La seconda fase del crollo dell’Asia è iniziata

La seconda fase del crollo dell’Asia è iniziata

accelerating Asian deflation, especially in producer prices, China and Japan, more evidence that the tariff effect on the global economy will not be inflationary. In fact, we keep getting reports all across the economy that companies are choosing to absorb the tariff. In fact, it was so much that San Francisco Fed president, a known hawk, Mary Dailyaly, said, “We’re seeing the same things. We’re not seeing these tariff input cost rises flow through to consumers. Now in China, Japan, and we should pay attention to these Asian countries because deflation there has made some very big changes. Japan is not usually deflationary in producer prices. In fact, they had a run of eight consecutive months of positive producer prices up until May and June. Now, they’re accelerating somewhat to the downside, which is a huge red flag. Not just because it’s Japanese producer prices because but also because we’re talking about May and June. This is not March. This is not April. We’re now into May and June. And especially Japanese automakers, they’re taking the hit as everybody everybody sees and everybody recognizes. Over in China, Chinese producer prices are accelerating to the downside. Now, we’re used to Chinese producer prices declining because, as the Chinese government has said recently, inventing a term for this called nuan or involution. Basically, they have a problem of overcapacity. And over capacity is just a euphemism here for recession conditions, which are we’ve got too much productive capacity that we’re using. We don’t have nearly enough demand. Therefore, prices have to adjust. price. In fact, prices are the only way to adjust so long as that companies are told not to get rid of workers and lower their production capacity. So, what all this tells us is that as far as the inflation risk from tariffs, thus far up until the end of June, looking at Asia and its forward-looking indicators and its forward-looking conditions, we’re not seeing anything like inflationary conditions. But you know who is? You know who is seeing inflation from all of this tariff business? a fellow by the name of Jamie Diamond, which means that JP Morgan must be looking to buy Treasury bonds on the cheap. So, Steve, Steve, we got a lot of stuff to go over here. We got Jaime Diamond, Mary Dailyaly, the Fed, but really, I think the story here is Asian deflation. We got accelerating producer price declines in China, and I mean accelerating, especially at the factory gate level. And then even Japan is joining in saying, you know, the Japanese car makers, um, we’re going to absorb the hits as much as we can from tariffs because we know what happens when we don’t. Volume just falls off a cliff. Yeah, Jeeoff, it’s kind of interesting. You look to China. I mean, they’ve been deflation for a very, very long time at the factory level. And, you know, we’ve been talking about this air pocket that eventually there’s this payback period is going to hit. And you know, China’s just kind of been leading this for so many years, but it’s now is starting to get prevalent where the government’s even, like you said, making up terms for a problem of over capacity, which is just a severe lack of global demand. And this is a real issue because they’re right. And I understand why they’re worried about it. Because as demand goes down, what happens is companies start fighting for customers. We know there’s fewer customers and that means they’re going to look to lower prices to try to gain market share. At some point, businesses just can’t survive on ultra thin or no margins and next thing you know, businesses start to close. People hit the unemployment line and then next thing you know, your demand problem gets a whole lot worse. Now, problem with Japan I see and this is something I’m curious about, you know, how this is going to impact consumer prices going forward because we have heard from a lot of companies saying, look, we’ve got to absorb as much of this we can, but now we’re finding out some of these tariffs are going to be even higher than we initially thought. The question is at what point can they not absorb it? We already know what’s going to happen. We know consumers are going to even higher prices, but at what point can these companies just not do it and we do see an increase in the CPI or is demand going down fast enough that we don’t? Yeah. So far that’s been the case, right? The CPI in the United States and other places around the world been relatively tame despite the price increases that have been absorbed by companies. Like you said, the one thing about China though is that companies are told you can’t adjust your production capacity. We need you to continue to basically run a jobs program because demand is so lackluster and really weak. So that’s the China’s stuck between a rock and a hard place, right? Because when you have a lack of demand, there’s really only two things you can do. We can either cut your prices and try to sell goods cheaper because there isn’t enough buyers or you can cut back on production which the Chinese government says don’t you do that because we need to have our factories filled and running because we do not tolerate unemployment here. So the Chinese government has actually this this new term we’re talking about nuan involution was was it was it was invented and publicized a couple months ago all the way up at the top levels of the Chinese government. In fact, it was Chinese premier number two Lee Kang who who put it in a report in March said we are going to do something about the over capacity in China which I mean you have to chuckle about that because again over capacity just means there aren’t enough customers to keep these factories running in the way that they need to to maintain levels of employment. So what’s what’s noteworthy about all that is they had over capacity fears heading into uh May and June and then suddenly producer prices accelerate to the downside and now the Chinese government is announcing all these concrete plans to eliminate over capacity which means there’s maybe a major shift in China in terms of government approach where they’re not just going to tolerate lower prices they may actually have to tolerate um rising unemployment thinking that maybe rising unemployment is the least of the two evils here, which is I mean that to me suggests that this is a substantial shift in the Chinese economy as it as it relates to the overall global economy. Again, the problem here isn’t capacity. It’s not over supply, it’s lack of demand. So, as Steve just said, is the Chinese shift in their political situation and their their political directives? Is that an indication the Chinese see it too that demand has gotten to be too big? They can’t just sit here and tolerate more prices going down lower and lower and lower. Yeah, Jeff. So what do you do in this case? Do you pump out a lot of stimulus? Do you just say go to factory and say look we’re going to buy production here and just fill full of warehouses and try to dump it on the global market which is exactly what we’re seeing in the tariffs are trying to stop but a lot of other countries are saying look we’ve got too much of your stuff too and so at some point again like you said there isn’t enough demand. It’s not just China’s capacity that we’re talking about it’s global capacity and I don’t think a lot of people realize it. It’s not just payback from the pandemic. It’s not just payback from front running the tariffs. There’s also a demographic factor. We saw a lot of baby boomers during the pandemic retire. Well, Jeeoff, as you know, when people go into retirement, their spending naturally goes down. I mean, they’re not committing to work. They’re not buying as many cars. They’re not buying the dress clothes. We can go on and on about all the things they’re not buying because they’re starting to watch their income. There’s no overtime, no bonuses, none of that stuff. So there’s a number of factors here that is a real big problem for the global economy. The question I’m kind of wondering now is what term is the Fed going to make up? That’s a good question because you know they want to make up a question. They want to make up a term like I mean the Chinese are really good about that. That’s the that’s what the Communist Party does well among the few things that it does do well is they come up with all of these terms to avoid having to say what’s really happening there. Again, nuan is just a fancy term for recession. Let’s be honest here. And of course, the Federal Reserve is never going to want to use that term either. In fact, as as we’ve been talking about all this time and everybody’s been talking about with the Fed with the July meeting coming up, so many Fed officials have expressed their concerns over what we’re not seeing, which is that companies, and they would do this. Businesses would do this if they could, if they had any purchasing power or pricing power, excuse me, at all. What they would be doing is saying, “Oh, tariffs, we don’t care. We’re going to pass those right along to our customers. They’ll eat it. Uh the economy is booming. Everybody has money in their pockets. Incomes are growing, you know, substantially. Therefore, they consumers and customers have room to absorb. The price increases. That’s not our problem. We’ll make it everybody else’s problem. That’s what businesses would do. But now we’re seeing that they can’t do that. And that’s again the evidence from Asia is basically that that there’s too much capacity, which means not enough demand. And what happens if you’re already in a situation where demand is weak and you start to raise prices? the it’s again simple economics smallly economics demand disappears even more which leaves you in an even worse position eventually these two these two positions have to reconcile in one way or the other and the real danger here as far as China and Asia before we get to the Fed the real danger with deflationary conditions like this is that eventually prices start to go down too low that it undercuts the ability of even healthy businesses to sell goods at a profit and therefore it infects a wider array of the overall economy in production side, which means which I think is one reason why the Chinese, as Steve just pointed out, are starting to try to deal with over capacity because now they see producers prices accelerating on the downside and think this thing really is getting serious. We need to step up. And the question that Steve asked is one that I think everybody really needs to ask themselves is what’s going to happen here? What is the response going to be first of all from the private economy, but also what are what are governments going to do up to and including the Federal Reserve? the Federal Reserve being independent of the government. But either either way, the Fed has to respond to these conditions. And as I mentioned in the introduction, Mary Dailyaly has said, “Hey, we were expecting tariffs to do more in consumer prices. It doesn’t seem to be happening and we’re finding out that businesses are absorbing the cost.” Yeah, it’s kind of interesting, Jeff, because we looked at global manufacturers and they figured this out pretty quick is we can’t really raise prices. And then I I forget where in Europe the service providers are like, you know what, we’re going to raise prices anyways. And then immediately thereafter like, hey, you know what? that that did not work at all. And now all of a sudden, everyone kind of woke up to the reality is look, we can’t raise prices here. And this is a big problem because consumers are saying, look, we can’t afford it. We’re not going to pay it. Someone has to absorb it. And yet you look at the US stock market, you know, pushing all new time all-time highs here and wanting to go higher and everyone champion it at some point. You’ve got to step back and say, “Look, if people aren’t spending and companies are absorbing this, what’s going to happen to profit margins that are driving this equity market higher?” The risk is you start to get margin expansion. Of course, Jeff, we know what that leads to is massive bubbles in the equity markets. And so, you start to step back and then you look at things like, you know, we heard from Delta this week. And I thought this was a really interesting comment from the CEO. He’s like, “Travel is baseline. It’s plateauing.” And I like, so it’s not getting better. We heard that, you know, the economy had bottomed out. It was improving. They’re saying it’s not. They’re saying people are delaying booking. Well, they don’t need to book early because there’s seats available. And then what did they say? Which I think the most interesting part, Jeff, is he said, “Look, if things don’t change by mid August, we’re going to have to, you know, we’re going to deal with our over capacity problem by cutting back.” And of course, that means fewer jobs, fewer hours. And so you start to understand I think China’s concern here now. How they’re handling it may be the wrong way. I I think there’s they’re waking up to the reality is look this there’s going to be a lot of unemployment. But for anyone watching here that thinks this that’s not going to happen here in America or in Europe or in Canada or in Mexico or anywhere else around the world, it’s going to. Yeah. It almost I again it almost has to because you have a situation where the everybody’s between a rock and a hard place and there are really no good options. You mentioned Delta Airlines, Steve. I thought that was funny because the market reaction to it and the mainstream reaction to it was this was great. Delta Airlines didn’t have catastrophic earnings. So, this was fantastic. When as Steve points out, if you actually heard what the guy said and what the report was really about, it was like, wait a minute, this isn’t going so well. Maybe it wasn’t as catastrophic as some people were talking about. But it wasn’t a complete collapse in business. But what he said was, “Okay, we can give you guidance and the guidance isn’t all that great because we don’t see a whole lot of uptick in demand. In fact, we still see weakness in our demand.” So, we lowered our estimates before we gave up on giving estimates. And maybe we maybe we have a possibility. There’s a chance we could meet the lower estimates, but there’s also a significant chance that we don’t. And if we don’t, we’re going to have to start cutting back in capacity. So it’s you can almost hear involution in what he was talking about about as far as Delta Airlines as well as the rest of the airline business. They’re talking about nuan too which is over capacity and their their their solution is quite simple there too because they can’t cut costs right they can’t really lower prices uh I mean they’re kind of stuck in that that that position either so their response to weaker demand is going to be less less uh less supply of their services and less supply of airlines and therefore less use for pilots and flight attendants and ground crews and everybody else and so what the point here is with Japan and with China and even Mary Daily Jamie Diamond, everybody is seeing the same thing, which is we thought prices were going to be passed through to customers because Jay Powell said the economy was strong and resilient. The Chinese are saying, “What are you talking about? We’re seeing producer prices accelerate to the downside, which leaves us in with very few good choices. We have been cutting prices. We’ve been flooding the world with our cheap goods. That’s not going to continue. I mean, with accelerating downside prices, especially at the factory gate, we’re talking about real deflation there. Um it just means that there’s a lot of economic trouble that nobody’s really equipped to deal with. The issue is really about demand, not what we can do on the supply side. And you know, Jeeoff, speaking of nobody’s equipped to deal with this, that you saw what the PBOC said this week about their over capacity problem, which is great. They’re like, “Hey, just so you all know that monetary policy does a lot of things, but there’s certain things it just doesn’t really do.” And so I just love that these central bankers, you know, they tout how, you know, monetary policy, interest rate policy, QE, whatever it is they’re up to, just does all these amazing, wonderful things. And here the PBOC’s like, “Hey, don’t look at us cuz like this this one’s out of our wheelhouse here, you know? So I I just I I just love how central bankers position themselves. Like when things are great, yes, it’s because of us.” And then when things are going wrong, it’s like, “Oh, no, no, no.” Like we we went as far away from this as possible. Yeah, shouldn’t they have said that we can stimulate demand, right? If we have too many goods, we’re producing too much stuff. We’ll just do our magical stimulus policies. Demand will rise and that will that will rebalance everything. So, I mean, I love that you brought that up, Steve, because they’re basically saying we have recessionary conditions and there’s nothing that we can do about it. I mean, yes, they couched it in terms of, well, we can’t restrict supply. Well, that’s not what other central bankers say. They’ve been telling us for the last couple years that they can restrict supply and everything bring everything back in balance. So again, the point that we’re trying to make here is that from the Chinese perspective, not just of their own economy as well, really more so the global economy. They’re saying we really can’t do anything about the demand side. So we’re going to have to start dealing more and more with what are we going to do about about supply side, which is not I mean that’s that’s the recession part of the recession. That’s where demand falls off, prices start to adjust, which is a signal that things are not going in the right direction. And then the businesses or in this case the government has to say what are we going to tolerate as far as lowering supply? And then the bigger question is how do we get there with lower supply? Is it going to be you know are we going to take we’re going to have companies absorb the hit to their margins and their profits and say in China you could do this. You could say okay that’s it. You guys are going to have to take the hit. You have to keep running your factories. You have to keep uh at least keep people employed. or is it going to be more of okay, we’re just going to let everything start to readjust on its own. Lower levels of supply to lower lower levels of demand, which is more and more likely what we’re seeing out outside of China around the rest of the global economy. Yeah, Jeeoff, I think if demand was going up, companies would have a lot more margin to absorb it. But I mean, if you think about a factory, if demand’s going down, I mean, you still got your building, your equipment, and yeah, you can get rid of workers, you can cut production, but if you’re only using half your factory, you still have cost as if you have the entire factory there. So, you know, you start looking around the world and we haven’t seen it really come down here on the US producer prices. how we’ve been seeing kind of disinflation there, not deflation like China. But if you look at a lot of these surveys, particularly the regional Fed surveys, you get the feeling that we’re not far off from what China’s experiencing and you start looking around the rest of the world and you know, Germany’s been there for a while. You start seeing other places where it’s like, look, the bottom that, you know, we we just saw here in the airline industry that everyone’s saying, oh, maybe this is a bottom. just a pause, just a plateau before maybe it’s mid August, maybe it’s a couple months down the road before we start to see another slide down. But based on what I’m seeing in demand, Jeeoff, it tells me that the worst is far from over. Yeah, I kind of like how um how Mary Daly put it in her comments about how companies were negotiating through the supply chain to handle rising input costs. He almost made it sound like they were Santa Claus, that they were doing this out of the, you know, they didn’t want customers to be overburdened with higher prices. And so they’re going to they’re going to get into these backroom, you know, boardroom deals where various companies carve up their input costs. And you realize what she’s really saying is that this the economy is so weak. We have evidence for this. I mean, consumer spending has fallen off here in the United States. As Steve mentioned, producer prices aren’t as negative as they are in China and Japan, but they were unusually weak over the couple months that we have data for. And now we have all this anecdotal evidence from, you know, San Francisco and everywhere else that’s, you know, businesses are not doing it because they want to be doing. We keep making this point. They’re doing it because they have to do it. And they, the reason that they’re going to these types of lengths that Mary Daly would be commenting about these negotiations that are taking place is it goes to show you that there’s the rock and the hard places. Businesses really have very few options. It’s basically how do we deal with this together to try to get out of this situation before we have to really take more extreme measures. And so that will only buy you a little bit of time. So in the initial the initial tariff period, companies are going to take the hits as we told you and we talked about this before. They’re going to take the hit in the short run, but there’s a clock on this. And the more hits that they have to take and the longer they have to take it, the more likely they’re going to say that’s enough for us. They’re more likely they turn to to become the Chinese government and say we’ve gone too far. Now comes the not neuan not over supply and over capacity. Now comes the real recession that we all we all recognized.

Asia is suddenly awash in deflation. Japan is now experiencing it. And while not necessarily new for China, the acceleration downward to producer prices hints at deterioration in demand, overseas as well as locally. It’s become a big enough change the government in Beijing crucially appears to shifting its own economic focus, a potentially profound worldwide signal. Oh, and Jamie Dimon.

Eurodollar University’s conversations w/Steve Van Metre

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