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Housing and car sales, oh my!

  – by New Deal democrat[If last week was a slow week for economic data, this week is a virtual wasteland until Thursday, so I took yesterday off.]Last…

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This article was originally published by Bondad Blog

 

 – by New Deal democrat

[If last week was a slow week for economic data, this week is a virtual wasteland until Thursday, so I took yesterday off.]

Last month I wrote that typically it has taken at least a 20% decline in housing construction to be consistent with an oncoming recession, and that we weren’t there yet.

As of the most recent housing permits report, single family permits were down 17% from their recent peak:

One of the most persuasive fundamentals-based models of economic cycles, by Prof. Edward Leamer, with decades of proof ever since World War 2, posits that housing is the most leading harbinger, turning down about 7 quarters before a recession, followed by motor vehicles, followed by producer durable goods, followed by consumer durable goods.
So, the most recent report on motor vehicle sales is not very encouraging. I have stopped following the private manufacturer reports, because most producers have cut back to quarterly rather than monthly reports, so the monthly numbers are mainly estimates. But the BEA issues its own report with a one month delay, and the most recent report for August, just released, showed a decline of over 10% for that month alone, and a total decline of 28% since April (blue in the graph below). Meanwhile, the more leading heavy trucks segment also declined 5% for the month, and a total decline of 19% since March (red):

 

Outside of the 1970 recession, heavy truck sales have declined at least 23% (and usually much more than that) before a recession began. Light vehicle, including cars, have typically declined at least 10%.

So heavy truck sales have not quite hit the point of being consistent with an oncoming recession, although cars and light trucks have.
It is important to note that our current situation is sui genesis compared with the past 70 years, because there has been no significant increase in either short or long term interest rates. Demand remains intact. 
This is entirely a supply bottleneck, which has driven prices for finished goods higher. A close analogy would be the oil shocks of the 1970s, at least one of which was an artificially caused supply shortage (the Arab Oil Embargo). The big difference here is that there is no wage-price inflationary spiral, because there are no unions able to obtain automatic “cost of living” wage increases. We have seen wages increase sharply in many places due to the pandemic, but with all emergency benefits ended, that has or shortly will almost certainly cease. If the supply shortages do not ease shortly, then the next thing to watch out for is whether more broad durable goods spending by both producers and consumers stalls. In particular real retail sales per capita has almost always turned negative YoY shortly before the onset of recessions in the past 70 years:

By contrast, at present YoY real retail sales are up almost 10%:

If that number were to suddenly plummet close to 0, I would be much more concerned that the supply bottleneck was on the verge of creating a recession.


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Economics

Looking at oil from different perspectives

[This blog post is a modified excerpt from a commentary published at TSI about two weeks ago. We’ve updated the charts and prices to reflect the current…

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[This blog post is a modified excerpt from a commentary published at TSI about two weeks ago. We’ve updated the charts and prices to reflect the current market situation.]

Today we’ll take a brief look at oil through three different lenses: The long-term price-action lens, the physical supply-demand lens and the macro-economic lens.

The following chart shows the significance of the US$76-$77 price level above which oil has moved over the past few weeks. This price level acted as support during large downward corrections in 2011-2012 and capped the 2016-2018 rally.

The move above major resistance is not a short-term buy signal, because the market is ‘overbought’ (which, by the way, doesn’t guarantee that the price will fall, but does mean that the risk of new buying is relatively high). However, it is a reward for those who added to their oil exposure when the commodity and the related equities were ‘oversold’ at various times over the past three months and is consistent with our view that the cyclical advance will extend into 2022.

With regard to likely future performance, of far greater importance than the break above long-term resistance is that the physical supply situation remains unusually ‘tight’. We know this is the case because strong backwardation (meaning: nearer-dated contracts are priced well above later-dated contracts) prevails in the oil futures market. This is evidenced by the downward slope on the following chart. Strong backwardation can only arise and be sustained in the oil market during a period when the demand for oil is high relative to the currently available supply.

The most recent data on the following chart is for the situation at 14th October 2021, but the futures curve continues to have a steep downward slope. For example, at the time of writing oil for delivery in December of this year is priced at $84.55, whereas oil for delivery in December-2022 is priced at $72.58 and oil for delivery in December-2023 is priced at only $66.56.

Note that the prices of oil futures are NOT forecasts of where the spot price will be in the future. Instead, the futures price relative to the spot price reflects the cost of storage. Since the cost of storage is always above zero, the futures price will always be higher than the spot price unless there is a current shortage of the physical commodity.

oilfuturescurve_251021
Chart source: https://www.erce.energy/graph/wti-futures-curve/

Our last chart shows that the oil price and the Inflation Expectations ETF (RINF) usually trend in the same direction. This positive correlation is part and parcel of a broader positive correlation between commodity prices (as represented by indices such as GNX) and inflation expectations.

Both oil and inflation expectations have resumed their cyclical upswings following corrections during the second and third quarters of this year.

oil_RINF_251021

At the moment, the price action, the supply-demand fundamentals and the macro-economic backdrop (as reflected by inflation expectations) are saying the same thing. They are all saying that we should expect the oil price to continue its upward trend.



Author: Jacqui

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Precious Metals

Last Week’s Bitcoin Buzz

A lot is happening in the cryptocurrency market these days and what follows is a recap of some of the major developments this past week.
The post Last…

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A lot is happening in the cryptocurrency market these days and what follows is a recap of some of the major developments this past week.

By Lorimer Wilson, Managing Editor of munKNEE.com

1. Paul Tudor Jones’s Views About Cryptocurrencies As An Inflation Hedge 

Billionaire investor Paul Tudor Jones, in an interview with CNBC’s “Squawk Box”, claimed that surging inflation is now “the single biggest threat to certain financial markets and probably…to society in general” adding that October’s 5.4% YOY CPI number, which matched readings from June and July, was perhaps the most glaring warning yet and warned that it’s likely only going to get worse. He believes that cryptocurrencies are a hedge against central bank money printing and that …crypto…is winning the race against gold at the moment [and]…would be a good inflation hedge.” While Jones prefers direct ownership, he thinks the new Bitcoin ETF will be “fine” and the SEC’s blessing is reassuring.

2, Latest Fear & Greed Index for Bitcoin & Other Large Cryptocurrencies Shows Extreme Greed 

According to Alternative.me’s multi-factorial crypto market sentiment analysis, which gathers data daily from five sources on a simple meter from 0 to 100 to visualize a meaningful progress in sentiment change of the crypto market. Zero means “Extreme Fear”, while 100 means “Extreme Greed”. When Investors are getting too greedy it means the market is due for a correction and the current Index reading is 75, down from 82 yesterday. See here for the latest reading.

3. 50 Experts Say Bitcoin Will Reach Over $5M By 2030 – Yes, $5M!

50 industry experts were asked in late September to early October by finder.com for their thoughts on how Bitcoin will perform over the next decade and their average view (see here) was that Bitcoin will be worth US$71,415 by the end of 2021, before rising to US$249,578 by 2025 and reaching US$5,237,082 by 2030.

4. Bitcoin Is Going To $500,000! Here’s Why

According to Luke Lango’s Hypergrowth Investing article this week (see here), gold is typically bought as a store of value to protect against inflation, but this year, instead of buying gold, they’re buying Bitcoin. Lango maintains that since the gold market is an $11 trillion market were Bitcoin to get that big, you’re talking an $11 trillion market on 21 million tokens, which implies a price per token of about $500,000.

5. New ProShares Bitcoin Strategy ETF Launched This Week

According to a private investor from the Netherlands, the new ProShares Bitcoin Strategy ETF (BITO), which started trading this week, will be a game-changer for the crypto market making the process of investing in Bitcoins considerably easier, safer, and more convenient for these 5 major reasons.

6. Walmart Pilot Program Allowing Customers To Purchase Bitcoin and Redeem It For Merchandise  

Walmart (NYSE:WMT) has launched a pilot program that allows customers to purchase bitcoin (BTC-USD) through Coinstar kiosks – enabled by Coinme, a crypto wallet and payment firm that specializes in bitcoin ATMs (BTMs) – in 200 of its stores across the United States. After inserting bills into the machine, a paper voucher is issued. The next stage involves setting up a Coinme account and passing a know-your-customer (KYC) check before the voucher can be redeemed. The machine charges a 4% fee for the bitcoin option, plus another 7% cash exchange fee, according to the Coinstar website and verified by CoinDesk.

7. Valkyrie Bitcoin Strategy ETF To Launch Today & Become Second Bitcoin Futures ETF

A second U.S. Bitcoin futures ETF will reportedly hit the market Friday, with the Valkyrie Bitcoin Strategy ETF (BTF) set to take on the hot new ProShares Bitcoin Strategy ETF (NYSEARCA:BITO) then.

8. VanEck Bitcoin Strategy ETF Set To Launch Next Monday

VanEck wrote in a U.S. Securities Exchange Commission filing Wednesday that its new VanEck Bitcoin Strategy ETF (BATS:XBTF) will be available “as soon as practicable” after this coming Saturday, Oct. 23. That presumably would mean next Monday, Oct. 25. Like BITO, the VanEck ETF will offer investors a way to gain exposure to Bitcoin (BTC-USD) through the futures market.

9. Grayscale Investments Hopes To Convert Its Bitcoin Trust Into a Bitcoin Spot ETF

Grayscale Investments announced Tuesday that it’s filed with the U.S. Securities and Exchange Commission to convert the popular Grayscale Bitcoin Trust (OTC:GBTC) into a Bitcoin spot ETF.

10. Interactive Brokers Has Introduced Cryptocurrency Trading For Registered Investment Advisors

Interactive Brokers (NASDAQ:IBKR) has introduced cryptocurrency trading for registered investment advisors in the U.S., allowing them to trade and custody bitcoin (BTC-USD), ethereum (ETH-USD), litecoin (LTC-USD) and bitcoin cash (BCH-USD) via Paxos Trust on behalf of clients.

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Author: Lorimer Wilson

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Economics

Goldman Cut’s China’s 2022 GDP To Just 5.2%

Goldman Cut’s China’s 2022 GDP To Just 5.2%

Less than a month after Goldman stunned its Wall Street peers when it slashed its Q3 China GDP…

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Goldman Cut’s China’s 2022 GDP To Just 5.2%

Less than a month after Goldman stunned its Wall Street peers when it slashed its Q3 China GDP forecast to just 0%, forecasting no growth in the world’s second largest economy, Goldman has done it again and in a note published late on Sunday, not only does the bank admit that China has entered a phase of “temporary stagflation”, but in a tone that is almost apologetic as Beijing will likely take great offense at this provocation, the bank cut its 2022 GDP forecast form an already low 5.8% to just 5.4%.

Goldman first summarizes the stagflationary dynamics of the recently concluded third quarter, in which just Chinese real GDP growth slowed to a 0.8% annual rate while at the same time, PPI inflation reached 10.7% yoy in September, the highest on record.

However, and this is where Goldman is ever so sorry for offending Beijing with its “math“, Goldman’s Hui Shan writes that this “stagflation” is very different from the experience of the US and other developed countries in the 1970 (spoiler alert: it actually isn’t different at all as we explained in “Is Stagflation Here: Comparing The 2020s With The 1970s…“).

Goldman then spends the balance of the note not so much focusing on China’s deep economic problems, as much as apologetically explaining (to anyone who will listen), why these challenges are so transitory, they can effectively be ignored. As Shan writes, “the weakness in Q3 growth was driven by a number of factors, including the August Covid outbreak that impacted many provinces, the sharp slowdown in the property market, and the energy shortages and power cuts in late September. We think the Covid outbreak probably played the biggest role in negatively impacting Q3 activity, followed by property and energy.”

It gets better: to make sure the message is received loud and clear in Beijing, Goldman goes so hyperbolic as to call events in Q3 a “perfect storm” (which of course is unpredictable, so it’s not Beijing’s fault for what is taking place in the economy). Here are Goldman’s key observations on this topic:

The weak Q3 growth was driven by a number of factors – Covid outbreaks and chip shortages that the government has less control over on the one hand, and property tightening and power cuts that are mostly policy-driven on the other. The September activity data show evidence on the combination of various shocks to the economy (fig.3) For example, catering sales (i.e., restaurant services) rebounded sharply in September after slumping in August on Covid lockdowns in multiple provinces. Auto production and sales remained soft on chip shortages. Property sales continued to drop on the government’s deleveraging efforts and lending restrictions. Output of high-emission products such as steel and cement fell sharply on the “dual controls” of energy use and severe coal shortages which led to power cuts and production halts in these sectors.

After the anemic sequential growth year-to-date (averaging only about 2% annualized rate), the Chinese economy appears to have gone from a positive output gap at the end of last year to some excess capacity in Q3.

Looking across different sectors, Exhibit 5 shows that, with the exception of agriculture, all industries are currently at or below trend level of output, assuming a pre-Covid sector-specific trend. In the case of leasing and commercial services (e.g., travel agencies and large conferences), hotel and restaurant services, and other services (e.g., household cleaning services), the negative output gap remains significant. Eighteen months after the onset of the Covid outbreak early last year and with no end of the “zero Covid” policy in sight, activity in these sectors is at risk for longer-term scarring effects.

Household consumption was the hardest-hit part of the economy last year on both lower income growth and a higher saving rate. By Q3, household saving rate has mostly normalized to its pre-Covid level, falling from a peak of 35% in 2020Q1 to 30% now (Exhibit 6). The main constraint to consumption is income growth. As of Q3, the growth of household disposable income averaged only 6.6% per year over the past two years, compared to 8.8% in 2019. Among different sources of income, growth of business income underperformed the most, averaging 3.6% per year over the past two years compared to 8.0% in 2019 (Exhibit 7).

In other words, China’s stagflation is “temporary” and should reverse soon. Until it does, however, Goldman is tracking the contribution of housing to GDP growth, and calculates it as subtracting 0.5% from Q3 GDP. The bank admits that it expects “even bigger drags in the coming quarters.”

Meanwhile, as the property market shrinks, and the overall economy is barely growing, PPI inflation soared in September, but here too Goldman expects CPI inflation “to remain muted in the coming months for two reasons. First, food and service inflation has little relationship with PPI inflation and is likely to stay low. Second, even at extremely high levels of PPI inflation, the pass-through into CPI inflation is fairly low: we estimate an additional 1pp increase in PPI inflation raises headline CPI inflation by 0.1pp.” It explains further below:

September PPI inflation reached the highest level since the data were available in 1997, raising questions about both the duration of the high PPI inflation and its potential passing through into CPI inflation which has remained low. On the first question, PPI inflation is likely to stay high in the near term, but should soften notably in six months on base effect. If prices were to remain unchanged from here, PPI inflation would drop to about 2% in mid-2022. On the latter, we expect the pass-through from PPI to CPI to be limited for two reasons.

First, CPI has three distinct components – food, non-food goods, and services (Exhibit 11). Food inflation and service price inflation are likely to remain low in the coming months on depressed pork prices (which dominate food prices) and negative output gap (which is a key driver of service inflation). Second, historically the sensitivity of CPI non-food goods inflation to PPI inflation is statistically significant but economically small. Exhibit 12 shows a nonlinear relationship where relatively mild year-over-year PPI inflation (i.e., between -5% and +5%) appears to have very little impact on CPI non-food goods inflation.

But even at more extreme levels of PPI inflation, the magnitude of the pass-through remains modest: an additional 1pp increase in PPI inflation from its currently elevated levels boosts CPI non-food goods inflation by 0.25pp which translates into 0.1pp for headline CPI inflation.

Goldman’s bottom line is please don’t revoke our operating license in China for telling it how it is that things are bad but will get better soon because “unlike the stagflation of the 1970s, the very low growth and high inflation in China in Q3 were policy-driven (e.g., property tightening and decarbonization), partial (e.g., PPI only), and likely temporary (e.g., policies have already been adjusted to boost coal production and accelerate fiscal spending in Q4).” Again, all of this is a pure figment of Goldman’s goalseeking imagination. For a full picture of how the 1970s stagflation is ominously similar to what is going on now, read this.

In any case, with China’s economy now at stall speed, Goldman had a choice: bad news and even worse news, or good, if meaningless news and, well, worse news. The bank picked the latter writing that it now expects a sequential pickup in growth in Q4 – which by the way  is unchanged from Goldman’s previous forecast – with year-over-year GDP growth to drop to 3.1%. However, while nobody cares about Q4 without the bigger picture, it was here that Goldman saved its worst news for last, warning that “long-term policy direction such as property deleveraging remains unchanged as evidenced by the latest news on starting property tax trials in select cities.” As such, the bank has slashed its 2022 growth forecast to 5.2% from 5.6% previously.

And, as was the case with Goldman’s overoptimistic 2021 GDP forecasts, expect  many more GDP cuts as China’s economy gets dangerously close to a hard landing, if not outright crash. Not surprisingly, Goldman’s conclusion suggests as much:

Given the continued slowdown in credit growth – the year-over year growth in the stock of total social financing (TSF) dropped to 10.0% in September from 13.5% a year ago – and the “just do enough” approach of policymakers, we revise down our credit growth forecast to 10.5% for 2021 (previously 11.5%). This still implies a modest pick-up in sequential credit growth in Q4. In addition, we recently changed our monetary policy forecast and no longer expect a RRR cut in Q4. This is not a call on the broader monetary policy stance. Rather, recent communications by the PBOC suggest that the central bank is likely to use targeted liquidity instruments (e.g., SME and green financing relending programs) instead of broad-based RRR cut to replace the large amounts of maturing MLF loans.

Finally, Goldman looks at its downside case scenario (the onw which will happen), and says that “if growth were to deteriorate sharply, we believe the government will react decisively, especially as China prepares for next year’s Beijing Winter Olympics” (starting from Feb 4)and the 20th Party Congress (October/November). Spoiler alert: growth will deteriorate sharply from here, something which the PBOC clearly see and is why the central bank just injected a net $190BN in reverse repo, the biggest liquidity injection since January. Here, too, expect much more.

And while Goldman expects a sequential pickup inQ4, its year-over-year growth is poised to decline further. But under the “just do enough” mentality of policymakers, especially as the unemployment rate remains low despite weak growth, the bank warns that “growth headwinds are likely to linger and the slower-than-expected credit growth over the past few months should weigh on economic activity next year based on historical experience.”

Tyler Durden
Sun, 10/24/2021 – 22:04







Author: Tyler Durden

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