The Market Giveth, The Market Taketh Away

Wednesday, July 01, 2009

The market giveth, the market taketh away. That's the story in periods of indecision, when punters have little in the way of conviction and are swayed by each new datapoint. The, ahem, creative ways of interpreting the data just add to the "fun."

Take yesterday's figures in the US for example. Equities received an early fillip from the release of Case-Shiller house price data that was a) slightly better than expected, and b) hsowed an uptick in the y/y pace of decline. Somehow, this was spun as representing an uptick in house prices. Actually, when we look at the underlying index, pictured below, we see yet another monthly decline...albeit at a slightly reduced pace.

Regardless of what month-to-month changes in data do for the rest of the year, we should all gird ourselves for quite a bit of volatility in the y/y figures. As the aftermath of various 2008 crises (Bear/Fannie/Lehman), fall out fo the equation, yearly rise in activity (and, it should be added, inflation) will rise sharply.

In any event, the happy times proved short lived after the fall in consumer confidence. Macro Man has mused before on the inanity of the stock market reacting to a measure whose primary driver is prior stock market action, and yesterday demonstrated that it works both ways. What consumer confidence giveth, it also taketh away.

In any event, there was enough in the overnight data for the China believers to keep believin'. Korean exports staged another impressive recovery in June, while remaining well short of last year's peak. Unfortunately, half an hour of digging for the monthly breakdown by country, updated for June, yielded unsatisfactory results. While Bloomberg has some data, it is pretty obviously wrong.

So at this juncture for Macro Man to confirm or deny that Chinese demand is riding to the rescue. Reading some of the ancillary analysis, it looks like quite a bit of the export bounce was down to ships; readers are invited to judge for themselves whether that is either sustainable or particularly healthy.

In any event, Macro Man is savvy enough to get out of the way when the market has its mind made up. And hey, the Chinese PMI was a decent enough number, as indeed have been the European equivalents so far this morning. And didja catch a load of Aussie retail sales? Up a full percent, baby! (Let's not talk about building approvals, though. Please.)

Part of succeeding in this game is knowing when to bet large and when to dial it down. If, as seems likely to Macro Man, the Chinese "miracle" seems too good to be true and the global PMI rebound simply represents a re-stocking phase that will not be met by final demand, the market will give back the opportunities that it has withdrawn over the past few months.

And in answer to mpm's query in the comments section of yesterday's post, Macro Man will countenance becoming more bullish when the good news come from sources other than those known to be, shall we say, economical with the true. Ultimately, Macro Man foresees another consumer downleg thanks to the large mortgage resets looming next year; until he sees some evidence that this hurdle can be successfully surmounted, his heart will belong to the bears, even if he occasionally rents a long risk position if that's the opportnity that the market gives.

Posted by Macro Man at 9:37 AM  


The Bloomberg ticker for Korean exports to China is KOEXPCHN. Exports to China were up in June, but still down about 46% year-on-year. G

Anonymous said...
10:36 AM  

That looks like bad data. Datastream has Korean exports to China at ~7 bio, whereas Bloomberg has it at $4.4 bio.

Macro Man said...
10:40 AM  

are you sure thats not goods and services vs. Goods?

Is it just goods or services and not both?

Anonymous said...
10:43 AM  

Whatever the % might be for China to rescue the down cycle means Chinese imports have to make up for the fall in US consumer demand - do those numbers add up ? Extra credit is given for discussing the structure of the Chinese economy, which is export-driven itself and light on domestic consumer demand. Further credit is given for talking about the feedback from increase US consumer savings leading to a permanent decrease in imports and structural lowering of the Chinese growth rate to something in the 5-8% range. One could also add the effect of recent stimulus on a domestic credit bubble and ask whether or not the local bank loans are "sound".

dblwyo said...
10:47 AM  

It looks like the Bloomberg data shows exports to China for the 1st 20 days, then subsequently gets revised to account for the whole month. The datasets match through February, after which the Bloomberg figures are much lower.

Macro Man said...
10:55 AM  

I find it bizarre that an economy that has a competitive advantage in global low value exports is a good play in what is looking (and verified by data) like a secular change in anglo-saxon consumer spending behaviour...

Sadly, even if I try to look at price action only, the evidence on average points to risk asset bear rally.

I can;t help feeling bearish. There is nothing I can see that is bullish in aggregate. This is not 1992, 1998, 2003 etc...

However, what can you do but sit on some cheap option plays and get increasingly irritated.

I suppose the other point is where will the next "crack" appear?

nov 2006 - subprime lenders going bankrupt
mar 2007 - UBS's "prop" desk
jun 2007 - Cioffi's credit funds
july 2007 - OIS Libor spreads
H2 2008 - anglo saxon banking system and numerous other things

where does the market least expect a problem? is it China? are we goiing to see a sov funding crisis start this summer? where is the next shoe going to drop?

Anonymous said...
11:09 AM  

Another place which is least expected (from my self as well because there is no consumer debt in the country) is India..... If you plot Indian Industrial production against US housing indexs it lags perfectly and shows IP dropping by 14% over the next 18 months. I think that will be a shock to alot of people.

Even if the underlying theme is bullish longer term, the change in perception can shift the global sentiment.

Anonymous said...
11:18 AM  

Macroman, viz next shoe to drop I have the answer - its protectionism. And its going to get crack-a-lacking as we come up to this Copenhagen summit. Leaving for Bali tomorrow to be utterly MIA for a bit but if we see Spoos at 940 again I'm getting short again. A trade war will take the whole thing down. Already putting together my custom basket of companies in China and the US with export exposure to the other in spades.

Nemo Incognito said...
12:57 PM  

Well, from my prch the list of potential shoes to drop would barely fit in Imelda Marcos's closet. European banks! Commerical property! Protectionism! Option ARM motgage resets in 2010! Commodity bust! The list goes on.....

Macro Man said...
1:08 PM  

From earlier... as noted the Bloomberg numbers are for the first 20 days of the month, they are then revised later. The other point to note is that the 'headline' figures are not work-day adjusted. Adjusting for the number of work days puts the year-on-year figure down 17%, not -11%. Korean exports can be a useful global leading indicator (GS use it in their "GLI") but they tend to be correlated (or slightly lag) the ISM new orders and commodity currencies like the A$.

Anonymous said...
1:27 PM  

great ADP number there.... i mean, sorry, bad number, yet we rally...i give up

Anonymous said...
1:52 PM  

there won't be any ARM resets in 2010, don't be a sucker for this.

Anonymous said...
2:07 PM  

Korea is the honourary Anglo Saxon economy in Asia with household leverage to rival the UK and Australia. If exports don't recover Korea is toast. Korea and the KRW will probably blow up again one day...

Anonymous said...
2:10 PM  

Uh...why won't there be any ARM resets? Cramdowns? If so, what dos that say about banks' "profitability"?

Macro Man said...
2:11 PM  

fucc that, my entire family cant get help from any agency or anyone else from their ARM.... The reason? In order to get help you need to have cash that will cover the shortfall in value of the house.

My sis is $25k underwater and works for an Auto co. ARM resets are for real and they happen to bottom out this month! This is the last month until 2011 we will have low resets. $1.3T left and real interest rates are at their highest levels in 20 years.

Id say its all over for banks breathing space.... and the insurance companies are next.

Anonymous said...
2:20 PM  

Has Macro Man wondered why China's PMI is only 53 given the massive policy stimulus? If growth really was booming in China shouldn't the PMI be even higher?

Anonymous said...
2:35 PM  

If I may tentatively add my few cents for what its worth..
1. About whether China's recovery is real or not, we will not know for sure until its too late anyways. But I'm willing to bet certain sectors in the Chinese economy are relatively insulated, and therein lies the opportunity, far better to focus efforts there.
2. Chinese officials themselves have said something to the extent that "China can only hope to take care of China", and that the Chinese economy will switch from profitable, export led growth, to activity driven (read unprofitable) policy driven growth. But the central govt and the SOE have the savings for that (debatable).
3. I doubt the Obama Admin, Congress and Fed will ALL sit idly by while the ARMs blow up, good chance a new acronym will be created.

To Anon@11:18, correlation is not causation are there any reasons for that?

To Nemo, yes protectionism is a constant worry but given the profits US companies are making in the orient - look at GM's + GE's China sales, Mcdonald's expansion plans, heck Transformers II, expect strong lobbying from within the U.S. itself...

TulsaGuy said...
2:48 PM  

The best available breakdown for Korean exports by country can be found on the Korea International Trade Association website ( These show exports to both China and US recovering at the same pace (roughly -15% in June vs. -25% in May). Though they aren't released until around the end of the following month, I generally place more trust in the BoP trade figures published by the Bank of Korea than the preliminary ones put out on the 1st (by the Ministry of Knowledge Economy).

Anonymous said...
2:52 PM  

I was on the KITA site this morning (what a pain in the ass- they make you register!) , and they only had the country date through May. Prhaps they'ce updated it since the piece was written.

Macro Man said...
2:53 PM  

Actually, yeah, now I remember. I found the June figures in an Economics Data Flash from Goldman....who knows how they got it, but clearly the KITA chairman's promise to "Along with the KITA family, [I ]will strive for continued development and improvement of KITA's services to best serve our members" is not being honored!

Anonymous said...
3:00 PM  

Tulsa, there is only one economy that can reflate naturally (i.e. without governments holding rates at zero), and thats India. I wouldnt be long India, but structurally the government can collapse and the people will still do fine. In the US, if the gov collapses, See you later GM, Citi, BofA, and The State of California........

China needs a strng USD or it will implode. You cant raise M2 at +20% for more than 12 months, or you get hyperinflation. If you cut off the spiggot now you get debt deflation and commodities on credit, which need to be sold.

What ever sector you pick in china, make sure its dollar denominated (power plants or oil producers)...

If Interest rates stay this high, or go higher the tax revenues needed for the treasury to issue more debt will not be there. That should kill many future acronyms. Nominal GDP is negative, that means tax revenues are as well fyi.

Anonymous said...
3:00 PM  

MM -- just FYI, the next ARM reset "boom" in the USA is coming in September / October. The first mortgagees should be getting their rate reset notices sometime in July (ie now)

It might take a few months for these loans to show up as deliquent, especially with the creative accounting banks are using now.

If Obama/Geithner force banks to accept restructured loans, it will cramp their profitabilty, as you pointed out above.

IMHO, the Fed is no longer independent of the Treasury. They are running a steep yield curve to effectively subsidize bank profits without having Congress pass a law to that effect.

In the "no free lunch" department, banks are going to be "asked" (a la Ken Lewis / Merril) to use said subsidy to facilitate mortgage restructuring

Greg said...
3:02 PM  

Makes sense, Greg. My only question is....where do the big bonuses for GS, JPM, et al fit in??!?!?!?!

Macro Man said...
3:10 PM  

"Ministry of Knowledge Economy"
hahaha, I am sorry, that one never fails to crack me up

The issue with USD is that while we can come up with various reasons why it should be lower (fiscal issues, help exports), some academics have gone even so far as to say 'hey, 5-6% inflation wouldn't be so bad, it would help with debt repayments'

One can hope that is not the type of academic nonsense reasoning which also says that you can have as much debt as possible.....blah blah

the only way US can be allowed to even have minor inflation to reduce debt payments is in full concert and agreement with the debt holders,
otherwise, with a country with so many foreign holders, it better do all it can to keep the USD strong.

Also, what about this whole notion of...
"foreigners finance us but Japan is fine with 200% debt to gdp, because its all domestically held.."

As we move towards export/ investment led economy, doesn't our C/A shrink, leading us to finance the deficit ourselves..

tom said...
3:11 PM  

To TulsaGuy, the common factor between Korean exports, ISM new orders and commodity currencies is global growth..

Anonymous said...
3:21 PM  

I would go further and say US consumption, which leads ISM, Korea, and commods

Anonymous said...
3:34 PM  

All this negativity is interesting, but doesn't change the fact that the market looks to be beginning it's 2nd quarter straight of rocketing into the stratosphere.

I'd rather be right for the wrong reason and make money.

Anonymous said...
3:35 PM  

Well, Chinese stimulus money can only sustain some infrastructure works and provide a few jobs. The best outcome is to meditate the negative results of recession. BUT, the wage is way down so the consumption as well. Unless the social safety net is in place now(do not count on it), private consumption is just not there. Yes automobile gets a push but that is it. Combining data on all cosumption items, you are still facing the negative growth. The profit margin is certainly close to zero for demostic suppliers.

The problem is the personal income is declining. There is just no way to improve that until you want hypeinflation. You could see that the current stockpiling of commodity is to prepare for inflation. If dollar finally sinks, how could China avoid the inflation pressure? If exchange rate cannot be changed, the only option is to NOT import commodity at that time in the future--so it has to buy commodities now to be prepared.

What is the hope here? Well either you hope the western countries recover soon or Chinese social safety net is in place then people will begin to spend some money.

Anonymous said...
3:38 PM  

HA HA! ANd how much did you make last year?

By all means, stay long. But you should do some sort of risk analysis here.

Anonymous said...
3:38 PM  

structurally we are 15 years from Chinese consumers bailing us out, and thats based on previous growth estimates. How will they make up the US shortfall?

Also, personal income isnt declining, statistically.

Chinese commdity stockings were at what? $10B? Not much when you have $2Trillion in reserves. Looks like a crappy hedge to me. Or atleast half hearted.

Anonymous said...
3:42 PM  

Much of what is counted as "retail sales" in China is actually "wholesale sales" underlying consumption trends are weaker. If you ask Chinese officials privately, they are much less optimistic on consumption for the next 1-2 years (in contrast to some of the sell-side cheerleaders) due to the inadequate social safety net, high cost of health care and education... the massive loan growth is ending up in the A-share market and 'government infrastructure' (read future NPLs)

Anonymous said...
3:51 PM  

Thanks for the replies guys, appreciate it. Um... no one is making the case for China making up for the US and EU final demand shortfall. But out of US, EU, India and China, which is the least bad? Declining personal income should be a global phenomenon by now and which economy can weather it best? On a side note, I think the next shoe to drop is when the US unemployment checks run out.

TulsaGuy said...
4:15 PM  

I don't get the hyperinflation argument. They'll start a war before you see that happen in N. America.

Professional Gringo said...
5:39 PM  

MM, check Hong Kong and Macao to see if they are accounted differently, though not sure they would account for a whole 2.6 BLN....

Eduardo Guelman said...
5:46 PM  

interesting comments on China's lending position..

Anonymous said...
9:42 PM  

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