US claims at a record low, Argentina base rates at 60%, the failed Chinese model, and the negative rate tax

Today’s daily newsletter is very late but hopefully still useful. Yesterday I said I have a few thoughts on China that I want to run by you. I didn’t get them out yesterday. So I will incorporate them into today’s post. Feedback appreciated as always

Jobless claims are at a record low in the US

For those of you who have been following me for a while, you know I like the jobless claims series because it is as good a real-time indicator of the economy as any given that it is released every week. And when the economy turns, claims data also turn.

Last week, the more stable 4-week average number fell 1,500 to 212,250, the lowest level since December 1969, when record keeping began. For me, this isn’t a contrary indicator. Instead it is just confirmation that the current economic situation is positive. It can be contrary if other forward-looking indicators show weakness. But they don’t. And so, it suggests that we have many months to go of robust economic data.

Why this matters: The second GDP estimate for Q2 revised the quarter up to 4.2% from 4.0% yesterday. And the Atlanta Fed’s GDPNow tracker is at 4.1% growth for Q3. To me, this speaks to a December hike to go with the September hike. And remember, that could keep pressure on emerging markets, though the strong dollar story seems to be receding at the moment.

Argentina raises rates to an eye-popping 60%

Since I mentioned EM, I should also mention the fact that Argentina’s central bank raised base rates to 60%.

Last week, when I was on holiday and driving back from the beach past the house my wife lived in during high school, my mother-in-law pointed to a bank building and said something like, “that’s where we got a loan for the house. I know it sounds crazy but it was at 16% interest, if you can believe it. We refinanced as soon as rates came down.”

I think it was 1977 when she bought the house. So mortgage rates were somewhat higher in the early 1980s. But still, can you imagine what it’s like living in Argentina right now? Base rates are now 60%. The Peso has already been cut virtually in half and was down on the news of the central bank move.

Why this matters: The Turks are saying they don’t want to go down this path of rate hikes. And you can see why. Argentina is screwed… royally. And the medicine isn’t even working. They are already in an IMF program. They hiked rates from 45% to 60% and the currency went down. That’s not good.

So what does this mean for Turkey? I don’t know. I mean Turkey’s currency slid today as well. This morning, it was off 9% for the week. And it’s sort of stabilized at that level. Should Turkey hike base rates? It’s hard to say it would have any impact given what we’re seeing.

None of this is good for EM. It says hot money is simply fleeing emerging markets with a sort of ‘act now, do analysis later’ reasoning to it. That’s a signpost for panic

China v Mexico

China is the big daddy for EM. Now, I know a lot of people talk about China as the biggest economy in the world on a purchasing power parity basis. But did you know that the average Chinese makes less money than the average Mexican?

What’s more China’s urbanization is mostly over. And it’s aging. By 2023, the population is predicted to start shrinking. No superpower has formed from that basis: not Spain or Portugal in the 15th and 16th centuries, not the Netherlands in the 17th century, not the UK in the 19th century and not the US in the 20th century.

Why this matters: The demographic challenges in China are immense.

The Chinese model in Africa

Meanwhile, the FT says “the Chinese model is failing Africa”. Now, you often hear that China’s state-controlled development model is responsible for the country’s huge growth and is something other countries should emulate. The FT is having none of it.

…to be productive and contribute to economic development, infrastructure needs to be high-quality and high-performing. And the evidence shows that China’s infrastructure-driven economic model has been far from efficient and is one to avoid rather than emulate. Over half of China’s infrastructure projects are under-performing, damaging rather than fuelling growth and leaving an enormous debt burden for the domestic economy.

These same risks are now manifesting themselves in Africa. Take the standard gauge railway in Kenya, built and financed by China. Completed last year to connect Nairobi, the capital, with the port city of Mombasa, the railway was grossly overpriced at $3.2bn. Instead of refurbishing the existing line, a far cheaper option, Kenya paid China three times more than the industry standard.

Struggling infrastructure projects like this have intensified a rising debt problem for large and small African economies alike. Now it is hoped investment from China will generate the necessary jobs and revenues for countries to avoid infrastructure-induced debt crises.

But, beyond pockets of growth, the prospects are slim that Africa will capture a large amount of new manufacturing investment and labour. The majority of Chinese manufacturers are, in fact, staying at home and taking advantage of the growing cost effectiveness of automation. And those that do venture abroad regularly choose south and south-east Asia over Africa.

Africans are not blind to the dangers that lie in Chinese engagement on the continent. Political elites and boutique consultancies may be cashing in. However, influential voices, such as Nigeria’s former finance minister Ngozi Okonjo-Iweala, have cautioned against following China’s state-led growth model, arguing it can feed corruption.

Hit up this link for the full piece. It makes for interesting reading. Consider it a contrarian view.

But China has military might

While China lags in projecting firepower on a global scale, it can now challenge American military supremacy in the places that matter most to it: the waters around Taiwan and in the disputed South China Sea.

That means a growing section of the Pacific Ocean — where the United States has operated unchallenged since the naval battles of World War II — is once again contested territory, with Chinese warships and aircraft regularly bumping up against those of the United States and its allies.

To prevail in these waters, according to officials and analysts who scrutinize Chinese military developments, China does not need a military that can defeat the United States outright but merely one that can make intervention in the region too costly for Washington to contemplate. Many analysts say Beijing has already achieved that goal.

I definitely recommend this New York Times article excerpted above.

Why this matters: There are a lot of ways China can retaliate against the US. The word on the street is that the next round of US tariffs against China are imminent. And we all know that the Chinese simply don’t have a target-rich environment to work with regarding tariffs. That means they have to choose asymmetric measures to retaliate. Their military muscle in Asia will help them in this effort.

My sense here is that this tariff spat could spiral out of control and turn a trade war into something more akin to real war. We’re a long way from that now. But it is something to keep your eye on. Both Russia and China will look to carve out spheres of influence to counter the threat of US hegemony. And in the age of Trump, US allies won’t be as favorable toward the US in countering these moves.

Risky Loans are everywhere in the US

Back in the US, note the following:

Lenders are stepping up offers of consumer loans with few strings attached, often to individuals with poor credit histories they all but ignored in the years after the financial crisis.

The offers promise a way to help pay down other debts or fund home renovations or vacations, fueling concerns that customers could overextend themselves. “Take control of your finances,” says one mass mailing. “Your dream can come true,” says another.

American Express Co. , Goldman Sachs Group Inc., LendingClub Corp. and Social Finance Inc. are among those behind an onslaught of unsolicited mailings offering unsecured loans, known as personal loans, as large as $100,000. In the first half of this year, lenders mailed a record 1.26 billion solicitations for these loans, according to market-research firm Competiscan. The second quarter marked the first period that lenders mailed out more offers for personal loans than credit cards, a much bigger market, according to research firm Mintel Comperemedia.

Why this matters: even though this is a tiny market, the proliferation of lax lending standards is emblematic of lax lending elsewhere. If high quality institutions like Goldman or AMEX are wading into household subprime lending, it tells you the opportunities in prime loans and in the nonfinancial business sector have been picked over. We are truly at a point where lax lending standards are everywhere.

And with the Fed raising rates – albeit slowly – an accident is bound to happen. The question is not if but when. Bullish macroeconomic data say it won’t be soon. But the growing signs of credit excess tell you the unwind will be more problematic than anticipated.

Negative interest rates in Europe

Last one here via Bloomberg:

Some smaller banks in Germany and Switzerland are struggling to find the right answer to the negative deposit rates charged by central banks in the region. Several lenders have announced new strategies in recent days. Penalty interest on private customers’ savings were either introduced, canceled or changed.

The latter is the case at Switzerland’s Postfinance AG. It will levy a fee on account balances of 500,000 francs or more as of October 1. The previous limit was 1 million francs. The charge amounts to 1 percent of the money exceeding the threshold.

“Even though we are virtually no longer paying any interest, we have received more than three and a half billion francs in client funds in the past 12 months,” Postfinance spokesman Reto Kormann told Bloomberg. “In order to stop the strong inflow of new money and even to get an outflow of customer funds, we must therefore tighten our fee regime.” As a state owned bank, Postfinance is not allowed to lend money on its own, he added. “Thus, there are only a few products left to offset the burden of negative interest rates.”

Here’s how I am reading this statement: “we don’t want your money because the more money we have on deposit, the more we have to fork over to the ECB and the Swiss National Bank because of negative interest rates. So we will start taxing you to pass on those costs.”

I think that’s what these guys are saying.

Why this matters: this is the kind of behavior central banks don’t want to see. I think negative interest rate policy has reached the limit of its potential. And I suspect the central banks know this too. They read the papers. They talk to bankers. So they know this is what’s started happening.

No matter how weak the euro area economy is, you can bet the ECB will have a tightening bias. They want to end QE and get away from negative rates as fast as they can. Soon enough, the SNB and the ECB will join in the tightening of monetary policy.

But notice that what’s happened here definitely, definitely points out the limits of NIRP. If we get a bad downturn and the central banks decide they need to do something drastic, and they turn to negative rates, it’s not going to stimulate anything. It is a tax. And it will feed the downturn. Just something to keep in mind for later