credit markets

If it works for the ECB it can work for the Fed. Be happy!

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"The only thing that saves us from bureaucracy is its inefficiency."

– Eugene McCarthy

We foolishly find ourselves asking: when will Federal Reserve quantitative easing reach its limit?

Considering the consequent boost to risk appetite that flows from QE, enriching those who hold financial assets while doing little for those holding welding torches and spatulas, we are happy to tell you that the Fed has plenty of room to maneuver the printing presses still.

And if you’re wondering just how much credit they can pump into banks or how much government debt they can buy up in order to keep the Keynesian desperados operating, it’s at least 26% more of total government debt – that would take them to even with the ECB efforts that have to this point “succeeded” in suppressing severe risks:  

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While the Fed has only taken on assets in proportion to government debt increases of 37%, the ECB has matched about 63% of the increase in government debt.

And it’s likely the Fed won’t be stopping anytime soon. From The Contrary Investor,

As we’ve written about many a time, credit is the lubricant that makes really any economy move forward.  In a generational credit cycle deleveraging environment, which we believe is still the correct macro, if credit contracts in one sector of the economy, that contraction must be offset by another sector continuing to take on leverage at a rate at least equal to the sector contraction in question simply to keep macro economic growth stable.  To the point, Government sector credit (debt) expansion has offset household credit contraction in the current economic cycle so far. 

The household sector, while there has been some marginal improvement in consumer credit numbers, has been reluctant to leverage back up.

We took the following three charts from  

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Clearly the current surge in growth and recovery talk may be overstated, if you consider inflation’s impact on GDP (chart 1). And the state of the consumer is still a big question market, if not still a major sore spot. Without the household sector to fall back on, the public sector will likely continue to compensate for households thriftiness. Well, maybe.

There are clouds on the horizon—the Paul-Ryan-Cumulus-Cuttis cloud, for example.  If those dastardly Republicans, such as Ryan, are serious about putting our massively bloated government on a diet, it could be very scary for the Keynesians in our midst.  But, they should not fear.  After all, Ben Bernanke told us recently how he saved the world once; why should we even dream he couldn’t do it again should fiscal stimulus be stymied. 

So, stocks traders; don’t be concerned about the fact this is the most tepid economic “recovery” from a major recession we have ever seen.  Don’t worry that a one good push will topple the Eurozone into the abyss.  Don’t even think about further unrest in China, they have plenty of jail space and eager comrades to beat the bushes to ferret out evil doers. 

Be happy.  We are sure Apple can hit $1,000 in no time.  

Apple Computer Daily 1996-2012:  Rocket launch!  

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Have we seen a similar trajectory before?  And did everyone want to buy it and quit their day jobs back then?  Yes!

Nasdaq 100 Index Daily 1996-2000:  

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And in case we forgot how badly that “buy Nasdaq 100 then retire” idea worked out, here is the rest of the story...  

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Don’t worry.  Be happy! 



Jack and JR


Is this China’s last ditch effort to avoid the hard landing?

shop“We will improve policies that encourage consumption.”

- Wen Jiabao

Let me ask: what have China’s central planners now admitted is integral in supporting sustainable Chinese economic growth?  

  1. New emphasis on consumption-led growth to rebalance the lopsidedness of investment growth that’s currently compensating for softer export growth

  2. The need to cool speculative bubbles within the economy so as to reduce the inflationary pressures and manage social perceptions

I agree. But easier said than done, of course.  

We talk a lot about why the shift to sufficient levels of consumption will be tough for China to achieve with any efficiency. Basically, the consumer faces pressures from inflation and redirected capital flows, from the central government to local government investment projects, which prop up the current system, despite the need for a shift.  

Amidst the puzzle pieces China is using to put together an economic rebalancing, commentators have sought to expose the main obstacles to achieving that goal. Real estate is certainly among the largest obstacles. It is certainly worth watching.  

While we don’t get as much bubble talk as we once did, China’s housing situation is still fragile ... and it is still an important piece in China’s economy.  

It is among the reasons we see comments from the Chinese Premier today regarding a revised growth target lower than the all-important 8% level, a need to stem rising home prices, a commitment to making credit accessible, and:  

He also said the government would defuse rising local government debt, regarded by many investors as the key risk to fiscal sustainability. Government figures show about 10.7 trillion yuan ($1.7 trillion) was owed by local governments at the end of 2010.  

That was from Reuters. So is this:  

China's big four state-backed banks will lend more to qualified property developers to boost entry level housing supply, a statement in the central bank's newspaper on Friday said, a signal that they are ready to ratchet up real estate lending.


According to the statement published on the front page of Financial News, a paper run by the People's Bank of China, the big four banks "will proactively support qualified property developers to develop common commercial housing that is in demand to boost effective supply of common commercial housing."  

There are a lot of conflicting winds blowing through the Chinese economy. Some measures may achieve their intended goal; but much of the policy jawboning amounts to setting perceptions, conveying to the public just what Chinese officials want its people, and investors, to expect.  

When it comes to China’s revised GDP target, it’s anticipated that they are just setting the bar low so they look better once they clear it. Until now 8% marked the floor at which China believed it could achieve growth necessary to keep social concern from boiling over.  

Apparently lowering the growth target offers policymakers room to reform the system and encourage businesses all at the same time. Reuters:  

Lower growth will allow Beijing to reform key price controls without causing an inflation spike, so monetary policy can stay broadly expansionary to ensure a steady flow of credit to the small and medium-sized firms the government wants to encourage.  

In a nutshell, that’s the familiar stop-and-go policymaking Chinese officials have become known for over the last 4 years.  

China has succeeded in recent months to bring inflation down. And CPI out later this week will probably reveal prices are stable around 4%. This opens the window for China to take supportive action aimed at growth numbers, and they know it.  

But one has to wonder if this is China last chance to dance. Besides the internal risks to growth, China continues to tug with a Europe that’s heading into recession and a US that’s fighting to stay above water. If they are able to stabilize investor expectations, their efforts could be supportive for markets through to the end of Q2 or into Q3 assuming there is not some inescapable external shock.  

The Shanghai Composite Index began reflecting the Chinese growth downturn back in the second quarter of 2011; it has since rallied back in 2012. But will we see Chinese stocks foreshadow a renewed downturn in the Chinese economy that is deep enough to disappoint?        

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We might get some near-term selling that is technical in nature. But as I said, China is working overtime to keep things going. That may mean it is still a couple more months before we see real fallout in Chinese stocks and global risk appetite.  

For good measures, here is the Shanghai Composite and the S&P 500:  

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Seems like some sort of correction is due.