Chinese Trade Surplus Drops

Today’s Pfennigfor your thoughts…

Good day, and a marvelous Monday to you!

Front and center this morning, let’s take a trip to Asia, and see what all the commotion from the markets overnight was about.

Chinese trade data, that’s what it was!  In dollar terms, the Chinese trade surplus for July was “only” $43.03 billion.

I say “only” facetiously because most countries would love to print a $43 billion trade surplus for one month! But, we’re talking about China here folks, and the experts had forecast the Trade Surplus to print at $54.7 billion.

I’m not sure what these so called experts were smoking, going with a number that strong, when June’s trade surplus was $46.54 billion.

So, there was some slippage here, right? Yes, that’s right, but why would the markets be all up in arms about this slippage from $46 billion to $43 billion?

The details in the report showed that both exports and imports were down over 8%.

I think this tells us two different stories.

First, the domestic demand in China has come to a stop, and that’s not a good thing. But the exports drop reflects to how weak the major economies of the world are — the U.S. and the Eurozone included. So, China gets all these darts thrown at them, but some should be redirected toward the U.S. and Eurozone.

There is one thing about the exports number that scares me a bit.  And that is, what if China decides to do what everyone else in the world has done to their currencies, debasing them, depreciating them, and whacking them until there is no more to whack, just to improve their exports?

I’ve talked about this before, and always reasoned that as long as China was working toward getting the renminbi to be part of the IMF’s reserve currencies that they use for the Special Drawing Rights (SDR’s), that China would not put that work to risk by depreciating their currency.

But now we’ve been told by the IMF that they will revisit their decision a year from now, what would it hurt if the Chinese decided to adjust the renminbi’s value downward now? Think about that, it would much like forgetting about the pain, and a year from now, the IMF would have forgotten about what the Chinese did.

But, after I’ve gone through all of this, the renminbi was allowed to appreciate overnight, marking the third consecutive trading session with an appreciation.

This morning I noticed that the price of oil dropped another buck to the $43 handle (actually $43.82), and immediately my eyes switched to the petrol currencies to see what damage had been done to them with this latest drop in the price of oil.

I then noticed a Bloomberg article that had a title of “For Norway, Oil at $50 Is Worse Than The Global Financial Crisis.” I shook my head in agreement.

For all the clients of EverBank World Markets that are lucky enough (HA!) to receive the Review & Focus each month, you may recall me talking about how Norway and Sweden had already had their banking meltdown in the 90’s and I explained how these two countries dealt with their banking problem then, vs. the way we did it here.

I showed how their way of handling their banking meltdown allowed them to go basically unscathed during the Global Financial Crisis. But now with the price of oil dropping like a rock kicked off a cliff, this is far worse for Norway.

Well, anyway, we all know now what happens to a country that depends so much on one commodity, and that commodity’s price heads south.

In other news from Norway, July CPI (consumer inflation) was bang on expectations at +2.6%, but that’s down from June’s +3.2% print, and could lead the Norges Bank to believe that they have the breathing room to cut rates next month.

I would caution them that this downward path to the price of oil could turn around at any time, and IF it did, inflation would be Norway’s new problem.

Here in the U.S. I just shake my head in disgust over the rainbows and lollipops that keep getting thrown to us regarding the economy.

If our economy was so darn strong, why then is China swimming in red water with exports?

Well, we’ll get a better feel for things at the end of this week, because by the time we reach the end of the week, we’ll have seen three BIG reports. Retail Sales, Industrial Production and Capacity Utilization.

And while I’m on the U.S. economy — what’s up with bonds? Have you been tracking the falling yield of the 10-year Treasury?  Well, the 10-year is now trading with a 2.19% yield.

Wait, what? That’s right, the bond boys sure aren’t allowing the wool to be pulled over their eyes, and in addition to that, think about this for a moment — Bloomberg is reporting this morning that China slashed their U.S. Treasury holdings by $180 billion.

So, a bond rally is going on, with that news at the doorstep? I just had to stop and scratch my balding head, and try to figure that one out.

The currencies are pretty much down or flat this morning. The Jobs Jamboree on Friday was interesting in that it didn’t meet the expectations of 235,000 jobs created, but was close enough to stir up the hornet’s nest of rate hike expectations by printing at 215,000 jobs created.

It’s a classic battle right now. You have the folks that believe that now is the time to hike rates, and so they viewed this jobs print as proof that it’s time. And then you have the folks, like me, that don’t think it’s time to hike rates, and don’t believe whatever the BLS says so we don’t even think the jobs print was worth the paper it was printed on.

Once again last week I read that this year has been an awful year for startups, and that more businesses were closing then opening.

Now that’s the premise of the BLS’s Birth Death Model. That for the startups there’s a delay in getting their employees on the records, so the BLS makes an “adjustment” each month and adds or subtracts (mostly adds, rarely subtracts) based on their “model.”

So in a year, when it has been confirmed a couple of times now that there are more “deaths than births” this year, the BLS has seen to it to add 833,000 jobs.

Of July’s 215,000 supposed total jobs created, 83,000 were added by the BLS.  So, maybe now you get the ideal why I’ve become so disillusioned with the BLS’s numbers.

The euro is down a small bit this morning, and has pushed back during the time that I’ve been here writing, so maybe it can get back to flat before the day is over.

Greece has given the final stamp of approval of the euro 86 billion bailout/aid package. That was nice of them to do, eh?

The commodity currencies like Aussie dollars (A$), New Zealand dollars/kiwi, Canadian dollars/loonies, Brazilian real, and so on, are all feeling the pressure of the weaker Chinese data and are all searching for a bid this morning, as they trade in the red.

The U.S. data cupboard only has some third tier data to print today, and again tomorrow, but come Wednesday, July Retail Sales will print.

I have to say this ahead of the Retail Sales print: July has become the new “back to school sales” month, with schools starting so darn early these days.

And then the BHI tells me that we were in South Florida for the last 8 days of July — of which there were lots of rainy afternoons — and when there are rainy afternoons, my wife goes shopping. So, based on those two things, the BHI is indicating a recovery in Retail Sales for July. But we have to wait until Wednesday for that!

Gold is up a couple of bucks this morning, but we all know how that can go once the NY Traders arrive at their desks.

So, did you see the story in the Wall Street Journal on July 17th written by Jason Zweig?  Here’s the headline: “Let’s Be Honest About Gold, It’s a Pet Rock”. He went on to say, “it’s time to call owning gold what it is: an act of faith.”

The folks at GATA asked the question, “Why are central banks and governments so sensitive and secretive about what are supposedly only pet rocks?” I thank the folks at GATA for bringing this to my attention, as I had failed to see it in its original form.

Pet Rock? Good gracious, I know some people don’t believe in owning gold and that’s fine, but to call it a pet rock? I won’t even start on this, because I could be here all day stating all the facts that make his pronouncement wrong!

I have to tell you that I got a HUGE kick out of the FridayDaily Reckoning. It was titled “Conversations With a Central Banker.” Of course they didn’t really have a conversation with a Central Banker (Fed) but when you read through it, the conversation sure seems to be real.   So, here’s a snippet:

Daily Reckoning: So what you just said about the free market, price controls, the invisible hand — all that — doesn’t apply to money and interest rates? But you said a minute ago that price controls end in disaster every time.

Central Banker: We have to maintain a stable dollar, you idiot!

Daily Reckoning: Wow, OK. But if the Federal Reserve is supposed to maintain a stable dollar, why has it lost over 95% of its value since the Fed opened for business in 1913?

Central Banker: Well, we have to adapt to changing market conditions. After the housing crash of 2008, for example, we had to step in to save the market from collapse by shoring up the money supply.

Chuck again. Ok, so maybe you can’t get the gist of what it was all about, so you should probably go the website and read it there in its entirety, I do believe you’ll get as big a kick out of it as I did! And don’t forget it’s all fictitious, there was no real conversation that took place!

That’s it for today. I hope you have a marvelous Monday!

Regards,

Chuck Butler
for The Daily Reckoning

P.S. The Daily Pfennig is first published everyday, right here.

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