Has the last sucker been sucked in?

Levered algo traders have had enjoyed a lucrative business model over the past 2 years as QE belief swept the world: ramp it (risk prices) and they (a gullible public) will be sucked in. With FX traders dumping the Yen overnight, computerized programs are madly ramping the carry trade with stocks skyward once more out of the gate this morning. Business news are trying to justify the move on “better than expected” US industrial production in March. But such blind optimism overlooks that the upside beat was largely thanks to a surge in motor vehicle and parts production, which will only add to excess auto inventories that were already sitting at the highs seen in the Great Recession depths in 2008-09.

Driving by our local Ford dealership last week, I noticed a prominent billboard: “Ask us about our off-sight inventory of new cars and trucks!” Car dealers are drowning in inventory forced on them by the manufacturers while able and willing buyers have been thinning once more. Everyone with a pulse has already bought a new car on zero down, zero interest, over 97 months!! Car loans are this cycle’s sub-prime boil waiting to burst.

Meanwhile, as attentions are fixed on Crimea and missing planes, overnight we have quiet news of the next Chinese debt default now in process. See: China Developer with $567 million in debt said to collapse. This new trend of Chinese bond defaults is being increasingly recognized as the thin edge of a massive wedge. See, The Chinese Emperor has no clothes for an excellent summary:

What gave the markets the shivers last week was a statement from Li that a series of defaults were inevitable as the government tries to rationalize. A default by Haixin Steel, a relatively small operation but with ties to coal and iron ore companies was what gave rise to international concern. It also reflects what industry sources believe is a growing collapse with half of the country’s steel mills losing money. A week earlier China experienced its first bond default when Chaori Solar, a small privately owned solar panel maker, was unable to meet interest on Rmb1bn ($163 million) of bonds sold only two years ago.

In the past, the government has always picked up defaulting companies. If that policy is now to be abandoned, it is unclear just how big the debacle will be and whether it could lead to panic. Already world copper and iron prices fell sharply under the pressure of Chinese speculators retreating from their bets on a continued high level of metals production…

This prelude to a cataclysmic readjustment of the Chinese economy is arriving at a time when Western economists and businessmen have had to abandon a long-cherished hope that continued rapid Chinese [and Indian] development would prop up the world economy. But their disillusionment on this aspect is likely to pale into insignificance as the effects of the Chinese slowdown impacts further on commodity producers in Africa, Latin America and Australia.

[and of course Canada, American commentators nearly always forget about little old Canada in these comments….]

Commodity producers and currencies are all closely connected to the deflation of the Chinese [debt] miracle. This next chart maps the topping pattern in copper and the Canadian dollar today that resembles a similar break down heading into the 2008 recession.
Copper and C$ Mar 16 2014

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