A Dash of Coldwater Economics

Michael Taylor
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Scan Widely, Watch Closely. For years I've tracked around 500 data-sets from the world's leading economies every month to produce the most data-rich suite of shocks & surprises indexes. When something catches my eye, this daily podcasts talks about it . . . briefly.

  1. 08/10/2022

    US CPI Surprise - What it Means for US and Global Inflation

    The US July CPI result was better than expected, with headline inflation moderating to 8.5% yoy (from 9.1% in June), mainly thanks to a 4.6% mom fall in energy costs. This was on the back of a 10.4% mom fall in Brent oil prices and a 8.5% mom fall in Nymex natural gas prices. It is not obvious this is being repeated in August: so far, on average oil prices have fallen a further 7.5% mom, but gas prices have rebounded 12.6% mom, and overall the CRB index, which fell 9.5% in July, is almost unchanged. Still, July's result is strong enough to allow us to scale back the likely inflationary trajectory in the US, with it now expected to peak at 9.1% in September, before drifting down to below 8% by end-2Q23.  But two caveats. First, I'm fashioning these trajectories from the 6m deviation in 5yr seasonalized trends - but volatilities in CPI indexes during the last six months have been consistently dramatic (both above and below trend), and in some cases (UK) positively freakish. So even a 6m trend assumption isn't looking particularly stable month-on-month.   Second, whilst inflationary pressures may be moderating in the US, they are only now beginning to show up in force in NE Asia. Overall, this means that my measure of global aggregate inflation continued to rise in July. . . .

  2. 07/28/2022

    US 2Q GDP - Profits and Stockmarket Valuations

    I'm less concerned with the recession/no-recession arguments (hey, don't US politics just absolutely fascinate you?  Me neither), than with the implications for profits and stockmarket valuations. Three observations:  1. Regardless of headline GDP, once you strip out extremely volatile inventory-flows, there's been essentially no growth in final sales of domestic product now for five quarter.  There's just no momentum at all.  2. The massive fiscal stimulus has not yet completely been washed out of the Kalecki profits reckoning. I calculate profits were down 7.4% qoq and 19.4% yoy, mainly thanks to the fiscal deficit moderating.  But there's worse - the profits/GDP ratio has fallen to its lowest level since 1Q16 - so there's cyclical as well as one-off structural pressure at work.  3. All of which means the S&P500 remains overvalued on my slow-model basis, which has been essentially on the money for the last 30 years. July's rally will extend that overvaluation. So the vulnerability continues, and rises.

  3. 07/22/2022

    The US Camel's All Tapped Out

    The speed and severity with which data from the US has collapsed over the last month is extremely unusual.  Why is the outbreak of inflation doing such damage so quickly.  One reason is the way in which the US profits model has changed over the years, until since 2000 to the present day, 77.6% of Kalecki profits are attributable to household and government dissavings, whilst only 22.4% come from net investment and net exports.   Compare that to 1960-1980, when net investment and exports accounted for 65.7% of profits, with h'hold and govt dissavings generating only 34.3%.  Let's state the obvious: if your profit model depends disproportionately on h'holds and governments spending more than the earn, sooner or later, even the strongest financial balance sheet will become impaired, fragile. And it's that financial fragility which is kicking in, and kicking down, right now.

  4. 07/21/2022

    ECB's Transmission Protection Instrument, UK's Shocking Interest Payments

    Two things today: first, a closer look at the ECB's so-called 'Transmission Protection Instrument'.   Short take: it's open ended, with only decorative conditionality. The real constraint is that it mustn't inflate the ECB's balance sheet. So if it wants to do anything other than short-term fire-fighting in (say) Italy's bond market, it will have to do so by selling (say) German bonds.  That'll make ECB meetings fun to watch.  Second thing: today's UK public sector deficit of £22.1bn featured an astonishing £19.9bn in interest payments. That's 23% of total spending, which is 6.2SDs above the long-term average.  Cui bono? Why, chancellor Rishi Sunak of course, hoping to step up to become PM on a Treasury-determined manifesto of immediate recession-inducing tax rises.  That unprecedented shock of interest payments could almost have been designed to illustrate the Treasury's - sorry, Rishi's - argument.  And probably was - 6.2SDs after all.

  5. 07/20/2022

    UK Inflation - No Good News

    The UK is about to enter the strange and disturbing world of sustained double digit inflation. We can tell that from the underlying trends generating June's 9.4% yoy headline CPI, but also by the way the gap between input PPI (24% yoy) and output PPI (16.5% yoy), and the gap between output PPI and CPI are continuing to widen.  Not until we see some evidence that the pressure to 'pass-through' factory inflation pressures has peaked can we expect headline CPI to retreat.  There's no sign of that yet.

  6. 07/18/2022

    Stop/Starting China's Economy

    Fiscal policy is doing the heavy lifting as China seeks to re-start its economy following zero-Covid strategy lockdowns.  June's monthly data suggests they're having some success in re-opening, even if this isn't obvious in the yoy results.   But 2Q GDP growth of 0.4% yoy catches China's economy at its lowest ebb, and the closer you look at it, the uglier it gets. After all, this 0.4% yoy growth was generated really only by net exports and a surging fiscal deficit - strip those out and 2Q nominal domestic demand was in freefall. Which is what you'd expect when you close down the economy.  Full all-singing, all-dancing illustrated & detailed version available on the Coldwater Economic sustack page.

    Stop/Starting China's Economy

  7. 07/15/2022

    World Economic Bulletin - 15th July

    People are queuing outside some small banks in Henan, desperate to rescue their deposits. Is this the start of another near-collapse of China's banking system.  On balance, the available evidence makes that very unlikely.

  8. 02/09/2022

    World Economic Bulletin - 9th February. HK's Reserves Fall

    We've now had more of January's foreign reserves data for Asia, and its generally shown modest falls, as you'd expect when the dollar strengthens and asset prices fall.  To recap: China's reserves fell 0.9% mom, Japan's fell 1.4% S Korea's fell 0.3% (thanks to some very active switching out of bonds);and Indonesia fell 2.5% (includes some foreign debt repayment). But Singapore managed a 0.1% rise.  Today we had Hong Kong, which reported reserves down 0.9% mom - ie pretty much in line with what we've seen elsewhere. But there are a couple of problems: first Jan's loss comes after a year of near stasis, with the result that reserves are now falling in yoy terms. This is only marginal, but its very rare for HK, and shows that HK has received negligible reserves inflow from global QE this time - in stark contrast to the reserves bonanza HK enjoyed in 2009/2010.  The second problem is this: the HK dollar is run as a currency board: in theory, if foreign reserves fall, then the net HK$ clearing balance of the banking system, or currency in circulation, has to shrink too. In simple terms,  the impact of falling foreign reserves is sharper in HK than in most Asian economies.  And so, in Nov HK M0 grew only 1.7% yoy, and in Dec HK$M3 only 1.5%.  And there is this third consequence: Hong Kong's continuing liquidity is increasingly being supplied by China. We have the net international breakdown of HK's banks net int'l position only up to October. But what is shows is consistent with the rising pressure: HK banks' total net assets fell by US$51bn yoy to US$327bn; but its position with China fell $41bn to a net liability of $28bn. My bet is that by January it was much deeper. Again, having a net liability position to China is very rare for HK - back in 2014 it had net assets in China of $335bn. The last time it had a net liability position was back in . . . 2008 - 2009. What this adds up to is HK's increased financial vulnerability to a) a strengthened dollar; b) any tightening in China; plus, of course, any feedback in loss of confidence.  That's quite a lot of vulnerability to take into the likely environment of 2022.

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Scan Widely, Watch Closely. For years I've tracked around 500 data-sets from the world's leading economies every month to produce the most data-rich suite of shocks & surprises indexes. When something catches my eye, this daily podcasts talks about it . . . briefly.

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