Income report showing potential future spending and economic growth

[0R0 + 6,251]

https://www.marketwatch.com/story/jobless-claims-rise-over-2-million-again-but-data-offer-glimmer-of-hope-2020-05-28?mod=economic-report

In my area, yesterday's shopping spree showed businesses desperate for workers, with signs out at the windows of all restaurants and stores I passed by or entered. Stores parking lots were loaded.

https://www.marketwatch.com/story/personal-income-surges-105-in-april-on-the-back-of-government-relief-payments-but-spending-lags-2020-05-29

Personal income is up 10.5% despite a drop of 8% in wage incomes. The Federal programs have more than compensated for the damage to incomes.

With so much of the economy closed, people had less opportunity to spend than they may have been willing to. Consumer spending was down " Consumer spending fell 13.6% in April after a 6.9% drop in March. Economists polled by MarketWatch had expected a 13% decrease. "

As a result, personal savings have risen 33% after having risen 13% in March.

Prices are -0.4%, however, this accumulation of purchasing power and decline in output are promising a future surge in price inflation.

 

This looks like fuel accumulating to fund consumption and rehiring as well as industrial expansion to displace China from supply chains. Which is what Trump is likely to campaign on and will start acting on NOW with the Chinese imposition of mainland law on HK, being viewed as a breach of China's obligations on the return of HK to Chinese control. Thus making the claim of its word being worthless and its commitments  on the "trade deal" being considered as null.

That is going to be coupled with a mass migration of approximately 28% of city labor to work from home outside the city. (based on surveys from Redfin and Zillow referenced in other posts) with a large construction boom in locations yet unknown. We don't know what the distribution would be in geographies. We also don't know how much of it would be within the US, but we do know that it can't be in China and other countries where you can not secure communications. Particularly any that use Huawei or other Chinese communications equipment.

The Fed has established swap lines with 14 central banks

Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank, the Reserve Bank of Australia, the Banco Central do Brasil, the Danmarks Nationalbank (Denmark), the Bank of Korea, the Banco de Mexico, the Norges Bank (Norway), the Reserve Bank of New Zealand, the Monetary Authority of Singapore, and the Sveriges Riksbank (Sweden).

It appears to be the core of the US global trading system to come, with Taiwan and EU still pending, not obvious whether the EU needs the swap lines now - it did in the GFC.

 

I think this will involve a rise in US oil consumption, not so much any rise in global oil consumption, particularly not  in Europe, which is demographically set for a rapid decline in demand, nor in China, that is also set to peak in oil consumption because of the same demographic factors, if it hasn't peaked already. Pricing may be higher than expected soon because of the oil intensity of the recovery in the US, in deliveries, in construction, and industrial expansion.

 

[BLA + 1,666]

ORO

Good piece

Other Topic : You have some interesting insight into our world events and problems. 

Edited June 1, 2020 by BLA

[0R0 + 6,251]

7 hours ago, BLA said:

ORO

Good piece

Other Topic : You have some interesting insight into our world problems.  Well informed.

If you wouldn't mind I'd be interesting in your thoughts on the evolving China situation taking into consideration Trump's recent response today.  Seems a little light on action.  I'm thinking he might be giving China a chance to rethink their position before the September Hong Kong implementation goes onto effect. He also has an election to consider and doesn't want to upset the U.S. economic apple cart .  .  .  .  at this time.  

I suspect if Trump's is given a second term we will see quite a bit of action from Trump on China and a myriad of other issues. 

Your thoughts ? Whenever you get the time if you want.

First of all, In the pandemic chaos, the world does not know what to expect of China's economy. The EU political class does not know what to expect of China's future. They tended to accept Chinese growth numbers as they were reported, with some padding to be expected. Internal estimates from China that I had quoted here before were 1.6-17% real GDP growth in 2018, and up to 0% for 2019. That would have taken Total Factor Productivity down to -3% to -5% from the commonly reported -2%.. The EU, or rather Germany, were building on a continuation of the narrative of the Expanding Chinese Middle Class into which they could continue exporting. That is as the German industrial capacity is still far greater than Germany nor its neighbors could ever absorb. Their numbers looking forward for domestic consumption are downright bleak. IIRC the German GDP is 45% exports, it will have to increase those exports in order to keep their people employed.

That was a myopic strategy since China can no more maintain growth into a declining demographic no different from Germany's, and endemic overcapacity going into the future as is the case in Germany as well.  The only consumer good Chinese want was more centrally located tier 1 real estate someone would actually afford to live in. This mythical economic good can not be exported from Germany, nor can it feed its construction. The steel and concrete is all domestic as is the disposable construction equipment.

China would have peaked in 2025 had its export growth and consumer credit and housing bubbles been maintained. EU and US corporations are still eyeing the straight line projections of the past into the future despite the Chinese being very obviously fast approaching their peak, or possibly past it due to the economic collapse of CV19. 

The Chinese pandemic bailout has been confined to financing a job protection scheme by banks. Which increased credit by 6 Trillion Yuan in March and 3 Trillion in April - well above the trend.  Orders and export orders and retail sales continue to drop in the third month after the economy reopened, dropping over 6% in April. Expectations from China credit analyst Charlene Chu among the most accurate China skeptics are that the recovery is not happening, expecting PMI for May to be significantly under 50, and once coupons for restaurants expire that sector will return to unsustainable consumer business levels. No idea whether the unemployment level estimated at 26% (up to 205 million) including migrant workers, has improved any from April survey estimates. But the PMI data suggest it hasn't as no business pickup occurred in April. Industrial output prices have fallen further than commodity inputs, again pressing production margins. Investment activity has yet to resume fully, only half way recovered.

I don't know by what magic the PBOC and CCP leaders thought the economy would recover from the export of the virus to their export markets via rising exports. But the continued recession has caught them by surprise and they are only now working on it with reluctant stimulus of just 5% of GDP, and 10% of GDP in extra credit, vs. 12% fiscal in the US and 20% of GDP credit handed out and another 20% pending.

https://www.scmp.com/economy/china-economy/article/3086569/china-pledges-largest-ever-economic-rescue-package-save-jobs

I suspect food inflation is the reason they had not acted sooner, as it had already hit 20% in Febr.

Each credit impulse in China produces a food price rise, which counters much of the economic benefit of the credit by reducing disposable income of the lower income classes. This chart below does not include this year's values yet. The scale of the required restructuring of China banking is similar to that of 1994-6 devaluation, and likely bigger. The resulting food inflation would be socially devastating at this point.

The EU, particularly Germany, is sitting on the side waiting to see where the wind blows and whether China recovers. If it does not, then they will side with the US in a "not made in China 2025" program. They are not giving up on their China market if they don't have to - i..e. if it is not collapsing. Or China is not at war.

The key thing to watch about about Europe is the banking sector, which is accumulating steep losses as the lockdowns cut off business incomes and thus their payments on bank credit. The thinly capitalized banks are at risk, their pretend assets dollar books are unbalanced. If they  collapse then the Eurodollar system goes with it, leaving only UK Japan and US banks to pick up the slack and reassemble the system. The draw on the ECB swap lines and Fed international repos is not showing a continued dash for liquidity. Again, EU banks hold lots of weak US credit in CLOs as they did before in 2009.

https://gnseconomics.com/2020/05/22/the-approaching-european-global-banking-crisis/

So they will be reluctant to give up any degree of revenue. They will latch onto China till it is obvious that it is in permanent decline or are booted out of office by their very angry people. But replacing China in supply chains is happening regardless. Without the exports of China goods growing, it begs the question where they would fund the import of Europe's exports. Particularly if a commodity (oil) price spike is coming. The strategy of staying away from an alignment with the US has little chance of producing any value for Europe, and so long as they are not aboard, Trump is limited on how far he can take actions. China has to show a robust recovery next month or two or be ejected from the trade system.

Back to China.

The new Work from Home movement has finally shifted the math and is allowing people to work away from the major city centers in the future.  That only leaves the school district problem where only a tiny segregated elite community in each of the megalopolis cities has decent schools that produce Tier 1 university candidates. Those people have to stay, since the Tier 2 cities where the cheaper (still expensive in absolute terms) real estate is doesn't have any quality schools at all. So if you are out of the kid business you can go Work from Home there, and leave the hyper expensive apartment in the good school district to your adult children and the grandkid. Or sell the damned millstone and buy a spacious luxury space in the nearest Tier 2 city. Possibly along with many others from your firm.

But there is the rub. If Tier1 city land is no longer being bid up to absurdity, then how will provincial governments and thus the central government too, be able to fund anything? Land sales were 70-90% of revenue for the Provincial Govs. The hyperexpensive Tier 1 apartments and office space constitute the bulk of the Chinese financial system's collateral for their loans. A large chunk of that is owned by leveraged investors. If the Work from Home movement holds then these will normalize towards Tier 2 levels and suffer from the fact that first time home buyer's demographic is shrinking very rapidly as the millennial spike is 32 years old and in 10 years, the population of 32 year olds will be 40% smaller. So the combination of the extreme real estate pricing and the fact of the forward slope having to be downwards makes it inevitable that prices will decline far more then they did in Tokyo in the 1990s. 80% losses are the least damage one should expect. That would flush the investor's official 50% equity (much less in reality since much of that is loans from family and friends) and bring 60% losses on the loan portfolio. Real estate prices are down 7% since the shutdown, having fallen initially and remained low.

The problem of demographics also plays into the cash flow situation for China's banks. They rely on a constant flow of savings from older workers at the peak of their incomes feeding the Ponzi scheme at 45% of income. By 2025, half of them are retired and drawing down savings while the Millennial spike only gets started on their savings and are already burdened by 60% of GDP in consumer debt. they won't be at peak savings till 2040. So the net retirement savings in 2025 should cross 0 into the negative. That means that since the investments of the banks are in cash flow negative strategic industries, all further stimulus or stabilization funding or consumption growth funding or construction funding will have to come entirely from rapid money printing large enough to overwhelm the deflationary impulse in demand.

That hole in cash flows wiill not be filled and will lead to money printing that would cause a bigger inflationary impulse in food prices than the previous one 20 odd years ago.  It looks like a dead end.

[Semthesis 0]

Guy, you are extremely intelligent. That was very well written and informative. Thank you! I appreciate it.

[specinho + 439]

On 5/30/2020 at 12:59 AM, 0R0 said:

https://www.marketwatch.com/story/jobless-claims-rise-over-2-million-again-but-data-offer-glimmer-of-hope-2020-05-28?mod=economic-report

In my area, yesterday's shopping spree showed businesses desperate for workers, with signs out at the windows of all restaurants and stores I passed by or entered. Stores parking lots were loaded.

https://www.marketwatch.com/story/personal-income-surges-105-in-april-on-the-back-of-government-relief-payments-but-spending-lags-2020-05-29

Personal income is up 10.5% despite a drop of 8% in wage incomes. The Federal programs have more than compensated for the damage to incomes.

As a result, personal savings have risen 33% after having risen 13% in March.

This looks like fuel accumulating to fund consumption and rehiring as well as industrial expansion to displace China from supply chains.

 

First of all, would like to give a definition to frame a clearer consensus for the discussion:                                                                                                                                                                   Per capita income (PCI) or average income measures the average income earned per person in a given area (city, region, country, etc.) in a specified year. It is calculated by dividing the area's total income by its total population or calculable from readily available gross domestic product (GDP) and population estimates .                                                                                                                                                                                                                                                         This calculation might be dubious  in its function. It is commonly acknowledged that in a population, there would generally be new borns, adolescences, teenagers, adults, retirees. Working population may vary depends on the stage of development of a country or area. Incomes of the population differ from business owners, labour, farmers etc .........  The end result of this broad assumption is we are getting      

GDP per capita of Laos	$2,670 (nominal, 2019 est.)[4]  $8,110 (Purchase Power Parity, 2019 est.)[4]

More than  20 years ago, the average income of Laos was ~ 400 USD. Now, it is 8000 USD?? This is how much they can spend to stimulate the growth of economy?? It would be plenty, no?? If this is true, then, we ought to be getting  few thousands percentage of growth rate and not merely 8%, no??                                                                                                                                                                                                                        Or, if there is a population of 1000, working adults 400 people, total income of this area is USD 4 millions. Then, average income per total population is 4 million/ 1000  equals to USD 4000. Average income per working population would be 4 million/ 400 people equals to USD 10 000........ A big shift in average purchasing power..............     but does it project the reality appropriately??                                                                                                              

Edited May 31, 2020 by specinho