Weak Data Follow on the Heels of Declining Confidence, Which Follows on Slowing Money Supply Growth Rates …
We recently noted that global business confidence has declined sharply in June to a new post 2008 crisis low. The biggest declines were recorded in China, and oddly, in the US. European confidence data were weak, but showed relative improvement to earlier surveys. We assume that the ups and down in these data points are directly related to slowdown and acceleration phases in money supply growth, which are not synchronous in these regions. While US and Chinese money supply growth rates have in recent months slowed from previously very high growth rates, they have accelerated markedly in the UK and Europe from previously very low growth rates (in the UK money supply growth still recorded negative year-on-year growth in the middle of last year. It has since then moved explosively higher).
No Fun in Richmond
Promptly we now get a bit of corroboration of all this from actual economic data (even though we must stress that one should always take such 'empirical confirmations' with a big grain of salt). US housing data for instance delivered a negative surprise, with existing home sales dipping in spite of the recent investor-driven buying frenzy.
Then the Richmond Fed's manufacturing business survey was published, showing a rather outsized disappointment, with new orders free-falling. The service sector survey wasn't all that great either, with service revenues diving (admittedly this series is quite volatile, but one cannot fail to notice the overall 'weak recovery' trend compared to the pre-crisis era):
Richmond service sector revenues - click to enlarge.
Richmond survey manufacturing activity – the dips are regularly more pronounced than the recoveries – click to enlarge.
It should be pointed out that a number of other regional US surveys released last week delivered positive surprises, so one cannot just point to the Richmond data and make a mountain out of what may turn out to be a molehill. However, monetary developments exhibit varying lead times relative to real economic developments, so it is quite possible that the slowdown in money supply growth is just beginning to be felt.
Accelerated Slowdown in China
In China the issue is perhaps not so much the fact that money supply growth is now far lower than during the heady post 2008 crash stimulus orgy, but that China's government is rumored to be rationing credit to certain industries. Apparently the goal is to starve industries which have 'overcapacity' (really: industries in which gobs of capital have been malinvested).
Whether or not there is such precise targeting of credit distribution by the planners, we know there have recently been signs of stresses in China's interbank lending markets – which have also been blamed on deliberate action on the part of the PBoC.
Overnight, the latest Markit Flash PMI for China was released, showing a further weakening of economic activity. It is important to remember here that such data tell us nothing about whether this is good or bad. If, as seems likely, malinvested capital and the associated bubble activities are in the process of being liquidated, then the long term outlook will be improved. However, given the sheer size of bubble activities in China, this could entail very considerable short to medium term pain.
This is of course also leaving aside for the moment that we don't really trust the mandarins to get all that planning right, including the rationing of credit.
As we have always maintained over the years, China's economic success since Deng's reforms is owed entirely to the extent to which it has moved away from central planning. In short, its economy has grown a lot in spite of the fact that the remnants of central planning retain a very strong influence. However, it seems possible that a threshold has finally been crossed and that many of the wealth destroying activities that have been undertaken due to the misguided incentives created by the country's mercantilistic planners (China's equivalent to pyramid building), are now coming home to roost in what could turn into a sizable bust.
China Flash PMI, via HSBC/Markit – click to enlarge.
The entire report can be downloaded here (pdf). There is really not much need to comment further on this, although we would like to quote Mish's comment regarding the alleged need for the planners to 'engage in more fine-tuning to stabilize growth' as HSBC's chief economist maintains.
Says Mish: “We do not need fine tuning, we need to eliminate fine tuners.”
We agree, although we imagine the fine-tuners won't.
European PMI's Improve Somewhat
At the time of writing, only the German (pdf) and the French Flash PMI (pdf) have been released (the remaining euro area PMIs will be released over coming days, and can be found here; we may comment if it anything unusual transpires).
As can be seen there, the data in the euro area's two 'core' nations have clearly improved, with Germany once again the positive standout, actually showing expansion. France can merely boast of a slowing in its ongoing manufacturing contraction.
As already indicated further above, similar to the UK, where both sentiment and economic activity have recently been on an upswing as well, we think monetary factors are the decisive driver of this improvement. Again, if one thinks these things through properly, then it should be clear that none of this has anything to do with genuine wealth creation, or rather, it is impossible to say how much activity is owed to genuine wealth creation and how much is owed to capital consuming bubble activities.
We do however know that given the leads and lags between monetary and credit expansion and business activity, the mirage of 'things are getting better' regularly follows in the wake of credit expansion, even if it is ultimately an illusion and turns out to be detrimental to the accumulation of real wealth.
Finally, here is a chart showing European government debt to GDP data comparing 2011 to 2012. Again, it is hardly worth commenting on this – as we have recently pointed out, they all keep spending like drunken sailors. There are the odd exceptions – e.g. Greece (to the far right) had little choice – but overall, the 'fiscal targets' of whatever 'pact' or 'compact' is in force at any given time, continue to recede further and further into the distance (eventually they will reach the edge of the world and fall off). 'Austerity' is a slogan, a meme, a promotion. It is not the reality, at least not for governments. There is of course plenty of austerity for the private sector, which has been burdened with innumerable additional impositions, from taxes to regulations.
Debt-to-GDP ratios of European sovereigns, 2011 vs. 2012. All that austerity must really hurt – click to enlarge.
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