China's debt fueled recovery brings distortions; FDI up in China but outbound investment down; US deficits swell to dangerous levels; UST 10y at 0.67%; oil down and gold unchanged; NZ$1 = 66.7 USc; TWI-5 = 69.7

China's debt fueled recovery brings distortions; FDI up in China but outbound investment down; US deficits swell to dangerous levels; UST 10y at 0.67%; oil down and gold unchanged; NZ$1 = 66.7 USc; TWI-5 = 69.7

Here's our summary of key economic events overnight that affect New Zealand, with news the Chinese economy may be powering the meager economic activity the world has right now, but it is just a debt-fueled 'recovery'.

And their economy is taking on much more debt. New yuan loans rose in August at their fastest pace in nearly three years, adding almost +NZ$800 bln in just one month.

And although car sales in August reached almost 2.2 mln, the world's largest car market is still struggling to move "New Energy Vehicles" (electrics and hybrids). In August they sold 109,000, so only less than 5% of Chinese cars are electric. This is despite crowing that they rose almost 25% in August from a year ago. China sells about 21 mln cars a year to claim the #1 spot as the "world's largest" car market and far more than #2 USA (17 mln per year).

China needs rising car sales, especially for its steel industry. But the country's steel exports have been subject to 15 new anti-dumping investigations in the first nine months of this year, more than all of last year. Other countries bristle at their growing dominance. Thailand is the latest to take action against the Chinese onslaught.

And while China is emphasising exports, foreign firms are raising their investment in the country, with FDI up almost +19% in August 2020 compared to the same period a year ago.

But outbound investment from China isn't as enthusiastic these days. And one place in particular the Chinese are pulling back from is Australia. Four years ago it exceeded NZ$20 bln. Last year under NZ$3 bln. The prospects this year are for lower again.

In Indonesia, their capital Jakarta is locked down with 11 mln people restricted to their homes for at least two weeks, as the pandemic bites fiercely there. Hospitals are swamped. Seaborne escapes to Australia will worry Canberra.

In the US, the monthly budget statement from the US Treasury revealed another huge -US$200 bln deficit in August, taking the twelve month total to a new record high of just on -$3 tln. Given that the annual rate of GDP is now just under nominal $19.5 tln, that is a Federal deficit of -15.4% of GDP, a staggering level. And that takes the total of US debt held by the public (ie: excluding interagency debt) to over US$20.8 tln. So the annual new deficit added almost 17% to that load in one year. And the US Administration not only did nothing to deal with this load, it actually made it worse. Even at tiny interest rates, the interest cost load amounts to $537 bln per year in 2020. If rates ever rise, this cost will be toxic, and a rise to an average interest rate of 3% will consume more of their tax revenues than their Defense Department, and nearly half of their enormous DHHS (welfare) budget.

American core inflation rose a bit more than expected in August, now up +1.7% in a year. Not included in that core inflation reading is food that was up +4.1% and petrol that was down almost -17%. But included are two items in demand in a pandemic and recession; medical care is up +5.3% and used cars are up +4.0%. So it is more expensive to buy a car to look fo a job, but cheaper to drive around in the search. Don't get sick, however.

The US Department of Agriculture report for September (WASDE) notes that China's demand for grains, especially wheat, if on track for record imports, especially from Australia and Canada. That would be China's highest level of imports since the 1995/96 season. The USDA also raised it forecast for beef prices on Chinese demand. And they have slightly lowered their milk price forecast.

In Canada, household debt burdens are falling and fast. Households are paying down debt as uncertainty over employment rises. But that is not fast enough for some; their regulator sees delinquencies and foreclosures rising later this year and into next.

The latest global compilation of COVID-19 data is here. The global tally is 28,831,000 and up +558,000 in two days. Global deaths now exceed 921,000 (+10,000).

Just under a quarter of all reported cases globally are in the US, which is up +86,000 to 6,695,000 and a never-ending large rise. Their death total is now 198,300 and rising at about +1000 a day (598/mln and could pass the UK rate in the next few days - but the UK is in its own renewed surge yet again).

In Australia, there have now been 26,651 COVID-19 cases reported, and that is only +86 more cases from Saturday and only from Victoria and NSW. Deaths however have now topped 810 (+13). Their recovery rate is up over 88% now.

The UST 10yr yield is holding at 0.67% but that is down -5 bps in a week. Their 2-10 rate curve is unchanged at +54 bps, their 1-5 curve is at +12 bps, while their 3m-10 year curve is now just over +57 bps. The Australian Govt 10 year yield is unchanged at 0.90%. The China Govt 10 year yield is holding at 3.15%. The New Zealand Govt 10 year yield is also holding at 0.61% and little-changed in a week.

The price of gold will start today at US$1940/oz which is virtually unchanged in a week. Silver has also recorded little change from this time last week.

Oil prices will start the week lower at just under US$37.50/bbl in the US while the international price is down to just under US$40/bbl. These levels are -US$2 lower than this time last week.

The Kiwi dollar will start the week at 66.7 USc and a very slight firming. Against the Australian dollar we are unchanged at 91.5 AUc. Against the euro we are also marginally firmer at 56.3 euro cents. That means our TWI-5 is still at 69.7.

The bitcoin price is little-changed today, at US$10,289 and also about where we were at this time last week. The bitcoin rate is charted in the exchange rate set below.

The easiest place to stay up with event risk today is by following our Economic Calendar here ».

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39 Comments

https://opinionator.blogs.nytimes.com/2013/11/10/learning-how-to-die-in-...

As for debt, the gap is inexorably widening and there is no - zero - chance it will ever narrow. The energy going into the system, plus efficiencies, will never catch the debt issued, even at zero interest, and all the infrastructure extant - never more of it, both here and globally - is decaying and 'inexorable' is the description there too. Time for a re-set.

Which we won't do - we'll all, jointly and severally, attempt to 'retain/increase' our 'wealth'. So we will pump housing and share bubbles until they pop.

Perhaps all the prophets and architects, the great creators in other words, will come down off the monumental mountain of debt of their making, take a universal hair cut, write offs, wailing, gnashing of teeth and blood letting, and then undoubtedly set to creating another mountain?

"The biggest problem we face is a philosophical one: understanding that this civilization is already dead."

Ditto on the virus. You've been focussed on resources for a large chunk of your adult life PDK whereas I have a strong background from childhood in health and nutrition. Same principles apply, I've known it is coming. We are dead, the sooner people accept that and stop trying to get someone else to fix the problem the better. I mean the health system is just another piece of infrustructure that will fail under the increaseing burden. Did you see the link last week to the exponential growth in viruses since 1960?

Look at the psychological journey the virus has taken us on? I'm seeing increased division, just like in politics. People coming out and saying the other camp are stupid and if you don't like MY position then you are not my friend, bugger off. All the wrong position, it is how do we deal with this for what it is, a failing world. Denial isn't dealing with it.

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It's always been the case Scarfie - tribalism. Mankinds history is full of it from the neanderthals onwards. Just another form of politics or religion. And it is used by the rich and powerful (influential in whatever way they can be) to protect their power and privilege.

You can’t taper a Ponzi scheme ...

Well obviously, if the housing and share bubbles are pumped until they pop, then we will have your reset, won't we?

Geeeze, if people are fleeing from Indonesia to Oz, imagine what it would be like being on a small unsanitary boat full of people with Wuhan Flu on it! Eeeek!

Dr kendrick on Covid. I think this guy has the logical solution without killing our economy

https://drmalcolmkendrick.org/2020/09/13/a-way-to-control-covid-19-for-now/

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"The survival rate is above 99 per cent. People aged under 60 are far more likely to die in a road accident, but we don't ban them driving cars.
...The World Health Organisation now says that serological surveys show the infection fatality ratio has kept falling, so far to between 0.5 and 1 per cent, substantially below the 2-3 per cent originally feared.
... It is more like the Asian flu of 1957 and Hong Kong flu of 1968, which were bad, but did not shut down the entire world."
https://www.afr.com/policy/health-and-education/new-virus-facts-ignored-...

Yes Profile we heard you.

you gave up on that guitar didn't you?

One more thing to tick off before starting.

if you want i can help, just ask David for my email. Andrew

What about taking that logic to the extreme, and ban all 16-24 year olds from driving, and have a total lockdown for the over 70s. The first would actually save more lives.

Isn't that the same theory Sweden predicated their response on? Seems the jury is still out on that one. I personally think what NZ is doing is a better approach, especially if we can get the tracing of contacts refined so we don't have to lock big chunks of the country down.
I wonder if he's taking his own advice and purposefully increasing his exposure risk ? Doesn't make any mention of that.

No, Sweden has admitted that should have done more to protect the elderly.

Early days Hook. We are completely isolated from the rest of the world & our second biggest foreign exchange earner is now bringing in 0. Not to mention the 338,000 jobs being supported by the unsustainable wage subsidy schemes.

If we threw out all people on temporary work permits, and stopped subsidizing foreign owned businesses, we would get by on internal tourism, actually.

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When the Roman Empire fell Europe went into a 1000 year period of demographic, cultural, and economic deterioration called 'the dark ages'. We are probably entering the 'second dark age'. Fortunately NZ house prices will come out unscathed.

What happens to NZ house prices once things go back to normal and all the returning kiwi's go back overseas - the houses they are renting or have brought go back into the pool. This combined with NZ inc. sorting the immigration strategy out will make for interesting times.....
At some stage housing costs either improve (one way or the other) or there will be a revolt from the larger numbers of have not's who have enough of seeing the 'rich' get richer.

perhaps yes. NZ in the dark ages could well be a good place to hang out. It's pretty, nature isn't going to kill you except for the weather, and the gangs are OK if you don't get on their bad side.

So as long as we continue to be bad at building houses/infrastructure for the people who want to live here, high prices will survive.

My take of China agriculture.

China had massive stores of grain but lot of it was old and deteriorating rapidly. They used that store to control prices and demand. In a command economy there are too many levers to pull this was an almost impossible job. They apparently sold the surplus old grain to Africa cheap.

The West is faced with this constant uncertainty of what China is going to buy and from who. Last year it was all going to custard in the USA, then farmers who held grain back, suddenly found strong demand and emptied silos.

China has in the past bought huge amounts from Sth America and Russia but the USA is still, as I see it the super grower of grains, they have much much lower costs than countries like us and solid infrastructure.

China needs to lease land to farmers on a long term basic with a right to renew. This needs to be be transferable between farmers but not to non farmers. Farmers respond best to market forces what's happening at present, as China is the big world importer, is awfully confusing. Once China rebuilds it's grain store, what next? China needs to grow good quality food at home it's a big country with huge sheep and cattle herds, half the world's pig population but somehow it also is a shambolic. Large corporates won't deliver anything like smaller family farms will, they just compete with other offshore commodity producers.

last para there reminds me sort of, about reading the history of the Soviet Union apropos the Ukraine in the 1920/30’s. Imposed large scale collective farming vs independent landownership and the relative divergent outcomes. Might have a re-read if can find the book somewhere. Seems might be going the other way round?

I was there after the fall of the Wall came down. Fields with combines left where they broke down, with wheat just left to fall on the ground all around them. I would love to go to China and see how their farms actually function, i would expect loads of corruption from local officials.

I have been listening to Victor Davis Hanson, he is on the right but I do enjoy listening to him .

The free fall of the USA
https://www.youtube.com/watch?v=cQdnaGMXkWQ

Nationalism, good and bad lessons from history
https://www.youtube.com/watch?v=h1o4BAyd7GU

His books are all good reads.
I had this one to hand yesterday

https://www.amazon.com/Second-World-Wars-Global-Conflict/dp/0465066984

An authoritative new history of astonishing breadth, The Second World Wars offers a stunning reinterpretation of history's deadliest conflict.

Tks HT. Will do. If interested, from an entirely different boots on the ground perspective recommend Guy Sager, “The Forgotten Soldier”

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Following recent events, the Encyclopedia Britannica have updated their predictions regarding what the most successful entity will be post nuclear apocalypse from the humble cockroach to the new victor, the NZ house price. "Following comprehensive and detailed information supplied by Core logic there could be no other outcome" said the lead encyclopedia researcher.

Please remember to leave your 'sarcasm on' button on
Some gullible and impressionable readers on here :)

Post nuclear apocalypse all bank records,cloud based or not, all computer communications, and bank staff capable of organising the confiscation and changing of legal records, which will also be destroyed anyway, will not exist, so I shall retain my properties, although the above record destruction will have no proof of me, or my estate actually, as owner. So the values may drop slightly for a short time, but they are long term investments anyway.

Breakfast briefing: The world runs on debt distortion

Happy realization.

One has to wait and watch what the consequence will be of printing and distribution of money. Besides starting the process of printing and distribution was easy but HOW can it be stopped or controlled as this is a run away train and to stop means crash.

The only solution is to let it run as long as possible by printing and distribution of money as ploiticans and reserve banks are so panorid of the word word FALL that forget that it is better if economy cycle is alllowed to run its own course.

If I had a car that I could only rent out at a loss, have I an asset?
Now think about that in terms of currency.

Nobody knows what the end game is

Dr Ben Bernanke was at the helm at the time of the GFC. His credentials were that he had written his PhD thesis on the 1929 Great Depression, and having studied it in such depth and great detail he had the expertise to take care of the problem. So it came to pass he implemented 5 support programs, including TARP and 3 QE issuances. Based on his studies, his plan was to put a safety net under the asset markets for 6 months to prevent asset holders from puking their holdings. According to the Bernanke manifesto, sanity would return to normal after 6 months.

History tells us Bernanke was wrong then. And he is wrong.now. He Failed. The world is following a failed experiment

Nobody knows what the eventual outcome of increasing the revolutions of the financial spinning wheel

It won't be over in 6 months. Debt from the GFC is still in existence.

Bernanke is the architect. Anyone heard from Bernanke lately?

His credentials were actually that he had held a professorship at Princeton and was a foremost authority in macroeconomics for 20 odd years before serving on the board of Governors at the Fed for several years.

At that point in his career, his PhD thesis was completely irrelevant.

Same goes for most economics graduates at this point in global affairs.

..i don't understand many of the mechanics of these theories (does anyone), but strip it away and it seems they are trying to salve a physical problem by moving digits across a monitor (mostly from the poor to the rich).

A few centuries back you'd be drowned as a witch for thinking might work.

Correct. You're onto it. The point made by Puketepapa is, the architects don't know either

Wikipedia
Bernanke is particularly interested in the economic and political causes of the Great Depression, on which he has published numerous academic articles. Before Bernanke's work, the dominant monetarist theory of the Great Depression was Milton Friedman's view that it had been largely caused by the Federal Reserve's having reduced the money supply and has argued that one of the biggest mistakes made during the period was to raise interest rates too early

"Let me end by abusing my status as an official of the Federal Reserve. I would say to Milton: Re the Great Depression, you're right. We did it. We're very sorry. But thanks to you, we won't do it again

The depression was different. There were only 2 billion people on the planet, a large percentage of whom weren't really consuming bits of it. Most of the resources were still intact (particularly fossil energy stocks) and most of the sinks (the atmosphere's capability to absorb CO2, ocean acidification capability etc) were relatively unfilled.

This time, we are globally-forcing, on multiple fronts. Bushfires, refugee-streams, the virus, CO2, uncle Tom Cobley and all. There's 8 billion of us, more of whom want to consume ever-more of the planet.

The problem is that economists don't measure anything real. Debt-issuance, rates of forward betting and overshoot/undershoot of same, are all very well, but they're underwritten by thing physical (proof being if we could all get infinitely rich doing nothing we wouldn't need tourism, transport, agriculture etc). These people failed to factor in the Limits to Growth (and vehemently ridiculed same as per the Church ridiculing Darwin) and have been flying blind ever since. Keen gets it. https://www.resilience.org/stories/2020-09-10/nobel-prize-winning-econom... Sod-all else do.