Finally did our waiting

October 12-18, 2024

Big news. Formally, it is not entirely new piece of news, but only now can we say with certainty that it has taken place:

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A sharp increase in the national debt. Which almost certainly means a serious emission (one way or another formalized). This means that the choice has been made that there will be no reduction in the standard of living of the population (i.e., a reduction in the state budget deficit). But there will be high inflation.

The question of who will carry it out is still unclear, but certainly not Powell. We reported more than a year ago that he was, in fact, given an ultimatum: https://fondmx.pro/en/weekly-wrap/fed-s-leadership-and-a-rocking-chair/ today we can say with complete confidence that Powell did not fulfill the task. As did the entire liberal financial team. And this most likely means that they were shown the exit.

From the point of view of all other participants, this means that the possibility of extremely drastic events is open. What exactly is still a question, we will closely monitor the situation. But the most drastic options are not excluded, from hyperinflation of the dollar to mass bankruptcies of the largest US banks (these are different options, they cannot happen simultaneously).

Macroeconomics. Chinese data is a bit more optimistic this time. GDP accelerates to +0.9% in the quarter –

China GDP Growth Rate
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But it slowed down to a minimum of 1.5 years +4.6% per year:

China GDP Annual Growth Rate
Pic. 3

Fixed investment still weak (+3.4% y/y, Covid-exclusive record low):

China Fixed Asset Investment
Pic. 4

Industrial output accelerated to a 4-5 month peak (+0.6% per month and +5.4% per year):

China Industrial Production
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The same with retail sales (+0.4% per month and +3.2% per year):

China Retail Sales YoY
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But the decline in prices for new buildings is intensifying (-5.7% per year), with the record lows of 2015 (-6.1%) close by:

China Newly Built House Prices YoY Change
Pic. 7

Note that these are official data, so they are almost certainly significantly adjusted (in the optimistic direction) by the authorities. And at various levels.

Yuan loans in China +8.1% per year, the weakest indicator in all 27 years of data collection:

China Outstanding Yuan Loan Growth
Pic. 8

Japan’s manufacturing capacity utilization is 97.6% – not counting Covid in 2020 and the tsunami in 2011, this is the lowest value since 2009:

Japan Capacity Utilization
Pic. 9

US industrial production -0.6% y/y, 3rd straight negative and 9th in the last year:

United States Industrial Production
Pic. 10

Eurozone construction output -2.5% p.a., 7th straight negative:

Euro Area Construction Output
Pic. 11

Let us recall, by the way, that this is based on the official inflation of 3%. If we believe Larry Summers’ data, then these figures need to be reduced by about 5%, that is, industrial production will fall by exactly 0.5% per month, as we predict.
 
The assessment of the current situation in the ZEW economic sentiment survey in Germany is the most pessimistic in 15 years (if we ignore the Covid slump in spring 2020):

Germany ZEW Current Conditions
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NY Fed manufacturing index weakest in 5 months (and down):

United States NY Empire State Manufacturing Index
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China’s PPI (industrial inflation index) -2.8% per year, the worst performance in 10 months and the 24th negative in a row:

China Producer Prices Change
Pic. 14

This level of deflation indicates a serious industrial downturn.

UK PPI -0.7% per year, excluding Covid, this is an 8-year low:

United Kingdom Producer Prices Change
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Even a modest increase in the US mortgage rate (from 6.36% to 6.52%)…

United States MBA 30-Yr Mortgage Rate
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… caused a 17% weekly collapse in loan applications, which hasn’t happened in 9 years (not counting Covid)

Mostly due to demand for refinancing (-26% in a week):

United States MBA Mortgage Refinance Index
Pic. 17

The number of registered unemployed people in Britain has increased monthly for 6 months in a row (and 12 of the last 13 months):

United Kingdom Claimant Count Change
Pic. 18

In the US, the same indicator is at a 3-year high:

United States Continuing Jobless Claims
Pic. 19

Expenditures on all types of electronic cards in New Zealand are -5.6% per year, excluding Covid, which is an anti-record for all 20-plus years of statistics:

New Zealand Electronic Card Retail Sales YoY
Pic. 20

The ECB has cut the rate for the third time, by 0.25% to 3.40%.

The Central Bank of Indonesia did not change anything in its monetary policy, as did the Central Bank of Turkey.

Main conclusions. A surprising picture of a structural crisis (not recognized, by the way, by official liberal economic science, but described in detail by M. Khazin in the book “Memories of the Future. Ideas of Modern Economics”, Moscow, 2019): its pace is practically unchanged, the macroeconomic picture has not changed for many months.

Let me remind you that we noted the recession in Germany (the word is completely incorrect, but we have to use it as terminology) almost a year and a half ago: https://fondmx.pro/en/weekly-wrap/we-have-told-you-so/, in the European Union a little later: https://fondmx.pro/en/weekly-wrap/same-rake-again/ . And since then the picture has been repeating itself from week to week, from month to month. No acceleration of the decline, but no mitigation either! Despite the active monetary policy, both towards easing and towards tightening.

For the theoretical reasons for this phenomenon, see the book mentioned above, but for now it can be noted that the US monetary authorities, by distorting statistics, are creating serious problems for themselves. For example, one of Pavel Ryabov’s latest analyses.

US retail sales show extremely weak dynamics in 2024

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“In Sep. 24, retail sales grew by 0.43% m/m and many were encouraged, projecting the annual dynamics – up to 5.3% SAAR, but this does not work in assessing the volatile component, and how should the report be read?

The annual dynamics are only 1.7% y/y (Sep. 24/Sep. 23), for 9m24 growth by 2.23% at par, for two years +5.8% (9m24/9m22), for three years +16.4%, and for five years +37.8%.

Pic. 24

We need to take into account the record inflation for 40 years that occurred during this period. Census does not present data in real terms, but we can reconstruct the dynamics using PCE in the goods segment (not to be confused with the general CPI). BLS depicts deflation in goods, so in real terms the dynamics are outpacing.

Taking into account inflation, retail sales grew by 2.7% y/y (Sep. 24/Sep. 23), for 9M24 +2.5% y/y, for two years +4.4%, for three years +5%, and for five years +20.7% according to our own calculations.

The average historical growth rate (2010-2019) of retail sales was 4.1% taking into account inflation, over the past 5 years, they have made 3.8% average annual growth taking into account the wild pump of retail sales in 2010-2011 on Covid stimuli. Slightly below the trend, but not critical.

▪️ It is important that over three years the growth is only 1.25% taking into account inflation on average per year, which is three times lower than the long-term trend, over the last year or two retail has been growing by 2.1-2.2% per year (twice lower than the norm), but there are suspicions of underestimation of the price index in goods (the presence of deflation looks too optimistic).

▪️ The second important point is that since the beginning of the year, retail sales in real terms have grown by only 1.35% (Sep. 24 to Dec. 23) vs. 4% for 2023, 1.3% in 2022 against the backdrop of high inflation, 7.1% in 2021 against the backdrop of anti-Covid stimuli and an average of about 3% in 2010-2019.

The result is weak, there is no talk of any expansion of demand.

▪️ The third point is that 5 categories are declining in 9m24 compared to 9m23, and this is at par: construction and gardening materials – a decrease of 2.5%, furniture and fittings, household goods – a collapse of 5.7%, electronics, computers – minus 0.2%, fuel – 3%, and sports and entertainment goods – 4%.

The above categories make up over 17% of the structure of total retail sales.

So which categories contributed to the growth? Only 4 categories, making up 53% of the structure of retail sales, are: online sales – 1.28 p.p. in a total growth of 2.23% at par, catering – 0.61 p.p., food products – 0.19 p.p., small stores not related to retail chains – 0.11 p.p.

Essentially, online sales and food are the only things keeping retail going in the US.”

And if we add to this the notorious 5% by which (at least) inflation in the US is underestimated… Just in case, let’s recall Summers’ March revelations: https://fondmx.pro/en/weekly-wrap/no-signs-of-improvement-found/ . So the real picture is even sadder.

Well, we wish our readers a pleasant weekend and a not very tiring work week!

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