More Chinese data this morning in the form of the monthly new loans release. The number surprised on the upside and new loans remain on the plateau they have occupied for some months. I am not surprised to find that Chinese credit growth is still strong — real interest rates remain low. Paraphrasing Ian Malcolm (http://j.mp/uFiXDE), I tend to believe that in spite of administrative controls, “If there is one thing the history of [finance] has taught us it’s that [liquidity] will not be contained. [Liquidity] breaks free, expands to new territories, and crashes through barriers, painfully, maybe even dangerously, but, ah, well, there it is… [liquidity], uh, finds a way.” Michael Pettis provides support for this idea in an excellent interview with FT Alphaville (which I highly recommend: http://j.mp/vPrkC0). He argues that, while some small banks are experiencing a liquidity squeeze, the real issue is that deposits and loans are moving off-balance-sheet — i.e. this is the way that liquidity is finding. How does this idea fit with anecdotal reports of tightening credit conditions? Pettis has an explanation: monetary policy “feels tight because there’s been such a massive increase in investment flows to infrastructure and real estate projects.” Money is being diverted into developments and asset prices (witness growing reports of Zaiteku-type games in China).
Incidentally, on another China-related point, US import prices fell MOM in October. This series has been weak for six months. This is a good example of how the market invents things to worry about in good times. Back at the start of 2011, it was looking for reasons to worry about US inflation, and the notion that Chinese domestic inflation would drive import-price inflation in the US became scare story du jour. I said at the time that the market was “jumping at shadows” (http://j.mp/s1jMPk), and so it has proved.
I am now showing a mark-to-market loss on my short Brent trade. Tight inventories in Europe, fears over Iran and improving data flow from the US appear to be the cause. I knew that the market was tight when I went into the trade — but this trade was a way to play a drop in risk assets following the dead-cat bounce after the crash in early August, and the tightness of the market was exactly the reason that the market rebounded to a high-enough level for me to get on a wide stop — above 120, which with a weakening European economy and Libyan production slowly returning is still the wrong price. There is a balance to be struck between shorting markets that have been stronger, and hence getting a better stop level, and shorting things that have been weaker, and therefore likely have bigger downside potential. In this case, I was right to short oil rather than equities — a stop in the latter would not have been in an obviously wrong place for the market, and would have been taken out in the most recent rally. On the other hand, perhaps I should have used oil to time a short in copper, which was weaker then and subsequently had a big drop. I am still not sure what the right thing to do would have been. In any case, my real mistake here was to try to squeeze the drop that began in early August for more than it was worth — I should have taken profits when I predicted a rebound in early October.
Some further European news:
- The European Commission said that Greece’s debt would hit 163% of GDP in 2011 and 198% in 2012 without the latest write-down plan. With the plan, and taking the proportions of the debt that would actually be written down from my memory of analyses after the deal was announced, this means that Greece’s debt/GDP in 2012 will be (0.48*50%+0.52*100%)*198%=150%. I may have the proportions a little wrong, but the point remains the same: even if the 50% haircut happens, Greece will still have an unsustainable mountain of debt.
- Markets were unsettled yesterday by an S&P downgrade of France — which turned out to be a technical error by S&P. Good grief.
- I recently had dinner with a civil servant from the Treasury who was surprised how little regard I had for the pronouncements of the rating agencies. The media interest in France’s AAA rating (and hence the EFSF’s rating) shows why such people take them seriously — they imagine that because the media and politicians care, the market must care as well. But rating agencies are a lagging indicator — their utility, if they have any, is in telling everybody what the smart investors already know. When it comes to sovereigns that are in the eye of an economic (and media) story, everybody already knows what the smart money knows, and hence the market has already downgraded the EFSF — its latest issue was sold at a spread of 177bps over Bunds. France’s AAA rating is a sideshow.
Bank of England held rates and the asset purchase facility.
US trade deficit narrowed, b.e., in September on falling imports.
Initial claims 390k b.e. US data continues to improve, although economic forecasters appear to have caught up.
Import prices -0.6% d.e. Oct.
China new loans 587bn b.e. Oct.
China M2 growth fell to 12.9%, continuing a 2-year downtrend.
UK PPI Input -0.8% d.e. PPI Output 0% d.e. Oct.
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