Mish's Global Economic Trend Analysis |
- Chinese Markets Halted in 14 Minutes 17 Seconds, Equities Plunge Another 7.32%
- Reader Asks About "Limited Supply of Homes"; Home Hunting in California
- Another 2% Yuan Devaluation Coming Up? What Are the Risks? Explaining Chinese Capital Flight
- Factory Orders Decline Again, Previous Month Revised Lower
- ISM a Leading Indicator of Jobs? Why 2016 Will Shock to the Downside!
| Chinese Markets Halted in 14 Minutes 17 Seconds, Equities Plunge Another 7.32% Posted: 06 Jan 2016 10:09 PM PST Sea of Red in Asia There's another bloodbath in Asian equities his morning, the second in a week.  click on chart for sharper image Chinese Markets Halted in 14 Minutes 17 Seconds Chinese equities are down another 7.32% and the exchanges were halted in a record 14 minutes, 17 seconds. The Wall Street Journal comments on China's Shocking Stock Halt. A plunge in China stocks on Thursday led to their second trading halt this week and the shortest trading day in the market's 25-year history. The duration of trading that occurred in Chinese markets today: 14 minutes 17 seconds.$SSEC - Shanghai Composite  When central banks blow bubbles that is what eventually happens. Mike "Mish" Shedlock |
| Reader Asks About "Limited Supply of Homes"; Home Hunting in California Posted: 06 Jan 2016 06:29 PM PST Reader Brendan from California has some questions about housing. He writes ... Hello MishDon't Rush! Hello Brendon. First off I commend you for seeking multiple opinions and not rushing into anything. That said, please recall the alleged shortage of homes in 2005 and 2006. There was no shortage was there? Rather, there was an increasing number of people willing to pay any price to get in. The same is true today. The big difference today vs. the mid 2000s is that local variations are more widespread. Realistically, there is never a limited supply of homes, but rather a limited supply of homes at prices people are willing to pay. In California, especially around San Francisco and Silicon Valley, people once again are in a mad scramble to get in at any price. This just cannot last. So it won't. Hunting Homes in Silicon Valley The Washington Post reports on What it's like to house-hunt in Silicon Valley, the nation's priciest market. It's Sunday, which means house-hunting for Barry and Katie Templin. They have been on the prowl for months and saving for years, looking for a place with reasonable commutes to their technology jobs and good public schools for their two young children. They hope that is not too much to ask, even in Silicon Valley, the nation's most expensive housing market.Pure Madness The words that best describe asking $1.5 million for a home with black mold, a ceiling caving in, and original GE metal cabinets are as follows: Pure madness. If I had that piece of property I would want to get rid of it. When the cycle turns, and it will the seller will be lucky to get one third of that asking price. That is the dilemma. And that is why Brendon's request for "housing outlook for 2016 and 2017" is far too short. I advised many to buy in 2009-2011 after pointing out the risks. I cannot do the same today, except in places where valuations are not absurd. Ramsey Su on Real Estate I know Ramsey Su as a common-sense real estate expert from 2001-2003 when he posted on a Silicon Investor message board I hosted. He now posts on the Acting Man Blog. Those wishing to buy a house as well as those interested in real estate in general would be advised to peruse the Ramsey Su Archives on Acting Man. Specifically, I recommend his most recent post, Fed Action and the Real Estate Market. Su discusses among other things the "Central Planning Dilemma". He also notes "There are so many things that are fundamentally wrong with the real estate market that I will leave most of them to future rants. For now, I would like to point out that the market suffers from an acute supply and demand imbalance, both geographically and in terms of its mix. All the demand in Silicon Valley is not going to help Texas, which may start to reflect the stress of the oil industry." Su concludes with "The market cannot handle a 5% or higher mortgage rate. Refinancing still accounts for over 60% of mortgage applications. At 5% or above, the only refinancing business left would be the government's HARP subsidies. As for purchases, all stressed out first time buyers with high debt to income ratios and low down payments will be wiped out. Without the entry level, the trade up level is gone as well." I conclude with, if you believe a home you want to buy may not be affordable, then undoubtedly it isn't. You could get lucky, but it's far more likely you would become another trapped victim. Caution is in order. Mike "Mish" Shedlock |
| Another 2% Yuan Devaluation Coming Up? What Are the Risks? Explaining Chinese Capital Flight Posted: 06 Jan 2016 12:54 PM PST Another Yuan Devaluation Coming Up? Currency trends suggest another yuan devaluation is coming up. Specifically, the gap between the mainland China yuan (renminbi) to the US dollar, vs. the offshore floating rate of the yuan to the US dollar is now at a record high. The reason there are two rates is China has tight controls on the range the yuan trades in China, but the yuan floats outside China. In contrast to previous years where traders bet the value of the yuan would rise vs. the US dollar, traders are increasingly betting China will devalue. Explaining Chinese Capital Flight If China had no capital controls, the onshore and offshore rates would have to be identical otherwise there would be an instant guaranteed free money arbitrage opportunity in virtually unlimited size were China to maintain a peg the market did not agree with. Here are a couple of charts that show what I mean. Onshore Yuan  Offshore Yuan  Onshore / Offshore Rate Differentials
Another 2% Devaluation? The onshore yuan is weaker than offshore by 0.1426. That's a bit over 2%. In the absence of capital controls one could make an instantaneous 2% on an unlimited amount of money. That such spreads exist shows that capital controls work, for the most part, at least for now. However, capital controls are not perfect. Those able to skirt capital controls do so. One possible method of free arbitrage would be export/import trades that do not really take place, or simply padded higher. Fraud of such nature cannot be unlimited. $1 trillion in sudden exports or imports is going to get caught, but smaller amounts can be hidden. In addition, those sitting with a lot of money in a depreciating currency don't exactly like that outcome. Thus capital flight pressure is intense for two reasons. One way or another (slowly over time, or by another 2% devaluation), the yuan appears destined to sink. When will it stop? The Risk The risk, as always is that things get out of hand. Repetitive devaluations could trigger a rash of competitive currency devaluations with Japan or the US entering the picture. Meanwhile, devaluations will certainly trigger the ire of US Congress that views the trade imbalance with China as proof the yuan is undervalued. Donald Trump has stirred up that exact sentiment, For further discussion, please see:
Currency Crisis Coming Up When does pressure on the yuan cease? The answer may very well be "as soon as China floats the yuan and takes off capital controls". I expect a full-blown currency crisis before that day. On the other hand, if China floated the yuan right now, it could crash now. Take your currency crisis poison one way or another. Mike "Mish" Shedlock |
| Factory Orders Decline Again, Previous Month Revised Lower Posted: 06 Jan 2016 11:10 AM PST Factory orders rose last month for a change, but nearly all of it was due to transportation, especially aircraft orders that have a very long lead time. This month we see a 0.2% decline that's in line with the Econoday Consensus Estimate. Flat is a good description of the nation's factory sector as factory orders slipped 0.2 percent in November, making October's revised 1.3 percent gain look like a rare outlier. Durable goods orders were unchanged in the month while orders for non-durable goods fell 0.4 percent on price weakness for petroleum and coal.New Orders vs. Shipments  Bloomberg commented "But the nation's economy is not narrowly focused on the factory sector, evidenced by healthy readings in today's ISM non-manufacturing report." Well, the nation's economy is certainly not centered on consumer spending as most think. If it was, one could spend themselves to Nirvana. Moreover, manufacturing's importance is misunderstood nearly across the board. I posted a chart showing the relationship of manufacturing to nonfarm payrolls. Upturns and Downturns in Manufacturing ISM vs. Nonfarm Payrolls  The above chart plots percent change in seasonally-adjusted nonfarm payrolls vs. the seasonally adjusted ISM manufacturing index. Looking at about 30 turning points since 1965, I can only find one key top or bottom where manufacturing ISM did not lead jobs. For more details, please see ISM a Leading Indicator of Jobs? Why 2016 Will Shock to the Downside! Mike "Mish" Shedlock |
| ISM a Leading Indicator of Jobs? Why 2016 Will Shock to the Downside! Posted: 05 Jan 2016 11:19 PM PST ISM a Leading Indicator of Jobs? I expect monthly jobs reports in 2016 will shock to the downside. Before I list all the reasons, here's an interesting chart that suggests manufacturing ISM is a leading indicator of jobs. Upturns and Downturns in ISM vs. Nonfarm Payrolls The above chart plots percent change in seasonally-adjusted nonfarm payrolls vs. the seasonally adjusted ISM manufacturing index. Looking at about 30 turning points since 1965, I can only find one key top or bottom where ISM did not lead jobs. Unless manufacturing turns here, 2016 looks to be a rough year for jobs, especially vs. expectations. Why 2016 Will Shock to the Downside! Manufacturing is not the only reason to think jobs will sour in 2016. Here's a litany of reasons:
Mike "Mish" Shedlock |
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