UPDATE 8 – GLOBAL ECONOMIES HEADING FOR TURBULENCE, OBAMA STUMBLED, US DOLLAR WOBBLES, GOLD SURGES, US STOCK MARKET RALLIES AND ITS ECONOMY AT PIVOT CROSSROAD AS AMERICA HEADS TOWARD POLITICAL GRIDLOCK.

A tumultuous week has just swept the US political economic landscape and metals market since my last write up of 15 October 2010 Update 7, Global economies heading for turbulence, renewed risks of sovereign debt crisis, currency “war” risking double dip recession & massive damage to economies as gold keeps heading up north. A flood of uninspiring costs saving-inspired corporate results came in EU and US, mostly above analysts’ expectations but demonstrated puny sequential growths and almost glaringly and disappointingly, no headline turnover gains. Deutsche Bank, Germany’s largest bank, reported a third-quarter net loss of 1.21 billion Euros and reported difficult ongoing macro-economic and market conditions." It is not a surprise, given persistent fall in German’s retail sales as consumers faced continuing strong headwinds in EU’s strongest economy.

http://news.xinhuanet.com/english2010/business/2010-10/28/c_13578719.htm

Top 6 US banks were also NOT smiling at their September quarterly results despite improved earnings from lower accounting provisions. Headline revenues dipped underwater - indicating slower economic growth ahead. Contrary to media reads, all those “rebounding” October PMI reads in EU, USA and China are NOT positive signals of good times coming back – they are partly SEASONAL inventory production for Christmas shopping. Retail sales are spiraling downwards in Germany, depressed in Japan and patchy at best in USA. The two-month consecutive decline in the electronic index of Singapore’s manufacturing sector tells of the same dismal story as the steep falls in Japanese and Korean manufacturing PMI reads of the global weak consumer electronics sector. Intel, the foremost manufacturer of integrated circuits for computers, saw its revenue base of $11.1 billion grew by 2.34 % in third quarter, slower than its 4.5% gain achieved in the June quarter over March. Earnings per share stalled at 53 cents per share as corporate customers barely sustained weak consumer market. AMD, Intel’s closest competitor, suffered the indignity of 2% sequential revenue decline attributed to weaker than expected consumer demand. Discretionary consumer demand is still weak even as US auto sales performed better and closer to replacement rate of 12 million units per year. September durable goods order actually fell by 0.8% - a surprised second consecutive monthly decline. A couple of sparks, however, were seen in US retail sales with across the board gains in much of the sector in same-store sales in September and early October. Inventory build-up in September eased slightly in October. The question is – will this spending last or is this pre-Christmas rush to take advantage of promotional stock clearance deals leaving Christmas to the cold of winter chill? There are some warning signs emerging.

http://www.marketwatch.com/story/buried-by-inventories-2010-10-28

Most troubling was the number of cancelled orders they received from retailers during the third quarter. That doesn’t bode well for the make-or-break holiday season. Wesley Card, CEO of Jones Apparel Group said the uphill struggle against inventories had forced them to cart truckloads of unsold items to discounters to clear some space in their warehouses. It’s a growing problem throughout the industry. Appliance giant Whirlpool Corp is struggling with the same problem. Rising material and production costs are exceedingly hard to pass on to US consumers. The result is discounting, shrinking margins and a growing pile of unsold stuff. A good cross-section of US and global corporate giants has warned of tough conditions in the holiday Christmas spending season including Samsung, Microsoft, Wal-Mart and Target Corp.

Even Tupperware reported shrinkage in developed markets in local currency terms including US. In contrast, the consumer “spending down” from expensive restaurant meals continue to add traffic and sparkle to McDonald’s sales revenue and accelerating profits. Beige book reported US economy trawling along on a modest growth path as this author forecast on 15 October 2010. That at least partially explains the urgent necessity of the Fed’s FOMC November 3 meeting to another round of quantitative easing of US$600 billion of longer-term Treasury bonds, even though that is likely to be inflationary of impact. The Fed has already pushed short-term interest rates to zero. And its remaining option -- buying Treasury bonds to pump cash into the economy -- is risky and unproven. At this critical juncture, Obama stumbled politically when Democrats lost majority control of the House of Representatives, governorships and a whole swathe of state legislatures across the US. This mid-term election outcome is pivotal because of all of the economic and policy issues that remain uncertain". INFLATION WILL REAR ITS UGLY HEAD AS COMMODITIES PRICES SURGE. The tide of investors rush is into gold as the value of the US dollar faded faster. And in trigger of that QE2, the punished dollar wobbles. US dollar Index future fell to an intra-day low of 75.82 last Friday – that is roughly 6.8% decline compared to 81.4 close as of 16 September, itself a 2.4% fall from 82.7 as at end of August.

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=dxy&sid=0&o_symb=dxy

This author had forewarned of fast sliding US dollar since mid-September, Update 5 – Global Economies heading for turbulence, watch out the falling US Dollar The fall of US dollar has been unrelenting downwards with little breather in between forcing the Japanese and emerging currencies to appreciate upwards and destabilizing their economies particularly Japan and South Korea. With Hong Kong de-facto peg to US dollar, a lot of hot near-zero interest rate money will flow in without exchange rate risks likely to fuel assets bubbles and speculative attacks on currency in fast growing East Asian economies and driving up commodity prices and inflation globally.

With Congress in a stalemate and if US economy fails to recover next year and considering the escalating fiscal deficits and public debt to increasingly unsustainable proportions, there must be rising concerns of the US ability to repay the Chinese investors of US Treasury among gold speculators. Falling US dollar speaks volume of that as gold price surges to record levels persistently after short dips. Right now, a lot of gold speculation is NOT yet mainstream but physical off-take among retail investors is sustaining gold prices. Despite recent intense volatility, gold has caught the imagination of high net worth individuals like George Soros and Jim Rogers who invested heavily in SPDR Gold Trust as the US dollar rapidly loses its value. Warren Buffet, of course, distastes gold investment as he is much more economy focused in his investment outlook. And talk of Blackrock and JP Morgan Chase eyeing to set up a physical copper ETF despite gloomy weak economy evidenced by a weak global steel sector are not developments to be sneered at. The implied converse is that US dollar decline still got some way more to go, maybe even more significantly and at an accelerated rate. Yet the paradox is that the US dollar will remain the world’s sole reserve currency and remains practically impossible to change now, the dramatic problems confronting the US dollar on world trade and investment is locked in cold freezer to finally implode later as painful consistent adjustments creep in. Open economies like Singapore without strong domestic fundamentals are at big risks. As a harbinger of shifting dollar and gold as a “liquid” currency, Korea’s Central Bank is now seriously considering diversifying part of its foreign reserves into gold instead of the US dollar.

http://sg.news.yahoo.com/rtrs/20101018/tbs-korea-economy-cbank-gold-b8dd11d.html

This author believes that the change in political landscape in US might motivate a faster move in that direction.

Meanwhile major stock markets globally, especially the US surged ahead in apparent huge vote of disconnect to underlying economic fundamentals and growing political uncertainty. It is the cash flood driving the market, not the slow US consumer nor corporate. The big cash rush for bond sales by US corporate displacing equities is telling of how perversely “confident” that equities (as a proxy of economy) will perform instead of financial engineering (swapping cheap debt bond issues for dividend liability payment by share buyback). Real investment in hard assets to grow the business and economy seems the missing link as of now. US corporate are staring at consumers’ confidence and consumers are staring back at corporate investments and hiring – a locked stalemate.

The US is entering the second year of fragile recovery – either the consumer accepts and carry forward the baton of recovery or it tipped over into a brutal recession with little expectation of big Government spending rescue. Voter’s backlash was most virulent, unprecedented against an incumbent strongly favored Presidency not seen since 1930 – the disenchantment with the economy was paramount but equally no one is embracing with passionate love for Republicans who failed to translate the landslide into the Senate. The political quagmire is imminently displayed in the fate of Nancy Pelosi, the most powerful woman in US political history, now faced the prospect of mulling her future forward after the Congressional mauling. The US political economy landscape morphed beyond recognition of its previous overpowering legislative sway and in place of that a stalemate and probably a gridlock of brutally bitter fights waiting. The most and best likely scenario seems now is a continuing slow growth protracted recovery and the worst is a double dip with little hope of immediate respite.

As Obama feels the intense heat of voter desertion, anxiety is also everywhere over the size of America’s debt. The election brought a lot more uncertainty and in today’s uncertain fast moving environment, inaction of any gridlock stalemate is dangerous not just for America but the world.

http://finance.yahoo.com/news/Likely-gridlock-in-Congress-apf-3958821672.html?x=0&sec=topStories&pos=8&asset=&ccode=

Republicans know also that little cooperation and confrontation would be a folly and political suicide if the economic ship is let off to drift in fragile unsustainability. While the President’s veto still overrides, it is one of a “negative” contribution, not a positive impetus of agenda setting of difficult economic reforms from banking regulations to taxation to clean energy and most critically, desperate urgent need of monetary stimulus if the economic stalled. In this dangerous drift to possible political gridlock, there is intense pressure on the Fed Reserve to respond swiftly and decisively in any unfolding crisis. What does that mean? Maybe another round of QE3 money-printing and distribution by “Helicopter “ Ben Bernanke and all the complications that must bring, of havoc of destabilization of the global economy now seen unfolding?

US CORPORATE RESULTS - STRONGER BUT CONSUMER SPENDING LAGGING

Citigroup reported weakened lending revenues, no quality improvement on total allowances for loan losses or consumer loan loans sequentially. Third quarter revenues of $20.7 billion, is 6% down from second quarter. Net income was $2.2 billion, down $529 million or 20% from prior quarter.

http://www.citigroup.com/citi/press/2010/101018a.htm

Goldman Sach $1.74 billion was sequentially much better than the $453 million second quarter earnings – thanks to a 17.5% sequential reduction in net operating expenses from $7.4 billion in the June quarter to $6.1 billion. Net revenues, including interest income, were flat at $8.9 billion compared to $8.84 billion in the prior quarter but down nearly 28% on year earlier comparison despite a more bullish equity market conditions. Quarterly profit of nearly $1.9 billion was 40% lighter than prior year same quarter of $3 billion weighed down by slower investment banking activities. Goldman's Viniar noted challenging environment but cited there are signs that some improvements in client activity could be on the way. It remains to be seen if that persists and sustainable.

http://www.marketwatch.com/story/goldman-sachs-quarterly-profit-falls-40-2010-10-19

Rival Morgan Stanley also suffered steep revenue and net income falls from trading bonds, stocks, currencies and commodities on behalf of institutional clients. It posts an after-adjusted loss for the third quarter.

http://www.marketwatch.com/story/morgan-stanley-reports-third-quarter-2010-2010-10-20?reflink=MW_news_stmp

Wells Fargo reported better results with record net income of $3.34 billion but this is due to lower provisioning. Wells said its allowance for credit losses fell to $24.4 billion at the end of September from $25.1 billion on June 30. Nonaccrual loans and other nonperforming assets totaled $34.57 billion at the end of September, up from $32.94 billion at the end of June.

http://www.marketwatch.com/story/wells-fargo-reports-3-rise-in-quarterly-profit-2010-10-20

Bank of America’s September quarter came in better-than-expected. Excluding goodwill-impairment charge of $10.4 billion, it earned $3.1 billion. Whilst optimistic about long-term prospects, it remain conscious of “short-term challenges”

http://www.marketwatch.com/story/bank-of-americas-loss-widens-on-big-charge-2010-10-19

Shrinking revenues at US top 6 banks may continue as economy heads for slower growth ahead. Tighter credit and derivative rules restrict the growth in banking revenues after a record 2009. A weaker housing sector within a weaker economy did not help loans growth as banks have become more risks averse. Consumer and commercial loans at U.S. banks climbed 0.6 percent in September to $6.8 trillion from a year earlier, the first rise in 15 months, according to data from the Federal Reserve Bank of St. Louis. That provides a faint glimmer of hope.

http://noir.bloomberg.com/apps/news?pid=20601103&sid=aNRltv1bCTT0

At $24.27 billion, IBM demonstrated a marginal 2.3% gain on quarterly sales turnover in September over June sales of $23.72 billion. Earnings per share sequentially grew by 8% over the June quarter. June quarter sales were better than sequential proceeding by 3.7% indicating tougher trading conditions.

http://www.marketwatch.com/story/ibm-shares-drop-following-earnings-report-2010-10-19

Tupperware Brands Corp had a dismal September quarterly with sales turnover actually declined by 7.5% to $523 million. Net earnings were $39.9 million and on per share basis slipped by 30% to 64c in the same quarter-over-quarter comparison to June. Emerging markets such as Brazil, India, Indonesia, Korea, Malaysia/Singapore, Philippines comprised 59% of sales in the quarter delivered a 9% sales increase. Established markets sales were down 5% in local currency terms. Tighter margin due to higher product and increased marketing costs eroded net earnings. This is in line with management earlier forecast of weak second half.

http://files.shareholder.com/downloads/TUP/1046163149x0x410812/131d4a3b-3336-4565-8636-648f41f6daa8/3Q_10_Earnings_Release_Complete.pdf

McDonald Corp continues to outperform. Global sales grew by 6% over second-quarter to reach $6.3 billion driving in a net income of $1.39 billion or $1.29 per share. Dividend was lifted higher by 11% to 61c per share.

http://phoenix.corporate-ir.net/phoenix.zhtml?c=97876&p=irol-newsarticle&ID=1485461

U.S. consumer-confidence gauge rises slightly higher to 50.2 in October from September's 48.6 , the Conference Board reported.

http://www.marketwatch.com/story/october-consumer-confidence-rises-to-502-2010-10-26

The surprise is September US durable-goods orders. The Commerce Department data showed US-durable goods orders declined by 0.8% excluding transportation, the second consecutive decline in 3 months. The revised August durable-goods order decline is 1% instead of 1.5% previously estimated. Shipments fell 0.4% in September. Inventories rose 0.5%.

http://www.marketwatch.com/story/us-sept-durable-goods-orders-up-33-2010-10-27-830330

New orders for core investment goods (excluding aircraft and defense goods) fell 0.6% in September after a nice 4.8% gain in August, according to the Commerce Department. The boom in business investment is slowing, suggesting that the manufacturing sector may not be able to keep leading the economy forward.

http://www.marketwatch.com/story/investment-boom-is-fading-2010-10-27

September same store sales in retail look healthier generally - up 5.1% in J.C. Penny, 4% in Kohl,7.5% in Nordstrom, 2% in Ross Stores, 6.5% in Saks, 3% in Dillards. Apple Inc, Tiffany & Co, Nordstrom Inc reported better sales. This could be the first spark that the consumer is taking the baton as the driver of economic expansion.

http://noir.bloomberg.com/apps/news?pid=20601103&sid=aeHtFBP8UI1M

October retail sales appear to show signs of further consolidation of these gains. Macy’s Inc upped its second-half profit forecast and said its same-store sales rose 2.5%. Target Corp October same-store sales rose 1.7% while J.C Penny reporting that its same-store sales fell 1.9%. Most retailers did better-than-expected previously revised downwards by analysts after a hot summer. So was it better or worse? The month was very promotional. Traditionally, October is also a period when stores clear out goods to make room for the Christmas holiday merchandise. It is not known better sales figures were due to price discounting.

http://www.marketwatch.com/story/retail-stocks-rise-on-october-sales-results-2010-11-04

Existing-home sales in September climbed 10% to a seasonally adjusted annual rate of 4.53 million, the National Association of Realtors (NAR). That makes 3 consecutive gains in existing home sales but the association’s pending-home-sales index fell to 80.9 from a slightly upwardly revised 82.4 in August. Pending sales reflect contracts signed between home buyers and sellers, and closing a sale usually takes a few months. The latest NRA’s September pending home sales index, signals an “uneven recovery entering 2011,”

http://www.marketwatch.com/story/pending-home-sales-fall-18-in-september-2010-11-05-1244130

Prices fell by 3.2% in August over July according to the Case-Shiller home price index. Pending home sales has been on an uptrend since July when it rose by 5.2% followed by 4.3% in August. Housing market is still very soft even as activity level picked up.

http://www.marketwatch.com/story/sept-existing-home-sales-climb-10-2010-10-25

Sales of new homes climbed 6.6% in September, figures released by the federal government, representing the second straight months of gain. Though lower than 2009, it may signal housing demand may have hit the bottom in the last summer.

http://www.marketwatch.com/story/new-home-sales-climb-66-in-september-2010-10-27

Housing, banking loans and employment could be the tail end of economic recovery.

The Federal Reserve latest Beige Report showed the US economy growing, on balance, at a modest pace.

http://www.marketwatch.com/story/feds-beige-book-sees-modest-us-growth-2010-10-20

Manufacturing, the only bright spot in this recovery, has lifted again in October. The Institute of Supply Management’s manufacturing purchasing managers’ index increased to 56.9 last month, up from 54.4 in September. It was 56.3 in August and 55.5 in July. The average PMI for January through August was 57.8%.

http://www.ism.ws/ISMReport/MfgROB.cfm

New orders were up 7.8% to 58.9 compared to September figure of 51.1. Likewise production in October rose to 62.7 sequentially from September’s 56.5. Inventories were lower at 53.9 in October as compared to 55.6 a month earlier indicating faster shipment from higher production ahead of Christmas. Exports gained 6% to 60.5 in October from September 54.5. In contrast, imports fell 5% to 51.5 in October, down from 56.5. This is a hint that the falling US dollar has some positive impact on US GDP leakage. Overall, the manufacturing is growing faster than the month preceding and it could be a seasonal factor.

BRITISH ECONOMY – GROWING STRONGER BUT AUSTERITY WAITING

After increasing 1.2% in the previous quarter, British GDP grew by 0.8% in the September quarter – significantly higher than the 0.4% predicted by economist. A 0.6% gain in services sector, which make up 76% of the GDP, accounted for most of the growth. Industrial production, aided by 1% improvement in manufacturing component, was up 0.6% and construction increased by 4%.

http://noir.bloomberg.com/apps/news?pid=20601087&sid=abBPvDpjW_cY

The slowing pace of economic upturn came after UK Chancellor of the Exchequer had committed to stick to its planned June emergency budget spending cut by 83 billion pounds ($130.4 billion) between 2011 and 2015 – the largest Government spending cut in decades. It threatens to send the economy back into recession, just as a recovery is losing steam. Defence took a big hit.

http://www.marketwatch.com/story/britain-will-stick-to-deficit-reduction-timetable-2010-10-20

The cuts are aimed at narrowing the deficit to 2.1 percent of GDP in the 2014-15 fiscal year from the government forecast of 10.1 percent this year.
http://noir.bloomberg.com/apps/news?pid=20601109&sid=a2KqPZNRjxN0
With inflation running above the government’s 3% upper limit since March, there is little chance of Britain going into quantitative easing. Home prices fall the most since January 2009 as housing sector weakens. They are forecast to continue into 2011. There is “growing uncertainty” about the economy and the impact of the fiscal squeeze “at a time when we have seen an increase in the supply of new housing.”

http://noir.bloomberg.com/apps/news?pid=20601068&sid=apnlajrBBiCg

The Pound edged weaker as the currency market focus on the downside of fiscal tightening. As a warning sign of more headwinds ahead, Royal Bank of Scotland (RBS) plunged back into the red in the third quarter with a net loss of 1.146 billion pounds (1.3 billion) after a profit return of 257 million pound in the previous quarter.

http://www.google.com/hostednews/afp/article/ALeqM5hZoPo1zOTmCTv8zPCzQHcXCDjXuQ?docId=CNG.14a15ebfb0dc0cab49f38b324429877c.2f1

EURO ZONE ECONOMIES – INDUSTRIAL STRONGER BUT SOVEREIGN DEBT WORRIES PERSIST

Industrial orders in the 16-nation euro zone saw a 5.3% monthly rise in August.

http://www.marketwatch.com/story/euro-zone-august-industrial-orders-jump-53-2010-10-25

But the pain of sovereign debt crisis came back to haunt Portugal, Italy, Ireland, Greece and Spain as forewarned on 1 October 2010, Update 6 – Global Economies Heading for Turbulence, US stock market and US Dollar heading in divergent directions. Watch out for gold. The average price of credit-default swaps rose recently as governments of these Europe’s so-called peripheral nations are struggling to lower their budget deficits even as they impose public spending cuts and increase taxes. Greece’s 2009 budget showed the deficit was above 15 percent of gross domestic product, higher than previously estimated. They have urgent compelling need to get out of this deficit spiral – without which they risks spread contagion to the rest of EU forcing them also to austerity drive inhibiting and endangering their own economic recovery as well. As said Tim Brunne, a Munich-based strategist at UniCredit SpA. “It becomes increasingly difficult if you have high debt, and that feeds back again into your deficit and that’s a very difficult spiral to get out of.”

http://noir.bloomberg.com/apps/news?pid=20601109&sid=aLL.RNL5YXY8

“Sovereign issues are likely to be with us for most of the next decade until we see a combination of further unparalleled interventions, big currency moves, inflation, restructurings and/or defaults,” Jim Reid, head of fundamental strategy at Deutsche Bank AG in London, wrote in a note to investors. “We are not close to any of these at the moment but over time we’ll likely see these themes re-emerge. History would have to be re- written if we don’t.” AND THAT IS EXACTLY RIGHT.

German retail sales dropped steeply by 2.3% in September from August. Germany, EU strongest economy, experienced 4 consecutive months of decline in retail sales – 0.3% in June, 0.4% in July and a revised 0.4% in August.

http://www.marketwatch.com/story/german-retail-sales-drop-23-in-september-2010-10-29

There is yet no stabilization of private consumption demand and any expectation of a stronger September quarter GDP growth for Germany is reminded of being on the knife’s edge.

The Markit final euro-zone manufacturing purchasing managers' index of 54.6 for October is the first rebound in three months from a revised 7-months September of 53.7.

http://www.marketwatch.com/story/euro-zone-man-pmi-rises-to-546-in-october-2010-11-02


CHINESE AND EAST ASIAN ECONOMIES - WEAKER

China sudden interest rates hike on 20 October 2010 – first since December 2007 - caught financial markets by surprise. It is a significant adjustment backward from stimulus spending which had been fueling real-estate prices fanning inflation. China's national property-price index, which covers 70 large and medium-sized cities, rose 0.5 per cent in September from August, the first month-to-month increase since May. China's consumer price index rose 3.6 per cent from a year earlier in September, faster than a 3.5 per cent rise in August

http://www.theaustralian.com.au/business/markets/china-surprises-with-hike-in-interest-rates/story-e6frg926-1225940971812

Inflation is expected to accelerate in October according to Chinese Government media source. People’s Bank of China governor Zhou Xiaochuan has warned that the risks of excessive liquidity, inflation, asset bubbles and bad loans will “increase significantly”.

http://www.theaustralian.com.au/business/markets/chinas-purchasing-manager-index-jumps-in-october/story-e6frg926-1225946227958

The Central bank warned that more quantitative easing by developed economies will drive up gains in staple food items.

http://www.marketwatch.com/story/china-plans-more-steps-against-inflation-2010-10-28

China’s Cabinet warned last week that it will take additional action to curb property prices and do what it can to foster stability in commodity prices.

http://www.marketwatch.com/story/chinas-inflation-to-accelerate-in-october-report-2010-10-24

China’s economy is still growing too fast at 9.6% in the September quarter. The growth rate slowed down from 11.9 percent in the first quarter and 10.3 percent in the second quarter. The power cut and production curtailment in the last quarter seems to have little impact on industrial production and GDP growth.

http://www.chinadaily.com.cn/china/201010/21/content_11439504.htm

China Federation of Logistics and Purchasing has just announced this week its official Purchasing Manager’s Index rose to 54.7 from 53.8 in September and 51.7 in August, indicating strong CONSECUTIVE growths in spite of Beijing's efforts to slow the economy to avoid asset bubbles.

http://www.theaustralian.com.au/news/breaking-news/dollar-closes-higher-after-chinese-manufacturing-data/story-fn3dxity-1225946275072

The Chinese numbers contrasted sharply with PMI reports for South Korea, Taiwan and Japan, all of which showed a continuing slowdown.
Nomura Japan manufacturing purchasing managers' index fell to 47.2 from 49.5, the second monthly contraction in a row, indicating that slowing forward economic conditions and the strong yen are hurting most Japanese manufacturers.

http://edition.cnn.com/2010/BUSINESS/11/01/china.pmi.output.ft/index.html?hpt=Sbin

Japanese industrial output fell in September and deepening price deflation points to increased risks of an economic slump. Industrial output declined 1.9% from August when it dropped 0.5% adding signs to stronger Yen is causing the recovery to losing momentum.

http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=ah40ayfreaUM

To boost retail sales, Japanese retailers are cutting prices passing some of the lower costs of imports to consumers.

http://noir.bloomberg.com/apps/news?pid=20601080&sid=aiGd5N9pmSLA

Core CPI fell 1.1% from September year-earlier. Deflation points to the likelihood that the Japanese economy contracted this quarter. Companies reported planned production cut as Yen surged to a 15-year high of 80.4 Yen to a US Dollar. Toyota, for example, reported an 11% decrease in export shipment in August and official statistic showed September export growth was the slowest since beginning of 2010. The evidence points to rising Yen/US Dollar parity is sucking life out of Japanese exports and economic recovery momentum. The worsening economic conditions is pressuring the Bank of Japan to further quantitative easing and that also depending on how other developed economies moving along the same path.

South Korea’s economy slowed sharply to 0.7% growth in September quarter – half of the 1.4% GDP growth in the June quarter, amid weaker exports and manufacturing as global economic recovery turns cloudy. It was the second straight quarter that growth slowed.

http://finance.yahoo.com/news/SKoreas-economic-growth-slows-apf-237679402.html?x=0&sec=topStories&pos=main&asset=&ccode=

The HSBC October PMI for South Korea fell to 46.7 from 48.8, the second successive monthly number below 50. The HSBC Taiwan index fell to 48.6 from 49 in September, the third successive monthly number suggesting a contraction.

South Korea’s CPI increased by 4.1% in October to a 20-month high as compared to year earlier and quickening from the 3.6% advance in September. Inflation exceeded the central bank’s 4 percent ceiling even after the pace of economic expansion halved last quarter.

http://noir.bloomberg.com/apps/news?pid=20601068&sid=ajqfrIcOf34o

As Korean exports benefited from and demand picked up in October as the faster rising Japanese Yen struggles to restrain further rises, there is now pressure to raise interest rate after a three-month pause.

Singapore’s economy is also slowing down. Preliminary GDP figures for the third quarter showed a contraction of 19.8 per cent, quarter-o- quarter. That compared with growth of 24 per cent on the same basis in the second quarter. Released in October, it is the first sign that Asia’s economy is slowing down. Six-month forward manufacturing outlook for Singapore’s economy till March 2011 is more pessimistic according to the country’s Economic Development Board recent survey. Only 3% of those surveyed expected increased orders. The softer outlook cited weaker order, seasonal factors and the generally sluggish business conditions prevailing in Europe and US.

http://www.channelnewsasia.com/stories/singaporebusinessnews/view/1090208/1/.html

Since that survey, major events have occurred to add gloom. Singapore’s sudden exchange rate policy reversal of 14 October met with grim warnings of possible technical recession by MITI of 18 October. That hit the rocker of China’s surprise rise in interest rates on 19 October 2010. Asian countries use an array of fiscal as well as monetary policy via interest rate adjustments to curb speculative spending. In Singapore, it relied on exchange rate adjustment to curb inflationary pressure from abroad.

Singapore dollar is now prime easy target of speculative attack from the QE2s around the world. Such attack could drive up real-estate prices fueling inflation – exactly the same effects of rising Singdollar intends to curb.

The IMF latest pronouncement deems the US Dollar as overvalued “on the strong side of fundamental” despite the big fall since year to date. That implies it has substantial room to fall.

http://uk.finance.yahoo.com/news/imf-says-dollar-overvalued-afp-e4b33372b282.html?x=0

The net results for consumer might be neutral to negative but definitely negative for Singapore businesses going forward if the US Dollar depreciates significantly from here whilst the Chinese Yuan tagging on in tow. The competitive costs pressures within the manufacturing sector could well threaten the sector’s continued viability.

All regional Asian economies are troubled by hot capital inflows. Investors are sending more capital into higher-yielding assets in developing nations as monetary easing kept interest rates in the U.S., Japan and Europe near record lows.

http://noir.bloomberg.com/apps/news?pid=20601080&sid=a7s_XlpWb7lw

The Bank of Japan on October 5 cut its policy rate to “virtually zero” and announced a 5 trillion yen ($62 billion) bond-buying program. South Korea is contemplating taxes on foreign purchase of its bonds whilst India is resorting to adjusting exchange rate to counter this influx. Cheaper US dollar also pushes up Asian currencies, eroding competitiveness and threatening to stifle their economic recoveries as US attempts to export its way back to economic prosperity.

http://sg.finance.yahoo.com/news/Asian-central-banks-warn-rsg-3863251927.html?x=0

Summing up Asia, strong Chinese manufacturing growth in October is matched by weaker Japanese, Taiwanese, South Korean and Singapore’s industrial performance. These are anecdotal evidence that the weaker US Dollar is sucking growth out of Asia with Japan most hardly hit.

OVERALL – CORPORATE STRONGER BUT CONSUMER SPENDING PATCHY

European and US corporate results have been better than expected with few negative surprises. In this earnings season, most US firms posted upside surprises, but failed to provide impressive revenue results. Costs cutting were the norm. US auto manufacturing could turn in profits below the sub-12 million replacement sales, all thanks to generous discount and leaner operations. Even with strength of generally “improved” results, corporate forward guidance were also mixed. Global conglomerate, 3M, right into its final quarter cut its 2010 full year’s earnings by 6 cents per share despite three-consecutive quarters of revenue growth.

http://www.marketwatch.com/story/shares-of-3m-fall-5-on-softer-2010-guidance-2010-10-28

Toyota warned of gloomy outlook given threat of rising Yen. Globally consumer electronic is bracing for tougher times of falling prices. Panasonic, the world’s biggest maker of plasma TVs, lamented falling prices, the stronger yen and more expensive raw materials.

http://noir.bloomberg.com/apps/news?pid=20601080&sid=aXREhnF96a4A

South Korea’s Samsung and LG, the world’s two-biggest TV makers, have voiced similar concerns as rising won is dissipating the currency advantage over the Yen which had a larger jump on the US Dollar.

http://noir.bloomberg.com/apps/news?pid=20601068&sid=ajqfrIcOf34o

Samsung Electronics Co., the world's largest manufacturer of computer memory chips, cautioned that business conditions are deteriorating due to anemic recoveries in advanced economies even as it reported a 17 percent jump in third quarter profit to a record high. Samsung warned of difficult conditions in the final quarter due to weakening consumer confidence amid the slow economic recovery in the United States and Europe."

http://finance.yahoo.com/news/Samsung-3Q-profit-at-record-apf-4246308810.html?x=0&sec=topStories&pos=1&asset=&ccode=

Companies from Microsoft Corp. to Intel Corp. are increasingly counting on corporate demand as waiting consumers are reluctant to shop or pay higher premium for quality. U.S. retailers such as Target Corp. and Wal-Mart Stores Inc. are sweetening discounts ahead of the holiday season.

Companies are doing very well but instead of investing their profits and creating economic growth they are hoarding money and consolidating their financial position. In recent months, US corporations are leveraging up at record pace having sold more than $125 billion in bonds in September alone, the highest amount of the year, according to Informa Global Markets.

http://www.marketwatch.com/story/corporate-debt-binge-accelerates-as-yields-dive-2010-09-30

The acceleration of their bond issuance of debt is driven by hunger for bonds and the lowest yields since at least the early 1990s. NBC Universal (G.E. unit – $5.1 billion), Wal-Mart Stores Inc ($5 billion) Microsoft ($4.8 billion) GE Capital ($4 billion), Hewlett-Packard ( $ 3 billion), American Express Credit ( $2 billion), TransOcean ($2 billion), EI du Pont de Nemours ( $2 billion) are among big names taking advantage of low yields.

These companies with high ratings and strong balance sheets are locking in cheap funding using the proceeds they raised to pay for acquisitions, stock buybacks and even dividends. Other entities planning the same are Citigroup ($4.5 billion) after already sold $15.7 billion debt so far this year, BNP Paribas (2 billion), Codelco ($1 billion) Goldman Sach ($1.3 billion), Rio Tinto ($2 billion), Morgan Stanley ($1.5 billion) etc. They are doing it from a position of strength.

Like investors and consumers, American businesses are behaving very cautiously and are reluctant to invest in growth. They are selling debt to pay for dividends and buybacks thereby improving shareholders’ equity future return even though it increases leverage without providing any cash for organic growth in new business. They add nothing to the economy in short term but merely reducing their costs of capital and maybe reducing their long-term dividend payout if tough conditions continue to prevail.

I guess it is the perception out there that we don’t see things changing for some time to come when the necessary balance-sheet repair still has a long way to go for government, businesses and consumers. With the government taking the lead, each one, between business and consumers, are waiting for the other to take on the spending spree and the baton of growth. And that is imminently evident for American business in the US September quarter GDP figures at least.

Flash advance estimate of September quarterly GDP growth announced by the Bureau of Economic Analysis (BEA) shows the US economy grew at a slightly faster pace than the June Quarter of 1.7%. It grew by 2% in the current quarter.

http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

Contrary to media headline read, much of the gain in September quarter GDP growth had NOT been derived from increase in consumption spending. Relative to June quarter, growth in private consumption spending in the September quarter was slightly slower for both consumer durable and also consumer non-durable goods. Much of the increase was due to INVENTORY RESTOCKING AND DECELERATION IN TRADE LEAKAGE of strong export growth accompanied by slower gain in imports.

BEA reported the “small acceleration in real GDP in the third quarter primarily reflected a sharp deceleration in imports and accelerations in private inventory investment”. The change in real private inventories added 1.44 percentage points to the third-quarter change in real GDP after adding 0.82 percentage point to the second-quarter change.

Real nonresidential (business) fixed investment increased 9.7 percent in the third quarter, compared with an increase of 17.2 percent in the second. After 3 consecutive quarters of growth in business spending in software, demand from that sector is wearing of

The biggest disappointment is the missing housing boost – delayed consumption reflecting the deleveraging although some signs of stabilization now. Modest and gradual gain in consumer’s income is stalling recovery in housing commitments.


FORWARD – POLITICAL QUAGMIRE, SLUMPING DOLLAR & STALLED ECONOMIC AGENDA.

American voters gave President Barack Obama a good round of “shellacking” in the mid-term Congressional election, Democrats lost control of the Congress although survived a slim majority in the Senate. That must place Obama’s economy agenda forward in a difficult gridlock of political hostage – even much tougher than the Obamacare health reform. It is a landscape change of Obama’s political platform. Republicans have already vowed to roll back Obama’s agenda.

In the best of political fortune, prior to the mid-term Congressional election, the US can’t even spend on infrastructure waiting for industry to grow. It will take time and incentivized efforts to get high tech industries or green industries of any degree to populate new industrial development nearby to pay for these infrastructures let alone the debt to pay for its construction. China is in a far more fortuitous circumstance. It has already the industries in place and to add new ones to fully utilize and to pay for all these infrastructural development costs.

With a hamstrung political maneuverability, Obama is practically reduced to a cheap dollar strategy – lower dollar cut livings standards, lift corporate earnings and export back to prosperity. He can forget about fiscal stimulus as Republicans are hostile to “BIG” government. Neither is there any leeway available via monetary policy as US interest rate is near zero. Neither would EU consort with the QE2 type stimulus as Europeans are headed in the direction of fiscal austerity.

http://www.marketwatch.com/story/gold-rallies-as-price-drop-lures-investors-2010-11-03

As the Fed unleashed another US$600 billion quantitative easing program, gold and metals rallied strongly in the wake of sharply declining US dollar as the EU, in sharply contrasting stance, stay unmoved. The ECB’s key lending rate was left unchanged at a record low of 1%. The Fed move succeeded in punishing the dollar.

The G20 finance ministers Seoul meeting of 23 October concluded that the global recovery is underway, albeit fragile and uneven. Growth has been strong in many emerging-market economies, but the pace of activity remains modest in many advanced economies as noted in my earlier writings.

http://www.marketwatch.com/story/g20-recovery-under-way-but-uneven-2010-10-23

They warned advanced economies needs to be more “vigilant against excess volatility and disorderly movements in exchange rates” in order to “help mitigate the risk of excessive volatility in capital flows facing some emerging countries.” The Fed Reserve manipulation of the fast depreciating US dollar was what the G20 impliedly critical of. Geithner , US Treasury Secretary, spoke of world’s economy “is going through a necessary, but complicated process of adjustment” following “large financial imbalances” that include excess borrowing, overinvestment in real estate and “unsustainable leverage in the financial sector.” That should have been referred to the developed economies except China.

This author asserts that it is concomitant that economic reality dictates financial market bubbles taking a long time to burst and it also take an even longer time to heal. The continuing “sick-recovery-sick-relapse” syndrome of RBS proves that.

And this is very threatening of emergent economies at this moment as US floods the global financial system with liquidity not justified either by economic fundamental relevance nor has tangible asset backing. In blunt terms, US is printing money and “Helicopter” Ben Bernanke is early “Father Christmas” bringing cheers today and possibly a lot of tears of inflation in the future. All these were calculated unilateral bullying move to force the unwilling appreciation of emerging currencies which China won’t come to the party. This was despite an “uneasy truce” of no competitive devaluations by all G20 members based on fragile trusts averting a crisis of confidence in financial markets momentarily.

In truth, the US urge for faster steep appreciation of Chinese Yuan met with stiff resistance and that found a surprise accord of agreement in support from unlikely Germany which pointed fingers at US as “the” currency manipulator. The Chinese, quite rightly saw, that decisions of monetary policy and macro- economic aggregates are of domestic legitimate economic interest and therefore of necessity one of its own “sovereign” determination not available to US-instigated or any foreign pressures.

http://www.reuters.com/article/idUSTRE69N0QZ20101024

So the bottom-line still is a free-for-all despite the hypocritical smiles for photo shoots in the G20 Seoul meeting. The Fed’s FOMC meeting of 3 November started the ball rolling. The full impact is yet to be evident on financial markets. Small and open economies like Singapore are most vulnerable. As UBS Bank currency strategist Nizam Idris ( ST 3 November 2010, S$ powers to new high against US$) said correctly, the MAS monetary policy statement of 14 October 2010, of allowing Singdollar to rise uninhibited, made investors look the Singdollar as a “one-way-bet” betting it will only rise against the US dollar. The damaging implication of that on our industries and competitive position is still waiting to see outcomes ahead.

The FOMC minute confirms

- the slow pace of recovery
- gradual rise in consumer spending
- easing of corporate investment spending
- and a subdued underlying inflation trending lower in recent quarters i.e. an implied threat of deflationary environment risk forward
- its intention to purchase a further $600 billion of longer-term Treasury securities dubbed QE2.

http://www.bondsquawk.com/2010/11/fomc-november-2-3-meeting-official-statement/

It is a high risks decision – either it lift the economic recovery onto a steeper trajectory via depression of interest rates in the US or it fails, the excess liquidity flood globally will drive and add substantially to inflationary pressures, not only for the US but the world.

Asian Central bankers whose economies are enjoying higher rates of growth are naturally wary of this opening of liquidity floodgates. The influx of cash has already put pressure on currencies in Asia and other emerging markets to rise as added money supply will mostly serve to depress the value of the US dollar. With the exception of Singapore, most export-dependent Asian countries have either taken capital control measures, supplement it further or are contemplating such a move to contain the rise of domestic currency damaging its export competitiveness. Against the US dollar to date this year, the Thai Baht is up more than 11%, the Korean Won more than 6% and the humble Philippine Peso more than 8%. Market talk has it that Korea is likely to restrict foreign access to buy Won-based derivatives or re-imposition of tax on foreign investment in Korean Government bonds. Japan’s BOJ might expand its own quantitative easing measures watching closely the impact of US move. Hong Kong which maintains a de facto peg with the US dollar and therefore its currency does not fluctuate versus the US dollar will naturally “import” cheap US interest rates.

http://www.theaustralian.com.au/business/news/asian-officials-warn-qe2-will-open-liquidity-floodgatesa/story-e6frg90x-1225948139564

That makes it easy for Hong Kong consumers and businesses to borrow cheaply and bid up the prices of everything from real estate to fine art to businesses from China to Singapore – all of that short-term speculation on asset pricing and exchange rate appreciation as the US dollar meltdown. Chinese Government is obviously very concerned that the Fed's quantitative-easing program wouldn't stimulate the US economy but would boost the country's fund outflows, "affecting the stability of the global economy."

With many Asian economies seeking to impose varying capital controls, the flight out of weaker US dollar finds refuge in gold and base metals. Gold, in particular, benefited from a confused market of political and economic uncertainty with December gold hitting record high last week, almost a whisker from US$1,400 per ounce as Obama emerged shell shocked from the mid-term Congressional election which he received a nasty “shellacking”. Higher metal and oil prices spell inflationary pressure alongside other commodity prices. Stock prices rallied solely on liquidity influx but further disconnect with economic and political fundamentals. All asset prices have now lifted off onto a higher trajectory of higher treacherous volatility as US dollar and bond prices heading down south.

Intense voter backlash have reduced Obama grip on Congress to rubble. From a comfortable majority in House of Representatives, Senate and Governorships previously, the Democrats is now minority (185 vs 239 seats) in the House of Representative and retains only 15 to 28 Republican governorships though retaining a 52 to 46 seats majority in the US Senate. There must be uncertainty ahead as the results mean political stalemate over economic agenda is likely to eventuate. Even Ben Bernanke faces the prospect of greater scrutiny from resurgent, confident Republican lawmakers. The composition of lawmakers including so many “Tea Party” candidates who are NOT necessarily Republicans of political agenda further confused the intricate political landscape. The message is clear. Voters angry over the economy have abandoned Obama in the House of Representatives but NOT in this desperate desertion flocking to embrace the Republicans with any loving passion in the US Senate. Tea Party elected lawmakers are the “independents” policy voting bloc within the Republican ambit – the approximation of a “hung” Parliament similar to the UK and Australia. Exit poll showed American voters are angry with Obama’s slow-to-rise reduction in employment hopes BUT FEW COMPREHEND OR EVEN AWARE THAT without those fiscal stimulus, the unemployment would have been a lot higher and in any case, the tax receipt in that depressed state of economy would have compelled even steeper cuts in Government spending adding grievously to elevated unemployment level than current.

With so many “elephants” in his “democratic” bedroom, we are unlikely to hear Obama talking a lot about “change” mantra, lest he wants to smell more of elephant’s excrement attack. The hard grind of jobs, taxes, the budget deficit and national debt will be his nightly nightmare comes bedtime after inheriting the worst economic downturn since the Great Depression.

http://www.theaustralian.com.au/news/world/struggling-barack-obama-to-ditch-hope/story-e6frg6so-1225947492341

The passage of healthcare reform took a heavy toll on his Presidential divided time, energy and distracted his focus on the economy and employment generation. The journey ahead for Obama promises to be a lot tougher as the emotional Republican elephant, John Boehner, threatens the political gridlock of his demand in favour of “small” government ahead. There will have to be tough choices and compromises as Obama would foist budgetary responsibilities onto the Republican lawmakers

BUMBY ROLLER-COASTER RIDE FOR ALL IN THE GLOBAL ECONOMY AHEAD. It will most likely be a swim or sink knife's edge post-Christmas. Anyone disagreeing?

Zhen He
7 November 2010

Update 7, Global economies heading for turbulence, renewed risks of sovereign debt crisis, currency “war” risking double dip recession & massive damage to economies as gold keeps heading up north.

Just three days after my grim warning of 1 October 2010, Saturday, October 2, 2010 - Update 6 - Global Economies Heading for Turbulence, US stock market and US Dollar heading in divergent directions. Watch out for gold, of the threats of continuing European sovereign and banking woes, Nobel laureate economist, Joseph Stiglitz, warned a "wave of austerity" is sweeping across Europe could trigger a new recession.

http://sg.news.yahoo.com/afp/20101004/tts-finance-economy-stiglitz-c1b2fc3.html

But despite Stiglitz’s warning and somewhat “relaxed” banking regulations, the truth remains that EU’s inchoate recovery, rising from sovereign debt swamp, is faltering.

S & P already downgraded Ireland’s long-term sovereign debt rating to AA-minus on 25 August, 2010 raising its Government’s cost of borrowing money. Its severe recession induced by huge investment property bubble proved intractable to sustained recovery.

http://www.earthtimes.org/articles/news/340889,rating-irelands-sovereign-debt.html

Fitch Ratings lowered Ireland’s credit risks from A+ to AA- on 6 October 2010, citing bailout costs of its banking system.

http://www.bloomberg.com/news/2010-10-06/ireland-sovereign-debt-rating-cut-one-level-by-fitch-outlook-is-negative.html

Moody’s Investors Service is again reviewing Ireland’s Aa2 credit rating, so soon again after downgrading it from Aa1 on 19 July 2010 - citing the rising cost of recapitalizing the nation’s crippled banking sector, as well as an uncertain domestic outlook and rising borrowing costs.

http://www.marketwatch.com/story/moodys-puts-ireland-on-review-for-rating-cut-2010-10-05

Spain ( to AA from AAA) , Portugal ( to A minus ) and Greece ( to BB plus) – all last downgraded by S & P in late April 2010, are most likely to be on close watch list again – given how fast the situation deteriorates in Ireland, particularly if economic conditions worsen in the third- quarter. Current indications are NOT PRETTY. Spain and Ireland economies showed contraction in September according to Markit composite PMI read.

http://www.theaustralian.com.au/business/markets/sp-downgrades-spains-sovereign-debt/story-e6frg91o-1225859714169

Spanish gross domestic product grew at a slightly faster pace in the second quarter, expanding by 0.2% compared to the first three months of 2010.

http://www.marketwatch.com/story/spain-second-quarter-gdp-grew-02-bank-of-spain-2010-08-06

Portugal's economic growth slowed down sharply in the second quarter to just 0.2 percent from the preceding three-month period when gross domestic product grew 1.1 percent.

http://uk.reuters.com/article/idUKTRE67C1E520100813

Greece gross domestic product contracted by a downwardly revised 1.8% in the second quarter compared to previous quarter 2010.

http://www.marketwatch.com/story/greece-second-quarter-gdp-revised-down-to-18-2010-09-08

Stiglitz cautioned on Spain in particular, warning that deep spending cuts being introduced could prompt the country's economy to slow down and enter a "death spiral." similar to Argentina a decade ago. At present, Spain has not been attacked by speculators, but it may be only a matter of time."

http://www.hurriyetdailynews.com/n.php?n=top-economist-warns-of-european-wave-of-austerity-2010-10-04

Euro Zone – risks on the downside

Retail sales volumes fell 0.4% in the 16-nation euro zone in August, according to figures released by the European Union statistics agency Eurostat.

http://www.marketwatch.com/story/euro-zone-retail-sales-fall-04-in-august-2010-10-05

Euro-zone September composite private sector activity PMI slips to 7-month low according to the final reading of the Markit composite purchasing managers. The composite PMI fell to 54.1 from 56.2 in August.

http://www.marketwatch.com/story/euro-zone-sept-composite-pmi-slips-to-7-month-low-2010-10-05

The slowdown was broad-based, with growth easing in Germany, France and Italy, while Spain and Ireland saw renewed contractions.

Germany's industrial production rose 1.7% in August from the previous month.

http://www.marketwatch.com/story/german-industrial-production-up-17-in-august-2010-10-07

International demand orders, particularly from Euro area countries, rose 3.4% underpinned by unusual big contract orders for transportation equipment. These add to fluctuations in month-to-month industrial orders but unlikely to be repeated.

http://sg.news.yahoo.com/afp/20101006/tts-germany-economy-industry-orders-509a08e.html

Germany's August exports dropped 0.4%. It is the second consecutive drop in German exports supporting skepticism about the durability of its export-led recovery.

http://www.marketwatch.com/story/germanys-exports-drop-04-in-august-2010-10-08

British retail sales values rose 0.5% in September compared to the same month last year, the British Retail Consortium reported.

http://www.marketwatch.com/story/uk-sept-same-store-sales-up-05-brc-2010-10-11
British house prices continued to fall in September, according to the Royal Institution of Chartered Surveyors' monthly survey released Tuesday.

http://www.marketwatch.com/story/british-house-prices-fall-in-september-rics-2010-10-11

US Economy - Corporate results points to sluggish conditions

U.S. factory orders falling 0.5% in August offset 4.3% improvement in pending home sales. US stocks meander as concerns about European fiscal woes overhanged the market. There were strong autos sales in September and strength of aircraft sales was notable at Boeing in the September quarter when it delivered 124 commercial airplanes.

http://www.marketwatch.com/story/boeing-delivers-124-passenger-jets-in-3rd-quarter-2010-10-07?tool=1&dist=bigcharts

Despite these strong downstream demand, Alcoa reported steep fall, though much-better-than-expected, September quarter. Margins have been squeezed even as Alcoa remains upbeat of global aluminum consumption to rise 13% in 2010 over 2009, citing growing demand for the metal in countries such as Brazil, India and Russia and particularly Chinese auto sector.

http://www.reuters.com/article/idAF0717101720101007?rpc=44

Alcoa reported revenue raise of 2 percent to $5.287 billion from June qtr of $5.187 billion on higher volumes in aerospace sector and increased market share in the building and construction market. Net income was $61 million, or 6 cents per share was mean and lean, compared with $136 million or 13 cents per share in the June quarter when it eliminated $311 million in overhead costs. It also compared unfavorably with $77 million or 8c per share in the same qtr last year despite significantly higher throughput volume sales to third parties by some 15%.

Alcoa results, in the view of this author, are disastrous. It was lower than September qtr in 2009! And despite weaker dollar advantage in overseas market – which was the strength of its previous qtr’s strong performance - earnings tumbled substantially and contrary to bullish forecast by its management. Over the one year interval, though fluctuating between the ranges of US$0.82 per lb to US$1.10 per lb, aluminum price actually rose from US$0.87 to US$1.04 per lbs in the 2010 September qtr in contrast to the opposite direction in June qtr. Factoring that into account, Alcoa’s performance is rather disappointing.

http://www.kitcometals.com/charts/aluminum_historical.html

Notwithstanding the impact of adjustment to derivatives contracts marked-to-market, these results indicate tougher trading conditions in global market and competitive pressures of market share build at home. Strong demand, increased market share and falling earnings collectively adds to illogic of earnings calculus and positive outlook ahead for Alcoa and bode ill for global economy ahead.

In retailing sector, one positive development is the pick-up in apparel and footwear “necessities” retail sales in September identical store sales.

http://www.marketwatch.com/story/september-retail-sales-better-than-expected-2010-10-07

Looking further out from a year-on-year comparison, the underlying trend did showed marked improvement in the all-important holiday shopping season rise of nearly 2.3% in 2010 from ” from last year’s tepid 0.4% rise and the 3.9% decline of 2008”.

http://www.marketwatch.com/story/sept-retail-sales-look-to-be-positive-2010-10-06?link=MW_related_stories

September same store sales were up 5.1% in J.C. Penny, 4% in Kohl,7.5% in Nordstrom, 2% in Ross Stores, 6.5% in Saks, 3% in Dillards, 1.3% in Target, 4.8% in Macy’s and down 1.3% in Walgreen and 2% fall in Gap. US retail sales increased by 0.6% over August’s revised growth of 0.7% (from 0.4% earlier estimate) to make it three consecutive months of gain.

But the big supermarket food retailing deteriorated on a sequential quarterly basis. Kroger Co, US largest supermarket chain, first quarter sales of $24.8 billion returned a net income of $373 million saw a steep decline in its second quarter performance, which ended 14 August 2010, of $18.8 billion which earned $261.6 million.

http://www.marketwatch.com/story/lower-costs-solid-sales-boost-kroger-profit-2010-09-14

Safeway, the third largest US supermarket chain, reported June quarter sales of $9.52 billion and net income of $141.3 million were better than its September quarter’s reported sales of $9.44 billion and net income of $122.8 million.

http://www.marketwatch.com/story/us-stocks-drop-after-rise-in-joblessness-2010-10-14

Safeway Chief Executive Steve Burd said ““Deflation has been extraordinarily stubborn,” although price declines in Safeway’s sales at existing stores are abating at lower than the HUGE 2%. It is now closer to the 1.5% range as was also reported by Kroger Co. This is big margin difference because supermarket operation typically earns 3c to 4c per dollar of sales in good times. Americans are cutting down their grocery and personal care expenditures indicating consumption spending in US continue to decline.

Samsung Electronics, the world’s largest technology company by sales, issued earnings warning past week. It forewarned slowing European and US demand for consumer electronics goods. Instead of a traditionally strong third quarter selling season for the tech sector, the slowdown is a rude shock that consumers are withdrawing purchases sooner than expected. This is a warning of possible bleak Christmas.

http://www.theaustralian.com.au/business/news/samsung-electronics-earnings-warning-fuels-demand-concerns/story-e6frg90o-1225935486738

Intel Corp’s September quarterly results are equally disappointing. Intel reported strong corporate demand but it is believed increased sales there were due to businesses continuing to replace aging PCs and servers and embrace new more power-efficient data-center technologies.

http://www.marketwatch.com/story/intel-shares-rally-as-investors-embrace-results-2010-07-14

Sequentially, Intel struck a 3.1% top line revenue gain over the June quarter to reach $11.1 billion which itself registered a higher 4.5% jump over the March quarter. Net income growth of 3.4% in September quarter compared most unfavorably with 18% achieved in the June quarter over March quarterly results. This indicates clearly stress on margin as Intel struggles to push corporate sales volume on thin margin. Earnings per share of 52c in September were almost flat in comparison to 51c in June. The distress in pressure threw up a marginal increment in net earnings of $3 billion when compared to June quarter net income of $2.9 billion. Taking into account the fall of US dollar adding to competitiveness and pricing strength, the 3.8% gain in Asia Pacific ex- Japan, 2.4% rise in Europe of its revenue base and a flat sale growth in Japan, the reported results are disappointing. It points to very tough external trading conditions in hard sell and stagnating profits. Analysts have been pointing to signs of a weakening PC market amid concerns of another major economic downturn.

http://www.marketwatch.com/story/intel-profit-surges-on-solid-corporate-demand-2010-10-12

In conference call with analysts post the release of its June quarterly result, Paul Tortellini, Intel’s CEO, painted an upbeat picture of the global economy, saying "the economies of the world continue to reflect renewed economic momentum."

http://www.marketwatch.com/story/intel-shares-rally-as-investors-embrace-results-2010-07-14?pagenumber=1

Well, he is WRONG on both counts. Global economies were slipping and Intel fumbled badly in the September quarter.
Advanced Micro Devices Inc, competing in the same line at Intel, posted a poor set of results in the third quarter. Its most recent quarterly sales of $1.62 billion is sequentially down 2% from June quarter and net loss of $118 million is a huge jump from the June quarterly net loss reported of $43 million same year. AMD cited lower consumer demand and has forecast forward revenue to be flat sequentially.

http://www.marketwatch.com/story/amd-posts-narrower-loss-as-sales-rise-2010-10-14

Taiwan’s statistic bureau is already forecasting a very steep fall in December Quarter GDP growth to a mere 1.4% after registering a phenomenal GDP growth of 13.1% in the first half of 2010.

http://noir.bloomberg.com/apps/news?pid=20601068&sid=aK0tMx1WQ0Yw

Analysts spoke of semiconductors are at the end of the electronics food chain and thus are the last to feel any inflection in demand. It is some indications of how badly the electronic export-dependent industry in Taiwan had been hit by slumped demand; expecting to hurt Taiwan’s final quarter GDP growth. And Singapore won’t be any different.

JP Morgan Chase & Co September quarterly results came in higher than analysts’ expectations which itself is nothing much to crow about. A profit of $4.42 billion, or $1.01 a share, in the quarter, was the outcome of “credit costs continued to fall, mortgage-delinquency rates held steady and credit-card chargeoffs dropped.” In the year-earlier period comparison, revenue actually dropped to $23.8 billion from $26.6 billion, indicating the continuing trend of shrinking organic growth in business volumes, deleveraging by consumers and deleveraging of financial institutions.

http://www.marketwatch.com/story/jp-morgan-profit-jumps-23-2010-10-13

“Our mortgage-delinquency trends remained relatively flat compared with the prior quarter, and we expect mortgage credit losses to remain at these high levels for the next several quarters,” Chief Executive Jamie Dimon said. “If economic conditions worsen, mortgage credit losses could trend higher.” J.P. Morgan said its provision for credit losses in the third quarter was $3.22 billion, compared with $8.10 billion a year earlier - a drop of $4.88 billion. Yet a posted profit of $4.42 billion this current quarter compared with $3.55 billion in the quarter prior showed only a $0.87 billion jump in net earnings on an after tax basis.

In other words, the 23% “improvement” in September quarter earnings compared to same period last year is due to prior period’s aggressive accounting in writing off credit card charge-offs, with no underlying growth in business top-line revenue. The US economy, by JP Morgan’s results indications, is NOT improving.

On quarter-over-quarter comparison, General Electric Co 3Q 2010 results also disappointed badly. Revenue of $35.9 billion struck was 4% lower than June quarter sales of $37.4 billion. Net attributable earnings to the company were $2.05 billion in September quarter as compared to $3.1 billion in June quarter. Translated on per share basis, GE’s earnings per share fell to 18c, down from 28c per share achieved in the quarter prior. Consensus analysts’ expectation was 27c per share.

http://www.marketwatch.com/story/ges-third-quarter-net-profit-sales-drop-2010-10-15

GE Capital, its sore thumb, did showed some healing – thanks to hollow log accounting in prior quarters, it turnaround to show a net earnings of $0.9 billion even though GE Capital’s revenue base declined 4.6% to $12.5 billion from the quarter prior of $13.1 billion. Net losses from discontinued operations were $1.1 billion following disposition of its former Japan consumer finance business. The results reflect no growth in GE core business including GE Capital where earning volatility encapsulate the flow of write-off of possible loan losses. Overall backlog remained flat at $172 billion compared to September 2009.

General Electric Co, Intel and JP Morgan Chase & Co’s share prices dipped on result announcements – the market was NOT impressed despite strong self-praises.

Elsewhere, U.S. factory orders declined 0.5% in August and pending home sales increased by 4.3% in the same month.

http://www.marketwatch.com/story/us-stocks-drop-on-eurozone-concerns-2010-10-04

Institute for Supply Management's non-manufacturing index climbed to 53.2 in September from 51.5 in August.

http://www.marketwatch.com/story/dollar-down-treasurys-up-after-ism-services-2010-10-05-109180?tool=1&dist=bigcharts&symb=DXY&sid=3044712

U.S. wholesale inventories rose 0.8% in September and the inventory-to-sales ratio was 1.24.

http://www.marketwatch.com/story/us-wholesale-inventories-rise-08-in-august-2010-10-08

Auto sales in September were strong despite cutback in incentives among domestic manufacturers and importers alike. A bullish stock market helps.

http://www.marketwatch.com/story/us-car-makers-slash-deals-and-still-log-sales-2010-10-07.

The economy lost more jobs in the September.

http://noir.bloomberg.com/apps/news?pid=20601103&sid=aKpc.UqcvLt0

Fiscal deficits forced Government to cut more jobs, by 95,000 workers after a revised 57,000 decrease in August, according to Labor Department figures in Washington. Private payroll added 64,000 incremental jobs demonstrating the adverse impact of fiscal austerity.

The Fed Reserve forecast is for a “modest” growth in the coming months. Growth, while clearly still unsatisfactory, is positive according to Larry Summers. Most recent indications showed US manufacturing expanded at a slower pace while consumer spending increased slightly.

UK Economy – unstable, risks on downside & easier monetary policy

The PMI for the services sector, which accounts for more than 70% of the nation’s economic output, rose to 52.8 in September from a 16-month low of 51.3 in August, according to the Chartered Institute of Purchasing and Supply and Markit.

http://www.marketwatch.com/story/services-pmi-eases-uk-double-dip-fears-2010-10-05

Stronger PMI read in September help easing fears of a double dip recession for now. Tesco’s Chief Executive, Terry Leahy said improving sentiment in slightly higher sales of upscale fine food, urging similar positive outlook for non-food sales going into Christmas

http://www.marketwatch.com/story/uk-consumer-in-recovery-mode-tesco-ceo-2010-10-05

British industrial production rose 0.3% in August from July 2010.

http://www.marketwatch.com/story/british-industrial-output-up-03-in-august-2010-10-07

Britain Conservative-Liberal Democrat Government will scale back public spending cuts aimed at reining in a record deficit if the economy starts to deteriorate. Its Energy Minister, Chris Hulne warned that “a double-dip recession is not impossibility”

http://sg.news.yahoo.com/afp/20101009/tts-britain-politics-economy-cac1e9b.html

Staggering out the austerity cuts in Government’s spending over 4 years might be the only option available.

Bank of England Governor, Mervyn King, is also less optimistic. There are some signs that the recovery in June quarter growth – the fastest pace in 9 years of June quarterly performance – is cooling off. House prices has cooled off 3.6% in September from a month earlier and jobless claims increased for the first time in 7 months this year. Easing by US and Japanese Central Banks is likely to strengthen the British Pound, eroding the UK’s competitiveness and undermining its recovery. Britain is now leaning toward monetary easing as well given increasing concern of downside possibility ahead.

http://noir.bloomberg.com/apps/news?pid=20601085&sid=aMhEFAi0zvOA

In a similar vein, ECB meeting, President Jean-Claude Trichet said on the 7 October 2010, economic risks for the euro area are still to the downside, but that the monetary stance was “accommodative.”

http://www.marketwatch.com/story/european-stocks-drop-renault-shares-rally-2010-10-07

Japan Economy – rising Yen & losing steam

A recent economic panel warned that Japan’s economy will worsen through next year, as benefits from the government stimulus program fade, and as the U.S. economy continues to languish.

http://www.marketwatch.com/story/japan-experts-see-economy-worsening-report-2010-10-05

As the Yen head for a 15-year high against the US dollar in August, Japan's export growth slowed for a sixth straight month in August, in a sign that the recovery is losing steam.

http://www.bbc.co.uk/news/business-11416470

Yen has headed higher since despite BOJ recent failed intervention.
China’s GDP – renewed threats of bubble & slower growth pace
Meanwhile, the Chinese Government continues to pile downward pressure on property bubble. The latest move involves banning ownership of more than one residential accommodation per family for those living in metropolitan Shanghai as a way of curbing what the authorities called “irrational demand”. This is the same as the restriction imposed in Beijing since April 2010.

http://www.theaustralian.com.au/news/world/shanghai-imposes-one-home-per-family-policy/story-e6frg6so-1225935995572

The September trade figures just released showed China is slowing down with both exports and import growth slowing sequentially from August. Imports rose 24.1 percent on-year in September to a record high of 128.11 billion dollars, but slower than the 35.2 percent growth recorded in August. China's exports rose by 25.1 percent in September year-on-year to 144.99 billion dollars, compared with an increase of 34.4 percent in August.

http://sg.news.yahoo.com/afp/20101013/tts-china-economy-exports-a73cdd6.html

Overall – currency war damaging, big risks for all but options limited

The silent currency “war” now underway underscores the global economic imbalance. The global economy needs to be rebalanced, Larry Summers warns. “It can’t have the United States consumer being the single engine of global economic growth.”

http://noir.bloomberg.com/apps/news?pid=20601109&sid=aZ5qJB8WRSIk

But this won’t be easy. Japan is grinding to a slowing halt. Under pressure to shore up its economy hard hit by deflationary consumer spending at home and adverse impact of strong Yen rapidly slowing Japanese exports, Japanese Cabinet on 8 October 2010 approved a new 5.05 trillion Yen (US$ 61.3 billion) emergency stimulus package. When implemented, it will add 0.6% boost to Japan GDP.

http://www.france24.com/en/20101008-cabinet-approves-billion-dollar-stimulus-package-naoto-kan-japan-yen

Likewise, not much compensating uplift can be expected from Chinese economy. A decade of emphasis on exports and investments have pared down domestic consumption to 35 percent of gross domestic product from 45% ten years ago, the lowest of any major economy, Societe Generale AG says.

http://noir.bloomberg.com/apps/news?pid=20601068&sid=agagn6YHRQiA

That is about US$1 trillion. As a relative comparison, US private consumption is around US$10 trillion – that is 10-folds higher.

http://seekingalpha.com/article/195410-nouriel-roubini-on-the-coming-commodities-correction

It is therefore unrealistic to expect any significant increase in Chinese consumption to be capable of offset even a small fall-off in US aggregate demand. China cannot be the engine of growth either replacing any slackening of US demand.

The ratio of consumption to Japanese and European economies is around 60% but retail spending in both is pretty sick. Germany, EU strongest economy, experienced 3 consecutive months of decline in retail sales – 0.3% in June, 0 4% in July and 0.2% in August.

Retail sales volumes in the 16-nation euro zone fell 0.4% in August after 0.1%, 0.2% 0.4% rises in July, June and May respectively – the declining positive momentum of retail sales faded into negative as austerity drive bites. Euro zone recovering is heading southwards.

August retail sales declined 0.5% over July in Britain – the first since January 2010 and a warning sign that consumer spending may be slipping just as spending cuts is about to take effect.

http://www.irishtimes.com/newspaper/breaking/2010/0916/breaking23.html

On a month-to-month basis, Japanese retail sales increase 1.4% in August, 0.7% in July 0.4% in June - after huge 2% decline in May. Consumer spending in September will see the beneficial lift of the Government’s US$10.9 billion stimulus spending impact approved in early September.

http://www.moneynews.com/Headline/japanstimulus/2010/09/10/id/369796

The evidences point to declining consumption spending in EU/Britain matched by modest gains in consumption in US, Japan and China. There should be modest, but much more subdued rate of growth in Britain, Germany, the rest of EU and US and a slight fall in Chinese GDP growth numbers in the September quarter.

Looking forward, the major key challenges now would be currency market discipline, the rebalance of austerity pressures and further stimulus spending in all major developed economies – is much harder to achieve. The global structural imbalance of trade and fiscal surplus enjoyed by developing economies and China in contrast with massive fiscal and trade deficits in EU, US and Japan will take much longer to rework if ever.
Japan had reverted back to stimulus spending since August 2010 posts the Toronto G20 meeting of June. Britain is also swinging back to stimulus from austerity bringing all major economies into alignment with the US and China for the first time whilst much of the rest of EU members struggles on with austerity discipline.

The IMF meeting in Washington last weekend failed to eliminate the spectre of a damaging global “currency war” derailing recovery. It was almost theatrical. China just won’t budge to US pressure but were more visible making their case in media conferences, speeches and public seminars – sorts of playing to the public gallery. Whilst this visibility sought to ease tensions, the Chinese were careful not to venture beyond the promised undefined “gradual” ascent of the Yuan. The only thing US succeeded was to keep the burning issue of the Yuan’s exchange rate policies alive in the next G20 meeting in Seoul this November.

http://www.theaustralian.com.au/business/news/us-to-turn-up-currency-pressure-on-china/story-e6frg90x-1225937139306

That failure in Washington is not totally unexpected. IMF has been notoriously failing of encouraging China’s Yuan appreciation since 2006 when it was arguing for “gradual” Yuan appreciation in Tokyo instead of a free float.

http://www.thefreelibrary.com/IMF+adviser+calls+for+gradual+yuan+flexibility.-a0109331963

''No, we are not arguing for a free-float Renminbi (Yuan), I think that would be a big mistake in China's circumstances, it doesn't have the infrastructure to deal with that,'' That position has not changed now, so how is it going to be any different in Washington over the failed past weekend meeting? The Chinese exploited that to advantage making it a theatrics rather than engaging in politics or economy, leaving the US to either pursue its agenda unilaterally or multi-laterally via G20 in Seoul this November. China is now really too big and dangerous to offend unless US wants to provoke a trade war when its economy is weakest to confront and neither side can afford one. The Chinese also know that playing the hard ball risk the trade and currency issues might move these US domestic politics beyond the deft handling of the President’s hand in the US Congress, making future resolutions even more difficult. Even in amicable times, we see the unilateral initiatives in US often fell on their own political weight with Congressional wrangling and fearful reactions, combining often both. Congressional findings on “China issue” of trade and currency issues often find it too difficult a hot potato to handle for both past Democrat and Republican administrations and mostly got nowhere. This is real politics. The unspoken fear is full-scale trade war escalating into the UNLIKELY Chinese “nuclear option” retaliatory dumping on US Treasury bonds, rushing yields and interest rates up, deflating US economy. A massive sudden sell-off and/or a steep fall in the US Dollar will greatly diminish the value of its remaining holdings for China. Obama is left with no cards to play and the Chinese walking on egg shells knowing it cannot sustain the twin impacts of stronger Yuan and the risks of a double dip recession EU ravaging its European export market at the same time.
The only other route available to the US is the multi-lateral option via G20 and even that route found little appetite for the Chinese palate. Treasury Secretary, Mr. Timothy Geithner, actually suggested a Chinese currency boost reciprocated by other Asian currencies found Yi Gang, deputy governor of China's central bank, dismissed that notion out of hand as "very unlikely.” The presumption, rejected by the Chinese, is that China fears rising Yuan without matching Asian currency appreciation, could attract American investments to re-locate elsewhere in Asia competing against Chinese exports into US.

http://www.theaustralian.com.au/business/news/us-to-turn-up-currency-pressure-on-china/story-e6frg90x-1225937139306

Lost in the midst of these political posturing is economic rationality. Joseph Stiglitz, Nobel Prize economist, warned of perverse negative risks of forcing the Yuan up actually aggravating the US/China trade imbalance

http://www.marketwatch.com/video/asset/economist-joseph-stiglitzs-take-on-china-2010-10-09/C3577DCF-EA87-4F29-883E-471C27AB65BE

Stiglitz argued correctly that if the actual US demand for Chinese goods are relatively inelastic, rising Yuan merely forced the quantity demanded down at a SLOWER pace than price rise with the net effect of Americans paying more for Chinese goods and aggravating US trade deficits vis-à-vis China. When Chinese goods are so “cheap” and the ease of counterfeit as substitutes, the rising Yuan may found its perversity imploding to full effects hostile American Congressmen may soon discover to their regret.

http://www.cnbc.com/id/38504275

EU, whilst dissatisfied with both US and Chinese intransigence, are less confrontational. The EU see a twinning of interlocked problems – US internal and external deficit reduction pressures and Chinese needing to boost internal consumption to be less dependent on EU and US export markets and a rising Yuan is a necessary component instrument of reaching that goal. THE CRUNCH IS SPEED – the Americans desperate to speed up this process and the Chinese recalcitrant of pacing faster than economically feasible of adjustment pains and risks of internal unrest of massive Chinese unemployment.

On the way, a trade/currency clash seems inevitable and each country has become more and more nationalistic and less of emphasis on multi-lateral cooperation as the currency battles spreads globally. Wen Jiaobao warned EU in Brussels, against pushing China harder to raise the Yuan ahead of the IMF Washington last week reminding all that Chinese exporters operate on very thin margin and unable to cope with Yuan appreciation nor a tariff imposition.

http://www.marketwatch.com/story/chinas-wen-warns-europe-not-to-push-on-yuan-2010-10-07

Undue pressure on Yuan, he warned, could sink Chinese manufacturing sector “bringing disaster to China and the world.” In fact, Chinese manufacturing sector is facing tremendous wage costs escalation lately, leaving China lesser scope to flexibility on the Yuan appreciation going forward. And there is no general consensus among economists if a rapid appreciation of the Yuan is a cure-all of US/China trade deficit and unemployment problems. At a consumption ratio of mere 35% of the GDP, China can hardly lift that ratio or its aggregate consumption higher especially if bankruptcies and unemployment rise accompany a Yuan appreciation decimating part of its industrial base. Unlike US, wages are low in China and savings rate – a lifelong habit of low demand elasticity – do NOT change overnight. American politicians, in my judgment, simplistically, way over-estimate the potential for Chinese consumption uplift via a rapid shift in Yuan appreciation on Chinese domestic consumption.
European countries are equally not extremely sanguine of American’s position of Chinese Yuan exchange rate policy. They too had been hard hit by rapid fall in US dollar as evident from the drastic fall in US Dollar Index Future (DXY). Americans are looking for one-way adjustment from everyone else except themselves. Currently at an eight-month high of 1.4 US dollar, European Union Economic Affairs Commissioner Olli Rehn complained that "the euro is currently bearing a disproportionate burden in the adjustment of the global exchange rate,"

http://sg.news.yahoo.com/afp/20101008/tts-eu-economy-forex-currency-c1b2fc3.html

EU sees China's export strength was underpinned "much more than the currency "but aided by massive subsidies and other "unfair trade practices." Checking these subsidies and unfair trade practices are more cumbersome and even harder of substantiation whilst the US is clearly looking at a more simplistic, even outcome-doubtful faster solution of pressuring China on lifting its Yuan.

http://sg.news.yahoo.com/afp/20101008/tts-eu-economy-forex-currency-c1b2fc3.html

Chinese, of course, can play the game sweet and dirty, making some adjustment on ‘subsidies” like export rebates as pressures mounting in Europe, soothing anger and resorting back to protectionism again when the protests die down. The complaints of “undervalued” Yuan, whilst most vocal amongst US politicians, have found some sympathetic echoes - in Europe, East Asian and BRIC countries. China cannot remain completely oblivious to these international pressures. Bogged down by a sickly domestic economy, Japan’s growth now depends more than ever on exports. Face is so important in Chinese politics – China cannot be seen as bowing to international pressure and Chinese President have made it amply clear its gradual currency reform will be “under the principle of independent decision-making” i.e. don’t tell us what to do!

http://www.bbc.co.uk/news/10150810

Chinese negotiation tactics tends to do nothing from the beginning until forced into making last-minute changes but that pushes both sides into very difficult position and narrowed perspectives of limited achievable outcome possibilities.

http://www.marketwatch.com/story/how-china-can-manage-yuan-exchange-rate-pressure-2010-10-06

The Chinese are also smart in playing the exchange rate outside the realm of DIRECT exchange rate manipulation. We see that happening before our eyes. Besides pledges of expanded trade and investment ties, China recently provided a $5 billion credit facility to enable Greek shipping companies buy Chinese ships – playing the role of paid banker and trade partner, earnings on two streams.

http://seekingalpha.com/article/228480-china-shows-its-currency-hand?source=dashboard_macro-view

The Chinese has plenty of financial power to fulfill that role, circumventing European acrimonious accusation of “unfair trade practices”. “We hope that by intensifying cooperation with you, we can be of some help in your endeavor to tide over difficulties at an early date,” Wen told Greek lawmakers recently. By buying EU bonds issued by Greece and other sovereign debt members, the Chinese are shoring up the Euro relative to the Yuan. It all looks very neat, generous yet cunning but the intended outcome isn’t too far from close scrutiny - a higher Euro to benefit Chinese exports. Here is the simple mathematics.

For the People’s Bank of China, China’s Central Bank, to diversify away from the dollar by selling rapidly its holdings of US Treasuries, it will create a self-reinforcing decline in the US currency, resulting in it suffering enormous losses. The best strategy is by slow measured liquidation and in line with this touted “diversification” moves, instead buy EU and Japanese sovereign debt, boosting their currencies upwards. It is killing two birds with one stone – all above board, legitimate even respectable.

Latest US data shows China’s holdings of US Treasury bonds to be to $846.7 billion – a decline of about 10 percent from a peak of $939.9 billion in July 2009. It is simple risk “DIVERSIFICATION” moves – so what the Chinese wants the world to believe.

http://noir.bloomberg.com/apps/news?pid=20601103&sid=aY_hBy23fRJ4

A “gradual” rise in Yuan tied to a weak US Dollar against a strong Euro favored Chinese exporters into EU market in the same way as its “diversification moves” buying into Japanese sovereign debt places Japanese exporters at an elevated Yen exchange rate disadvantage in overseas markets. THE CHINESE ARE WAITING FOR US DOLLAR to decline rather than appreciating its own currency sharply against all currencies – that perhaps explains why China refused a regional currency appreciation with its Asian trade partners proposed by the US in Washington last week.
The US is momentarily checked in the currency chess board stalemate as the Chinese has a lot of ammunition to play this hardball over the long haul. In the short term, massive quantitative easing from Japan, US (and any sudden roundabout turn in EU) could have strong inflationary impact on China undermining its own ability to control interest rate and liquidity policies. Chinese capital controls too, may not be effective in stalling inflow of excess hot money as China is now also an open economy. What could happen to its own property bubble if it escalates further from this point?
A currency war is “not for the good of the global economy," IMF managing director Dominique Strauss-Kahn and There's no domestic or national solution to global problem,” The IMF is understandably very concerned at the spectre of an escalating currency war. IMF’s managing director spoke at Yalta on 3 October 2010 also commented on troubling developments in a dozen of countries as far apart as Singapore and Columbia admitted to buying domestic currencies to make export cheaper. Japan last month intervened for the first time in six years to restrain the yen but Yen has now risen above the pre-intervention level. South Korea, Brazil and Switzerland are among the countries that have also acted this year.

http://noir.bloomberg.com/apps/news?pid=20601103&sid=awefq0OGcPhc

"Most countries in Asia are moving in the direction of capital controls," said Dariusz Kowalczyk, a strategist at Crédit Agricole. Analysts do not think it will work successfully either – the incoming tide of capital inflow of “hot money” is too high.

http://edition.cnn.com/2010/BUSINESS/10/12/currency.wars.latest.ft/index.html?hpt=Sbin

Willingness for international consensus and cooperation for fiscal and monetary policies among major economies have decreased, making the sustenance of the “very uneven recovery’ difficult to hold.

http://sg.news.yahoo.com/afp/20101002/tts-imf-economy-finance-forex-ukraine-509a08e.html

These disturbing developments underscore my earlier warning 3 weeks earlier of the inherent “difficulty of coordinating fiscal and monetary policies adjustments globally is proving hard of achieving results” on 16 September 2010, Update 5 – Global Economies heading for turbulence, watch out the falling US Dollar. The disintegration of discipline has its root in the Toronto G20 meeting in June 2010. Ni Sha Ju Xia – analogous Chinese proverb, fluid downhill wasting of mudslides brings with it both mud and sand together – combination of both negatives and positives – necessarily brings with it both positive recovery and negative imbalanced outcomes that is unsustainable.

http://www.independent.co.uk/news/world/politics/g20-applauds-fiscal-austerity-but-allows-for-national-discretion-2012292.html

In that meeting, the G20 applauded austerity but allowed national discretion in preference of austerity to reduce their deficits at different paces according to their national circumstances or further stimulus as each nation sees fit. Different countries will be able to phase in the tough new international banking regulations at different times according to their economies' needs and countries should continue fiscal stimulus measures to boost economic recovery, or make moves to cut ballooning public deficits.

http://www.independent.co.uk/news/business/news/g20-compromises-on-plans-for-tougher-banking-rules-2012247.html

Britain along with EU nations, including Germany opted for steep spending cuts after sovereign debt crisis spooked financial markets whilst understanding that "synchronized fiscal adjustment across several major economies could adversely impact the recovery". China along with US favored additional stimulus fearing that the stampede to cut state spending in Europe could choke off a global recovery. The end result is an economic recovery neither “strong” nor “balanced” and maybe unsustainable. The United States, Europe and Japan continue to struggle and China remains overly dependent on exports to Europe, Japan and USA.

http://sg.news.yahoo.com/afp/20101007/tts-imf-economy-outlook-world-c1b2fc3.html

The irony is that India, China and East Asian robust economies cannot sustain their rebound unless US private consumption picked up and US is now relying on “cheaper” dollar strategy to suck out growth in these heavily-export dependent countries to sustain and boost its own recovery. The “outlook forecast can be described as “Mei Kuang Yu Xia ( to get worse and worse) is the most likely outcome going forward” as I did cautioned last mid September, Update 5 – Global Economies heading for turbulence, watch out the falling US Dollar.

Stiglitz warned in early September that if Germany, France and Britain maintained its spending cuts, it will have slower growth impact in the European zone and contagious to the strength of US recovery.

http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=aKQ.X9YAxId4

That prognosis seems to be emerging of current evidence – European sovereign debt and banking crisis have re-ignited in Ireland and German Deutsche Bank needing additional recapitalization despite the acclaimed success of banking “stress” test now proven weak of quality control as suspected all along for Ireland at least.

http://www.theaustralian.com.au/business/news/did-irelands-banks-lie-over-losses/story-e6frg90o-1225935307475

The IMF GDP figures and forecast below show it.
ACTUAL FORECAST
2009 2010 2011
Global growth -0.6% 4.8% 4.2%
Advanced economies -3.2% 2.7% 2.2%
United States -2.6% 2.6% 2.3%
Euro zone -4.1% 1.7% 1.5%
United Kingdom -4.9% 1.7% 2.0%
Japan -5.2% 2.8% 1.5%

All advanced economies have NOT recovered from their GDP downturn of 2009 despite talk of global “recovery”. Even the “strong” first half growth of 3.5% for developed countries was “low” given they are emerging from the deepest recession. The IMF statement of 6 October 2010 warned that economies in developed countries such as the United States and Europe will slow during the second half of 2010 and the first half of next year and in this period, there is of “downside” risks of not being sustained.

http://www.marketwatch.com/story/developed-economies-to-slow-imf-says-2010-10-06

The OECD is also predicting slower growth and downside risks. Economic momentum in the world's leading industrialized countries slowed in August when a key index showed "negligible or negative growth," Its composite leading indicators (CLI) for August 2010 reinforce signals of slowing economic expansion already seen" in July noting further that CLI indices for Canada, France, Italy, Britain, Brazil, China and India pointed "strongly to a downturn."

http://www.oecd.org/document/40/0,3343,en_2649_34349_46166824_1_1_1_1,00.html

Economic expansion was continuing in Germany, Japan and Russia and stronger signals of a peak are emerging in the United States.

Impacts & implications

The renewed quantitative easing, nicknamed QE2, will not resolve the slowing pace of US economic expansion. There are many reasons. The most intractable causes, of course, are what Ben Bernanke called “poor demography” liability impacting inescapably on recovery. Tax revenues declined sharply confronting ballooning fiscal demand. In both US and EU, it is the baby boomers who got badly hit. The unemployed among them cannot survive with massive benefit cuts and the rests are adverse to further consumption binge based on property bubble, credit easing or spending incentives. They are de-leveraging, busy building their banking account because they know very well they don’t have time to make up lost grounds. Analyst often forgot that the US stimulus package is flawed because it is mostly tax-cut, unemployment relief, TARP bailing out banks and autos, housing purchase incentives and “Cash-for-Clunkers”. It is all what Chinese would call “fire-cracker” treatment of a big bang and impact is extinguished from the moment of explosion. Chinese strategy is based on different mindset- you build infrastructures and support facilities to outreach economic opportunities and sustaining it over the long haul.
The US stimulus spending transform long-term problems into short-term perspectives and US consumers behave exactly in induced response. You see that exactly in US September retail sales statistics and JP Morgan Chase & Co results. The up market “The Gap” reported lower same store sales sequentially while the necessities cheaper end of retail shows up with higher same-store sales results. JP Morgan headline revenue fell consecutively and fell off in delinquency of credit card demonstrate ample proof of consumer spending retrenching as time prolongs. The US consumer is unable to undertake the consumption boost filling the void to uplift the economy as the fiscal stimulus and fast diminishing restocking cycle of the big 2008/2009 downturn driving the economy are coming to an end. The “lazy consumer” is painting a faltering economic expansion story in all major economies, except China, as businesses struggle to pick up where Government sector is phasing out.

The transition from stimulus to the needed austerity now looks increasingly distant of achievable outcomes. But the impending QE2 in US, China, Japan and leaning backwards from austerity in Britain and Europe (except PIIGS) is not and cannot possibly a solution when the current stimulus is demonstrably failing. Extremely loose monetary policies have very limited impact on sustaining economic development except in the very short-term but flood global economies with unwanted speculative liquidities – the major effects of which roil currency and financial markets.

Businesses have all to find exports to take up slack demand but aggregate global demand is slow to quantitatively respond. Having all but exhausted traditional monetary and fiscal policies, industrial nations are looking for new ways to spark growth amid subdued domestic demand, best achieved for depreciating one’s currency.

http://noir.bloomberg.com/apps/news?pid=20601103&sid=awefq0OGcPhc

It is the “beggar-thy-neighbor” politics and economic strategy. US Treasury Secretary Timothy F. Geithner warned of a “damaging dynamic” of competitive weakening that could limit global growth

http://noir.bloomberg.com/apps/news?pid=20601103&sid=a8QzC3V7wC_k

While pointing fingers at China, “Helicopter” Ben Bernanke conveniently forgot that he is also dumping cash all over America’s countryside by the QE2 with newly minted cash straight from the hot printing press of heaps of US dollar which investment guru, Jim Rogers, described as money printing by developed economies until all the trees are gone! This loose monetary stimulus starts with a big flood will soon build into a tsunami tide swarming all economies around the world with cheap, near zero interest costs, in search of economic opportunities or merely seeking short-term speculative risks in property, commodity or currency speculation – all unhealthy of bubble forming wreaking destructive havoc once they reversed the flow.

We already have seen massive havoc of that already. The incoming flood tide lifted currencies across the world, hitting export-dependent Asian economies particularly hard. Asian currencies rose for a sixth week, the longest winning streak in a year, on speculation the Federal Reserve will pump more money into its economy, increasing funds available to invest in higher-yielding assets.

http://noir.bloomberg.com/apps/news?pid=20601080&sid=aVHuQ_bbpEeU

And the same is happening in the commodities market. The fast depreciating US dollar and currency fears globally is driving commodity prices varying from 8% to 12 % up north, notably hard metals and most soft agricultural produce even as economies around the world is fast losing steam. NOW THAT FUELS INFLATION GLOBALLY AND DRIVING UP SPOT GOLD PRICE relentlessly.

http://money.cnn.com/2010/10/05/markets/dollar_gold_oil/index.htm?cnn=yes

Inflation is above target in Britain, Germany, China, USA, Australia, South Korea and the last two have raised interest rate to cool of inflationary threats while China raised its banking reserves ratio recently to 17.5% and banning those living in Shanghai from owning a second property regardless of financial affordability just like in Beijing. Contrary of all others countries putting up capital controls, selling dollars in the forex market or engaged in their own stimulus QE2 like Japan and maybe shortly UK as well, Singapore did an about turn this week. It will move up the bandwidth of Singapore dollar relative to US dollar to contain inflation even as rising domestic currency must hurt Singapore’s external competitiveness as the economy shrank in the September quarter and gloomy conditions prevailing forward.

http://noir.bloomberg.com/apps/news?pid=20601087&sid=aQ09wYmg5R0o&pos=1

There is no domestic solution of global economic imbalance. The shadowy currency war in competitive devaluations is risking triggering a major European sovereign debt and banking crisis at any moment now. As Timothy Geithner put it correctly, “I think you have to distinguish the challenges faced by Greece, by Spain, Portugal, Ireland,” Those countries need “to move very, very aggressively to bring their commitments more in line with their resources. In other words, these weakest economies in EU has NO CAPACITY for a QE2 without endangering their sovereign debt rating downgrading triggering yet another bigger banking crisis and a meltdown of financial market confidence that potentially could wreck the entire global economic recovery.

The IMF is now tasked with the responsibility of watching supervision that this “damaging dynamics” do not escalate further and to developing rules of the road or guidelines with respect to how countries deal with their currencies.”

http://noir.bloomberg.com/apps/news?pid=20601085&sid=a6oYjItJmDZE

Bernanke himself also warned that surging annual deficits presented a "real and growing threat" to the US economy as tax revenues dried up and the government splurged on economic bailouts and stimulus spending.

http://www.cbsnews.com/stories/2010/10/04/politics/main6927476.shtml

The assumptions are that borrower might suddenly require higher rate of interest making borrowing unsustainable – confidence issue here of borrowers. Bernanke said, “"The only real question is whether these adjustments will take place through a careful and deliberative process... or whether the needed fiscal adjustments will be a rapid and painful response to a looming or actual fiscal crisis." Two creatures are involved here – the “sweetness” fiscal stimulus spending and the other is the “bitterness” austerity creature. Like the Chinese saying, sweetness preceding must bring long-term bitterness or short-term bitterness precedes the long-term sweetness. This dilemma of difficult policy choice is increasing coming into sharp focus now than ever for Obama and the Federal Reserve.

In the interim, the pressure is enormous for the US to reduce its trade deficits by a cheaper dollar policy – even it is unofficial and has damaging consequences for the US and the rest of the world.
The dollar index has lost 7.8% since the end of August and the euro is almost 11% higher.

http://www.marketwatch.com/story/dollar-pressured-by-singapore-tightening-2010-10-

There are signs that even a weaker dollar does NOT alleviate US trade imbalances. As its trade deficits deepened to $46.3 billion, China is running a record surplus in August.

http://money.cnn.com/2010/10/14/news/economy/trade_balance/

The deficit with China widened to a record $US28bn in August from $US25.9bn in July WHEN THE YUAN/USD EXCHANGE RATE HARDLY MOVED in that interval. American propensity to imports of Chinese goods had other market dynamics beyond simplistic assumed exchange rate differential.

http://www.theaustralian.com.au/business/news/soaring-us-trade-deficit-adds-fuels-to-china-trade-tensions/story-e6frg90x-1225939032957

Obama hopes to double exports in the next five years, creating an estimated two million jobs domestically. As the economic momentum weakens, renewed splurge on QE2 spending heighten risks of inflation as Government has no option of stimulating the bubble but printing money. Printing money equals cheaper dollars as supply increased. The danger risks of no action are if you slow down too much, free-fall is next.

For now, the dollar violent decline could help US avoid a double dip recession by simply sucking out growth from China, East Asia, and the EU economies. The rest of the world will now swim in asset inflation, rising food and commodities prices, currency markets roil whilst US stock market kept bubbly effervescent driven by influx of massive liquidity injection with no investable home otherwise and gold price heading higher in conspiracy as QE2 risks creating permanent damage to all devalued currency and inflationary economy.

Anyone disagreeing?

Zhen He
15 October 2010