovery remains tepid. After rebounding in the second half of 2011, growth slowed to around 2 percent in the first half of this year. Strong headwinds persist on private consumption, as households continue to deleverage.
...
The United States remains vulnerable to contagion from an intensification of the euro area debt crisis. U.S. financial institutions have limited direct claims on the euro area periphery, but strong financial linkages with the core euro area. Financial stresses in the region may affect the United States mainly via a generalized increase in risk aversion and lower asset prices (including for U.S. multinational firms with substantial sales in the euro area) even though safe haven flows would likely reduce yields on safe assets, notably U.S. Treasuries. Lower demand in the euro area would reduce U.S. exports to the region, while U.S. dollar appreciation on safe haven flows would hurt exports more generally.

The IMF also pointed to the "fiscal cliff" uncertainty as one of the developments inhibiting growth.

IMF: - It is critical to remove the uncertainty created by the “fiscal cliff” as well as promptly raise the debt ceiling, pursuing a pace of deficit reduction that does not sap the economic recovery.

In fact it is the broader government belt tightening that has already taken place which is contributing to this weakness - even before the impact of the "fiscal cliff". Here is a comparison of the recent government spending growth (inflation adjusted) to the average of the previous 9 cycles. The initial stimulus has ended and cuts are starting to take effect just when historically in the cycle government spending had been picking up.

X-axis in quarters (source: DB)

DB: - Last quarter, inflation-adjusted federal government spending declined -5.9% after falling -7.0% in the previous quarter. These were the two largest back-to-back declines since Q4 1995 and were predominantly the result of sharp falls in military outlays, ostensibly related to the withdrawal of troops in the Middle East. The drop in government spending reduced Q1 GDP by about half of a percentage point.

Unfortunately the US economy is still very much dependent on a steady flow of federal dollars. Any further disruptions in this flow would severely dampen the recovery process. That is why if not managed appropriately, a combination of spending cuts and tax increases of the "fiscal cliff" could easily tip the US economy into a recession.

SoberLook.com

Summer of 2011 redux?

The Citi Economic Surprise Index continues its relentless slide. The US PMI (52.9 vs. 53.3 expected), the Philadelphia Fed Diffusion Index (-16.6 vs 0 expected), Empire Manufacturing, Industrial Production, etc. are all coming in below expectations. It would seem that economists would adjust their forecasts by now, but that hasn't happened.

Citi Economic Surprise Index

This is somewhat reminiscent of last summer when a mix of US budget issues and fears in Europe increased market volatility and put downward pressure on economic activity.

SoberLook.com

The Economic Surprise Index is now trending down

Notice how the US economic data coming out lately has been quite mediocre relative to expectations? For example, today's pending home sales came in -0.5% vs. +1% expected. Dallas Fed manufacturing activity came in at 10.8 with 16 expected. Citi has an index that tracks economic data surprises. Here is the definition:

The Citigroup Economic Surprise Indices are objective and quantitative measures of economic news. They are defined as weighted historical standard deviations of data surprises (actual releases vs Bloomberg survey median). A positive reading of the Economic Surprise Index suggests that economic releases have on balance beating consensus. The indices are calculated daily in a rolling three-month window. The weights of economic indicators are derived from relative high-frequency spot FX impacts of 1 standard deviation data surprises. The indices also employ a time decay function to replicate the limited memory of markets.

The index is now trending lower as the negative surprises are starting to weigh it down. The US economic forecasters have gotten a bit ahead of themselves, which may indicate a need for caution.

Citigroup Economic Surprise Index (Bloomberg)

SoberLook.com

Instead of Baltic Dry, watch iron ore prices

The Baltic Dry Index, which measures dry bulk cargo shipping costs, has been dropping to levels not seen since 2008. This has generated a great deal of excitement as analysts try to determine if this decline is all driven by shipping overcapacity or is there a demand component.

MarketWatch: New super-sized ships ordered up during the era of cheap credit and surging global trade could explain the index’s 57% plunge in the last three weeks, according to Macquarie Research...
...
Shipping companies appear to have jinxed their own industry by ordering up too many grand ships when conditions looked very favorable before 2008.

Meanwhile, further new capacity, equivalent to 22.7% of the existing fleet, is due to be delivered this year, according to Macquarie calculations.

Baltic Dry Index (Bloomberg)

Is there a corresponding economic slowdown that is manifested at least in part in the Baltic Dry decline? To watch for signs of a global slowdown one should instead pay attention to raw commodity prices, in particular iron ore. Here is what the media has to say about the topic:

Businessweek: Iron ore headed for the worst monthly performance since October amid concern that slowing global economic growth and Europe’s sovereign-debt crisis may curb demand for the raw material used in steelmaking.

But the media tends to manipulate numbers to make their story fit. This Businessweek article was published today - why would they reference October? For that reason it is often more helpful to look at charts. The index discussed here is the average price for the 62% content iron ore delivered to the port of Tianjin (China). The index is computed by the Steel Business Briefing and represents demand levels for raw materials in China.

China import Iron Ore 62% Fe spot (CFR Tianjin port) USD/metric tonne (Bloomberg, Steel Business Briefing)

The chart shows that indeed we had a correction in the price of iron ore in October, but the index had since stabilized. With the Baltic Dry index no longer representative of global demand (at least not until 2013 when capacity is expected to stabilize), a better measure of demand is the price of iron ore delivered to China. And that index, while clearly off the highs, is certainly not falling off the cliff - for now.

SoberLook.com

China admits its growth problem sparking social unrest

The economic statistics from China may not be always reliable, but the trend has been unmistakable. The economic growth is not what it used to be. The manufacturing PMI has weakened significantly:

 

Even the non-manufacturing PMI is showing signs of stagnation. 

This is an indication of a slowdown in domestic demand, which China is admitting:

People's Daily: The index for new orders posted the biggest drop, down 5.3 percentage points to 47.2 percent while that for new export orders dropped 4.8 percentage points to 45.6 percent.

"Less active consumption in the off-season and the sluggish demand in the construction sector combined to weigh down the index," said Cai Jin, vice president of the CFLP. 

Anything but stellar growth brings something China is not prepared for - social unrest. The protests continue to spread.

Delaware Online: Reports of recent strikes at factories and other major employers, especially in southern China, reflect increasing pressure on Chinese manufacturers already grappling with surging costs for labor and materials.

Even government officials are beginning to openly get concerned.

BBC: Zhou Yongkang, a member of the politburo, asked provincial officials for improved "social management".
...
"It is an urgent task for us to think how to establish a social management system with Chinese characteristics to suit our socialist market economy," Mr Zhou said in comments published Saturday. "Especially when facing negative effects of the market economy.

If the euro-zone situation continues to deteriorate causing a further slowdown, not only will it impact global economic growth, but the unrest and the inevitable crackdown that follows may become a geopolitical and a human rights issue.

SoberLook.com

Italy's rapidly shrinking money supply is a sign of impending recession

The money supply statistics for Italy continues to be alarming. Ambrose Evans-Pritchard, who often writes on the issue for the Telegraph had been ringing the alarm bell about the declining money supply indicators.

The Telegraph: The broad M3 measure tracked closely by the European Central Bank as an early warning indicator shrank last month by €59bn to €9.78 trillion, a sign that Europe's long-feared credit squeeze is underway as banks retrench to meet tougher capital requirements.

Below is a chart form Banca D'Italia showing the three measures of money supply.

The rapid decline in the narrow measure M1 is particularly alarming because it includes bank deposits.  That decline can be caused by accelerating decline in liquidity for the corporate sector and individuals, but it can also be the result of new lack of trust in the Italian banking system.  There has been some anecdotal evidence of Italian citizens pulling their cash from local banks and moving deposits abroad.

Reuters: A Swiss tax adviser has also noticed a rise in the number of Italians ready to pack up their bags and move to Switzerland. "It's pensioners or businessmen who want to get Swiss residency and move their operations there. I have had more requests to this effect since the summer than over the past 10 years." In Lugano, a Swiss lakeside town close to the Italian border, bankers report a shortage of deposit boxes -- a favourite way for investors to hide their money from the taxman.

What is interesting about the current crisis, though, is that businesses and individuals are not simply trying to find ways to hide their money to avoid tax. "The transfers are being made in the light of day, either to ad-hoc trust companies or in any case by declaring them in the tax returns," said one Swiss banker.

The decline in M1 may in fact be an indication of a depositor shift away from Italian institutions. Whatever the reason for the decline, it is clearly a sign of a serious credit crisis in Italy,

The Telegraph: "This is the first sign of an emerging credit crunch," said James Nixon from Societe Generale. Banks cut their balance sheets by €79bn in October, while mortage lending saw the biggest drop since December 2008.

Italian banks are increasingly becoming reliant on the central bank to fund themselves. The table below from Banca D'Italia shows a significant increase in financial institutions' borrowings (over EUR 111 bn) from the central bank between October and September of this year.

Such declines in the money supply combined with increasingly high interest rates would typically be met by an easing of the monetary policy.  However in the case of the euro-zone, the ECB drives the policy and gives significant weight to the overall money supply in order to make policy determinations.  Therefore the Italian central bank is at the mercy of the ECB to help ease such tight monetary conditions.  The ECB however, influenced by Germany who is paranoid about inflation, is not in a hurry to do so. 

If the confidence in the banking system continues to deteriorate, a full scale run on the banks may be possible.  Either way there is no question that these money supply conditions will lead to a severe economic contraction in Italy.

Banko Ditalia - Italy Central Bank Statistics

SoberLook.com

China comes face-to-face with economic slowdown

Economists have long been downplaying the impact of the crisis in Europe on China's growth, but realities on the ground are hard to ignore. Fearing inflation, Chinese authorities have been slow to respond with a policy easing, but they are starting to pay attention.

Here is a quick video interview with Huang Yiping from Barclays Capital about the economic situation in China. Below are some highlights:

1. China Investment Corporation (CIC), China's sovereign wealth fund is involved in Europe. It has been buying some sovereign bonds, but is more interested in "real" asset purchases. For example as pressure builds on Italy to privatize some of the state assets, CIC may be a buyer.

2. Monetary policy easing in China has begun but is still in the form of "fine-tuning". Nevertheless the government is intent on pushing down property prices, thus will not support real estate based lending - yet.

3. China is pushing banks to do more lending to small and medium size businesses (SMEs) who are having a tough time obtaining credit and are struggling from the global economic downturn.

4. Barclays expects an official easing announcement in Q1 of next year in the form of a cut in reserve requirement ratio.




The slowdown of China's economy - much of it driven by the crisis in Europe - is starting to become visible.

The Sydney Morning Herald: As orders have dropped, factories have started to lay off workers, cut overtime and in some cases withhold pay. In Dongguan, scene of the most violent of last week's strikes, some 450 small and medium-sized factories have closed in the past 10 months as the overseas market has shrunk.

Propelled by years of strong demand and easy credit, China's manufacturers have become overextended and are having trouble facing a slowdown. In fact most of these companies have never seen a real slowdown and are totally unprepared to deal with the cyclical nature of the industry. More from the Sydney Morning Herald:

Thousands of workers clashed with police on Thursday at a footwear factory in the city of Dongguan after 18 workers were reportedly laid off and overtime was cut. A thousand workers went on strike on Tuesday at the Shenzhen factory of a Taiwanese electronics company. A day earlier, hundreds reportedly struck at a Shenzhen company that makes underwear and lingerie. On October 28, hundreds of employees of a Dongguan furniture company protested in the streets after the factory boss disappeared without paying them three months' salary.

This unrest may continue to grow, spreading to a number of provinces. China's officials may be able to cook the growth numbers a bit, it's hard to ignore the nation's workers' discontent. China, as usual, resorts to their propaganda machine. "Are Chinese people truly miserable?" asks People's Daily:

"Misery" is a regular word today. From emotions reflected in the media and online, the Chinese sense of misery is increasing while happiness seems to be dwindling.

And the answer to the misery question from the propaganda machine (People's Daily) is:

Chinese people should believe that a better life awaits them and that the next generation will embrace a brighter future. People should also be confident in a more democratic and fairer society with less corruption.

 Welcome to the "brighter future".

SoberLook.com