China's amazing GDP growth and recovery experienced since the 2008 - 2009 crisis is slowing down. The rate of growth continues on a downward trajectory, as more economic problems begins to emerge that are accelerating its slowdown for the economy and global growth. These problems have been building for some time now and many of the problems now faced by China have stemmed from the economic policy decisions that the Government implemented to fight off the last crisis.
How Did China's Economic Problems Start?
China's economic recovery from the 2008 crisis has been remarkable as the country was able to quickly adapt to the global challenges that swept through and effected its own economy. China was able to shift the focus temporarily away from exports, to their own domestic economy as they began to accelerate spending on fixed asset expenditure on various large infrastructure projects around the country. This was funded by lowering interest rates and accelerating the use of debt to spur their own economic recovery. By implementing this strategy it also spurred demand for overall consumer spending as more credit began to flow through their economy.
This strategy worked very well and within a short period of time the flow of credit and spending began to shift the growth of China's economy higher once again. As a result, it lifted the global economy higher as China grew imports to fuel its large fixed investment expenditure projects and increased consumer spending. This allowed many commodity based countries like Canada, Brazil, US and Australia among others to bounce back quickly from the 2008 economic crisis. The increase growth in consumer spending in China also facilitated countries with a large manufacturing base like the EU region to also return to growth.
As a direct result of China's return to strong GDP growth, global foreign capital investment in China soared, as investors were attracted by the growth rates.
So why does China have some many problems effecting its economy in 2017?
One of the main causes is because China's economic recovery was predominately achieved by utilizing record amounts of debt to stimulate demand and now the debt load is becoming an anchor to their economy. (See chart below)
Before the 2008 / 2009 crisis, debt to GDP in China was moving sideways at around 130%, as new debt growth offset new growth in GDP. After the crisis hit the debt to GDP skyrocketed, meaning the new debt was no longer having the same effect on demand and GDP growth like it did prior to 2008 - 2009 crisis. The probably cause for the shift in effectiveness on GDP growth after the crisis, was due to increased debt towards inefficient projects designed only to spur immediate demand regardless if the projects were financially viable.
Since demand now has been effected by the debt levels of mostly inefficient debt accumulation, it began to hamper growth and the economy began to slow after a few short years.
Now that the economy slow down is accelerating, the capital that came from abroad during the China growth recovery, together with domestic savings of China's citizens is fleeing China, in search of new growth opportunities in other countries.
The capital flight of over $1.2 trillion since 2015, is impacting on China's financial system and its currency the Yuan as financial conditions have tightened. This has impacted demand in China as access to credit becomes more difficult. This in turn spurs more demand for capital to find a new home globally as the currency becomes weaker as well as growth.
How Are The Economic Problems Impacting China's Growth?
Real Household Disposable Income Growth Falling
Prior to 2008 - 2009 crisis, China's real household disposable income was growing above 10% (See chart below). It reached a temporary high of 14% y/y on growth just after the crisis took hold as the stimulus spurred growth and incomes for a short period. After the crisis was in full swing the real household disposable income slowed to 6-7 % growth.
After peaking in 2012 income continued to decrease, as it made its way to just above 4% growth in real household disposable income in 2015. A level of growth that was considerable lower than the trough reached in 2009.
Since the new debt that flowed into the economy during the recovery was not introduced in an efficient way, the increased debt provided only a short term spike in growth rates. This most likely caused the slow down in real household disposable income growth as the debt began to wane on overall demand rather than expanding it.
China's Capital Flight Explained
The flow of capital leaving the country has been accelerating in late 2016 and 2017. This short video below explains why the rush of capital out of China is occurring.
China Tries To Stem The Capital Flight Problem
Since record amounts of capital is continuing to leave China each month it has placed an enormous amount of pressure on the financial system, as the outflow pressure is tightening financial conditions and liquidity within China. To tackle the tightening conditions, the Chinese Government has been adding massive amounts of liquidity that spiked in 2016 to attempt to stem the pressure. While they continue to add billions in liquidity the People's Bank Of China (PBOC) have had to sell their foreign reserves assets to fund their liquidity injections and support the currency.
The Outflow Pressure Continues In 2017
The chart below highlights the fact that China continues to struggle with managing their financial conditions as their financial system has once again required a surge of liquidity injections to ease the tightening conditions. Over the 5 day period from the 16th to the 20th January 2017, the PBOC had pumped in $1,130 billion Yuan into the system.
Without these injections the banks would face a cash crunch and the whole system would seize up and their economy would go from slowing growth to a crash in GDP.
Defending The Yuan To Slow Capital Flight
The existing policy of China is to have an orderly and planned depreciation of the Yuan currency relative to the US dollar, in order to keep their export driven economy competitive internationally.
However, as the capital flight began to increase in reaction to the Government decision to devalue the Yuan by larger amounts in August 2015, the currency has become more volatile on the market as the Yuan began to depreciate at a faster rate to what the Government had planned. To reduce the pace of devaluation, the PBOC has been actively supporting the Yuan by selling their foreign US dollar reserves to allow the Yuan to appreciate and offset the selling demand from capital leaving the country. By engaging in continuous support of Yuan they have depleted their reserves of US dollars by over $800 billion to support the Yuan.
Depleting Foreign Exchange Reserves
Since the Yuan is pegged to the US dollar, with a small allowance for market swings from the set daily spot rate, the Chinese Government has created another problem as it tries to control their currency devaluation to spur exports. The PBOC is rapidly depleting its reserves to control Yuan currency market. With the current pace of depletion of reserves the PBOC will run out of foreign reserves in only a few years time. So their current strategy to control the exodus of capital leaving their country by actively intervening in their currency is running out of money and time.
This is why the calls from economists around the globe to allow their currency to be fully floated rather than be pegged is growing. This will allow the PBOC to retain their reserves as they no longer need to intervene. The downside is that the reaction from the market from a free floating dollar is that the currency will most likely experience a sharp fall once floated, compounding the problems for China.
Chinese Citizens Buy Bitcoin To Protect From Devaluation Of The Yuan
The Chinese people are fully aware of the Governments plans for a continued devaluation of the Yuan as one of the economic policies to spur GDP growth for China. This has led to Chinese citizens sending large amounts of their capital in 2014 & 2015 overseas to purchase foreign assets like real estate in Vancouver, Sydney and New York to protect themselves from devaluation. To combat this the Government has implemented stricter capital controls to slow the capital flight by limiting the annual limit of capital leaving China to $USD 50,000 which is one of the many recent capital controls put in place by the Government.
To get around the capital controls the Chinese citizens have had to become creative and finds new ways around the capital controls. One of the big trend in 2016 to get around the capital controls, was to buy Bitcoin in China. When they want to sell their Bitcoin investment, they sell on a foreign Bitcoin exchange rather than the Chinese exchange meaning their capital is now outside of China.
This strategy became very popular last year and was one of the main reasons why Bitcoin was the best performing currency in 2016 with an approximate 100% return priced in Yuan / Rmb currency. (See chart below)
If the Government decided to also crack down on the use of Bitcoin as part of their capital controls, we could see a sizeable correction in the price of Bitcoin in 2017.
Global Economy Slowing As Trade Volumes Show Anemic Growth
Global trade volumes are barely growing and have been experiencing anemic growth since 2012. (See chart below). Like many of the charts shown in this article, there was a spike in volumes in 2010 as stimulus measures impacted on trade volumes as they spiked to just under 20% growth. After the stimulus waned the growth rates collapsed as well and now are barely growing.
Since China is a major trading partner with most countries the trade volumes growth doesn't bode well for its exports. Together with China's other economic problems, China will struggle with its GDP targets for 2017 due to its export weakness. This is especially true as it appears that the low growth in volumes is slowly heading towards 0% growth.
Global Export Values Slowing
The global trade values show a similar picture to the trends experienced with trade volumes globally. After experiencing a sizeable correction in trade values in 2009, global trade was able to rebound and make new highs. However since 2010 - 2011 the global trade values have been trending sideways, with the last 2 years showing that global trade values have been steadily falling.
China's Growth Engine - Exports Records Worse Slump Since 2009
Recent data released last week showed that China's exports recorded its biggest fall in exports since the 2009 slump. Exports actually declined by 7.7% in 2016, while China's imports also slowed by 5.5% as their economy internal demand for goods continued to decline.
Now President Trump is officially in office, the Chinese Government are worried about the implications of an impending trade war that could begin under his Presidency, as he tries to restore jobs and begin to increase manufacturing of goods in the US. If tariffs are implemented in the US on foreign goods as previously suggested by Trump, China's exports would fall even further in 2017 and beyond which would encourage more capital to flee China.
China's Key Economic Data - All Trending Down
The four key areas the world monitors to gauge the health and prosperity of China's economy are GDP, Industrial production, retail sales and fixed asset investment. From the most recent data available provided by the Chinese Government (see chart below), you can see the long term charts of all 4 data areas, are trending down from 2010. The official economic data even though may be overstated by the Government on the true state of the economy, reflect the consensus that China is slowing by its own metrics.
The Market Reacts To A Slowing China
The market has taken notice on the shift of China's economy and the problems its currently faces, as traders have been steadily increasing the bets on the Chinese stock market that it will fall. The percentage of shorts over shares on the China A shares ETF has jumped from 1% in September 2016 to 13% in January 2017 as traders prepare for a correction in the stock market based on a deteriorating economic outlook for China.
China's Economic Challenges Face No Easy Solutions.
This article highlights the many issues at play contributing to China's slowdown of the economy for 2017. There are however several more issues currently at play that are not covered in this article. See below a short video to highlight some of the problems discuss in this article, as well as others not addressed that China need to solve for the long term viability of the economy and its people.
China & Global Economy Fortunes Tied Together
The implications of China's problems on the global economy are real and significant as the world relies on China's annual GDP growth to fuel global GDP growth. China also relies on the global economy for its export growth. This means that if China's growth slowdown is gathering pace in conjunction with global trade stagnating, it would appear the global economy is heading for another slowdown. If the slowdown persists this could easily turn into a recession. The only difference this time compared to the 2008 - 2009 crisis, is that the stimulus plan that will be implemented by Central Banks and Governments might not work as effectively. This is because the global economy has already been subjected to at least one or more forms of stimulus continuously for the last 8 years to support global growth.
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The world has changed a great deal in the last 85 years in terms of how the markets and the economy functions as well as how we see them operating. Slowly over time we have added and implemented more and more policies, regulations, controls, mechanisms and various forms of stimulus in an attempt to smooth out business cycles booms and busts. Central Banks (CB's) and Governments have tried very hard to shorten the busts / recession cycle by lowering interest rates and extend the boom cycles in each and every business cycle over the last 85 years.
Now we fast forward to 2016 and the chief aim is to never experience a bust / recession / depression or deflation ever again. Central Banks (CB's) have taught us that they are all bad things and that we must avoid them at all costs.
These CB's have tried multiple policies and even some new experiments like negative interest rates in attempt to keep the global economy from experiencing a slow down or any amount of deflation. How bad is it really if the price of everyday items like food, rent and fuel becomes 1 or 2% cheaper each year. For the average income earner around the world their money will be allowed to go further if prices fall.
The more we have tried to control every aspect of the market, capitalism and the economy, the harder its becoming to not lose total control of these very things. However I believe we are already in the process of losing control of one of the most important things, the real economy. Presently all the Central Banks have done an excellent job at keeping the Financial assets Ie Stocks and Bonds markets up at or near record highs , while the actual economy has been unable to improve in real inflation adjusted terms over the last 10 years.
Real Assets At All Time Lows
If we take a look at the chart below, it illustrates perfectly the complete distortion of over 85+ years of controlling mechanisms, policies and Central Bank experiments have done to the relative value of real assets compared to financial assets.
This chart goes all the way back to 1925 and currently we are at an all time low, for real assets (Houses, commodities, fine art, jewellery etc) relative to financial assets of stocks and bonds. All the stimulus and attempts at controlling the markets and economy have only influenced the price of financial assets. Financial assets are more easily influenced and controlled through electronic exchanges, rather than real tangible assets which are much harder to manipulate on a global scale.
In the video below, Ray Dalio and company deliver a frank assessment on how we have reached the physically limits of the system. As we have artificially pushed markets and demand higher through debt accumulation, lowering interest rates to zero and by ballooning the derivatives market.
Increasing Volatility And Valuation Divergence
The chart below provides a good understanding on the ever increasing huge swings in volatility the financial markets have experienced. Central Banks began to introduce and try new stimulus and policy ideas in the early 2000's to reduce the busts / recessionary periods, causing large swings in the prices of the financial market as well as the valuations.
The most recent round of stimulus that began in 2009 with Zero Interest Rate Policy (ZIRP), followed by QE 1, 2, 3 and negative interest rates have stretched out the valuation of the S&P 500 relative to US productivity. Up to 1995 / 96 US productivity moved in sync with the S&P 500 stock market. This is clearly no longer the case as the chart indicates a strong divergence in valuation.
This week we received the latest monthly industrial production number in the US and showed that the year on year figure remains negative.
Since mid 2014 you will notice that industrial production data used to coincide with the value of the S&P 500 index very well. Now industrial production has been falling for 2 years and the stock market is near nominal all time record highs.
One of the policies that the Central Banks have utilized to try and control the economy, markets and financial assets values is to physically adjust interest rates up and down. Since the 1980's when Paul Volcker raised interest rate to around 18% to combat high inflation, we have been steadily lowering them all the way to zero.
Why Lower Interest Rates No Longer Work?
Presently the federal funds rate is at 0.25% as you can see from the chart, however lower interest rates are no longer having the desired effects to stimulate the real economy anymore. One of the reasons for this is the fact we have reached the limits of our debt bubble cycle. We can no longer leverage ourselves any higher despite having interest rates at close to zero .
Leveraging Corporate America
One of the many side effects of lowering the federal funds rate to close to zero, has been the leveraging of US companies to levels higher than the 2007 and 2008 peak before the GFC crisis. Debt to equity is approaching 60% for non-financial companies, as the incentive to load up on debt has never been so high. But is it really helping corporate America?
What Is The Debt Being Utilized For?
The accumulation of more debt relative to assets would be ideal in the short term if companies were utilizing the debt to fund new innovation, capital expenditure and additional capacity for future growth.
The reality is that a large majority of the debt accumulation has been utilized to fund buybacks of company stocks to artificially boost earnings per share (EPS) which in turn helps stock prices rise despite the company profit not actually growing from this strategy.
The chart below shows that share buybacks have more than doubled since 2012 to $161 Billion in the 1st quarter of 2016, as more companies engaged in artificial growth strategies rather than invest in their own business models.
IBM a large technology company that has been an consistent innovator issuing several thousand new patents each year. However even though IBM still continues to issue several thousand patents, the company has been steadily increasing its debt levels (See chart below) to allow it to participate in stock buybacks.
IBM Increasing Debt & No Growth
These higher debt levels has allowed IBM to engaged in stock buybacks with the additional funds at their disposal. Unfortunately for IBM the stock buybacks have not helped the actual company as it has struggled to grow over the last few years.
The chart below is a perfect example how a large company has tried to control its EPS through artificial boosting its profits with stock purchases funded through debt. However the actual result is that IBM's revenue (which can't be artificially adjusted through stock buybacks) has been falling since 2012 as the company continues to struggle to grow its top line and bottom line numbers.
Netflix, which is relatively young technology company that provide online streaming of TV content, is a company that has been investing large amounts of money into the companyto deliver new and original TV content, as it differentiates itself and reduces its reliance on licensing content from other media companies.
On the 18th October Netflix announced its latest quarterly result, which was above estimates for EPS and subscriber growth. However the interesting thing that investors didn't seem care about is that Netflix free cash flow is going the wrong way and accelerating. It burned through $506 million in a single quarter and just over $1 billion over 3 quarters. (See chart below) The stock ended up jumping around 19% after reporting its results.
Because of the huge drain of cash despite reporting a profit, Netflix did mention it will be tapping the markets for an increase in debt soon. Because interest rates are so low the market does not care that Netflix is essentially, borrowing more money to make new TV shows to attract more members. The current business model is simply not sustainable, especially when the company spends $142 to add one new subscriber.
If Interest rates were set by the market and were not manipulated by Central Banks the actual interest rate would be significantly higher to encourage savers to part with the capital. In this scenario Netflix business model would not survive in its current form.
The last chart summaries very simply, how "we have lost control of the real economy by trying to control everything". Global GDP estimates continues to decline as global stocks continue to increase, as Central Bank balance sheets fund global stocks higher.
Lastly this MUST WATCH video Rick Santelli makes a simple request to Central Banks.
One by one real estate markets across the globe have begun to pop as the record real estate bubble has turned to a slow down in prices and growth. Multiple regions and real estate markets have begun to cool despite record low interest rates and Quantitative Easing (QE) stimulus.
Until recently the global real estate markets had been one of the best performing asset classes over the last 7 years, as Central Banks coordinated efforts to stimulate the economy in 2009 and further in 2012 - 2016 brought interest rates around the globe to record lows. Some countries even went negative with the objective to ensure GDP growth continues.
The Tipping Point Of Stimulus - Too Much Of A Good Thing
Eventually though any market will reach the limits of what artificial stimulus can do to prices and demand. Whether its auto / car market, think of the cash for clunkers stimulus and the more recent auto subprime loans bubble in the US, or whats happening right now with real estate prices in different countries. Eventually demand begins to wane even when stimulus remains or increases. This happens when too much of a good things begins to take hold and stimulus actually becomes a negative to demand.
Pizza Eating Example:
If your hungry and you love pizza you decide go to a pizza restaurant. The demand for eating pizza is high, however eventually the demand or desire for more pizza will start to fall until you reach the point of when you don't want no more pizza. Your desire or demand will not change even if the pizza price falls by 50% making it easier to buy more. Why because you reach the limits of your own consumption and demand eventually disappears.
This simplified example works in a similar way to economic stimulus in asset markets as it does for the rise and fall in demand for pizza. Everything has a limit where extra stimulus stops being effective.
Luxury Manhattan Real Estate - Latest Market To Correct
The luxury real estate market in Manhattan is one of the latest markets to cool as it pop its real estate bubble. In the chart below you can see the declining trend in growth in prices in Manhattan. Since January 2015 where growth was around 8% pa, the level of growth has continued to fall each month to February 2016. Where the data shows that it has gone negative to close to a 1% fall in prices.
San Francisco area has been another hot real estate market that has started to cool down, despite being a trendy place to live and close to employment opportunities. With several big Technology companies headquarters located in the area.
In this short video below its give you a good understanding how the bullishness of the real estate market has tapered off, as the real estate sales and prices have soften and the time taken to sell has increased compared to a year ago.
One of the reasons why the San Francisco real estate market has started to cool despite low interest rates and stimulus is due to the fact the employment levels in the area has peaked, and has been stagnating since September last year with no growth recorded in employment in the area. This has effected rental demand and rental prices have begin to come down also weighing on the San Francisco real estate market.
Based on the indicators and the employment data the trend for this real estate market is not looking good going forward.
Across over to Vancouver real estate market in Canada, has experienced a spectacular fall in prices in a very short period of time. (See chart below)
Similar to San Francisco real estate market, Vancouver had experienced sharp rises in prices over the last few years as foreign buyers and local demand drove up prices. This was due to record low interest rates forcing investors to find a destination to earn a return on their capital, as cash and bonds income continued to fall. However recent tax increases for foreign buyers in Canada has effected demand dramatically in the area, with prices falling sharply since July this year.
The video below gives you a snapshot of the current Vancouver real estate market and the fallout from a sharp drop in home sales in the region. On a bright note they expect the market to remain relatively stable moving forward. Given the global backdrop in real estate trends this assumption may change.
In the UK commercial real estate has been experiencing a slowdown since the beginning of the year and was in the process of cooling before the Brexit vote dampened confidence for this asset class further causing further pain for the sector.
The graph below shows the trend in property deals value falling compared to the same month year ago. The trend is clearly falling faster as February through to May show steeper falls than January.
The falls in property deal values is most likely the consequence of income and capital growth returns continuing to fall each month since reaching the peak in October 2014 of 12.95% return, to the current return of 5.91% in March 2016. (See chart below)
Australia's real estate bubble has continued to remain red hot in bubble territory despite warnings from BIS and other groups on debt levels. To see the article click here Australia's debt addiction fuels bubble.
Despite the residential real estate market continuing to perform strongly in Australia, the Australian real estate investment trust (REIT) sector which predominately focuses on commercial real estate, has experienced sharp falls in prices since August. The REIT sector current price has fallen back to the levels set in April this year despite setting a yearly high back in July this year.
Why It Feels Like Everything Is OK
This chart below shows exactly why it appear that everything seems to be OK even though each month another real estate market across the globe starts to cool as their bubble pops and deflates.
The chart below shows global GDP expectations for 2016 overlapping the global stock market and global central bank balance sheet levels.
The chart shows the blue line which represents global central bank balance sheet continuing to increase, and the global stock market following this trend up with it since the start of this year.
What this indicates is that the global stock market is being held up by artificial stimulus as the stock market no longer reflects global GDP movements to the downside.
I'm aware that not every real estate market around the globe has started to pop. In fact some markets like China and Australia residential market are continuing to go higher.
The signs however are getting stronger as more and more real estate bubbles popping are emerging each month. Eventually more real estate markets will be effected, as the stimulus effect on demand starts to fade. Coupled with the fact global GDP continues to fall and the effect it will have on employment levels will cause real estate markets to fall in more regions.
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China's remarkable growth in GDP has provided a large boost to global growth over the years. As the global economy and trade recovered from the GFC in 2009 and 2010, China was major contributor in reversing the global down turn and lifting GDP higher.
China Growth Fueled By Record Debt Levels
Its no secret anymore that the real reason, China has been able to rebound so strongly in the last 7 years, was because China has accumulated a record amount of debt to fuel its own GDP growth and keep demand for global trade strong.
Now that total debt to GDP is approaching 300% (see chart below) in China, its starting to become a drag on the largest economy in the world. As the economy continues to slow due to its debt bubble impacting growth, it increases the risk that China will actually threaten global growth as it deals with its own debt crisis.
If you take a look at the chart below from 2004 to 2008 period, you will notice that the debt to GDP ratio was stable and moving sideways at around 175% debt to GDP. This indicated that the economy was growing in sync with the level of debt growth within China's economy, which is a healthy sign of a growing stable economy despite at the time debt to GDP was high.
However when you look at the chart from 2008 to 2016, the debt to GDP starts to increase for the first few years and then accelerates as it approaches 2012 over the next 4 years to 2016. This trend is not a healthy sign for China's economy, as this indicates that the GDP growth has been unable to keep up with the level of debt taken on within the economy.
If debt is growing faster than GDP the debt stops becoming a contributor to growth and instead starts to drag on growth especially as debt to GDP ratio accelerates.
China To Drag Global Economy Down
Now that the debt has become a major problem in China, there have been a number of people and international groups including the BIS, Bank of England (BOE) and NAB Bank among others, who have raised concerns over the growing risks that China's debt bubble poses on the global economy.
The video below is from a former chief economist of the IMF Ken Rogoff discussing the key issues he believes China's slowdown poses on the global economy.
Debts Start To Pile Up
The chart below is from 2014 and shows the EBIT debt coverage of 780 bond issuers in China, and the level of interest payments to operating profits.
You can see that back in 2014 a number of debt issuers had a level of 100% or higher EBIT debt coverage. Meaning that the interest payments were higher than operating profits to pay for the loan. Leaving the only options of defaulting on the debts or borrowing more money to pay the interest. Borrowing money to pay existing interest and debt is the definition of a ponzi scheme.
The chart is very interesting even though its from 2014, as it layed the foundation for the problems companies in China are facing in 2016.
According to Reuters.com 25% of Chinese companies profits in the first half were not higher enough to service their debts and make their interest payments.
China's Debt Crisis Too Big For Government Stimulus To Be Effective.
Professor Steve Keen highlights in this video below, his agreement with BIS assessment of China's debt crisis, the subsequent slowdown in growth and how China grapples with its high debt levels.
Steve also suggest that the China's Government will attempt to stimulate the country to allow it to grow out of its debt problems, however he believes the problem is too big even for the Government to handle without experiencing a downturn in the economy.
Global Growth Slowdown To Continue
China's debt crisis and its subsequent slowdown within its own economy, is coming at an inconvenient time for the global economy. Many countries including the US economy are starting to experience a slow down as recent economic indicators highlight the slowdown in global growth.
Within the US it's becoming more apparent that the US economy is about to experience a recession or may already be in a recession unofficially.
To see the recent post on the slowingUS economy click on the link . Is the US in a recession?
The 7 Year Experiment
Central Banks around the globe have experimented with a myriad of different policy tools over the last 7 years, with the explicit goal of reigniting global growth to prior 2007 levels. Central Banks figured if they could reverse falling asset prices and deflation, by creating inflation via Quantitative Easing (QE) they would be able to re inflate asset prices and kick start growth.
However since the global economy slowed down in 2007 and reversed course, crashing in 2008 and 2009, growth hasn't been quite the same. In fact the recovery from the 2008 recession has been the weakest in history.
By flooding the world with trillions of dollars in liquidity and creating money out of thin air, by printing digital money or QE and dispersing it through the banking system, the Central Banks have been able to create the illusion that the global economy is growing and things are back on track.
Yes the S&P 500 is just off all time record highs in price, and yes real estate prices around the globe have either recovered most, or all of the losses prior to the 2008 crash. Better still real estate markets in some countries like in Canada and Australia have surpassed their previous highs . Wages have also been rising steadily for the last 5 years after falling from 2008 to 2011. Yet for the average person it doesn't feel like we are better off with higher levels of standard of living. More importantly we cant seem to pin point the exact reason why.
The Hidden Tax
The actual reason why the recovery from 2008 crisis has been so sluggish, with the weakest on record is because real household incomes adjusted for inflation have gone nowhere. In fact real household wages are down 1.1% in the last 16 years. This is evident even though nominal wages have actually grown by just over 40% since the year 2000. (See chart below Titled: Median Household Income in the 21st Century)
Inflation is sometimes referred to as a hidden tax, because you don't seem to notice it as much on a day to day, quarterly or annual basis. Yet inflation over a 5 or 10 year period or longer can be really easy to spot when you take a look and compares prices over longer periods for goods, services and assets like food, rent, education and real estate.
Since real wages adjusted for inflation has not increased in 16 years, yet the level of private debt has grown dramatically over the same period, the share of wealth by the bottom 90% of US households has actually been declining. (See chart Titled: Distribution of wealth in the US since 1917)
The reason for the decline is because the bottom 90% have used debt to fund increasing consumption on their home and living expenses, since their real wages have stagnated. In comparison the top 0.1% have steadily been increasing household wealth as they have been able to utilize debt and higher equity / capital levels to take further advantage of rising asset prices over time.
Lastly to further illustrate the real cost of inflation, and how it can be subtly hidden from most people. Take a look at the chart below of the S&P 500 which has been adjusted for inflation.
If you take a look at the current level on the right hand side of the chart you will notice its only just above the price level from the year 1999 / 2000 level.
The second interesting point is that the last bull market that occurred between 2001 - 2007 did not reach the prior 1999 - 2000 level when adjusted for inflation, even though the nominal price chart for the S&P 500 recovered to the same level as 1999 - 2000.
Some Things Cant Be Manufactured
So after experimenting with so many different policies and trillions of dollars in QE, Central Banks have achieved the outcome they have desperately tried to create, inflation and an artificial type of manufactured growth. Artificial because when you factor or adjust for inflation, you realize that there isn't a whole lot of real growth to be shared around.
Apple Inc - NASDAQ: (AAPL) the largest market cap company in the world with a market cap of just over USD $580 billion, has recently been in the financial news headlines for claims it has underpaid taxes within the European Union (EU) region. The EU has ordered Ireland on its behalf to collect from Apple back taxes of EUR $13 Billion plus interest payments for underpaying corporate taxes over several years. However the ruling may not stand as the Ireland Government is debating on whether to enforce the EU's decision.
Overnight Apple released to the world the latest updates on the iPhone, iPhone accessories and the new Apple watch, so I thought today would be a perfect time to review Apple's chart in 'Stock In Review'.
Looking at the long term chart below you can see that for Apple shareholders who have owned the stock over the last 7.5 years have been rewarded with a close to 10 fold share price appreciation from a low of around $11 (share split adjusted) that was reached at the depths of the financial crisis in Jan 2009 to the current price in Sep 2016 of $108.36.
The long term monthly chart of Apple below shows an impressive uptrend that has continued since making the lows in 2009, with the price comfortably above its trend line and moving averages.
On a weekly chart Apple overall picture looks a little different, as Apple had been in a downtrend after breaking its strong uptrend in the first week of Aug 2015, shown in the chart below at around $115 a share. Once it broke the downtrend it continued to fall for the next 12 months.
Interestingly Apple broke its down trend in the first week of August 2016 one year to the date of its trend turning down.
Zooming in on a daily chart, you can see that once Apple formed a strong support level around $92.50 a share on 4 occasions (see chart below), Apple was able to reverse and break its downtrend channel.
After breaking out of its downtrend Apple experienced a short pullback in price before starting to rise again which is a bullish sign for Apple.
So overall even though Apple has some tax issues to sort out with the EU over the coming months, the market doesn't seem to mind, or the market doesn't believe it will be forced to pay the large tax bill ordered by the EU.
Disclaimer: This post was for educational purposes only and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide those services.
If you were told 5 years ago that at some point in the near future that investors would be happy to part with their capital to invest in companies and lend them money and be charged interest for handing over their capital, you would probably say 'that's impossible' and 'that would never happen'.
Well today that idea has become a reality in Europe, where 2 non-financial companies borrowed money from investors and will be receiving interest instead of paying interest to investors.
A German multinational company Henkel AG as well as French company Sanofi SA have both issued debt that carry a negative yield.
Henkel AG has borrowed €500 million for two years issuing bonds that yield negative -0.05%, and Sanofi SA has issued €1 billion in 3 year bonds also yielding -0.05%.
Up until recently investors had only been buying negative yielding Government bonds as Central Banks around the globe had increased their Quantitative Easing (QE) purchases buying back from investors AAA + AA Government bonds.
However the EU Central Bank ran into a problem with their QE purchases of highly rated Government bonds, the pool of available bonds to purchase was quickly shrinking so the EU Central Bank decided to modify the QE buying of acceptable bonds to include A rated EU corporate bonds to increase the available pool of bonds to purchase.
Because of the expanded EU QE program that has been running since last year, yields on European corporate bonds have been steadily falling where by A + BBB rated bonds are now negative yielding with riskier BB rated corporate bonds about to go negative as well.
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I am a private trader and equities investor that loves the trading and investing world, following the markets and everything in between.