The FT has an extremely important article on the Chinese housing market. According to government data that the FT has obtained, but which has not been publicly released, the number of residential property transactions in China’s fifteen largest cities was down 39% YOY in October. Nationwide, transactions were down 11.5%. This is the first hard evidence I have seen of a residential property crash in China. It seems that, although prices have not fallen significantly, the market is seizing up. The article also points out some important facts: property construction in general was 13% of China’s economy last year; and banks have only been stress-tested for a 30% fall in property transactions, and the stress tests did not include the effect of a property bust on the value of banks’ collateral (a fact confirmed by a “senior official”). China remains opaque, but these data suggest that there could be something big brewing, and it is something that could damage the whole economy, because a decline in residential construction could be significant on its own, because the data hint that the rest of the property sector may be weak, and because a reduction in property transactions means a fall in local-government land sales (of which there are already anecdotal reports) which are an important funding source for local governments. Local governments have been the main contributor to China’s investment-led growth in recent years. 

Unsurprisingly, the UK’s budgetary consolidation programme is off-target. The reason is the weakness of the economy, and the reason for that is the austerity programme, although David Cameron is blaming the overhang of debt, or some such thing. I do not know for sure what the right answer to the UK’s problems is — I tend to think it is fiscal and monetary stimulus — but I have been convinced, ever since the last election, that austerity was the wrong answer. Now our country’s economy is to be depressed further by the know-nothing political hacks we have elected. It would have been better for the economy if Labour had won the last election and Ed Balls was Chancellor today. 

As in 2008, it is easy to forget about the growing stresses within the global banking system. It is hard to get a sense of how the world looks from the funding desk of a large bank. But we can see that the EURIBOR-EONIA spread is at 0.94% and the TED spread is at 50bps, the top of its post-2009 range. The EURIBOR-EONIA spread only has history back to 2000, of course, but a TED spread over 1% has been rare in recent decades (excluding the financial crisis). It broke that level in previous times of stress, such as 1998 and 1987. Since the EURIBOR-EONIA spread is pushing 1% and widening, it seems reasonable to think that stresses in the European banking system are fairly acute.

I should say something about the US situation. The market’s fear, now that the supercommittee has failed to reach agreement, is that various measures that expire at the end of this year will not be extended, and that there will consequently be a fiscal tightening in 2012. According to FT Alphaville, the measures are: 
  1. Discretionary spending caps from the debt-ceiling agreement, troop drawdowns and small expiring tax provisions: 0.5% of GDP.
  2. Expiration of the payroll tax holiday: 0.73% of GDP.
  3. Expiration of extended unemployment benefits: 0.37% of GDP.
Some of the first point looks set to happen regardless of any agreement, and that implies a small tightening of fiscal policy. The real question is over points 2 and 3. My read on the situation is that the supercommittee was never going to reach agreement, and the fact that 2 and 3 have been extended before suggests that it is possible they might be again. In any case, I think that the important point is that fiscal policy will be neutral or restrictive in 2012, and therefore that the economy will weaken — unless the recovery has become self-sustaining, which I doubt.

Bloomberg’s quotation of the day comes from Alexander Pope: “The most positive men are the most credulous.” I do not know what is meant by “positive” here, but if the quotation is supposed to mean that people with a cheerful, trusting outlook are more easily taken in, then I am not sure it is true. To quote the conclusion from a 2010 paper from Social Psychological and Personality Science: “Contrary to lay wisdom, high trusters were significantly better than low trusters were at detecting lies. This finding extends a growing body of theoretical and empirical work suggesting that high trusters are far from foolish Pollyannas and that low trusters’ defensiveness incurs significant costs.” There is a bit more info here:


Existing home sales beat expectations but remain on a plateau.

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US preliminary GDP
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