Kohlruebenwinter for Coventry, Cologne, Caritiba & Canton

Last week it was announced that Beijing was reversing an earlier decision to allow local governments to issue their own bonds, causing eyebrows to be raised everywhere among the sceptics who may also have noted that the Chinese Index Academy were reckoning that the latter’s crucial revenues from land sales were some 38% lower in the first half of this year, on a national count, with declines in the capital and Shanghai suffering drops of up nearer 60%.

In a classic sign of policy confusion, it was also reported that the authorities were simultaneously giving tacit encouragement to the banks – which are otherwise struggling to hit their fatally-conceited, top-down targets for loan growth – to make up some of the resulting shortfall, as well as launching a $14 billion bond under the auspices of the MOF in order to raise funds for these stalwarts of misplaced spending and crass Keynesian malinvestment.

Meanwhile, Tao Zuojin, head of the China State Shipbuilding association, vouchsafed that up to a half of all his members might go bust within the next two years, reeling under a 60% decline in the gross tonnage of orders (90% of yards are said, in some quarters, to have won ZERO orders so far this year) as global economic deterioration compounds the widespread glut of maritime freight capacity and the lessened availability of cheap credit continues to haunt a sector largely expanded during the super-stimulus years.

Granted, the problem is not just confined to China – the global trade and resource rebound has suckered in all too many from outside the Middle Kingdom, too, as can be attested by the fact that 60% of the world’s dry bulk fleet has an average age of little more than three years, with deliveries scheduled this year likely to expand the fleet by around a sixth, even after scrappage is taken into account. But matters have come to such a pass in the earthly capital of Schactianism that Shanghai Shipping Exchange president Zhang Ye (no, not Zheng He!) told a regional industry forum that the state might not only soon require all cargo to be carried by domestic lines, but that all their vessels might have to have been built in Chinese yards, too.

Whether this resurrection of the infamous English Navigation Acts of the seventeenth and eighteenth centuries is truly a matter of official study – one shudders at the implications for world trade were so nakedly protectionist a measure to be enacted – it does show how desperate the situation has become for it even to be floated as a trial balloon.

Across at the local steel mill, things are not much better, with YTD losses rising appreciably from the same time last year to leave the businesses who pour half the world’s alloy with their already slender profits cut in half, stranding the group as a whole with a knife edge 0.1% operating margin and a decidedly sub-inflation ROA of just 0.6%. The worst third of them, all in the red, were actually left nursing a combined income gap of $2 billion, substantially higher than the losers’ tally this time last year.

If you think it might be important – not just to users of steel, but to diggers of dirt in the iron ore and metallurgical coal game – whether there is any immediate prospect of achieving an acceptable real return on capital in this moiety of the global industry, you should perhaps ponder on the fact that, since the comparable, pre-Crash semester in 2008, China’s steel production has risen by fully one-third (total capacity stands perhaps another 35% in excess of that), while the rest of the world has trimmed its output by some 5-6%. In other words, it is not just true of oil that China’s ill-advised crash stimulus package has been responsible for a share of incremental consumption much greater than unity in the past four years, but for materials associated with this particular destruction of capital, too.

Nor is business exactly humming in the thermal coal market, either. Indeed, the storage facilities at Qinhuangdo in Hebei province – the world’s largest coal terminal and one responsible for one-half of all China’s import needs – came perilously close to overflowing, with the peak stockpile of 9.5 million tonnes registered in mid-June representing 93% of the port’s total capacity and standing two-thirds higher than the seasonal average. Across the country, the total estimate which Li Xin of the China Coal Transportation and Distribution Association gave to the China Times was a mountainous 300 million tonnes – equivalent to 3-4 months’ imports and one month’s total consumption.

For reference, steel stockpiles are said to stretch to 12 million tonnes – up 35% since the start of the year – with dockside iron ore inventories not far short of 100 million tonnes – or around 7 weeks of imports.

Citing weakness in the electronics, machinery, and transport sectors – as well as an absence of major government outlays – state researcher Antaike lowered its estimates for domestic copper consumption growth to 5% in the current year. Elsewhere, it was reported that cement production had only risen 4.4% yoy in May (a gain of 5% in the first five months as a whole) with that of flat glass slumping 10.2% to depress the YTD total to a scanty 1.7% gain versus a 19.6% rise in the corresponding period in 2011. Needless to say, businesses in the first are seeing profits tumble by 50% or more, while those in the second are collectively in the red.

Is it any wonder that Deputy Director Shao Ning of SASAC – the body charged with oversight of the major SOE’s – said that these coddled giants should be girding their loins for ‘the next three to five years (sic) of winter conditions’ by striving to ‘strengthen their basic management practices… attaching great importance to cost reduction and enhancing  efficiency… Increasingly a matter of life and death in times of austerity and contraction…  central enterprises must fully understand the gravity and urgency of the current situation, and devote attention to being able to survive …’?

All in the price, the optimists say, but we – with our Austrian theories of boom and bust reinforcing our admittedly far less expert reading of the political tensions at work – are not so sure. Those expecting another massive monetary infusion should bear in mind that a PBOC survey of Beijing residents showed last week that an increased majority of 73.1% of respondents said that prices of goods were unacceptably high and that almost half of them feared a ‘surge’ in their prices over the coming quarter – a pessimism largely rooted in the Bank’s recent interest rate reduction, one suspects.

Whether or not such anxieties are well-grounded, their currency will not allow the policy-makers to place too much faith in the idea that the ongoing fall in the official CPI index will, of itself, be sufficient to give them room to conduct any grand, counter-cyclical manoeuvres in the coming months.

But, of course, the week’s main focus has not been China, but whether or not the Germans really did suffer two defeats at the hands of the Italians, or just the one.

The tenor of the press coverage in the Heimat is fairly one-sided in the interpretation that ‘Madame Non’ did in fact give in to an Italo-Hispanic threat of boycott by means of which we were presented with the ludicrous spectacle of two inveterate starvelings making the threat that if they could not dine on caviar they would not accept carrots to a woman who was not all that keen on sharing any crumbs from her table with such as they (she was, after all, only cajoled into accepting the so-called Growth Pact which they were blocking out as a gambit to secure the two-thirds parliamentary majority needed in order to pass the ESM enabling legislation – a programme which she and hers were also not that keen on in the first place!)

The editorials and op-eds were bad enough, with their talk of ‘democratic deficits’, ‘witch-hunts’, ‘tearing up treaties before the ink is dry on them’ and ‘reaching into the German pocket’,  but some of the readers’ comments went so far as to invoke images of the infamous ‘Kohlruebenwinter’ when the besieged German populace barely fended off starvation on a monotonous diet of root vegetables in 1917, as well as the even more emotive leitmotiv of betrayal, the ‘Dolchstoss’ – or stab in the back – by means of which the Allies overcame a supposedly undefeated Imperial Army a year later.

And yet it may not be entirely a piece of political slipperiness for the Chancellor’s team to argue that nothing much actually has changed.

Several commentators have pointed out that there are, in fact, no new ‘instruments’, just as Frau Merkel promised. It remains the case, they contend, that the ESM has neither been extended, nor allowed to leverage itself up; that its use as a means of financing banks directly is subject both to the inevitably fraught process of first establishing a pan-European banking supervisor-cum-Resolution Trust (and one possibly equipped with a Scandinavian doctrine of managerial dismissal and stock and bondholder loss-sharing, to boot); that, in the meanwhile, if Spain needs to re-cap its banks, the overstretched Spanish budget will still have to bear the strain; that, theoretically at least, each and every emergency loan is supposed to be decided on a case-by-case basis by national legislatures on the typical EZ-weighted calculation – leaving the Bundestag with a final right of veto, should it ever screw its courage to the sticking place; that she can rely on the disgruntled Finns and Dutch also to block whatever they can; that the whole vexed issue of seniority of claims has not been precluded, merely finessed away by means of not insisting on an explicit declaration of what, much like the IMF, is likely to be an implicit priority, once implemented; and, finally, that the Grim Reaper may put away his scythe for now, since she has NOT in any fashion given way to the issue of joint Euro-Bonds.

Thus, as is so often the case in financial markets – for all their pretence at scientific objectivity in analysis – this largely comes to down to a matter of what its participants want to believe. If you are ready to scoff at German pusillanimity, or to despair at the cynicism of its leaders’ political calculation, or to rejoice at the prospect of another dose of global Keynesianism – or simply to exult that, finally, risk assets can rise and you can look good for a few weeks – you will tend to believe that the once-forbidding Siegfried Line is now bedecked with newly-scrubbed Allied underwear.

If, conversely, you believe that additional debt is no solution for over-indebtedness; that the extreme time-preference of the venal place-holders who comprise the political class will never allow them to introduce much-needed reforms except under the most exigent outside pressures; that the deliberate ruination of a nation of savers and profit-makers is too high a penance to observe in order to absolve their opposites of their sins; if you are predisposed to a bearish outlook for assets which you suspect still bear the artificial premium attached to them by the past quadrennium’s over-zealous interventionism, you will be eagerly reading between the lines for signs that the triumph of Monti, Rajoy, and Hollande has been an illusory one and that the sell-off may soon resume.

In any case, the next scene of the farce-cum-tragedy will take place in Karlsruhe on the 10th, when the German Constitutional Court will – somewhat unusually – take oral depositions from the pros and antis, as a preliminary to making a more considered judgement later.

As this all plays out, it should also be noted that all the past year’s summitry and special operations have effectively reinforced the business of capital withdrawal and banking dis-integration across the ‘natural frontiers’ of the Rhine and the Alps. As the ECB balance sheet has doled out an extra €800+ billion in new credits, TARGET2 creditor-debtor balances have swollen by €590 billion (€390 billion v-a-v Germany alone) with M1 only adding around €210 billion, with half of that increment having taken place in Germany and two-thirds of it in the wider creditor group which includes the Netherlands, Finland, and Luxembourg.

Thus, German real M1 growth has accelerated smartly from 0.9% pa to 5.2% (the median rate of the past three decades), driven by a veritable explosion in the local monetary base. Across the combined Creditor-4 grouping, real M1 is rising at a rapid 5.7% annual rate while – alack and alas! – the same key measure in the rest of the Zone is deflating at 3.9% annualized.

Were we to write down debts, entitlements, subsidies, wages, and costs and free up balance sheets, capital means, and labour in the latter unfortunates at the same time that we allowed the extra monetary infusion to go about its accustomed work among the former blessèd quartet, it would eventually effect the necessary rebalancing – in classic Humean stock-flow terms – that the bloc so badly needs. Thus, our condemnation of the process should really confine itself to the observation that it is precisely those same necessary accompaniments that so much of the Latinate policy thrust is aimed at avoiding, at the direct expense of their unsullied northern neighbours.

While the combatants take a brief respite from the battle, we can instead entertain ourselves with the spectacle of Monsieur Oui – the new incumbent of the Elysée Palace – trying to keep his rash electoral promises to reverse the sweeping tide of ‘neoliberalism’ and to stimulate growth while simultaneously being forced to trim his budgetary outlays to the not inconsiderable tune of €40 billion. Bon chance, mon brave!

The soak-the-rich measures we can expect, in what will be a victory for blind ideology over both economic theory and empirical verification, will further poison what are already noisome waters for investment and capital formation. As such, this is a prospect which is already said to be impelling elevated numbers of the likely soakees to quit the nest, in a less sanguinary replay of the Revocation of the Edict of Nantes.

Ironically, many of these would be émigrés are said to be looking, in time honoured fashion, across the narrow waters of La Manche for their haven. Ironic, because perfidious Albion herself is a shining example of how not to manage a recovery.

For Britain remains locked into a grinding recession of its own with its banks not just being hauled, again, before the court of public opinion, but still sheltering far too many zombie companies on their books, to the decided detriment of those better entrepreneurs who are now being bled in a cut-throat competition with living dead businesses able to operate, at their creditors’ behest, only for cash.

Thus, despite allowing its currency to sink further than any major nation in the Crash, to the point of a post-war low; despite passing a sentence of death upon the rentier class, as per the Great Apothecary’s quack prescriptions from the 30s; despite the continuation of such a vast scale of government exhaustiveness-amid-‘austerity’ that Leviathan – and Leviathan alone – has swallowed up nigh unto £1/2 trillion in private sector and foreign savings this past 3 ½ years – so that the Beast has devoured 5 months of total private national output while moving its share of GDP back up towards those same peacetime highs which have twice in a generation seen the country reduced both to internal ruin and external derision – despite all this, Britain remains in enough of a recession to trigger a dangerous attack of populist headline-grabbing from its hapless ruling trio.

It seems the new Huguenots may well avoid the worst depredations of their own leadership by hopping on the ferry at Calais, but they should not count on alighting amid a Land of Milk and Honey, by any means.

Far away, across the Western Ocean, the US – still the best horse in the glue factory as Dallas Fed president Richard Fisher so colourfully puts it – has so far stood above this fray. Not least of the reasons for this is that, despite a dip in the offshore component in QI, corporate profits plus proprietors’ income have reached close to the best levels seen, as a proportion of private GDP, in the past five-and-a-half decades, while manufacturers’ operating margins have reached their best levels in the past four-and-a-half. Returns on equity are none too shabby, either. The incentives to produce, to invest, and to hire, would seem to be present even if a natural caution still pervades the owners and managers of capital, given both the domestic political uncertainties and the cloudy foreign horizons.

But, of course, THAT was then and THIS is now. With monetary growth slowing at home, and economic weakness afflicting Latam (Brazil’s IP just printed its weakest reading in 2 ½ years of -4.3% yoy, taking the level back to those of five years ago), Asia, and much of Europe abroad, the past may not be prologue. Certainly, that seemed to be the message being given by the latest NAPM number which suddenly dropped to what is almost a 2-year low, led by the biggest single month fall in new orders since 9/11 – a plunge only otherwise exceeded in the last half-century by the outbreak of the Iran-Iraq war and the onset of the second oil shock.

Was this a one-off, or is it the first crack in the foundations of a modest American recovery and re-orientation? Only time will tell.

1 Comment

  • Paul Marks says:

    Print (or create money by book keeping tricks), borrow and spend. Contrary to the propaganda Keynesian history textbooks this was the policy of many regimes of the 1930s (the Italian Fascists, the German National Socialists, the American New Dealers, the Popular Front government of France….) and it is the policy of most regimes now (including, it is now clear, China).

    The one major element of the 1930s that has not yet been followed is international trade war – this, it appears, is now starting up (for China, with its massive trade surplus, to start up the Protectionist game is insanity – but governments are insane, so insanity is to be expected).

    Oh well – the end will come soon.

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