Friday 29 November 2019

Corbyn climbs to 34% in the polls

Since releasing their manifesto Labour seem to have risen from about 30% to 34%. So far seems to be the Lib Dems that have lost the votes to Labour with potentially more losses to come. 

The Tories are flat lining, having already won the Brexit party votes. Corbyn really needs to take a few points off the Tories to get a hung parliament, otherwise a small Tory majority is most likely. Labour are the third party in Scotland as well. 

But I don't think the polls are accurate. As posted before, Im sceptical the polls are picking up the surge in young voters who either don't have land lines or don't answer unknown mobile callers.

Anything less than a 2-3% point majority into the election and I think The Absolute Boy will have good chance of lucking into Downing Street. Even with the Tories scoring a few points more than Labour the chance of a hung Parliament is high, which would leave Labour with either negative control or the option of forming a coalition with the SNP.

Wednesday 27 November 2019

US business cycle outlook

US profits, US business credit growth, US inventory liquidations
Basically margins are being squeezed by late cycle dynamics. So why do sell side analysts think margins will bounce next year? 

Utilities and Healthcare are about the only S&P sectors doing OK this year. Fundamentally all hopes are pinned on this year's substantial margin compression reversing next year. On 5.5% 2020 sales growth, it will take a weak USD and a lot more to make it happen.

From Factset earnings insight:

There is plenty of evidence of margin compression and poor outlook from CEOs. I leave two below.


Most recessions are triggered by inventory liquidation. The run up in inventories into Trump tariffs has not been run down yet, but seems like it will be in Q1, so data should get worse in Q4 and Q1. 

Looking to the Fed H8 survey BUSLOANS chart, by Feb or April BUSLOANS will be flat YoY. That has always been associated with a recession. 

Trump stick saved business loans/ the cycle in 2017 with a tax cut and $1.3Tn fiscal deficit. But the trade war, late cycle dynamics and the prior Fed hiking cycle have brought us again to the brink of a recession. 

How will he stick save it going into an election campaign? When will equities or high yield pay attention?

UK election registrations and voter swing to Labour

UK election

New voter registration closed last night. There have been 4.7m new voter registrations with 3.1m of them under 34 yrs old. On a 2017 voter turnout of 32m, new registrations are 15% of the 2017 vote. 

Are the polls picking up this change in the electorate? 

Young voters are massively Labour biased 60/40 vs Tories. Thats worth about 600k extra Labour votes or a 2%swing in voting bias for Labour and against the Tories. Lib Dems and SNP also benefit in addition to this. 

If you add back undecideds and refused to answer then there is about 25% of the youth vote still up for grabs so if Corbyn has a good last three weeks the Labour > Tory bias could be even greater. 

Hung Parliament?

Is the following plausible. Boris wins 300-320, vs 323 needed for a simple majority of 1. 

Corbyn constructs disagreements with SNP, then Boris forms a minority govt. Corbyn then lets him pass the WA to leave the EU. 

Corbyn will then have achieved his lifelong goals of splitting the Thatcher Tory party and delivering Brexit. 

He can hand over leadership to Stamer or whomever by the Autumn conference. That will be in the thick of a Trump/ Warren election with Warren campaigning on hard socialist credentials. Stamer then calls a confidence vote in Bojo...

We will find out soon enough. 

Tuesday 19 November 2019

Chinese trade developments and the trade war implications

So I thought I would take a look at what has been happening in China's trade this year.

What I was expecting was a slow down in commodity imports, which in turn would hurt the EMs and Australia that export them, while higher value imports remained steady.

However what I found was the opposite. Commodity imports are up substantially, which has all the hallmarks of centralised government spending, while tech and industrial goods are way down, which points to a significant slowdown of private sector investment.

One initial point though is that, as very large countries, both the US and China are amongst the most closed economies. China exported (in 2016) 20% of GDP and imported 18%, while the US exported 12% and imported 15%. Small countries and emerging markets often have trade in the 60-150% range of GDP. So as far as trade goes, both are relatively insulated. However, in the case of China, it is the private sector that is most leveraged to exports.

 OECD; 2016 imports and exports as a percent of GDP:

Additionally as China's economy has developed the overall current account surplus was declining:

Within that, China has run a surplus with the US and EU, while running deficits with Japan, Korea, Taiwan, Australia and the RoW. In 2018 for example its trade with the World ex-US was even - the US accounted for the entire trade surplus. 

October and YTD trade tables sourced from GACC:

Chinese imports in 2019:

We can see this year and continuing into October a large set of rebalances happening.

Total exports are marginally down, while imports are down 5% YoY in the first 10 months. October 2019 imports are down 6.4% on October 2018. Over the summer imports were down 4-5% YoY, so imports have weakened again into October.

As imports have slowed and exports remained stable, the first 10 months saw China's trade surplus rise $85Bn YoY, roughly $100bn annually. On a $13.6Tn economy that will be worth about 0.75% of GDP. Not bad for an economy only growing 6% or so.

Within this, given the Trump tariffs combined with the increased US double deficit, Chinese-US exports are down 11.3% and imports down 25.4% YoY for the first 10 months. The net China-US trade surplus is roughly flat at a quarter of a Trillion. Given the higher value of US exports, that has actually weakened the US terms of trade with China.

So far in the Trade War, all Trump has succeeded in achieving is an own goal. Given Trump's propensity to keep pushing forwards with the same strategy, this does not bode well for the trade talks. I have discussed previously why I don't think the two sides can agree on the main stumbling blocks and that China will stall until Q2 next year and try and push a compromise deal through that protects their interests and gives Trump a superficial win to sell to the electorate. However I also think that is a misjudgement by the Chinese of Trump's reaction function and will result in no deal before the election.

The recent flat lining of imports from EM does not bode well. Many of them are highly leveraged to trade themselves and have seen significant domestic credit expansions since 2010, in some cases M2/M3 has grown 300% plus. However so far China's continued large imports of a range of commodities have supported EM overall.

Also of note is the $50Bn net increase in exports to the EU. There is only one remaining market big and open enough to absorb product dumping from China after the US hiked tariffs. In my European perfect storm blog I had Chinese product dumping into the EU as a key deflation/ recession catalyst. I only expect this number to get bigger over the next year. On the USD18.7Tn EU economy it will cost about 0.32% of GDP this year. 

In terms of the sectoral composition, the brunt of the slowdown is obviously being felt by the private sector.

Machine Tools are down 26%, Hi-tech 8%, Metal products 17% etc. Meanwhile iron ore is up 34% and Pharmaceuticals up 21%.

China's fiscal stimulus is supporting areas with heavy state spending, while it seems the private sector is struggling.

Chinese fiscal deficit as a percentage of GDP:

The IMF in August forecast a fiscal deficit of 6.1% of GDP in 2019 and 5.5-5.7% for the next few years.

Nominal GDP has been growing at around 8.7% and total credit has grown by around 9% of GDP per year recently, so gross credit creation has been around 18% of GDP. Given the credit demand is government driven and therefore stable, the likelihood of Minsky is low.

The IMF has a managed slowdown to 6% or so GDP growth in 2019 with the support of a fiscal stimulus and consumption supporting final demand.

Domestically, so far the consumer is holding up, albeit the retail sales reflect the slow down in credit growth and nominal GDP falling to mid-high single digits in recent years. Consumer confidence and retail sales YoY:

But Manufacturers are seeing a small recession and services are slowing to near flat.

China Business Confidence Index:

China New Orders Index:

China Services PMI:

Caixin Manufacturing PMI:

Official Manuf PMI vs Caixin Manuf PMI:

Looking at the above business surveys and the import and export data, the import of goods paid for by the government shows a lot of growth, while goods more typically bought by private manufacturing and retail businesses look like they are contracting.

Looking through those charts, the Caixin manufacturing bounce looks weird and will probably fall back in November. Business confidence is closely linked to New Orders and fairly closely linked to Services PMIs. All three have weakened into October.

Globally where there is a smaller SoE/ government sector in general the slowdown has been manufacturing led. Services in developed economies look like they have further to fall in Q4 and perhaps in Q1-2020 to 'catch down' to manufacturing.

In the US real private inventories seem to lag GDP by one or two quarters. But inventory accumulation or liquidation is a key recession/ recovery trigger. Inventories were run down in the aftermath of the 2015/2016 slowdown and brought the US to near a recession prior to Trump launching the tax cuts and increased fiscal deficit. That combined with stocking up prior to tariffs caused a rise in inventories in 2018. But with the slowdown in GDP, it seems likely that inventories in the other sectors will track down towards the auto sector over the next 6 months.

CEO confidence is also heading towards contractionary levels, while bank loans to businesses have fallen to a level where YoY if they drop lower it is normally associated with a recession. In fact, in 2016 they fell to a level that has always been associated with recessions but the US fiscal and Chinese stimuluses helped boost the economy for another couple of years.

The slowdown in 'Business loans' is due to demand stalling out over the summer and then starting to contract since August. If the indicator keeps going sideways then by March it will be flat YoY, which has always been associated with a recession. If Business loans fall then it will likely be flat YoY by January or February.

There are also some initial signs of falling oil product demand starting since August.

So overall it looks like the US is on a slowing trajectory with more contraction to come in manufacturing and the potential for services to catch down. US Q4 Nowcasting GDP is currently showing US growth almost slowing to a halt.

Meanwhile China continues to grow 6% and gloat about it.

I wonder if the pow wow this week with Chairman Powell was aimed at priming the Fed for a December rate cut to coincide with no phase 1 deal and a tariff hike. Jan Fed Funds futures aren't pricing a Dec cut, so far. In fact the next cut is only priced in as being next October.

These developments are hardly likely to encourage Trump to compromise on a Phase 1 deal. In fact he could instead up the stakes. Trump just keeps pushing until he gets his way, in the way that 'stable geniuses' always do.