Futures Unchanged Ahead Of Jobs Number Following First Ever Chinese Corporate Bond Default

Today’s nonfarm payroll number is set to be a virtual non-event: with consensus expecting an abysmal print, it is almost assured that the real seasonally adjusted number (and keep in mind that the average February seasonal adjustment to the actual number is 1.3 million “jobs” higher) will be a major beat to expectations, which will crash the “harsh weather” narrative but who cares. Alternatively, if the number is truly horrendous, no problem there either: just blame it on the cold February… because after all what are seasonal adjustments for? Either way, whatever the number, the algos will send stocks higher – that much is given in a blow off top bubble market in which any news is an excuse to buy more.

So while everyone is focused on the NFP placeholder, the real key event that nobody is paying attention to took place in China, where overnight China’s Shanghai Chaori Solar defaulted on bond interest payments, failing to repay CNY 89.9mln (USD 14.7mln), as had been reported here extensively previously. This marked the first domestic corporate bond default in the country’s history – indicating a further shift toward responsibility and focus on moral hazard in China. Whether or not this is China’s “Bear Stearns” moment remains to be seen, however nearly a dozen deals were postponed or canceled in the aftermath of this development meaning that as expected the entire bond market is set for a repricing now that moral hazard may have to be taken out of the equation – the end result will be yields that are hardly lower which for a $12 trillion corporate bond market can only spell bad news. But since the market has long ago lost its discounting capabilities, expect to feel the impact of future bond defaults in real time.

In the meantime, copper (futures down over 2.0% this morning) which is heavily used for debt financing in China specifically, and Shanghai Chaori Solar’s failure to repay is being seen as a warning shot that many more could follow, as the Chinese authorities pull away from their previous policy of bailing-out-at-all-costs. As such, copper prices have fallen in tandem with a declining appetite for credit in China.

Stocks in Europe traded lower this morning, with Bunds also better bid as market participants positioned ahead of the release of the latest jobs report by the BLS later on in the session. Despite the absence of apparent appetite for risk, it was the health care related stocks that led the move lower which indicates that the price action  was largely result of investor positioning and not a fundamental shift in the outlook. Still, safe haven related flows supported JPY which in turn weighed on the USD and ensured that EUR/USD and GBP/USD traded in the green.

Going forward, apart from awaiting the release of the latest jobs report by the BLS, market participants will also get to digest the release of the latest jobs report from Canada.

Bulletin news summary from Bloomberg and RanSquawk

Treasuries steady, long end leads, before report forecast to show U.S. economy added 149k jobs in February while unemployment rate held at 6.6%.

The U.S. and EU put Russia’s Vladimir Putin on notice that they will be united on imposing sanctions if he’s unwilling to defuse the Ukraine crisis and pursue a negotiated solution

The crisis in Ukraine is putting the question of Poland’s accession to the euro back on the agenda as the military standoff stirs memories of the Cold War

German industrial production rose 0.8% in January, the third consecutive monthly gain and in line with median estimate in Bloomberg survey

EUR/USD rose as much as 0.35% to 1.3909, strongest since October 2011

Shanghai Chaori, a Chinese solar-cell maker failed to pay full interest on its bonds, leading to the country’s first onshore default and signaling the government will back off its practice of bailing out companies with bad debt

California Governor Jerry Brown, who decries a widening gulf between rich and poor, is campaigning for a fourth and final term presiding over a state that’s outpacing the U.S. in producing both millionaires and food-stamp recipients

Gary Cohen, the top U.S. health insurance regulator accused by congressional Republicans of misleading them before the troubled start of the Obamacare website, will resign

Sovereign yields mixed. EU peripheral spreads narrow. Asian equities mixed, Nikkei +0.9%; Shanghai Composite little changed. European equity markets decline, U.S. stock-index futures gain. WTI crude and gold little changed, copper falls

US event calendar

  • 8:30am: Trade Balance, Jan., est. -$38.5b (prior $38.7b);
  • 8:30am: Change in Nonfarm Payrolls, Feb., est. 149k (prior 113k); Change in Private Payrolls, Feb., est. 145k (prior 142k); Change in Manufacturing Payrolls, Feb., est. 5k (prior 21k)
    • Unemployment Rate, Feb., est. 6.6% (prior 6.6%)
    • Average Hourly Earnings m/m, Feb., est. 0.2% (prior 0.2%)
    • Average Hourly Earnings y/y, Feb., est. 2% (prior 1.9%)
    • Average Weekly Hours All Employees, Feb., est. 34.4 (prior 34.4)
    • Change in Household Employment, Feb. (prior 638k)
    • Underemployment Rate, Feb. (prior 12.7%)    —
    • Labor Force Participation Rate, Feb. (prior 63%)
  • 3:00pm: Consumer Credit, Jan., est. $14b (prior $18.756b) Central Banks
  • 12:00pm: Fed’s Dudley speaks in New York
  • 12:30pm: Former Fed Chairman Bernanke speaks in Houston

Asian Headlines

Shanghai Chaori Solar defaulted on bond interest payments, failing to repay CNY 89.9mln (USD 14.7mln), alongside expectations. (WSJ) Despite the small size of the default, this marks the first domestic corporate bond default in the country’s history – indicating a further shift toward responsibility and focus on moral hazard in China.

EU & UK Headlines

Analysts at BNP Paribas revise their ECB QE forecast and now see QE in Q4 vs. Prev. view that the ECB would engage in asset purchases after ECB staff projections in June.

Fitch affirms ESM at AAA; outlook stable. (DJN)

UK BoE/GfK Inflation Next 12 Mths (Feb) 2.8% (Prev. 3.6%). 40% of Britons expect rate increase in the next year vs. 34% in November, rate-increase expectation at highest since May 2012. (BBG/RTRS)

According to official models from the Office of Budget Responsibility, the UK faces a GBP 20bln black hole in public finances, suggesting further austerity and throwing doubt on whether the recovery will eliminate the deficit. (FT)

US Headlines

Fed’s Lockhart (non-voter, dove) said is prepared to consider overshooting on inflation, up 2.5%, to aid job gains. (RTRS)

Lockhart also commented that passing the 6.5% jobless rate should be a trigger to update forward guidance on forward rates and that bad weather may have cut GDP by 0.75 percentage points. (BBG)

Equities

While all ten sectors traded in the red this morning, the underperformance was led by health care and basic materials sectors, with the latter driven by concerns over potential implications that the first corporate bond default in China will have on the use of metal to finance debt. This also saw copper futures fall over 1.5%, with other precious and base metals also trading lower.

FX

With little in the way of major macroeconomic releases during the first half of the session this morning meant that the price action was largely driven by positioning ahead of the upcoming release of the latest jobs report by the BLS. As a result, risk off related flows weighed on USD/JPY and weighed on the USD. Consequently, despite cautious comments by RBA governor Stevens who stated that AUD/USD over 0.90 is higher than the RBA’s assessment, together with lower gold prices, meant that AUD/USD remained bid.

Commodities

Copper (futures down over 2.0% this morning) is heavily used for debt financing in China specifically, and Shanghai Chaori Solar’s failure to repay is being seen as a warning shot that many more could follow, as the Chinese authorities pull away from their previous policy of bailing-out-at-all-costs. As such, copper prices have fallen in tandem with a declining appetite for credit in China.

US House Speaker John Boehner said the US should open gas exports in order to counter the actions of Russian President Putin. (WSJ) Boehner believes a lifting of the de-facto ban on exporting US produced LNG would lessen dependence on Russian gas exports across west and eastern Europe.

CME lowered natural gas Henry Hub futures for specs by 18.5% to USD 4,400 per contract from USD 5,225. (RTRS) Russian NatGas and crude oil transit flows via Ukraine are uninterrupted and at normal levels, according to Gazprom. (BBG)

BP is seen to be skirting the US oil export ban, by taking on at least 80% of the capacity in the new USD 360mln Splitter mini-refinery that will produce just enough to escape restrictions on sales outside the US. (BBG) Meanwhile, the Co. has warned that fines over the Gulf of Mexico oil disaster in 2010 could exceed the USD 18bln it is braced for. (Telegraph)

ANZ said that gold consumption growth in China is slowing and that Indian gold demand remains robust. ANZ also raised its gold forecast for 2014 by 5.5% to USD 1339/oz and raised its spot silver forecast by 8.3% to USD 22.20/ oz, but added that gold may drop below USD 1300/oz in the near-term as China demand wanes. ANZ has also stated that platinum ‘has room’ to rally against gold. (BBG)

* * *

We conclude with the overnight summary from DB’s Jim Reid

It’s fascinating that in this period where the S&P 500 is 277% higher, nominal and real GDP are only 11% and 19% higher respectively and the average monthly payroll has only been 72k. It clearly shows how important the Fed (and other central banks) have been. We still think markets will be a lot more challenging once the Fed’s balance sheet starts to level off but for now it’s still increasing at $65bn/month. Talking of payrolls it’s that time of month again. After two disappointing numbers for December (+75k) and January (+113k) and disappointing readings from Wednesday’s ADP (+139k vs +155k expected) and the ISM non-manufacturing employment component (47.5 vs 56.4 last month) the market consensus is for a February figure of +149k whilst DB is forecasting +120k. The consensus may actually be lower than this but maybe not everyone has updated their forecasts after this week’s data. Consensus is expecting the unemployment rate to hold steady at 6.6% whilst
DB’s US Economists expect it to fall -0.1% to 6.5% although they note a larger decline is possible due to the expiration of extended unemployment benefits last December. Whilst the consensus NFP number would mark an improvement on January, a +149k reading would represent a sharp discount from the +204k averaged through the first eleven months of 2013 so it easy to see how bad weather is playing a role here even if the size of the impact is difficult to calculate. As DB’s Joe LaVorgna notes, if weather really is weighing on the numbers then we would expect to see a jump in the number of people who have a job but did not report to work because of “bad weather” which is data the BLS provides within the Household Survey. Even accounting for the past few month’s numbers, DB continues to expect average monthly payroll gains of around +240k in 2014. This would be some pick-up on the post crisis average of 72k discussed above.

Moving back to the other big event of the week, the ECB yesterday kind of told us that they are only going to act when absolutely necessary as they yet again missed an opportunity to be proactive in the fight against future possible low inflation/deflation. It now seems last November’s pre-emptive rate cut was an anomaly and not part of a new policy trend for the ECB. Overall our economists thought it would be difficult for the ECB to publish an inflation forecast materially below its own definition of price stability without providing more accommodation. However, this is indeed what they chose to do. They now think the ECB seems to be “hoping for the best”, and in their call for a cut yesterday they acknowledged they may have underestimated the Governing Council’s lack of room for manoeuvre. They now expect policy rates to be unchanged throughout 2014 given this. Given the above it wasn’t a surprise to see the Euro trade at the highest point since October 2011. Indeed will their lack of action be the spur for a sustained strong currency which continues to put downward pressure on inflation and forces them to act later in the year? Our bias remains that it will but yesterday proved that the ECB will need hard facts for them to be able to act.

After a mid-week lull, Ukrainian and Russian headlines increased yesterday, but for now global markets have been able to weather the newsflow. That isn’t to say that there haven’t been pockets of volatility as Russian equities (MICEX – 0.97%) and Russian fixed income (10 year +13bp) had a week day. On Thursday, Crimea’s parliament decided overwhelmingly to “enter into the Russian Federation with the rights of a subject of the Russian Federation” in a non-binding parliamentary vote. The parliament also set a referendum for March 16th for Crimean voters to decide if they wanted the peninsula to join Russia. If the move is approved by the referendum, all state property would be “nationalised”, the Ruble adopted and Ukrainian troops would be treated as occupiers and forced to surrender or leave, according to the Vice Premier of Crimea. Obama described the proposed referendum as a violation of the Ukrainian constitution and a violation of international law and announced potential sanctions against Russian officials who are involved in military action in Ukraine. The EU also looks set to follow with targeted sanctions. So the crisis doesn’t look like it’s over even if markets have become a bit more sanguine about the endgame.

Looking at overnight markets, Asian equities are trading with modest gains led once again by the Nikkei (+0.8%), mirroring a similar gain for the S&P 500 on Thursday (+0.17%). Onshore Chinese equities are once again lagging today possibly due to the news of China’s first corporate bond default (more below). In Asian currencies, the Indian Rupee (+0.15%) is adding onto yesterday’s 1.04% gain, further cementing its spot as one of the best performing currencies of late in Asia and the EM world. In China, domestic Chinese interbank rates continue to range around multi-month lows and both CNY (+0.05%) and CNH (+0.05%) are on track for one of their strongest weeks in two years.

On the topic of China, according to the WSJ the country’s first onshore corporate bond default has occurred earlier today in the form of Shanghai Chaori Solar Energy’s missed/incomplete RMB89.8m coupon payment. As we have written over the last couple of days, the bond is relatively small (RMB1bn or US$160m in face value) and the issuer is small (US$1.2bn in assets) but it’s an interesting case for a number of reasons. Firstly, it’s a bond where the majority of bondholders are retail investors (WSJ, citing company management) which widens the scope of the impact from the market’s typical institutional investor base. Weibo, China’s version of Twitter, is showing photos of retail investors at a local Shanghai government office protesting the authorities’ lack of action in assisting the issuer (21st Century Business Herald). Secondly, it should be highlighted that Shanghai Chaori avoided a default on its annual coupon payment last year due to the intervention of a local Shanghai government who persuaded banks to roll over loans. This time around, the policy appears to have changed with no last-minute assistance on the cards. Indeed, state-affiliated news agency Xinhua wrote in an opinion piece that a default would be the “the market playing its own decisive role”. Interesting, given that the Chinese solar energy market was heavily subsidised by the Chinese government in recent years. The Xinhua article also commented that Chaori was not going to be China’s “Bear Sterns moment”. In addition, domestic media are reporting that the company’s bankers and bond underwriters will not be helping the company make interest payments (21st Century Business Herald). Though this is a relatively small bond, there are potentially wider ramifications. Bloomberg reports that China’s  renewable energy industry faces US$7.7bn in bond maturities this year, and already three domestic bond issuances have been postponed or cancelled in recent days
according to Reuters. This is certainly a macro story to watch in 2014.

Looking at the day ahead, the main focus will be on US payrolls due out at 1:30pm London time which will dictate the tone for the rest of the day. US trade numbers for January will also be released at the same time as payrolls and US consumer credit numbers will be published towards the end of the US session. Ahead of payrolls, Europe will be focused on French trade (January) and German industrial production. Over the weekend, China will publish its February inflation and trade reports. The trade report will be closely watched in light of January’s Chinese exports which were significantly above consensus possibly due to Lunar New Year effects or potential invoicing distortions. For the record, consensus is expecting February export and import growth of 7.5% and 7.6% YoY respectively.


    



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Check out this “undiscovered gem”, a city known for all the wrong reasons

cartagena 150x150 Check out this undiscovered gem, a city known for all the wrong reasons

Cartagena, Colombia: Because of a $47 dispute the whole world got to know about Cartagena, a city on Colombia’s Caribbean coast. For all the wrong reasons, unfortunately.

Two years ago Cartagena hosted the Summit of the Americas, a get-together of all heads of state for countries from North, Central, and South America, bar Cuba.

Before Barack Obama got there a group of Secret Service agents that descended on Cartagena decided to have some fun. And apparently it was a wild night.

It would probably all go down unnoticed – including the summit in Colombia itself – had it not been for a huge ruckus and dispute the next morning with the girls that the agents brought back to their hotel over the payment for their services.

Cartagena deserves its attention for a host of other reasons, however.

It was one of the most important cities during the expansion of the Spanish Empire in the Americas. Its port was a major trading hub for gold and silver mined in New Granada and Peru. Galleons loaded with precious metals would depart from Cartagena for Spain.

Because of its economic and subsequent political influence in the Americas the city had a strong presence of royalty and wealthy viceroys. Its riches made it the top target for pirates and Cartagena is THE city most associated with pirates in the Caribbean, and the world.

To defend against the plundering the Spanish have built an elaborate system of walls, fortifications, bastions, and castles. The construction began after the attack by Francis Drake in late 16th century and took an incredible two hundred years to complete.

Thanks to those efforts, however, Cartagena’s old colonial town is today immaculately preserved.

It’s an incredibly charming place full of colorful balconied houses, open plazas, imposing colonial administrative and religious buildings, horse-drawn chariots clomping through the streets, performers, flamboyant fruit sellers, musicians… etc.

The place has a great jovial vibe. But that’s not all there is to Cartagena.

Just a 5-minute taxi ride away and you can change the fairy-tale romantic old town for a Miami Beach-like setting in Bocagrande where new high-rise hotels and apartment buildings are popping up like mushrooms after autumn rain.

No wonder the place is a tourist magnet. Most of them are from other Latin American countries, however. There are hardly any Western tourists here, apart from an odd backpacker.

For now the property market is largely driven by Colombians who have favored this Caribbean town for a long time. It’s still an “undiscovered” investment haven when it comes to foreign, and especially Western investors for now.

That’s something that’s bound to change as Colombia goes through its transformation period and sheds it bad-boy image.

A few European investors have already started coming in. But the potential that Cartagena has is enormous, given its bountiful attributes.

And the time to get in on the action and enjoy the spoils of its rise to prominence again is now, especially as practically no one else is looking at it.

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China Expands Defense Budget Over 12% To $132 Billion

Submitted by Ankit Panda via The Diplomat,

The biggest Asia-Pacific defense story this week is China’s decision to increase its defense budget by 12.2 percent to about $132 billion for the next fiscal year. Notice that the figure is noticeably uncorrelated with China’s 7.7 percent actual growth rate (with a 7.5 percent target rate). The numbers are expected, of course, and send a clear signal across the region that China is taking its investments in military hardware seriously. Contrast the Chinese trend with the United States’ belt-tightening on defense spending. The United States and China are, of course, nowhere near to a convergence in defense spending. Our China editor Shannon Tiezzi takes a look at the similarities and differences between the two budgets.

Beijing and Washington’s Defense Budgets: A Tale of Two Cities

Recently released defense budgets by China and the U.S. reveal different approaches but similar goals in Asia.

Beijing released its defense budget for 2014 today, as a draft budget was submitted to the National People’s Congress for review. Xinhua reported that the new budget called for a 12.2 percent increase, raising defense spending to 808.2 billion yuan ($132 billion). Outside of China, analysts and reporters viewed this increase with suspicion. “China’s Xi ramps up military spending in face of worried region,” a Reuters headline read. The article cited unease within Japan and Taiwan over a lack of transparency on how the money will be used.

Meanwhile, at the end of the February the Pentagon released its spending proposal, which called for cut-backs that would reduce the Army to between 440,000 and 450,000 troops (down from a peak of 570,000 in the post-9/11 period). News outlets across the country screamed variations of the New York Times’ headline:  “Pentagon Plans to Shrink Army to Pre-World War II Level.”

The official Pentagon budget, released yesterday, called for $496 billion in spending, keeping the budget effectively static. Over the course of the five-year budget plan, however, the Pentagon actually seeks $115 billion more than was allocated for it by the 2011 Budget Control Act. The fiscal year 2015 budget in particular “seeks to repair the damage caused by the deep spending cuts imposed by sequestration,” according to an article on the Defense Department’s website.  

The timing of Beijing and Washington’s defense budgets practically begs analysts to make comparisons—particularly since China and the U.S. seem locked in a long-term strategic battle for dominance in the Asia-Pacific region. The two defense budgets reinforce a narrative that suggests U.S. dominance is slipping in the face of a rising China: China raises its budget by double-digits while the U.S. undergoes painful cuts. As Zach wrote yesterday, spending cuts in the U.S. military particularly call into question America’s ability to finance the pivot to Asia.

The budgets also have different priorities for spending. Sun Huangtian, the deputy head of the general logistics department of the People’s Liberation Army, told Xinhua that the defense funds “will be spent mainly on modernizing the army’s weapons and equipment, improving living and working conditions for service personnel, and updating the army’s management system.” Chinese officials and academics cited in the article all agreed that an increase in spending was necessary due to external security challenges facing China, presumably including its territorial disputes in the East and South China Seas as well as a long-term strategic competition with the U.S.

Foreign Ministry Spokesman Qin Gang told the press that that China’s defense policy “is defensive in nature” and that spending increases were necessitated by China’s size and the geopolitical environment. “Some outside China hopes to see China stay as a boy scout and never grow up,” Qin said. “If that is the case, who will ensure our national security and how can the world peace be upheld? If that is the case, will China be tranquil, the region stable and the world peaceful?”

A spokesperson for the National People’s Congress was even more direct: “Based on our history and experience, we believe that peace can only be maintained by strength,” she told journalists.

Meanwhile, the U.S. budget focuses more on streamlining the armed forces as America transitions away from the war in Afghanistan. In a statement, Hagel said that the FY2015 budget and the new Quadrennial Defense Review explain “how we will adapt, reshape, and rebalance our military for the challenges and opportunities of the future.” Yet while Hagel and other DoD officials seem optimistic that the 2015 budget will allow them to do their jobs, they warned of disaster should another round of sequestration cuts take place in 2016. Assistant Secretary of Defense for Acquisition Katrina McFarland told a conference that further sequestration would result in a “hollow force,” as the DoD could not reduce troop numbers fast enough to be able to “preserve the integrity” of the armed forces. (Her alleged remarks that the pivot to Asia “can’t happen” may have been made in this context).

Hagel’s statement also warned that “continued sequestration requires dangerous reductions to readiness and modernization.” Such reductions, he said, “would put at risk America’s traditional role as a guarantor of global security.”

The defense budgets released by Beijing and Washington share few similarities, but they do have one thing in common: spokespeople claiming that their increased military spending is good for “global security” or “world peace.” On a global level, and more particularly on a regional one, both the U.S. and China are convinced that security can be achieved through an increased military presence.

China believes that the U.S. is pursuing a policy of containment, egging on its friends and allies in the region to challenge China over territorial disputes. Many top-level academics in China worry that U.S. support for Japan and the Philippines in particular has encouraged these two nations to directly challenge China, thus worsening the security environment. Accordingly, China is forced to build up its military to defend its claims, and also to discourage provocation by its neighbors.

The U.S., however, thinks recent actions by Japan and the Philippines are a natural response to what is viewed as increased Chinese aggression. Under this line of thinking, a more robust U.S. military presence in the region is taken as a positive contributor to regional security, because it would reassure countries that are increasingly nervous about China’s strength.

It’s a classic question of the chicken vs the egg: which came first, China’s aggression or U.S. containment?

Regardless of who is blamed for starting the cycle, it’s hard to deny that China and the U.S. are locked into a low-key (for now) arms race, where military spending by one side is used to justify defense budget increases by the other. But already, given the divergent trends in spending, some in the region are wondering how long the U.S. will be willing or able to match China’s investment in a regional military presence. Though the announced Chinese military budget is less than 27 percent of the U.S. budget, it’s safe to assume that close to 100 percent of China’s budget will be focused on upping Chinese readiness in the Asia-Pacific region. With a variety of global security concerns, the U.S. cannot make the same claim.

China’s J-20 stealth fighter has been the target of much peering and speculation by analysts in the West. The J-20’s design appear to be flawed  particularly if it’s goal was stealth above all else. However, according to new reports, several problematic elements of the aircraft’s design have been modified, ostensibly to improve stealth performance. The J-20 isn’t expected to serve in the PLAAF anytime soon; the Pentagon estimates that it will enter service in 2018. As far as anyone knows, the J-20 appears to be designed specifically for indigenous use by the Chinese air force. China has not yet pitched it for export unlike the J-31.


    



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China Credit Markets Tumble Most In 3 Months As Default Spooks Lenders, Deals Pulled

Ever since the specter of the first real domestic default on a Chinese corporate bond hovered over the markets, the Chinese credit markets have been leaking lower. The last 3 days have seen the biggest drop in Chinese credit markets in almost 4 months. That situation, wistfully occurring half way around the world while US equity markets press on to ever more exuberant (and ignorant) heights, meant at least 3 other Chinese firms pulled their bond issues today and, as Reuters reports, has "triggered widespread upheaval in the bond market." Banks are awash with liquidity (as indicated by low repo rates) but clearly unwilling to lend and external investors are now running scared.

 

The Chinese corporate bond market has suffered considerably in the last few days…

Even as repo rates have dropped (and CNY has strengthened) – repo rates at multi-month lows, CNY strengthening and stocks weak…

 

and SHIBOR at multi-month lows (suggesting plenty of liqudity at the banks but as we see below, a clear unwillingness to lend)…

And that has led to pulled issues…

Via Reuters,

The threat of China's first domestic bond default has prompted Suining Chuanzhong Economic Technology Development to delay a one billion yuan ($164 million) debt issue and two other companies have halted deals blaming market volatility.

 

 

The run-up in corporate debt since 2008, and overcapacity in sectors such as steel, coal and solar energy, have threatened the solvency of many borrowers.

 

Chuanzhong said late on Wednesday that the news that Chaori Solar was set to miss a coupon payment on Friday "triggered severe upheaval in the bond market", so it had delayed its bond deal.

 

Taizhou Kouan Shipbuilding postponed a 300 million yuan issue of short-term commercial paper, while Xining Special Steel cancelled a 470 million yuan offering of medium-term notes, the companies said.

 

The deals are relatively small, but the delays underline the risk that an unprecedented default will make it harder for other companies to access capital.

 

 

Yields on corporate and enterprise bonds pushed higher after Chaori Solar's announcement. Five-year AA rated notes rose 8 basis points to 7.77 percent, the biggest increase since November 15, ChinaBond data showed.

This situation is being exacerbated as the lending is being cut to the indistries with the most slack – with the result (as we warned about in the past) that commodity-based collateral for all the shadow loans is getting hammered (through no real demand) and crushing the credit system (through haircuts and forced deleveraging as collateral values collapse)…

This is very negative for the Chinese economy which now more than ever is reliant on credit as its growth-driver… and the China credit-crisis indicator remains flashing red (2Y Swap – 2Y Bond spread)…

 

 

Charts: Bloomberg


    



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An In Depth Look At The US Labor Markets

Submitted by Shane Obata of Triggers

An in depth look at the US labor markets

People love to talk about how statistics can be used to prove any point.

I don’t entirely disagree with that claim, but it really depends on both the perspective – or time frame – and the source of the data set.

My research typically involves trying to separate the meaningful data from the nonsense.

In general, people are increasingly absorbed with short term results.

What’s more important is long term trends.

Some of my favourite chartists such as @lanceroberts, @not_jim_cramer, @m_mcdonough, @zerohedge, @greekfire23, @cigolo, and @minefornothing are good examples of economic analysts who don’t try to fool you with the data.

Often time they will present their data over long time frames to make comparisons with other periods possible.

This can help us to identify similar expansionary or contractionary periods or inflection points.

Credible sources are essential but so is doing your own research and making your own conclusions.

But that’s the beauty of economic data – regardless of the author’s opinion, it’s open to interpretation. (Even though most of the time one side is right and the other is wrong – see: santelli and liesman, respectively.)

Back to the matter at hand…

Today we’re going to look at an area of the economy that I’ve been meaning to write about for a while – the US labor markets.

Despite that fact that US GDP is incredibly reliant on consumption – approximately 68% of US GDP is comprised of personal consumption expenditures…

Some could argue that consumption’s actual usefulness to an economy is not as great as it may seem.

For example, if someone buys a stuffed bear every day for a year straight then is that really going to improve the economy in the long run?

When thinking about the quality of an economy or a business venture isn’t sustainable growth what’s important?

In my opinion, wages are what drive an economy.   

Higher real wages allow people to save and then invest without taking on debt.

Unfortunately for the US economy, debt is up and incomes and savings are down.

Moreover, these trends have been in play for a long time.

The personal savings rate, GDP (yoy), and personal income (yoy) peaked in the 1970s.

On the other hand, household credit market debt outstanding is barely off of its peak.

As a result of inflation and lower real median household incomes, individuals are taking on debt in order to maintain the same standard of living.

And that’s why the CPI i?s? ?a? ?j?o?k?e? ?   cannot be considered an accurate gauge of the cost of living – because it no longer measures real inflation.

Let’s get back to the labor markets.

Every month, all the m?e?t?e?o?r?o?l?o?g?i?s?t?s?  economists make projections for the nonfarm payroll number.

Regardless of details and long term trends, what’s important to the market is whether or not it beats analysts’ estimates.

Despite a lot of talk about this number, job growth has not improved in a meaningful way for the past few years.

Furthermore, since the mid-1980s, the rate of increase (yoy) has been in a downtrend.

What’s more is that the number of jobs that the US has gained since the financial crisis has not consistently kept pace with population growth.

In other words, employment is only being created by the incremental demand caused by population growth.

This is reflected in the employment/population ratio – which has not increased since 2010.

But if the employment rate is flat then why is the unemployment rate falling?

To answer that question let’s first define the unemployment rate as: the number of unemployed persons / the labor force.

In order for this rate to fall one of two things needs to happen.

1)    The number of unemployed persons falls

2)    The number of people in the labor force falls

So why is it falling then?

Because of the number of people not in the labor force is increasing.

From 1980 to the present that number has increased from 60 million to 92 million.

What’s more is that people are now leaving the labor force at a faster pace than they were from 1980-2001 and from 2001-2010.

Let’s move on to another important consideration: the quality of the jobs that have been added.

For the most part, everyone is obsessed with the number of jobs.

That said, one could argue that the quality of those jobs is more important.

That’s because high quality and not low quality jobs are going to help the US government to bring in more tax revenues.

In a country where entitlements are growing at an incredible pace, that fact cannot be overlooked.

Unfortunately, the US is not adding enough of what David Stockman referred to as “breadwinner jobs”.

The paper that this chart was taken from can be found here; it’s one of the best analyses of the labor market that you might come across.

So what kind of jobs have been added?

Mostly low quality ones such as retail salespeople, cashiers, food prep workers, etc.

These are kind of jobs that 1) are vulnerable to technological advancement.   

Note: as technology continues to improve it’s likely that many people will lose their jobs to robots.

2) won’t generate enough tax revenues to support growing social benefit payments.

Note: to put to rate of increase in social obligations in perspective, social security now costs 8x what it did in 1980.

And 3) aren’t full time.

Note: during the financial crisis, full time employment as a % of the labor force fell dramatically.

It has recovered since then but it’s still at a depressed level.

On the other hand, part time employment as % of the labor force rose during the financial crisis and is still at a very high level.

Another concerning trend is that weakness in the labor markets is more apparent among the young.

The following graph shows that only the only age group that only those 55 and older have added net jobs since 2007.

Furthermore, since there are fewer quality jobs available overall – those jobs are often held by more experienced persons.

Both of these trends are reflected in lower and higher labor force participation rates for the young and old respectively.

As you can see in the following chart, participation rates for those 16-24 are projected to decrease through to 2020.

In contrast, the labor force participation rates for those 55 and older are projected to increase.

Now that we’ve gone over what’s really happening in the labor markets, let’s examine some of the misconceptions that are commonly held about them:

1) assumption: a falling unemployment rate is indicative of an improving labor market.

Reality: the unemployment rate – especially the U3 rate – is not a good measure of the health of the labor markets for reasons that we alluded to earlier.

On the other hand, the average duration of unemployment seems to be more relevant.

Currently, the average duration of unemployment in the US is 35 weeks.

To put this in perspective, from 1980 until the financial crisis, the highest the number reached was in the low 20s.

What this means is that those who are unemployed are staying unemployed for longer.

2) assumption:  a reduction in initial jobless claims is indicative of an improving labor market.

Reality: initial jobless claims are in a downtrend because – as Lance Roberts reports here – businesses are hoarding their employees

3) assumption: if the US economy keeps adding 200,000 jobs every month then everything will be fine in the labor markets

Reality: at the current pace of growth, “it would take until December of 2018 to return to pre-recession employment levels while also absorbing the people who enter the labor force each month”

In conclusion, the labor markets are not as healthy as some people think they are.

Employment seems as though it may have peaked for this cycle.

And the so-called “recovery” in the labor markets is much weaker than past recoveries were.

These trends are probably reflective of 1) changes in societal labor trends – such as the move away from manufacturing jobs and towards retail jobs.

And 2) a structurally weak US economy whose growth is being held back by debt.

Next time you hear t?h?e? ?w?e?a?t?h?e?r?m?a?n?  Joe Lavorgna talking about how good the labor markets are, consider the long term trends and go over all of the details before you draw a conclusion.

*And don’t forget to support #teamphil.

Shane Obata @sobata416


    



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Bacon, Inflation, And “What Gets Measured Gets Managed”

Core inflation, which excludes the effect of food and energy prices and is how every self-respecting economist measures price increases, is up 8.75% over the past five years. However, as ConvergEx's Nick Colas notes, this is a poor indicator for the true cost of living for many Americans. Having scrubbed the data, Colas has found the top 10 items that appreciated the most from 2008 to 2013 and the 10 items that became substantially less expensive, according to the government's Consumer Price Index (CPI). The data is deceiving though, as the CPI's "hedonic quality adjustment" distorts the amount of money people actually spend. Even more importantly, Colas warns, things that have a relatively low weighting in the CPI and that people use selectively – such as healthcare and education – don't have a big impact on the core number, but represent considerable expenses for many Americans. Thus we must use caution when using one figure to make policy decisions for an entire nation, and consider what happens to inflationary expectations if and when the still-sluggish economic recovery finally finds second gear.

Via ConvergEx's Nick Colas,
 
Note from Nick: For something that policymakers essentially think is a non-issue, we regularly get more questions about inflation than any other economic topic.  The most common observation is that “Real world” prices are rising far faster than the benign CPI readings used by the Federal Reserve to make decisions about interest rate policy.  Moreover, Treasury prices – essentially the market’s take on future inflation – may not be telling the whole story due to continued risk aversion among some investors.  Today Beth takes on the topic head on, looking at how the CPI gets calculated and why so many Americans are losing faith in this index as a measure of inflation. 
 
I can easily go through Costco’s 4-pound “family pack” of bacon in a week; nowadays it goes on and in everything – cupcakes, ice cream, muffins, scallops… and best of all smothered in brown sugar and baked to candied bacon perfection. 
But fellow bacon lovers beware.  In the past five years the price of bacon has jumped more than 32%, according to the Consumer Price Index (CPI).  This places it at number seven on our list of items that have appreciated the most from 2008 to 2013.  Unleaded regular gasoline tops the list with a 95.56% price increase, followed by fuel oil (+49.04%) and cigarettes (+48.27%).  Energy prices are a bit deceptive, however, as five years ago they were still in the massive slump induced by the global financial crisis.  
 
On the other hand, the price of television dropped more than any other item, falling 65.45% in the past five years, according to the CPI.  Round out the bottom three are personal computers (38.02%) and photographic equipment (-29.72%).  In fact, a majority of the bottom 10 items are technology-related and this is a result of what the CPI calls a “hedonic quality adjustment” (more on this later).  Toys (-24.13%) and dishes (-21.27%) also make an appearance on the list, which is likely a result of the continuing trend of outsourcing to low-cost manufacturing bases such as China.  See the tables following the text for the complete top 10 and bottom 10 lists.
 
Over the same period of time, headline inflation and core inflation (excluding food and energy prices) increased 10.86% and 8.75%, respectively.  However, there is much more to the story that impacts the true cost of living for many Americans, as the average inflation figures are typically don’t reflect how people actually spend their money.  For example, a middle-aged man who is footing the bill for his family’s healthcare expenses and saving for multiple college tuitions likely sees higher cost of living-driven inflation than indicated by the CPI, as healthcare and education expenses are of relatively little importance in the inflation calculation.  Read on below for our three most important and interesting takeaways from out top/bottom 10 analysis, including more on the variability of what people experience in their actual lives versus what the CPI represents.

First, why is bacon so expensive right now?  More interesting than important in the grand scheme of socioeconomic things, the cost of a pound of retail bacon surged to an all-time high of $5.07 last year; meanwhile, the wholesale price of pork bellies, which are cured into bacon, hit a record higher and exceeded $190 for one hundred pounds in 2013.  So what gives?  A mysterious virus – Porcine Epidemic Diarrhea (PED) – began killing mass numbers of piglets in April when it was first discovered in a U.S. herd.  In just one month, pork futures on the Chicago Mercantile Exchange spiked to more than $100 from $78 in March prior to the outbreak of the virus.  And in CPI data, the price of bacon in the supermarket officially increased 32.55% in the last five years.  On the plus side, reports indicate that the virus is subsiding and 2014 should bring with it lower bacon prices – so go ahead, eat up.

 

Second, the CPI greatly distorts the true cost of anything technological.  For example, if you bought a TV this year, chances are you did not spend 65.45% less than on the TV you bought five years ago.  Yes, the average price of a 32-inch flat-panel television hit an all-time low average of $435 in 2012, down from $546 in 2011; however, from Q1 2012 to Q2 2012, the average price paid for a new TV increased, climbing to $1,190 to $1,124.  As technology improves, consumers opt for the more expensive, fancier TVs as opposed to the cheaper, archaic ones.  To account for this, the CPI employs a hedonic quality adjustment in which statisticians reduce the amount of a price increase due to quality by a certain figure.  So if the price of a computer rose by 10%, the CPI statisticians might claim that two-thirds of the price increase was attributable to quality improvements and report inflation as only 3.3%.  In the case of televisions, technological advances have occurred so rapidly that the CPI math has grossly underreported inflation for TV and other tech products as well.

 

And finally, technology aside, the CPI also distorts the true cost of living for many Americans.  For example, inpatient hospital services (#5) and outpatient hospital services (#9) are both on the top 10 list, with respective 5-year price appreciations of 35.82% and 30.71%.  Both are things that people use selectively – if you’re sick then you’re healthcare costs can be exorbitantly higher than for the average person, yet hospital services as a whole only constitute 2.081% of the entire CPI.  Educational books & supplies – #8 on the top 10 list with a 30.85% price increase tell a similar story.  If you’re got three kids in college, you’re expenditures on education and vastly higher than for a single person who done with his or her education.  Educational books & supplies make up 0.195% of the CPI, while the broader education category is just 3.244% of the index.  Most people in college (or parents of college-age children) likely spend more than 3-something percent of their income in education.

The bottom line is that, while core inflation is a useful estimate for price levels in many instances, Federal Reserve Chairwoman Janet Yellen doesn’t care – at a policy level – about 35% healthcare inflation, 31% education inflation or 96% fuel inflation.  A typical American family of four might care immensely about all three, but in the eyes of the Fed inflation a 5-year core inflation rate of 8.75% is relatively minimal.  This highlights a major issue of using one basket of goods for an entire population – things that people use selectively represent a very small fraction of the CPI, yet are a huge fraction of expenditures for a significant portion of the population.
 
Say you’ve got an aging relative who needs nursing care – an increasingly common challenge for many Americans.  A private room at a nursing home runs about $90,500 per year, so rather than accounting for 0.17% (the CPI weighting for nursing home and adult day care services) of the average household income of $51,016, nursing home services account for 177% of your particular income.  And rather than 10.86% inflation over the past five years – the headline CPI number – your 5-year inflation rate is a whopping 46.0%.  Another example would be a family with two kids enrolled in private colleges, which command an average tuition of $30,094.  College tuition and fees are not 1.81% of you income, as they are in the CPI, but rather 118% of the median household income.  Your resulting 5-year inflation rate is thus 24.3%, or more than twice the headline inflation rate.  Both situations are not at all uncommon and highlight the inefficiencies in applying one uniform inflation gauge to an entire population.
 
There’s an old saying in business circles; ‘What gets measured gets managed”.  The Consumer Price Index may be an efficient way for policymakers to shorthand an answer to the question of inflationary levels.  It is, however, not an accurate method of assessing how consumers feel the effects of higher prices.  This is an important distinction, for inflationary expectations are the true drivers of how both financial markets and consumers alter their behaviors.  Because of the slow-growth global economy of the past five years, both groups have given the Fed a pass on inflation for the moment.  If and when things improve, the psychology behind inflationary expectations may well be different, and more on a hair trigger, than prior recoveries.
 
At least we’ll always have bacon to ease the pain.


    



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The Top 12 Signs That The U.S. Economy Is Heading Toward Another Recession

Submitted by Michael Snyder of The Economic Collapse blog,

Is the U.S. economy steamrolling toward another recession?  Will 2014 turn out to be a major "turning point" when we look back on it?  Before we get to the evidence, it is important to note that there are many economists that believe that the United States never actually got out of the last recession.  For example, data compiled by John Williams of shadowstats.com show that the U.S. economy has continually been in recession since 2005. 

So if anyone out there would like to argue that America is experiencing a recession right now, I certainly would not have a problem with that.  In fact, that would fit with the daily reality of tens of millions of Americans that are deeply suffering in this harsh economic environment.  But no matter whether we are in a "recession" at the moment or not, there are an increasing number of indications that we are rapidly plunging into another major economic slowdown.  The following are the top 12 signs that the U.S. economy is heading toward another recession…

#1 We recently learned that the number of new mortgage applications in the United States had fallen to the lowest level that we have seen in nearly 20 years.

#2 Radio Shack has announced that it is going to close more than 1,000 stores.  This is just another sign that we are in the midst of a "retail apocalypse".

#3 The ISM Services index just fell to its lowest level in 4 years, and ISM Services Employment just experienced its largest decline since the collapse of Lehman Brothers.

#4 Obamacare is really starting to hammer the U.S. health care industry

"The Affordable Care Act is creating significant financial uncertainty to health care organizations," said a survey respondent from the health care and social assistance industry.

 

"With little warning, the negative impact on revenue has been unprecedented."

#5 Trading revenue at the "too big to fail" banks on Wall Street is way down

Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM) are bracing investors for a fourth straight drop in first-quarter trading, a period of the year when the largest investment banks typically earn the most from that business.

 

Citigroup finance chief John Gerspach said yesterday his firm expects trading revenue to drop by a “high mid-teens” percentage, less than a week after JPMorgan Chief Executive Officer Jamie Dimon said revenue from equities and fixed income was down about 15 percent. If trading at the nine largest firms slumps that much, it would extend the slide from 2010’s first quarter to 36 percent.

#6 One of the "too big to fail" banks, JPMorgan, is planning to fire "thousands" more workers.

#7 Moody's has downgraded the credit rating of the city of Chicago again.  Now it is just three notches above junk status.

#8 The U.S. economy actually lost 2.87 million jobs during the month of January according to the unadjusted numbers.  Over the past decade, the only time the U.S. economy has lost more jobs during the month of January was in 2009 at the peak of the last recession.

#9 In January, real disposable income in the U.S. experienced the largest year over year decline that we have seen since 1974.

#10 Only 35 percent of all Americans say that they are better off financially than they were a year ago.

#11 Global retail sales for machinery giant Caterpillar have fallen for 14 months in a row.

#12 The economic data show that virtually all of the largest economies on the planet are slowing down right now.  The following is from a recent Zero Hedge article

The last 3 weeks have seen the macro fundamentals of the G-10 major economies collapse at the fastest pace in almost 4 years and almost the biggest slump since Lehman. Despite a plethora of data showing that 'weather' is not to blame, US strategists, 'economists', and asset-gatherers are sticking to the meme that this is all because of the cold on the east coast of the US (and that means wondrous pent-up demand to come). However, as the New York Times reports, for the earth, it was the 4th warmest January on record.

For much more on how the rest of the global economy is also slowing down, please see my recent article entitled "20 Signs That The Global Economic Crisis Is Starting To Catch Fire".

Meanwhile, things in Ukraine continue to become even more tense, and the Russian government continues to debate how it will respond if the U.S. does end up deciding to hit Russia with economic sanctions.

According to one Russian news source, the Russian parliament is actually considering the confiscation of the property and assets of U.S. businesses in Russia if the U.S. decides to go ahead with economic sanctions against Russia…

The upper house of Russia’s parliament is mulling measures allowing property and assets of European and US companies to be confiscated in the event of sanctions being adopted against Russia over its threatened military intervention in Ukraine.

We are talking about banks, retail chains, mining operations, etc.

U.S. companies have billions invested in Russia, and all of that could be gone in an instant.

So let us certainly hope that economic war between the United States and Russia is averted.  Our economy is hurting enough as it is.

But no matter how things with this crisis in Ukraine play out, it looks like hard times are ahead for the U.S. economy.

Unfortunately, most Americans never learned the lessons that they should have learned back in 2008.

They just assume that the federal government and the Federal Reserve have fixed our problems and have everything under control, so they are not preparing for the next great crisis.

In the end, tens of millions of Americans will be absolutely devastated when they get absolutely blindsided by what is coming.


    



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Mission Accomplished? Putin’s Approval Rating Hits 2-Year Highs

Obama did it by offering hope, change, and class warfare… Abe did it by printing inordinate amounts of money, pumping stocks up, and speaking in increasingly militaristic tones… and now Vladimir Putin has managed to get his approval rating to near-record highs – by invading Ukraine?


Via Pravda,

The approval rating of Russian President Vladimir Putin remains at the highest level during the last two years for two consecutive weeks – 67.8 percent, a survey conducted by the All-Russian Public Opinion Research Center (VTsIOM) said.

 

Sociologists noted that Putin’s rating has been growing against the backdrop of the worsening political situation in Ukraine and the Crimea, successful completion of the Olympic Winter Games in Sochi and preparations to the opening of Paralympic Games.

 

VTsIOM stressed that over the past two years, Russian citizens have expressed approval of the work of the head of state on the level above 60 percent.

 

Previously, the maximum value of this index was reported in May 2012 (68.8 percent), immediately after Putin’s inauguration as president.

Mission Accomplished?


    



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In Venezuela, This Is How You Convert $1 Into $175,000

Submitted by Francisco Toro via the Caracas Chronicles blog,

Say you come into Venezuela with just $1 and an eye for business. Just how much money can you turn that bill into using tried-and-true, being-used-right-now scams? With a bit of gumption the answer to that is…$175K or so. Really. Here’s how.

First, take your crisp new dollar bill to a black market currency dealer and buy yourself Bs.85.

Did you make sure to get travel insurance before you trip?

Good.

Now go to a doctor and buy yourself Bs.85 worth of medical attention. Any pretext will do. Don’t forget to get a receipt, though: your insurance company back home will reimburse your 85 bolivar claim at the official rate, giving you back $1 for every 6 bolivars and 30 cents you spent.

So after one doctor’s visit, your $1 has already turned into $13.50. Not too bad.

But we’re just getting going here. Needless to say your next step is to take your $13.50 right back to the currency tout and buy yourself 1,150 bolivars.

Next, take your 1,150 bolivars to any reputable Caracas jeweller. There, you can get about 5.7 grams of 18-karat gold for that. As it turns out, back stateside those 5.7 grams of gold are worth $182.29.

Your Caracas black market dollar dealer will be expecting your call by now: the $182.29 you netted for the gold buys you 15,495 bolivars.

This is fun, isn’t it?

But maybe you’re getting a bit impatient at this point. Sure, a 18,290% profit with no risk and for doing no real work isn’t too bad, but let’s say you want to make some real money.

For that, you need to go to a market with genuinely grotesque price differential. And in a petrostate like Venezuela, that can only mean one thing: gasoline.

At Venezuela’s ludicrous price of 0.097 bolivars per liter, the 15,495 bolivars currently burning a hole in your pocket can buy 159,742 liters of unleaded gas. That’s 42,200 gallons or so.

The next step is to load your gas into a tanker truck and drive it out to Colombia, where each and every one of your 42,200 gallons will sell for US$4.14.

By the time it’s all said and done, that clean, crisp $1 bill you came into Venezuela with has turned into US$174,905.

That’s a seventeen million percent profit margin for doing basically nothing.

This isn’t just some thought exercise, it’s the central reality of the Venezuelan economy today.

The catch, of course, is that the viability of each of these scams depends first and foremost on having official protection from some regime-connected power broker. You can’t smuggle gasoline out of the country without a National Guard officer (or 10) taking a cut. You can’t load much gold into a northbound plane without paying off an airport guard. Any attempt to buy a substantial number of official rate dollars is going to depend on some regime official – probably wearing olive green -giving his go-ahead.

As the protests mount on the streets, it’s important not to lose sight of this: it’s these rackets those guys are protecting.

And their willingness to use violence to protect them is roughly proportional to the profit margins involved.


    



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