China Credit and Global Inflationary Dynamics

By Doug Noland

Credit Bubble Bulletin: China Credit and Global Inflationary Dynamics

February 14 – Bloomberg: “China added more credit last month than the equivalent of Swedish or Polish economic output, revving up growth and supporting prices but also fueling concerns about the sustainability of such a spree. Aggregate financing, the broadest measure of new credit, climbed to a record 3.74 trillion yuan ($545bn) in January… New yuan loans rose to a one-year high of 2.03 trillion yuan, less than the 2.44 trillion yuan estimate. The credit surge highlights the challenges facing Chinese policy makers as they seek to balance ensuring steady growth with curbing excess leverage in the financial system.”

Like so many things in The World of Finance, we’re all numb to Chinese Credit data: Broad Credit growth expanded a record $545 billion in the month of January, about a quarter above estimates. Amazingly, last month’s Chinese Credit bonanza exceeded even January 2016’s epic Credit onslaught by 8%. Moreover, as Bloomberg noted, “The main categories of shadow finance all increased significantly. Bankers acceptances — a bank-backed guarantee for future payment — soared to 613.1 billion yuan from 158.9 billion yuan the prior month.”

February 14 – Bloomberg: “China’s shadow banking is back in full swing. Off-balance sheet lending surged by a record 1.2 trillion yuan ($175bn) last month… Efforts by the People’s Bank of China to curb fresh lending may have prompted banks to book some loan transactions as shadow credit, according to Sanford C. Bernstein.”

Yet this was no one-month wonder. China’s aggregate Credit (excluding the government sector) expanded a record $1.05 TN over the past three months, led by a resurgence in “shadow” lending. According to Bloomberg data, China’s shadow finance expanded $350 over the past three months (Nov. through Jan.), up three-fold from the comparable year ago period.

Friday from Bloomberg: “White House Chaos Doesn’t Bother the Stock Market.” Many are confounded by stock market resilience in the face of Washington discord. Perhaps it’s because global liquidity and price dynamics are currently dictated by China, the BOJ and the ECB – rather than Washington and New York. Eurozone and Japanese QE operations continue to add about $150bn of new liquidity each month. Meanwhile, Chinese Credit growth has accelerated from last year’s record $3.0 TN (plus) annual expansion.

February 14 – Bloomberg (Malcolm Scott and Christopher Anstey): “Forget about Donald Trump. The global reflation trade may have another driver that proves to be more durable: China’s rebounding factory prices. The producer price index has staged a 10 percentage-point turnaround in the past 10 months, posting for January a 6.9% jump from a year earlier. Though much of that reflects a rebound in commodity prices including iron ore and oil, China’s economic stabilization and its efforts to shutter surplus capacity are also having an impact.”

China’s January PPI index posted a stronger-than-expected 6.9% y-o-y increase. A year ago – back in January 2016 – y-o-y producer price inflation was a negative 5.3%.  It’s worth noting that China’s y-o-y PPI bottomed in December 2015 at negative 5.9%, the greatest downward price pressure since 2009. In contrast, last month’s y-o-y PPI jump was the strongest since August 2011 (7.3%). China’s remarkable one-year inflationary turnaround was not isolated in producer prices. China’s 2.5% January (y-o-y) CPI increase was up from the year ago 1.8%, matching the peak in 2014.

There are two contrasting analyses of China’s record January Credit growth. The consensus view holds that Chinese officials basically control Credit growth, and a big January confirms that Beijing will ensure/tolerate the ongoing rapid Credit expansion required to meet its 6.5% 2017 growth target (and hold Bubble collapse at bay). This is viewed as constructive for the global reflation view, constructive for global growth and constructive for global risk markets. Chinese tightening measures remain the timid “lean against the wind” variety, measures that at this point pose minimal overall risk to Chinese financial and economic booms.

An opposing view, one I adhere to, questions whether Chinese officials are really on top of extraordinary happenings throughout Chinese finance, let alone in control of system Credit expansion. Years of explosive growth in Credit, institutions and myriad types of instruments and financial intermediation have created what I suspect is a regulatory nightmare. I seriously doubt that PBOC officials take comfort from $1.0 TN of non-government Credit growth over just the past three months.

Continue reading China Credit and Global Inflationary Dynamics

Post-CPI

By Michael Ashton

Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guy or sign up for email updates to my occasional articles here. Investors with interests in this area be sure to stop by Enduring Investments. Plus…buy my book about money and inflation, published in March 2016. The title of the book is What’s Wrong with Money? The Biggest Bubble of All; order from Amazon here.

  • The timing of Yellen’s testimony was useful for her. Given base effects, y/y CPI may drop to 2.1% from 2.2% today. So y’day she >>>
  • >>>could sound hawkish, having a sense that today she’d get a decent CPI. It’s base effects that could drop CPI – but that’s optics.
  • Last Jan, core CPI printed 0.293%. Anything less than 0.23% will cause y/y to tick downward. Feb is also a tough hurdle.
  • But these MAY be tough hurdles because of tricky seasonals. Certainly Jan’s number could be. But this is why we look at y/y.
  • Actually, the BLS revised some of that…core was 0.293% in Jan originally but now comparison is a trifle easier at 0.266%.
  • So revising my prior tweet: anything less than 0.20% will cause y/y to tick downward. Feb’s hurdle will be 0.25%.
  • Well howdy doo. Core CPI +0.31% m/m, far above consensus and pushing y/y to 2.3% (actually 2.26%) when it was expected to fall to 2.1%.
  • That’s a whoops.
  • That’s the highest m/m core in a decade. At least, after revisions have lowered some peaks.

bfmcedd

  • Housing y/y 3.12% from 3.04%, Apparel +1.0% from -0.04%. Medical Care 3.86% vs 4.07%.
  • Last 12 m/m figures from CPI. At least the last 5 look like a kinda scary trend. Probably illusory.

last12 Continue reading Post-CPI

Entering the RINF Cycle

By Michael Ashton

Because I write a lot about inflation – we all have our spheres of expertise, and this is mine – I am often asked about how to invest in the space. From time to time, I’ve commented on relative valuations of commodities, for example, and so people will ask how I feel about GLD, or whether USCI is better than DJP, or whether I like MOO today. I generally deflect any inquiry about my specific recommendations (years of Wall Street compliance regimes triggers a nervous tic if I even think about recommending a particular security), even though I certainly have an opinion about gold’s relative value at the moment or whether it is the right time to play an agriculture ETF.

But I don’t mind making general statements of principle, or an analytical/statistical analysis about a particular fund. For example, I am comfortable saying that in general, a broad-based commodity exposure offers a better long-term profit expectation than a single-commodity ETF, partly because of the rebalancing effect of such an index. In 2010 I opined that USCI is a smarter way to assemble a commodity index. And so on.

When it comes to inflation itself, however, the answers have been difficult because there are so few alternatives. Yes, there are dozens of TIPS funds – which are correlated each to the other at about 0.99. But even these funds and ETFs don’t solve the problem I am talking about. TIPS allow you to trade real interest rates; but when inflation expectations rise, real interest rates tend also to rise and TIPS actually lose value on a mark-to-market basis. This can be frustrating to TIPS owners who correctly identify that inflation expectations are about to rise, but lose because of the real rates exposure. What we need is a way to trade inflation expectations themselves.

When I was at Barclays, we persuaded the CME to introduce a CPI futures contract, but it was poorly constructed (my fault) and died. Inflation swaps are available, but not to non-institutional clients. Institutional investors can also trade ‘breakevens’ by buying TIPS and shorting nominal Treasuries, since the difference between the nominal yield and the real yield is inflation expectations. But individual investors cannot easily do this. So what is the alternative for these investors? Buy TIP and marry it with an inverse Treasury ETF? The difficulties of figuring (and maintaining) the hedge ratio for such a trade, and the fact that you need two dollars (and double fees) in order to buy one dollar of breakeven exposure in this fashion, makes this a poor solution.

There have been attempts to fill this need. Some years ago, Deutsche Bank launched INFL, a PowerShares ETN that was tied to an index consisting of several points on the inflation-expectations curve. That ETN is now delisted. ProShares at about the same time introduced UINF and RINF, two ETFs that tracked the 10-year breakeven and 30-year breakeven rate, respectively. UINF was delisted, and RINF struggled. I lamented this fact as recently as last March, when I observed the following:

“Unfortunately, for the non-institutional investor it is hard to be long breakevens. The CME has never re-launched CPI futures, despite my many pleadings, and most ETF products related to breakevens have been dissolved – with the notable, if marginal, exception of RINF, which tracks 30-year breakevens but has a very small float. It appears to be approximately fair, however. Other than that – your options are to be long a TIPS product and long an inverse-Treasury product, but the hedge ratios are not simple, not static, and the fees would make this unpleasant.”

And so when people asked me how to trade breakevens, when my articles would mention them, I had to shrug and share my distress with them, and say “someday!”

But recently, this started to change. As TIPS late last year awoke from their long slumber, and went from being egregiously cheap to just typical levels of cheapness (TIPS almost always are slightly cheap to fair value), the RINF ETF also woke up. The chart below shows the number of shares outstanding, in thousands, for the RINF ETF.

rinfsoTo be sure, RINF is still small. The float – although float is less critical in an ETF that has a liquid underlying than it is in an equity issue – is still only around $50mm. But that is up 1200% from what it was in mid-November. The bid/offer is still far too wide, so as a trading vehicle RINF is still not super useful. But for intermediate swing trading, or as a longer-term hedge for some other part of your portfolio…it’s at least available, and the increase in float is the most positive sign of growth in this area that I have seen in a while. So, if you are one of the people who has asked me this question in the past: I no longer have a fear of an imminent de-listing of RINF, and it’s worth a look.

He’ll bring them [inflation], and they will love him for it

By Notes From the Rabbit Hole

[biiwii comment: going back to posting select items of my own content here, because… why not?]

I used to make fun of the FOMC rate hike “decision” language in the mainstream media because under the Obama administration and its economic policies overseen by the Fed’s monetary policy, there really was no decision, was there? It was ZIRP-eternity, interrupted by a lone and token rate hike in December 2015 (the Dec. 2016 hike does not count because the transition to a new administration and policy regime was already known; in effect, the Fed has already made its first hike under Trump).

According to the traders who make up the Fed Funds futures, there is no decision tomorrow, either. From CME Group, we have virtually no one predicting two successive rate hikes.

cme fed funds futures

That may or may not be the case. I think everything changed with the election, and the Fed you had before is not the Fed you have today. That Fed was a promoter of inflation and a hands-on supporter of the economy and especially, asset markets. The Fed had kept its implied ‘inflate or die’ mantra and associated monetary policy in place for 8 long years. But now with the country flipped over like an egg onto its sunny side, a new administration has proven it means what it says (beginning with its blunt, heavy handed and in my opinion, misguided delineation of race and religion on immigration policy).

egg

Focusing on the financial realm, what the Trump administration says is it is going to implement is fiscal (as opposed to monetary) policy in the form of tax breaks to corporations large and small, to tax payers, including and especially the wealthy, infrastructure building, including ‘the WALL’ (more symbolic than realistic in my opinion) and environmental and business deregulation far and wide. It is a much more business-friendly environment and keeping pure politics out of it, that is a good thing, economically.

In short, what is described above is a scenario where the administration has grabbed the policy burden from the Fed and thus, the Fed is free to do as it pleases now, no longer playing politics. The Fed knows, just as you and I know, that the indirect, and maybe even unintended aim of the Trump administration is to promote inflation. That is because they intend to promote economic growth through policy, just has the Fed has been trying to do for the last 8 years under Obama. By one method or the other, it is in the ‘promotion’ that inflation lives.

Continue reading He’ll bring them [inflation], and they will love him for it

The Fed Needs More Inflation Nerds

By Michael Ashton

Earlier today I was on Bloomberg<GO> when the PCE inflation figures were released. As usual, it was an enjoyable time even if Alix Steel did call me a ‘big inflation nerd’ or something to that effect.

The topic was, of course, PCE – as well as inflation in general, how the Fed might respond (or not), and what the effect of the new Administration’s policies may be. You can see the main part of the discussion here, although not the part where Alix calls me a nerd. A man has some pride.

My main point regarding the PCE report was that PCE isn’t terribly low, but rather right on the long-run average as the chart below (all charts source Bloomberg) shows. Of course, PCE has been lagging behind the rise in CPI, but because it had been “too tight” previously this isn’t yet abnormal.

spread

However, in the interview I didn’t get to the really nerdy part. Perhaps my ego was still stinging and so I didn’t want to highlight the nerdiness?[1] No matter. The nerdy part is that the reason PCE is low is actually no longer because of Medical Care, but because of housing. This next chart plots the spread of core CPI over core PCE, through last month’s figures, versus Owners’ Equivalent Rent (OER).

Continue reading The Fed Needs More Inflation Nerds

Inflation: Here’s What the Wrong Way Bet Looks Like

By Elliott Wave International

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Post-CPI

By Michael Ashton

Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guy or sign up for email updates to my occasional articles here. Investors with interests in this area be sure to stop by Enduring Investments. Plus…buy my book about money and inflation, published in March 2016. The title of the book is What’s Wrong with Money? The Biggest Bubble of All; order from Amazon here.

  • Last CPI of 2016…fire it up!
  • Core +0.23%, a bit higher than expected. Market was looking for 0.16% or so.
  • y/y core CPI rises to 2.21%. The core print was the second highest since last Feb.
  • For a change, the BLS has the full data files posted so brb with more analysis. Housing subcomponent jumped, looking now.
  • Just saw this. Pretty cool. Our calculator https://www.enduringinvestments.com/calculators/cpi.php … pretty cool too but not updated instantly.
    • BLS-Labor Statistics @BLS_gov: See our interactive graphics on today’s new Consumer Price Index data http://go.usa.gov/x9mMG #CPI #BLSdata #DataViz
  • As I said, housing rose to 3.04% from 2.90% y/y. Primary Rents jumped to 3.96% from 3.88%; OER 3.57% from 3.54%.
  • Household energy was also higher, so some of the housing jump was actually energy. But the rise in primary rents matters.
  • Will come back to that. Apparel y/y slipped back into deflation (dollar effect). Recreation and Education steady. “Other” up a bit.
  • In Medical Care, 4.07% vs 3.98%. That had recently retraced a bit but back on the + side. Drugs, Prof. Svcs, and Hospital Svcs all +
  • Medicinal drugs. Not a new high but maybe the retracement is done.

drugs

  • Core services up to 3.1% from 3.0%; core goods -0.6% vs -0.7%.
  • That’s consistent with our view: stronger USD will keep core goods in or near deflation but it shouldn’t get much worse.
  • The dollar is just not going to cause core deflation in the US. Import/export sector is too small.
  • Core ex-housing rose to 1.20% from 1.12%. Still not exactly alarming!
  • Not from this report, but wages are worrying people and here’s why:

atlfedwages Continue reading Post-CPI

Why Central Banks Can’t Make Inflation, and Therefore Recovery

By Jeffrey Snider of Alhambra

Inflation in China slowed somewhat in December, as the Consumer Price Index decelerated to 2.1% from 2.3% in November. Very much like in the US, Europe, and Japan, the CPI level in China continues a lengthy stretch significantly below the official monetary target. For China, the PBOC has set 3% as its definition of “price stability.” The last time inflation was at that level was for November 2013, meaning that for the next thirty-seven months the central bank has been unable to achieve its basic mandate.

The measures it has deployed to try and do so have been catalogued here in this space for some time, most recently yesterday. Given the PBOC’s balance sheet construction, it is quite clear that as far as RMB liquidity has been concerned there has been an intentional program of expansion.

As noted yesterday, this is similar in type to balance sheet expansion undertaken at other central banks, though, it should be pointed out, far less in terms of size (so far). Under announced QE’s in any of the US, Europe, or Japan, balance sheet expansion of varying sizes and durations had similarly limited effects (meaning none) on inflation. In the US, the PCE Deflator has been less than the Federal Reserve’s 2% target for a ridiculous 55 months despite a balance sheet of $4.5 trillion. The only explanations Fed officials have offered is either IOER or “transitory” effects of “other” matters, including oil prices, that are still somehow conferred that qualification as if applicable after just about five years.

From the lack of plausible account for their failure we can easily and reasonably infer unseen monetary factors (they remain unseen primarily because if they were recognized it would be a simultaneous admission of dereliction of duty). Unlike the Fed’s balance sheet, however, the PBOC’s actually displays these same factors, if only in part. In other words, the full account of China’s central bank on the asset side has been rapid expansion in RMB terms the past few years, but greater contraction in “dollar” terms coinciding and even preceding it.

Thus, what the Chinese have faced during that time is really no different than what stymied other central banks in less explicit form. They have all been overwhelmed by “dollars” that at least for the PBOC are in part included directly in the accounting for China’s functional monetary basis. The primary difference is that China’s “dollar” problems are of a more recent development, and so its increasingly more forceful response is likewise comparatively younger.

So far, however, it has achieved mostly the same results. So even if it isn’t technically balance sheet expansion or QE, that is only because the Chinese are more explicit about functional money and the overall impact of comprehensive contraction. If the Federal Reserve’s balance sheet were combined with integral parts of dollar markets, too, it might look strikingly similar.

Because of that, it is not surprising that inflation has behaved similarly in China as everywhere else QE was tried. The “dollar”, more open on that side of the Pacific, is visibly larger than the monetary policies meant to offset it. Though we can’t directly observe the dynamic in other places, that we can in China provides an explicit example of what the global economy remains up against.

CPI’s Positive Numbers

By Jeffrey Snider of Alhambra

The CPI shows once more the difference between meaningful change and the same sorts of positive numbers that have populated the last five years

Consumer prices accelerated again in October 2016, with the overall CPI calculating a 1.64% inflation rate. That is up from 1.46% in September, and the highest since October 2014. The reason is energy prices. For the first time in over two years, the energy component of the CPI was positive year-over-year. Having been as low as -20% in early 2015, and almost -11% this July, the difference in energy is obvious on the overall index.

abook-nov-2016-cpi-energy abook-nov-2016-cpi-v-pce-deflator

In fact, energy prices mainly determine the marginal changes in the total CPI. Though price differences are far more extreme in energy, their scaled effects on the whole index are very clear.

All that means is that consumer prices, according to the CPI, are back to where they were in 2012, 2013, and 2014. In other words, without the big drag from oil and other commodities, the CPI is still shallow. The 2-year change is just 1.81%, bringing into focus the highly unusual nature of this current period. In all prior periods, a sharp downturn was followed by an equally sharp upturn, prices as well as output. These are simple base effects and little more (and that “more” is where prices are doing more harm rather than reflect recovery).

Toward the end of 2006, for example, the energy component of the CPI fell sharply, down a little more than 10% that October, which had the effect of dragging the overall index down from near 4% to just 1.3%. Just two months later, despite energy prices still lagging, the CPI was back above 2.5% and then near 4% again by November 2007 once oil joined the final, mistaken eurodollar rush.

Continue reading CPI’s Positive Numbers

Inflation 101: Prep School for Preppers

By Danielle DiMartino Booth

Mention Preppies and visions of Izods with popped collars and boat shoes may come to mind. The Official Preppy Handbook, published in 1980, regaled readers with the “merits of pink and green,” instructing that, “socks are frequently not worn on sporting occasions or on social occasions for that matter. This provides a year-round beachside look that is so desirable that comfort may be set aside.”

Reference “Preppers,” on the other hand, and fashion goes out the window replaced by sturdy wears and wares. Gucci is supplanted by the “Bug Out Bag (BOB)” and “Get Out of Dodge (GOOD) Kit.” Modern day survivalists have upgraded their essentials to include electric generators, water purifiers, and several years’ worth of provisions. Who’s to blame them? Go big if you can’t go home.

Inflation 101: prepschool-for-preppers

In the blink of an election, the two worlds of Preppy and Prepper have collided. Rather than the possibilities being remote as doomsday scenarios suggest, potential outcomes are conspicuous in their size, abundance and mystery. Hence the logic when yours truly received this warning from a reader logged into a posh investment website in the wake of last week’s upset win for Donald Trump: “Buy brand name defensive ammo for handguns. It will hold its value better than gold. It is an inflation hedge. Buy a box every month. Diversify the calibers.”

Such sophisticated language and tone for a disturbingly dire forecast. And his admonitions came before the tizzy the bond market has thrown in recent days in anticipation of all manner of fiscal stimulus. The question on everyone’s mind is how far does the backup in bond prices in anticipation of inflation have to run?

Continue reading at TalkMarkets →