by Louis Navellier
October 26, 2021
China’s National Bureau of Statistics announced that China’s GDP grew at a 4.9% annual pace in the third quarter, down from a 7.9% annual pace in the second quarter; but I am skeptical that China’s GDP managed to expand by even 4.9% last quarter, since the latest PMI data signaled a recession. Between a domestic real estate bubble bursting, the Evergrande debt crisis, electricity power outages, plus negative service and manufacturing PMIs in September, China’s economic slowdown has been very swift.
I should add that Evergrande’s bonds denominated in Chinese yuan made some recent interest payments and $2.03 billion in U.S. dollar-denominated bonds finally paid $83.5 million in interest payments that were almost 30 days late, so Evergrande’s U.S. dollar denominated bonds technically avoided a default.
Nonetheless, Evergrande is clearly taking care of its Chinese investors first, while postponing payments to international investors. This is not a surprise, since Evergrande is likely taking orders from the Chinese Communist Party authorities on how to restructure its assets and related debts. However, this action by Evergrande on payment of its tardy interest coupons will now likely hinder other Chinese companies that want to sell U.S. dollar denominated debt. Overall, Evergrande still has over $300 billion in debt.
Another Chinese real estate company, Sinic Holdings Group, was downgraded by S&P Global Ratings to “selective default,” which is below its previous very “junk-like” ‘CC’ rating. Sinic Holdings Group missed an interest payment last week on a $250 million U.S. dollar denominated note. Like Evergrande, Sinic Holdings Group decided to miss payments on its U.S. dollar denominated debt first, and now credit analysts are watching to see if the company will default on its Chinese yuan denominated debt.
This practice of defaulting on foreign debt and trying to restructure domestic debt is common in emerging market countries, so China has clearly failed to graduate to a reliable industrial economy (like the G7 countries) due to its selective debt payments and brazen neglect of U.S. dollar denominated debt.
Energy Policies in Asia, Europe, and North America are Squelching Growth
Energy inflation is squelching worldwide growth as green energy proved to be very unreliable, especially in Europe, as a high-pressure system neutered the wind turbine output. There are also big concerns that solar panels are made via forced labor by Uyghurs in China. Furthermore, cobalt is largely dependent on child labor from the Congo, so the EV advocates needs to find alternative sources of lithium-ion batteries!
Belgium, which is sandwiched between pro-nuclear-energy France and pro-natural gas Germany, is making the transition to natural gas, but high prices are making Belgium rethink its energy sources. Currently, Belgium has seven nuclear plants that generate half its electricity, but these nuclear plants are scheduled to go offline in 2025 to make a big transition to natural gas. I suspect that Belgium’s nuclear plants will remain online beyond 2025, based on cost, carbon emission goals, and national security goals.
I think it is fair to say that the Climate Central Planners have failed. The Biden Administration’s intent to allow fossil fuels to be “transitory” until green energy alternatives could be developed essentially caused the crude oil and national gas industries to curtail investing in new production. Although high fossil fuel prices help to encourage more alternative energy solutions, they also promote slave labor (like the Chinese Uyghurs making solar panels) as well as child labor (cobalt from the Congo for lithium-ion batteries).
In the end, the green energy faction is caught in a tough Catch-22 dilemma, so the green proponents keep coming up with different solutions. While California promotes solar panels and home powerwalls, Britain continues to promote wind energy, Germany promotes natural gas, and France promotes nuclear energy.
U.S., Senator Joe Manchin (D-WV) has squelched much of President Biden’s green agenda in the proposed infrastructure bill, which is being watered down for a desperate year-end push. Furthermore, Senator Kyrsten Sinema (D-Ariz) is also opposed to proposed corporate and individual tax increases, which is now causing a scramble on how to pay for new government programs. Currently, the now-smaller proposed infrastructure bill has opposing tax proposals, where representatives in deep blue states want state and local tax deductions (SALT) raised, which in turn, forces even bigger tax increases. In the end, it will be interesting to see if any infrastructure bill and related tax increases can pass Congress.
Finally, since 2022 is a mid-term election year, there will be almost no bills passed since our elected representatives will be busy campaigning and belittling each other to regain or retain Party majority.
The U.S. Economy is Also Slowing as 2021 Enters the Home Stretch
In the U.S., economic growth has also slowed dramatically. The Atlanta Fed is now estimating only 0.5% annual third-quarter GDP growth, down from its previous estimate of near-6% annual GDP growth.
As prices for food, energy, and household goods increase, they will continue to account for a larger percent of consumers’ expenses, so some economists are now grumbling about the possibility of a U.S. recession. My favorite economist, Ed Yardeni, likes to describe the current economic environment as a “Hypersonic Business Cycle.” Even though the U.S. economy appears to have achieved “escape velocity” relative to China and other struggling economies, it is hard to fight gravity, so as the rest of the world stumbles, it is inevitable that U.S. economic growth will also slow. The advantage the U.S. has, relative to the rest of the world, is that food and energy inflation can be addressed more easily, since the U.S. is so vast and resource rich. However, the Biden Administration must also become less hostile to fossil fuels, since many green energy initiatives have lost momentum. Overall, if the Biden Administration fails to pass its green energy initiatives in a watered-down infrastructure bill in the next several weeks, then that will be a clear sign that U.S. energy policy has to pivot back to accepting more traditional fossil fuels.
The Fed announced that industrial production declined 1.3% in September after a revised 0.1% decline in August. This was the largest drop in industrial production since February and was complicated by motor vehicle production plunging 7.2% in September as supply chain glitches continue to curb auto production.
Utility output declined 3.6% in September as mild weather helped reduce electricity demand. Economists now expect supply chain glitches to persist through much of 2022. Until the port bottlenecks and supply chain glitches are resolved, industrial production will remain stressed. Despite the recent slowdown, however, earlier gains mean that in the past 12 months, industrial production has risen 4.6%.
The National Association of Realtors on Thursday announced that existing home sales rose 7% in September to an annual rate of 6.29 million. At the current annual sales pace, the inventory of homes for sale remains at an ultra-tight 2.4-month supply, so median home prices continue to rise. Median home prices rose in September to $352,800, up 13.3% compared to a year ago. In August, median home prices rose 15.2% in the past year, so home price appreciation appears to be slowing a bit.
Interestingly, the Commerce Department reported on Tuesday that housing starts in September fell to a 13-month low and dropped 1.6% to an annual pace of 1.555 million. Furthermore, August housing starts were revised down to an annual pace of 1.580 million, down from 1.615 million previously reported. Housing starts peaked at an annual pace of 1.725 million in March and economists were expecting an annual pace of 1.62 million in September, so the deceleration is much greater than economists anticipated.
Affordability issues, a shortage of appliances, and fear of higher interest rates have all converged to prick the housing bubble. This effectively leaves the stock market as most investors’ best inflation hedge.
Inflation, however, also helps companies to post record earnings. For example, Proctor & Gamble (PG) announced better-than-expected third-quarter results on Tuesday, but the company also announced it was raising prices on a variety of its goods. In other words, the 5.9% increase in Social Security benefits will be passed along to consumers and will therefore be a “wash” (at best) for retirees! There is no doubt that even when the supply shortages ease in late 2022 that inflation will be permanent. Inflation is very bullish for growth stocks, since companies like Proctor & Gamble will continue to raise prices to insure continued profitability. I should add that Proctor & Gamble will also likely repackage many of its goods in smaller sizes, so consumers will not immediately realize that prices for its goods have increased.
The Fed’s Beige Book survey was released on Wednesday. It said that businesses were burdened with “significantly elevated prices” due to higher raw material and shipping costs. The Beige Book survey also said that businesses continue struggling to find qualified workers, which is also contributing to higher service and labor costs. Interestingly, the Beige Book survey also said, “Reports of burnout are rising among workers and owners alike” and noted that many restaurant and retail owners in the Philadelphia area have to pick up shifts behind the counter or in the kitchen. The Beige Book survey also said, “Some contacts also noted a rising number of belligerent customers.” The comments in the Beige Book survey clearly cited many of the Fed’s frustrations with the labor market and rising inflationary pressures.
Finally, on Thursday, the Labor Department announced that new claims for unemployment in the latest week declined to 290,000, down slightly from 293,000 in the previous week. Continuing unemployment claims also declined to 2.481 million, down from 2.593 million in the previous week. Economists were expecting weekly and continuing claims to come in at 297,000 and 2.548 million, respectively, so unemployment claims came in better than expected. I think it is safe to say that the Fed’s unemployment conundrum has been largely fixed, so the Fed can now shift its main priority to fighting rising inflation. I suspect that the Fed will announce that it will begin tapering its QE at its upcoming FOMC meeting.
Navellier & Associates owns Procter & Gamble Co. (PG) but does not own China Evergrande Group (EGRNF), or Sinic Holdings in managed accounts. Louis Navellier owns Procter & Gamble Co. (PG) via a Navellier managed account but does not own China Evergrande Group (EGRNF), or Sinic Holdings personally.