Fighting the Suck in China

Posted on December 11, 2015 by MN Gordon

Old records are being broken.  New records are being notched.  On Monday, for example, the People’s Bank of China reported a record liquidation of foreign exchange reserves occurred in November.

Specifically, China’s foreign exchange reserves declined $87.22 billion in November to $3.438 trillion.  This amounts to a monthly sell off of 2.5 percent.  What could possibly be prompting the massive sales?

For starters, China’s economy is slowing down.  Chinese exports, the major growth engine for China’s economy, fell 6.9 percent on an annual basis through October.  What’s more, China’s on target to report its slowest growth in the last 25 years.

This means a number of different things.  But, at the moment, it means people with money in China are trying to get it offshore and out of Chinese assets.  Popular destinations include U.S. real estate and stocks and bonds.

U.S. Treasury data estimates over $500 billion have exited China between January and August of this year.  These, no doubt, are massive capital outflows.  But, despite increasingly stringent capital controls, forecasters believe the wealth exodus increased in November. Continue reading →

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Money Velocity Lethargy

Posted on December 8, 2015 by MN Gordon

Logic, common sense, and rational deduction are useful means for comprehending the world.  But they are merely tools.  The user will always be limited by the quality and quantity of the information available and their ability to properly interpret it.

Data and knowledge gaps can lead to false conclusions.  A wrong turn in the thought process can lead down a dead end street.  Where the economy’s concerned, people must make decisions with incomplete information.  That’s why things are often not what they seem.

For example, as night follows day and day follows night, should not price inflation follow the massive $3 trillion Fed balance sheet expansion that’s happened over the last 7-years?  Simply connecting the dots quickly leads one to a ‘yes’ conclusion.  More money chasing a static number of goods and services should result in price inflation.  For prices must rise to balance out all the new money.

This, of course, makes good practical sense.  In fact, it might even lead someone to sell dollars and buy gold.  They’d have a bullet proof rationale guiding their decision, wouldn’t they? Continue reading →

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Joe Sixpack’s Painful Plight

Posted on December 4, 2015 by MN Gordon

This week brought forward new evidence that the economy’s slipping and sliding backwards.  On Tuesday, for example, the Institute for Supply Management reported a 48.6 Purchasing Manager’s Index reading for November.  A PMI reading below 50 means manufacturing activity is not expanding; rather, it’s contracting.

Moreover, the 48.6 PMI is its weakest mark since June 2009.  Indeed, a measurement of manufacturing activity that recalls Great Recession era frailty is not indicative of a healthy economy.  To the contrary, it suggests the economy is softening over like a bowl of mashed potatoes.

Like the decline in corporate profits reported last week by the Department of Commerce, the strong dollar also seems to be the popular offender for the decline in manufacturing activity.  Obviously, the strong dollar makes U.S. manufactured goods less competitive globally.  It also widens the trade deficit and subtracts from GDP.

However, it’s not just U.S. manufacturers that are coming up short.  This seems to be a global phenomenon. Continue reading →

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Significant Yuan Devaluation Imminent

Posted on December 1, 2015 by MN Gordon

The Department of Commerce reported last week that U.S. gross domestic product grew at a 2.1 percent annual rate during the third quarter, not the 1.5 percent rate previously stated.  Apparently, private inventory investment was greater than initially estimated.  Nonetheless, GDP is significantly down from the 3.9 percent growth during the second quarter.

The more remarkable data point, however, was reported for corporate profits.  In particular, profits from current production decreased $22.7 billion in the third quarter.  This followed a $70.4 billion increase in the second quarter.

“Profits”, as reported by Reuters, “were down 8.1 percent from a year ago, the biggest decline since the fourth quarter of 2008.”  No doubt, a decline in profits that recalls Great Recession era weakness is not what executives are after.  Moreover, it’s likely a signal that business isn’t as strong as policy makers would have you believe.

The strong dollar seems to be the most popular culprit for declining corporate profits.  Certainly, the strong dollar makes U.S. companies less competitive globally.  It also exacerbates the U.S. trade imbalance. Continue reading →

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