Why nothing's being shipped, and why the fallout will be way way wi-i-i-i-ider than you think

The Baltic Dry Index (replaces the Baltic Freight Index). A composite of the Baltic Capesize, Panamax, Handysize and Supramax indices. The index is designed as the successor to the Baltic Freight Index and was first published on 1 November 1999.

Original charts etc from Wikipedia

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The (bullish?) link between the USD and Oil

Morgan Stanley has an interesting note out On the Link Between the USD and Oil. Basically, what Stephen Jen is saying is that the USD and oil price will be remain negatively correlated for a while yet. He lists 3 reasons each of how oil prices could drive the USD and vice versa. (See link above, or ask me for a copy.) "Specifically," he writes, "lower and stable oil prices should be positive for the USD, while rising oil prices should be negative for the USD."

I have made a bit of a hash of the y-axis on the Excel generated chart below, so I have left it out, but you get the idea, and they're all on the same scale. (Starting 1996, weekly data, Y-o-Y % change.)

Basically it looks more like Jen's call is "it's different this time."


He concludes, "For the global economy, a strong dollar/low oil price combination is much better than a cheap dollar/high oil price combination. Calmer commodity prices should also temper the hawkish bias some inflation-targeting central banks have had." That's pretty bullish for equities, but assumes that a strong dollar/low oil price combo really is what we're looking at. This time.

*** late addition: see here for correct chart!!
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Stumble It!
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China's manufacturing contraction... tighter money or...

The latest from that "great sucking sound"*...


So which way will the PBOC move - ever more inflation bashing tightness? Yes for rhetoric, IMHO, but not by action.

(As suggested here a couple of weeks ago.)

(* Originally of manufacturing jobs going to China)

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Stumble It!
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The USA really is really big

Stumbled upon this on the excellent STRANGE MAPS website...

US States renamed for countries with similar GDPs:

OK for Brazil & NY state, Canada & Texas and France & California, but... any New Hampshire residents out there? You must be very proud.

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(Bear in mind, though, the data's from over a year ago, when the USD was way higher and the Russian, Saudi, Iranian and Nigerian etc GDPs hadn't seen the oil-based upswing.)
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$130 oil? Try $30/bbl...

For those who think this time it's different (actually it is, isn't it? Errmmm...) check out this item from Credit Suisse global strategist Jonathan Wilmot, entitled "How Much Demand Destruction" in which he says that oil prices are and remain very sensitive to global economic growth and given inflationary concerns (and central bank cred, what's left of it) we're pretty close to a tipping point... and oil prices could well get to the $30 range.

Here are his front page bullet points (my emphasis):

How Much Demand Destruction?

• Most of the emerging world has a genuine inflation problem while most of the developed world has a rapidly escalating income, profits and credit problem that points to recession or worse.
• But two decades of hard won credibility for G10 central banks is at stake, so they cannot completely ignore the simultaneous shock to inflation expectations.
• Current and near-term global oil supplies are severely constrained: stabilising or reducing oil prices thus seem to require accelerated demand destruction in the OECD.
• By implication, the world’s major central banks may have little choice but to quietly allow the developing recession to unfold, while using other policies to limit damage to the financial system.
• That is essentially what market price action over the last month or so has been telling us, and might even be seen as the real sub-text of Bernanke’s testimony.
• This makes it all the more important to understand what combination of slower global growth and high energy prices will bring global oil demand to a halt. Our analysis suggests we are close to a tipping point towards much lower oil demand, and price.

If you can access CS research, please do so (or you can always ask me.) Otherwise, it's all Wordled here:

Asia - flattened by an Un-Flattening World

Excellent note from MS last night entitled HIGH TRANSPORT COSTS TO 'UN-FLATTEN' THE WORLD in which their economists note, in a glass-half-full sort of way, that with high oil prices driving transportation costs through the roof and the Asian export model under serious threat as a result, the development of domestic and regional consumption is a positive.

"We believe that, with rising transport costs, trade globalisation may slow significantly and the world will 'become more round'. Asia's trade model will be particularly affected. The near-term impact, in our view, is not positive for Asia; however, in the long run, this shock could coerce Asia into moving away from the export-led growth model."

(Maybe India rather than China has it right after all? Just a thought!)

The FT writes this morning, coincidentally, of P&G's rethinking of its supply network in the light of massively higher transport prices:

"Soaring energy prices are forcing Procter & Gamble to rethink how it distributes its products, with the world’s biggest consumer goods company shifting manufacturing sites closer to consumers to cut its transport bill."

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I wrote about the effect of transport costs on Asia recently here and here, but obviously didn't think it through quite as far as MS (and P&G)!

Lieutenant Motors comes to Asia

To be fair to CNBC they did come up with a fun piece on GM this morning as well, which noted that

"... the world's largest auto maker has a stock market value of only about $7 billion. That compares with a market cap of about $56 billion in 2000, when the stock was at its all-time high of $94.62 a share.To put that in even more perspective, GM's market value is now roughly equivalent to that of tax-preparation provider H&R Block and toy-maker Mattel."

The obvious blogger thing to do would be to apply their "analysis" to Asia... which is pretty much exactly what I have done here:

• GM's market cap is US$6.5bn, just ahead of Bank Rakyat Indonesia (hardly a titan even in Indonesia) at US$6.4bn and a little behind broker Yuanta of Taiwan at US$6.6bn.
• A little higher, you find palm oil plantation Golden Agri-Resources at US$6.7bn and noodle company Tingyi at US$6.8bn. (We like frying and we like our noodles in Asia.)
  
• A full billion bucks bigger than GM you get, ironically, auto parts company, Hyundai Mobis at US$7.5bn. (Not Hyundai Motors, mind you, which would cost you 2.5 GMs.)
  
• For two GMs you could get one SIA, Keppel Corp or... High Tech Computer (!!!)
  
• Three GMs would get you one OCBC Bank, but you'd need to top up a bit to get a whole Kookmin Bank.
• Four would almost (not quite) get you China Communications Construction Company
• Add another GM and you could talk to HK Superman Li Ka-Shing about his flagship Cheung Kong...

At the top of the pile in listed "Asia ex-Japan" you get Petrochina (60 GMs), China Mobile (42 GMs) and ICBC (38 GMs). Global giant HSBC trails along at #5 in Asia (30 GMs.) The biggest manufacturer in Asia is Samsung Electronics at 14 GMs (or 2 x Sony, for that matter.)

Heady analysis indeed!

Smart $ says 66% chance of n/c FED in September...

... after no change in the Fed rate today, as announced early this morning by Bernanke. (Rather hawkish comments, I thought: "Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased.")

As of yesterday, The Smart Money said there was a 10% chance of no change in FED rates in September, according to the futures markets. A month ago they said there was a 74% chance.


The "Sma-a-a-a-a-art money."

Bullish US consumer confidence??

The Conference Board consumer confidence figures came out for June last night at 50.4, the lowest since, (roughly.) Pick one:

• Bill Clinton was US President
• The Washington Redskins won their last Superbowl
• Operation Desert Storm
• The S&P500 had a 300 handle and the Dow had a 2,000 handle
• Apartheid ended in South Africa
• The Collapse of the Soviet Union
• The Start of The English Premier League
• Windows 3.1
• Tim Berners-Lee published an article about some new-fangled idea for a "World Wide Web"
• And "to get rich" became "glorious" in China... (maybe?!)
• ... etc etc

I was all set for some bearish comments, but just looking at the very simple chart below after those lousy figures (expectations were for 56 with the prev month at 58!) it actually looks quite bullish for equity markets, whether in the US or Asia, if you are taking a 2+ year view, which we all really ought to be. (Try and pick the bottom? Be my guest...)


Updated numbers not on the chart (for some reason):

• S&P500 (orange) 1314.3
• Conference Board Consumer Confidence (white) 50.4
• MSCI AC Far East ex-Japan (yellow) 466.7

OMG! China raises gas, diesel and jet fuel prices!!!!!! OMG OMG OMG!!!!

Off the top of my head (tips of my fingers) here are some houses that I noticed discussing, in published research, just this sort of move over the last 2 weeks alone:

• Credit Suisse
• JP Morgan
• Citibank
• CLSA
• ...
  

So... OMG! OMG! OMG! OMG!

Maybe it's not the hyper-bullish paradigm change and rerating catalyst that they and others are saying it is... that they knew all along, and that nobody else out on the street was onto, and that... (zzzzz...)

Still looking to cover some of my higher beta shorts, but taking my time.


(The FT article on the news here.)
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Perfectly timed note yesterday from Lan Xue at Citi... not the earliest on this theme (I am pretty sure that Dong Tao was, a couple of weeks ago) but great timing anyway!

• "Chinese utility and energy prices are just too low — China has not revised electricity prices since 2Q06 and gasoline diesel prices since Oct 2007, although both coal and oil prices have risen sharply.
• At current levels, China’s utility and energy prices are at least 50% below international prices, which clearly are unsustainable in the long run.
• If meaningful adjustments are made to electricity and utility prices, sectors such as airlines, auto and manufacturing in particular would be hurt.
• But we think such a move would be positive for the overall market, as it would signal a more market-oriented policy approach from the government, rather than continued price intervention."

Equally perfect timing from Frank "Bang-A" Gong across the road at Mr Dimon's new shop, JP in a note also released yesterday, prior to the NDRC announcements:

• "We are upgrading China to overweight within our Asian and Emerging Markets portfolios; based on a resumption of Renminbi appreciation, declining headline inflation and a potential switch in policy focus from inflation to growth. As is the case for the balance of North Asia, China would also benefit from a decline in the oil price.
• A fall in Chinese headline inflation to below 6% provides the flexibility to raise controlled fuel and commodity prices; this would benefit IPPs and refiners.
• The property sector should benefit from a change in government rhetoric from inflation to growth concerns."

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Interestingly, Dong Tao of CS concludes his own comments from this morning with a warning that: "there will be a bigger risk for the government launching harsh austerity if inflation gets out of control." He notes, rather more bearishly than his peers, that:

• "(it) is our view, that the hike of fuel and power prices... may push inflation toward double digits. This is just one of several possible outcomes, but we do caution that it could trigger aggressive tightening similar to the austerity engineered by then vice premier Zhu Rongji.
  
• Zhu raised interest rates by almost 150 bps in one and a half year and virtually cut off all bank lending through administrative measure. RMB devalued by almost 40% in the beginning of 1995.
  
• We estimate less than 0.3 pp down in GDP for 2008 due to the fuel and electricity price hike, which is minor and manageable. However, this does increase the risk of greater inflationary pressure, as wage growth is already accelerating.

• Beijing has moved toward the right direction by adjusting the increasingly outdated energy prices, but more are needed and will probably be done, in our view. The current price structure between input and output have not only caused heavy losses to the fuel and power suppliers; some of them may even get into cash flow problems soon.
  
• Under tight price control, inflation was transformed into fuel shortages, which has started to affect the operation of the economy through power interruptions and paralysis of truck transportation.
  
• We believe that Beijing will eventually move towards a complete liberalization of fuel and power prices, but the pace of such a process would depend on inflation. This goal may take two to four years to achieve."

What's worse for Asia than fewer orders from the US?

We get the WSJ in print, but I'm too cheap to also pay for it online (Rupert, are you there? I get FT.com free with my paper...) If you do, you can see the article here.

"Stung by Soaring Transport Costs, Factories Bring Jobs Home Again"

So basically, not only are you seeing inflationary wage pressures in the factories of Asia and the US's "Strong Dollar" so-called "policy" hurting costs on an FOB basis, (though FX translation gains for overseas sales remain the bright spot for US corporates,) NOW you have shipping transport costs driving costs at the CIF level through the roof too.

Net net, not good.


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The Strong Dollar Policy

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We already saw a bit of an impact on service jobs (in India) in this post. I thought it was funny at the time.

The PBOC says: "GrrrrRRR..."

Okay, this is a couple of days late, sorta, but I think it's relevant as we digest this morning's PPI figures from China and await the probably more important CPI numbers due out tomorrow. So, in reverse order:

Whisper (Chinese Whisper?) numbers suggest that May CPI will come in at 7.7% YoY (vs 8.0% currently expected, and 8.5% in April.) Whispers in China of this sort generally turn out to be quite accurate.


Meanwhile, this morning we saw the PPI numbers come in better (lighter) than expected. From CLSA:

"China reported 8.2% YoY Producer Price Index (ie the output PPI) for May, which outpacing April's 8.1% although slightly lower than market consensus of 8.3%. Meanwhile, May's Purchasing Price Index (ie the input PPI) reached 11.9%, 10bps higher than April's 11.8%, which may imply input costs are rising and only incompletely being passed on resulting in margin squeeze that we are seeing in company data."

And last Saturday, ahead of a long weekend ("take THAT, markets - hahaha...") we had the PBOC come up with not one, but two consecutive 50bp Reserve Requirement Ratio hikes. From Sherry Lin at Credit Suisse, in a note on the China banks this morning:

"We maintain that the RRR hike per se has limited negative impact on earnings of Hong Kong-listed China banks, which operate with relatively liquid balance sheets. We estimate that every 50 bps increase in RRR will reduce Hong Kong listed China banks’ earnings by less than 1%."

In other words, as I read it, the Chinese banks are not likely to be hit by this 100bp increase in the RRR (partly as the PBOC actually pays interest on it, I believe) as they are liquid - and given that they are liquid, it's unlikely to lead to a serious easing in their absolute capacity to lend. ("In the near term, China banks’ earnings will be more vulnerable to a sustained correction in local stock markets" as Sherry also notes.) The PBOC knows this and seems to be sending a message to the markets that its position continues to be that runaway inflation will not be tolerated...

BUT given softening industrial data (CS economist Dong Tao's comments here) and a massive natural disaster to cope with (and the fast approaching Beijing Olympics too) stamping hard on the brakes and driving economic growth through the floor is also clearly not the aim.

Still cautious on China consumer names, but surprise could be to the upside, especially given the sell-off post RRR/ long weekend/ Friday US tanking.


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The FT's Lex column suggests that the latest RRR move is to stem capital flows, of which a large part may be speculative, and that the next move may be to control capital inflows directly... and implicitly agreeing with my view that the PBOC is NOT trying to drive down China's growth.

Six(-ish) weeks on, the PowerTech tug of war continues...

So, who's winning the CLSA vs Tom DeMark (amateurishly interpreted by yours truly) Clash of The Titans now? (See April 23rd entry.)


Argh! Neither of them! I can't wait!

Macro Man: The ECB's Vicious Circle

Macro Man: The ECB's Vicious Circle

Jobs for the boys (or not)

So the US cratered on Friday on oil's record rise. Or maybe not. The US cratered on Friday on a US$ collapse after Trichet's Euro-Hawk comments (on... er... Thursday.) Or maybe not. The US cratered on Friday on confirmation of weak US growth given high and rising unemployment rates, and hence limited room to raise rates after all, despite the opposing view from the ECB and hence a weak Dollar leading to a boom in (further) inflationary-spiral stoking energy and commodity prices, despite climbing unemployment... ie stagflation. Eek! Maybe.

• Unemployment: 5.5% vs consensus 5.1%, up from 5.0% in the previous month
• Change in May non-farm payrolls: -49k vs consensus -60k, up from -28k (revised from -20k)
• Change in May manufacturing payrolls: -26k vs consensus -40k, up from -49k (revised from -46k)

Or maybe not!!

Now we have JP Morgan's strategists out with a FLASH! comment that the markets have got it all wrong... Here's their argument, in short:

• The Dow Averages ALWAYS 30% gain in the next 12-months anytime UE rate rises more than 50bp
• Anomaly in the data? A 50bp jump in Unemployment is usually a result of 150k jobs lost…A 50bp rise in UE rate usually results in 150k jobs lost, not 49k. This is shown Our Economics team views the 50bp surge in the UE rate as driven by a rise in teen-age labor force participation (i.e., summer seasonal) and not really due to a decrease in jobs.
  
• While US Economic data is the most reliable globally, we occasionally see statistical aberrations.
  
• The bottom line? The Markets are over-reacting. The big picture, in our view, is that jobs are holding in. The fiscal stimulus is going to boost June data. Oil remains the big overhang, but the US household and US Corporates are reducing fuel consumption. We are buyers of stocks on this sell-off.

OK - sounds reasonable enough on the surface, but aren't there always a bunch of teenagers out there looking for a job this time of year... or have I missed a change in the US academic calendar? Statistical anomaly - sure, it might be... or it might not... a bit hard to make an investment decision on that, though. And as for the payroll numbers coming in less bad than expected , leaving out how a negative figure is still a negative figure, and focusing on expectations:

• Change in May non-farm payrolls was 11k better than expected
• But April was revised 8k worse too
• So net 3k better?
• Big %$#-ing deal.

Knowing how jittery the markets are, it's likely that the market selloff was, indeed, a bit of an overreaction last Friday. However, net net, I remain cautious.


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I suspect the original reason for JP coming up with this note is precisely because the markets tanked... everybody gets read when they come up with a note explaining why the markets were wrong in gapping down/ up on volume... Everybody wants to be The Smart Money, after all, not just part of the dumb herd... everybody wants that (all at the same time!)

China inflation: Bang a Gong

(Get it On.)

JP Morgan's Frank FX Gong (Wharton PhD, ex-NY Fed... and his real initials) wrote in a very good piece last night on what to worry about in China and why we should not panic about food price inflation.

• China's food inflation (the key contributor to China's headline inflation) is very different from the global food inflation;
• The global food inflation has been led mainly by cereal (wheat, corn & rice) while China's food inflation has been mainly led by pork/meat;
• China is a net exporter of cereal (rice, wheat, & corn), while the global meat/pork prices are much cheaper than China's domestic price and China has not been a big importer of meat/pork despite higher domestic meat/pork inflation;
• No need to panic on China's food and headline inflation: if China really wants to kill the food inflation and bring down the headline CPI inflation, they can simply start to import meat/pork from the global market - especially so with a faster appreciating RMB. China absolutely has no need, and would NOT need to kill food inflation by hiking interest rates.

(Chart: JP Morgan)

Risk appears to be to the upside for refiners and IPPs in terms of the possible lifting of price controls if China's CPI figures, due late next week, remain under control. But I can't really understand why China is not ALREADY trying to bring food inflation down - food remains a significant part of rural household expenditure doesn't it? Is it just banking on a base effect kicking in during 2H to lower headline figures? (Peasants can't eat base effects!) Or perhaps the government wants a bit of pain on the cost/ margin front to squeeze out waste and inefficiency??

Slightly different from the Credit Suisse conclusion (from the Purchasing Managers Index input price trends) of widespread inflation kicking in that I mentioned on Monday. Looks like a fine line the PBOC is walking, if you ask me. On balance, I'm sticking to more accommodative policy for the time being.

Annoyingly, I can't figure out how to find his actual note on the MorganMarkets website to give you a document pull link. Maybe it'll come up on his page later in the day. (Even more irritating than Credit Suisse's site, but at least, unlike Merrill's, still works - just about - on Firefox.) AND yes, of course I'll e-mail you a copy if you ask nicely!!

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Earlier piece by Frank's colleague, Jing Ulrich, in which she points out China's shift in concern from inflation to growth. I also mentioned it in an earlier post, but hers is better!

An affordable sandwich in London by 2013

I'm not an avid (rabid?) Torygraph reader, but some interesting articles appearing there on UK housing and the economic beating the country's going to get as a result of its own stiff upper-lipped version of the sub-prime crisis.

1) The economy is going to get impacted, on a relative basis, more than any country in the world, according to the IMF:

"The IMF expects British banks to lose more than £20 billion - equivalent to three per cent of gross domestic product (GDP) - from the international meltdown in sub-prime mortgages. American banks, which had been thought to be bearing the brunt of the credit crisis, will lose £72 billion - equivalent to only 1.4 per cent of US GDP... European countries have lost £61.5 billion - 1.7 per cent of GDP. "

2) UK Housing prices... You Goin' Down, Sucka! (Now, there's a good Telegraph-style headline!)

"Many people... are mesmerised by the recent experience of constantly rising prices and they find it difficult to believe that prices could fall when there is such a "shortage" of houses and the demand is so great... What does it mean to say that there is a shortage of housing? A shortage of houses at what price? Without concern for price there is a shortage of Rolls-Royces."

If this goes on for another 5 years (it might) I'll finally be able to afford a sandwich for lunch in central London!

China inflation - chicken feet or Wal-Mart socks?

Contrasting interpretations of data coming out of China today.

Wang Qing at Morgan Stanley notes that "Food Prices in the 1st Week of April Continued to Decline" on a sequential basis. "Meat and vegetable prices experienced the largest drop. Meat prices declined by ...6.5% from the levels of ... the monthly average in March ... while vegetable prices declined by 12.3%." Not much commentary, but obviously positive news, on balance, even though "wholesale price indices ... show that the average prices for agriculture products and vegetables increased by 1.2% and 1.5% compared to the last week of March".

Meanwhile, Credit Suisse's big cheese economist, Dong Tao is reporting today that risk remains to the upside for inflation across the board, with the March Purchasing Manager's Index showing not only strength in the headline and new orders figures (second highest readings since inception 3 years ago) led by infrastructure investments, but also that INPUT PRICES are rising fast... to THE highest level ever. Good sign of a rebounding economy, but part of that is seasonal, part of that is catch-up from the snowstorm. Given inflation risks, he sees rate hikes in 2H08 and 10-12% RMB appreciation vs the USD in 2008.

He writes: "the pressure is all on the inflation front, as input costs continued to surge. While market consensus and the government are focused on food inflation, we see an across-the-board inflation on the horizon. Besides the rising material costs, anecdotally, the wage rate is also rising fast and accelerating, as people’s expectation on inflation has changed. The surge in global food prices does not help the situation. As wage pressure spills over from the manufacturing sector to the services sector, we anticipate a much quicker price hike given that the services sector does have the pricing power and has little room to improve productivity."

On balance, I think the figures are market positive near term. Comments from Wen last week on the importance of economic growth alongside inflation concerns indicates that the govt is aware of the continuing risks to growth, including softer net exports going forward... but food inflation remains the key, and with continued softer data on that front, policy developments may continue to surprise the market on the upside for the time being.