This is driven by the collapse in oil and other commodities. As we warned toward the beginning of the year recession is bleeding down the front range of the Rockies from Alberta to the Gulf of Mexico.
China is, as we say, The Ultimate Crony Capitalist State. Business and government are an amalgam. Long a crony paradise where a premium was placed on compliance and government favor and not on real pricing.
It looks like reality is finally starting to hit however.
About 6 months ago I was talking to a China energy markets analyst and he explained the complexities of implementing a carbon tax regime in the country to me. One bit I found particularly interesting. He explained that no one knew what the real price of energy coming from a particular plant actually was. A mandate from Beijing had been handed down, that energy would cost X amount, and that was the number used for “business.” Everyone knew the official price was way below the actual market rate but it sounded like no one really knew what the market rate was.
One can’t keep running a country like this. One must have real pricing for long term prosperity. The problem is that real pricing can create problems for the political establishment, anywhere, but particularly in China.
At the start of the day everyone had “plunge protection team” in the back of their minds. (Even if they wouldn’t say it.) It looked as if the short term fix was in. But it turned out to be more short term than many expected. When the dust cleared we were down, again, for the 6th day in a row.
At this point any rate hike looks like a big giant excuse for people to sell off stocks. People want to sell, really sell, one can feel it, but people don’t want to fight the Fed. However, if Yellen shoots a flare into the sky people will move on it. People just want a reason. Which is why Yellen probably won’t move rates.
It would be a pretty bold move for Yellen to hike in the midst of what looks like a possible looming recession in much of the world (Brazil, Australia, China) even if things are barely positive in the US from her perspective. On the other hand if recession is looming a move now might signal confidence in the US economy just enough to let the Fed gather some ammo for what is coming down the line. (Not that a quarter point would make much difference.)
Alternatively we could just have markets set interest rates, like they should, and we could all stop hanging on the words of a financial politburo. But that would make too much sense.
The collapse in oil and in other commodities is hurting Canada. But what is particularly interesting from an American perspective is that the slowdown is bleeding through the middle of the continent, from Alberta, through the upper Midwest and even down into Texas. (As we noted months ago was likely to happen.)
Caterpillar sales have been declining for over 2 years. Latin American sales have fallen off a cliff. Caterpillar makes heavy industry construction equipment. Draw your own conclusions.
It is interesting to note that the decline is not as sharp as during the “Great Recession,” it’s more stretched out and has been shallower. However it has been steady and steady declines are the thing of maturing depressions.
It should be noted that when aspirational countries hit economic brick walls they often do not react well. Suddenly power shifts, as do markets and political perspective – in policy circles and in the general population. This creates instability, which threatens the powers that be. The powers that be then react.
One can feel it. The initial optimism which spiked in this country with falling gas prices already feels long in the tooth. And the USA is basically the best there is. Pretty much every other major economy in the world is in recession or near recession.
Funny, for many people it still feels like we are in a recession, now we’re looking at another one?
China buys more copper than anyone to make the things China makes. If China’s manufacturing slows so to do inflows of copper.
It’s hard to get good information out of the Crony’s Republic of China. But we do know when they stop buying copper, and what that generally means.
We are starting to approach what many economists call “full employment.” The point at which the people who are unemployed really are “just between jobs.” There is little long term unemployment. Jobs are plentiful. There is upward pressure on wages. In short, general prosperity.
Can’t you feel it?
Ah yes, all the hokus pokus is less magic and more smoke and mirrors. Some of us have said this for a long time. But in the wake of Japan falling back into recession, Europe’s continued depression, China’s slowing, and the ongoing troubles in the United States one gets the sense that on some level the grand poobahs of central banking are just tired. The act can only go on for so long. Sooner or later it has to end. Really the Bank of International Settlements, the central bank of central banks turned on the lights earlier this year.
Newsflash! Things are not good economically.
Most people make significantly less in inflation adjusted terms than they did prior to the 2008 Crash. And it should be noted that the economy prior to the Crash felt pretty hollow too. People forget this now. But nearly everyone was living off of the housing bubble in the Bush years. That’s why it hurt so bad when housing ate it.
Remember the sea of realtors? At one point – around 2006 – it was basically impossible to go to a barbecue without meeting a realtor or a mortgage person. Idiot sons across the country were making money hand over fist, buying Suburbans, and getting in on rental properties. Where did all those people go? Actually don’t tell me. That the depression has wiped out this crowd is one the few positive outcomes of the last few years in my estimation.
Abeconomics is a Hail Mary throw if there ever was one. Though many will argue otherwise there is a limit to “money printing.” Are we reaching the point where the system just starts eating itself in Japan? Very possible. If an increase in the sales tax meant to help pay for the gigantic Japanese debt does this to the Japanese economy they face a bit of a problem to say the least. Raise taxes, reduce revenue. Looks like Tokyo is way over the Laffer Curve. (And it appears to have done it with a sales tax, not even an income tax increase.) But even getting below the curve by reducing taxes is unlikely to help much because the debt black hole must be financed somehow.
So the I guess the Fed needs to start thinking about cutting rates right? No one can afford monthly payments because rates are too high right? But they are as low practically as they have ever been you say? Uh oh, what does that mean?