General Macro Observations

[qldfrog]

http://www.brisbanetimes.com.au/business/property/brisbane-office-vacancies-reach-new-high-20140807-101k8e.html
Worse than during the GFC, back to the level of the recession we had to have
This matches what I see on a day to day: empty offices and retail in the CBD;
I have a tweaked vision obviously focussed on IT/Mining/Engineering projects so BA, PM and associated roles but for now years (ie end of mining boom 2 or so years ago) it has been a downhill slide in term of available positions as no new work arrive and existing projects get completed.
None of these type of jobs ever being recorded in tge jobless rate, yet having a very high economic impact.
IMHO, what we see now is the after effect of what happenned when these roles were lost months ago
This will explain my gloomy forecast for the next couple of years; hoping I am wrong.

 

[sydboy007]

1.Agree that the rise in unemployment was partly due to the change in participation rate, but I cannot tell if this would have happened anyway or was driven by change in definition. ABS does not think it had much impact on the participation rate figure, but small variations there impact unemployment. The market reacted adversely to this on the headline, but I am puzzled. Hours worked was up 0.9% sa. and there was a healthy move from part-time to full time employment. So the underlying is alright but it doesn't show through to the employment figure quite yet.

2.The market was somewhat surprised. The 1 year yield didn't move much because the RBA is expected to hold rates steady for a year. The two and three year bond yields each declined by 7bps. That's a move of some note and more or less implies that the chances of a rate rise in 2 years time has moved from near certainty to unlikely. Looking out three years, rates have moved from implying an additional 25bps rise and the further ~25% of a second tightening to less than a 50% chance of a single rate rise of 25bps. In other words, we are looking at a flat RBA official rate for at least the next three years.

1. My understanding of the employment figures was that total employment decreased by a seasonally adjusted 300 to 11,576,600 in July. The decrease in jobs was driven by a 14,800 decrease in part-time jobs, partly offset by a 14,500 increase in full-time jobs. Aggregate monthly hours worked decreased by 14.8 million hours (0.9%) to 1 ,610.7 million hours. That's a significant fall in hours worked - maybe a usual fall this time of year, but still a significant income drop for the economy.

The participation rate also increased by 0.1% to 64.8%, which is part of the reason why the unemployment rate rose, and softens the blow of the poor headline result, but since the GFC we've had roughly a 1.5% fall in the participation rate. How much of that is the pensioner boom and how much is discouraged workers? Anecdotally my friends in the retail industry are finding it hard to get enough work, so the level of underemployment is likely to be high as well, and reflects the large fall off in hours worked.

2. Fits with the fall in bank 3 year mortgage rates.

 

[DeepState]

Aggregate monthly hours worked decreased by 14.8 million hours (0.9%) to 1 ,610.7 million hours. That's a significant fall in hours worked - maybe a usual fall this time of year, but still a significant income drop for the economy.

You must have gotten the final version. I was reading off a pre-release which obviously still had a few typos in it.

 

[sydboy007]

another step or 3 down the road to human obsolescence

http://www.tomsitpro.com/articles/ibm-cornell-neuron-neurosynaptic-supercomputer,1-2103.html

BM, in collaboration with Cornell Tech and iniLabs, has announced the first neurosynaptic computer chip with one million programmable neurons, and 256 million programmable synapses, capable of 46 billion synaptic operations per second. The chip is about the size of a postage stamp and, IBM claims, is one of the largest complimentary metal-oxide-semiconductor (CMOS) chips ever made.

... Because of the neurosynaptic chip's communication and integration capabilities, multiple chips can scale out easily, much like a human cortex.

The new neurosynaptic chip, in addition to its impressive computing power claims, is highly energy efficient. The chip holds 5.4 billion transistors, thanks to the CMOS architecture, and, according to the IBM press release, “while running at biological real time, it consumes a miniscule 70mW – orders of magnitude less power than a modern microprocessor.” This is about the equivalent of a hearing-aid battery.

Additionally, unlike traditional computer chips that run and consume power all the time, the neurosynaptic chip is 'event-driven' and functions only when it is needed.

 

[Smurf1976]

Anecdotally my friends in the retail industry are finding it hard to get enough work, so the level of underemployment is likely to be high as well, and reflects the large fall off in hours worked.

I know quite a few people who were doing lots of overtime in the past but these days it's virtually zero Meanwhile they're not overly busy during normal working hours either.

Further, there seems to be a general "when someone leaves, don't replace them" policy among quite a few employers as well, they're basically avoiding putting off staff as such, by hoping that natural attrition does it.

This situation is basically underemployment in a physical work sense, whilst being lucky enough to still be being paid a full time wage at least for the time being. One resulting issue is that workload would need to pick up quite a lot before they'd need to look at hiring anyone new, if it was just a modest increase then current staff would simply work harder. The term "jobless recovery" comes to mind there.

 

[sydboy007]

I know quite a few people who were doing lots of overtime in the past but these days it's virtually zero Meanwhile they're not overly busy during normal working hours either.

Further, there seems to be a general "when someone leaves, don't replace them" policy among quite a few employers as well, they're basically avoiding putting off staff as such, by hoping that natural attrition does it.

This situation is basically underemployment in a physical work sense, whilst being lucky enough to still be being paid a full time wage at least for the time being. One resulting issue is that workload would need to pick up quite a lot before they'd need to look at hiring anyone new, if it was just a modest increase then current staff would simply work harder. The term "jobless recovery" comes to mind there.

My company has off shored 500+ jobs this year.

They moved a few to Tassie but now decided to stop them being 24 hours.

Starting to wonder when they'll decide my team is too expensive.

 

[Garpal Gumnut]

My company has off shored 500+ jobs this year.

They moved a few to Tassie but now decided to stop them being 24 hours.

Starting to wonder when they'll decide my team is too expensive.

That does concentrate one's mind. Look to your own health and wellbeing.

gg

 

[sydboy007]

That does concentrate one's mind. Look to your own health and wellbeing.

gg

It surely does. I look at some of the staff in my office and think to myself why would you upgrade to a new house and much bigger mortgage when you know the new management has moved from being customer focused to bean counters.

Being debt free is a safety net I'm enjoying, but I have to admit I'd like to job to last a couple more years so my savings is sufficient to seriously look at selling up and moving overseas.

 

[sydboy007]

doesn't bode well for the retail sector, especially since the $ hasn't really fallen yet.

 

[sydboy007]

http://blog.alliancebernstein.com/index.php/2014/08/12/trouble-on-the-margin/

Profitability at a Peak
As a result, profit margins have soared. Net profit margins more than doubled from 4.6% in March 2009 to 9.8% at the end of the first quarter. And based on our estimates, margins could come in just shy of 10% when all the second-quarter results are in (Display).

Sounds great, so what’s the rub? The problem is that, historically, margins like these have marked a peak rather than a normal level of profitability. And the factors that have driven margin expansion to date are unlikely to persist.
Margins gains have benefited from three key drivers: labor efficiencies, lower depreciation and amortization, and reduced interest expense. Although we are not forecasting a drop in margins, we think that it has become incrementally more difficult to make further progress on these fronts for several reasons.

 

[sydboy007]

Looks like China is getting serious about reducing the use of coal. Certainly not a good scenario for coal and iron ore. Will be interesting to see if Adani can get the Carmichael Coal Mine and Rail Project to fly with investors.

http://www.reuters.com/article/2014...-29605821&mc_cid=742a2e77a8&mc_eid=73f8e9ca55

China's capital Beijing cut total coal consumption by 7 percent in the first half of 2014 as part of its efforts to tackle smog, the official Xinhua news agency reported, citing data from its environmental protection bureau.

Under new plans to integrate Beijing with Hebei and the port city of Tianjin, the region will be treated as a "single entity" with unified industrial and emission standards.

Hebei said last week that it had cut total coal consumption by 7.53 million tonnes in the first half of 2014, amounting to just over half of its target of 15 million tonnes for the year.

The province agreed last year to cut total coal use by 40 million tonnes by 2017, and it is also planning to shed at least 60 million tonnes of excess steel capacity over the same period.

 

[sydboy007]

China looks to be getting ugly in terms of finance - doesn't bode well for Aussie iron ore and coal

July Credit stats out. New yuan loans were 385.2bn versus 780.0bn expected and and prior was 1080.

Aggregate social financing was 273bn yuan versus 1500.0bn expected and prior was 1970bn implying that shadow banking credit contracted 112bn in the month - a contraction of some 40%+

M2 decelerated sharply to 13.5% versus expected 14.4% and prior of 14.7.

 

[DeepState]

China looks to be getting ugly in terms of finance - doesn't bode well for Aussie iron ore and coal

July Credit stats out. New yuan loans were 385.2bn versus 780.0bn expected and and prior was 1080.

Aggregate social financing was 273bn yuan versus 1500.0bn expected and prior was 1970bn implying that shadow banking credit contracted 112bn in the month - a contraction of some 40%+

M2 decelerated sharply to 13.5% versus expected 14.4% and prior of 14.7.

This is important.

Do you regard this as a sudden stop or a seasonally driven anomaly that will correct itself? Or is it something different which is less alarming like representing reduced debt financed cross border financial activity to some degree. PBOC site is useless...

Lowest print since Feb 2010.

ASX Materials sold off a bit and AUD fell before more than recovering vs USD. Nothing too telling either way.

No material developments on the status of China Gov credit, Standard Chartered or Bank of China leading into this. Does not seem to represent concerns about financial stability. The Chinese Gov curve has been steepening and, despite no change in stance of the short end, could be contributing to reduced demand for credit. Activity indicators (YoY) did not show anything particularly special.

Credit intensity of growth recently has been increasingly high....does the inverse occur? That is, reduced extent of credit expansion will have limited impact of the rate of growth?

For Australia, China will be shuttering a stack of steel mills which are uncompetitive. I do not know if the reduction of demand for coal and iron ore will come from retirement of domestic sources - preserving Australian demand. Depending on which way this occurs, the most recent developments could swing from negative to positive. That is, a reduced reliance on wasteful credit and unproductive resource sets up a better functioning economy whose demand for Australian bulk products remains pretty much intact and more sustainable. Or not.

Which way does this break?

 

[sydboy007]

This is important.

Do you regard this as a sudden stop or a seasonally driven anomaly that will correct itself? Or is it something different which is less alarming like representing reduced debt financed cross border financial activity to some degree. PBOC site is useless...

Lowest print since Feb 2010.

Which way does this break?

If the Chinese Govt is serious about rebalancing then this has to continue not just for a few months but for years.

http://www.businessspectator.com.au/article/2014/8/13/china/middle-income-trap-will-haunt-china

China has done things differently. Even when it was a very poor country, with GDP per capita levels one-tenth that of the US, it embarked on a huge fixed investment splurge. In the 1980s, fixed investment as a proportion of GDP was already around 33 per cent of GDP, rising to just under 40 per cent of GDP by the late 1990s, and about 45 per cent of GDP during the middle of the last decade.

As mentioned, China had already reached those levels by the late 1980s at a time when it was still immensely poor. But in case readers still thought China's fixed-investment model can continue for some time yet, fixed investment as a proportion of GDP has now reached around 50 per cent -- unprecedented for any significant length of time for any economy in history.

Take the last decade during which China's official GDP increased by around 162 per cent. Of this 162 per cent increase, additional labour inputs have contributed about 6 per cent. But an enormous 135 per cent can be attributed to fixed investment, according to World Bank figures, with total factor productivity (using labour and/or capital more productively) contributing to only 20 per cent of the 162 per cent growth. This means that fixed investment has been behind more than 80 per cent of China's GDP growth over the past decade.

But the more likely reality is that economic gravity is already having its effect. After all, the amount of capital input needed to produce one additional dollar of output (the capital-output ratio) increased from 2:1 in the 1980s, to about 4:1 in the 1990s, and was well over 5:1 in 2011, according to OECD figures. At the end of 2012, the ratio was 5.5:1.

The above makes me think that a very bumping landing is heading China's way, and towards Australia as well. Our main exports will definitely overshoot on the way down. Our hollowed out tradeables sector wont be able to make up for the shortfall.

I would also think that the increasing issues China will face with their investment lead model starting to fail because of the enormous debts that are building up will make the Govt less likely to allow the private sector to expand and generate higher returns on investment, as well as see that investment is allocated far more efficiently. I'm not confident that China will escape the middle income trap without significant political and market based reforms, but the vested interests will fight doggedly to keep change to a minimum.

 

[DeepState]

If the Chinese Govt is serious about rebalancing then this has to continue not just for a few months but for years.

http://www.businessspectator.com.au/article/2014/8/13/china/middle-income-trap-will-haunt-china

Thanks for the article. An interesting read. I'll come back with questions because you are seriously tapped in with info sources and this is a really important and definitive issue for China and Australia.

In relation to the article, the author makes some interesting observations about the capital intensive nature of Chinese growth. These have been widely observed, including the reducing marginal returns from such. What I found interesting was his drawing upon Singapore, Taiwan, South Korea and Japan as examples of how Asian countries managed to escape the middle-income trap and as an example of how China's political economy has much to do in order to emulate this:

For the other East Asian economies that broke past the middle-income barrier, they had already entrenched many liberal civil and economic institutions by the time they reached middle-income status and did not require radical changes to their political and economic systems. This partly explains why they enjoyed a relatively smooth and non-violent transition to political pluralism and eventually democracy.


Singapore is not a democracy in anything but name. Its economy is heavily managed.


Taiwan's political system:




Korea's economy is strongly influenced by a oligopoly of Chaebols which prevent full price discovery and transparency. Its political system:




Japan is mired in economic malaise and has been for decades. In part, this is due to the manner in which the Keiretsu clusters prevent full price discovery from taking place and, hence, capital flows. In terms of a functioning democracy, here is a list of their prime ministers with tenure. Apart from Koizumi, the shelf life of the average Prime Minister since the Crisis is probably shorter than that for a packet of chips:




Whilst China's arrangements may not compare favourably to Western Democratic ideals, I'm not too sure that the effectiveness of the regime is as bad as the author might be implying when comparing it to the East Asian break-through economies.

 

[sydboy007]

Thanks for the article. An interesting read. I'll come back with questions because you are seriously tapped in with info sources and this is a really important and definitive issue for China and Australia.

Yes, most of the Asian economies are nothing like western democracy, but I'd say China is still more towards the command and control side than letting the market decide. The rest of Asian is a bit closer to the private sector dominating the economy, but still with a lot of Govt direction.

In some ways the Chinese can make the tough choices easier because the Govt doesn't have to worry so much about being voted out. They still have to worry that if they do stuff up badly that the population takes to the streets. That's the advantage with democracy. We use the ballot box to show our displeasure rather than rising up to overthrow our leaders.

I think the take away point is that either the Chinese take their medicine now and suffer slower growth and let the economy move towards consumption as the growth engine, or they can kick the can a few more times like they have since the GFC, but each time gets more expensive, and the next round of medicine is just that bitter and takes longer to work.

Whatever happens the gravity defying iron ore miners share prices are going to have to take a serious pounding, and I'd not be surprised to see iron ore fall towards $50. I don't believe the Chinese will allow as much of their production to close down as being forecast, especially when they'd be reliant on a strong ally to the USA.

I'd say anyone above vale on the cost curve is facing extinction over the next 18 months.

 

[DeepState]

1. Yes, most of the Asian economies are nothing like western democracy, but I'd say China is still more towards the command and control side than letting the market decide. The rest of Asian is a bit closer to the private sector dominating the economy, but still with a lot of Govt direction.

In some ways the Chinese can make the tough choices easier because the Govt doesn't have to worry so much about being voted out. They still have to worry that if they do stuff up badly that the population takes to the streets. That's the advantage with democracy. We use the ballot box to show our displeasure rather than rising up to overthrow our leaders.

2. I think the take away point is that either the Chinese take their medicine now and suffer slower growth and let the economy move towards consumption as the growth engine, or they can kick the can a few more times like they have since the GFC, but each time gets more expensive, and the next round of medicine is just that bitter and takes longer to work.

3. Whatever happens the gravity defying iron ore miners share prices are going to have to take a serious pounding, and I'd not be surprised to see iron ore fall towards $50. I don't believe the Chinese will allow as much of their production to close down as being forecast, especially when they'd be reliant on a strong ally to the USA.

I'd say anyone above vale on the cost curve is facing extinction over the next 18 months.

1. I found the following two charts interesting in their contrast (had posted it previously in End of the China Bull). Although economic growth is generally slightly hindered by lack of political freedom, it is a somewhat flat relationship (flatter than I would have thought). The difference to the Asian experience in isolation is stark.





2. Agreed. It will be interesting how consumption and services are going to take up the slack from government led investment over time. Will there be a flare up in the banking system? Does the reduction of support from credit growth cause a sudden shift in demand or asset prices? and so much more.

3. Going to have to leave this for tomorrow or so.

Thanks

 

[CanOz]

the recent econo numbers out of EU and the US are getting quite soft....anyone expect the world bank to lower growth forecasts again?

 

[sydboy007]

the recent econo numbers out of EU and the US are getting quite soft....anyone expect the world bank to lower growth forecasts again?

• Russia heading to recession - will curb their ability to invest inthe oil sector - will be noticable in a few years as their production keeps falling.
• Iraq - could see 2-3MB/d of oil impacted depnding on how things go with ISIL.
• Ebola in West Africa - if it continues to spread I can see this being a big negative to growth as well since a lot of western companies are bringing back workers so resource projects are slowing down. Potential black swan event if something dramatic happens.
• Debt levels in most countries aren't improving - still getting worse in plenty

I've not seen anything to make me think we're on a sustainable growth path as yet. With most of the world able to access near free money, yet growth isn't much above inflation in a lot of countries, it doesn't make me confident.

 

[DeepState]

So back to China for a tick,

Substantive drop in issuance of bank bills explains a lot of the decline. Possible wash out from higher June figures might be responsible for some of the gap too.

What is going on with issuance of bank bills and associated drop of shadow banking? Short term financing has to be rolled unless the economy suddenly stopped. If the economy did not suddenly stop, it could be the result of disintermediation of the shadows which doesn't do much to the economy. Would not take much to get this type of result given the size of the outstanding.

Some mention that longer term loans did alright.

So, is this demand destruction, supply reduction, washout from prior period, accounting chicanery via disintermediation....?

Market doesn't seem to care. Music plays on.