Update 4, Global Economies are heading for turbulence, what Ben Bernanke has not told us?

Bernanke, Revised GDP numbers, continued softness in Chinese demand and US recovery delicately poised on turning point.

Yes, the US economy was right in the door of autumn “Fall” into a double dip and a chilly wintry recession to follow, as forewarned in my previous write-up of 24 August 2010, UPDATE 3 – Global Economies heading for turbulence, are we at the door of autumn of a double dip and a recession just in waiting.

Ben Bernanke uttered the unholy “CONFESSION” of “deflation” when spoke to Central Bankers from around the world at the Kansas City Fed’s annual monetary symposium held at Jackson Hole, Wyoming on Friday, 26 August 2010 - after the US Commerce Department revised the 2nd Qtr GDP growth to 1.6% from 2.4% earlier estimate. With just 4 months remaining till end of this calendar year, the fact that Bernanke embraced the possibility of “deflation”, not just a double dip – an unthinkable proposition even to this pessimistic author, is stunning to say the least!. It hinted of urgency and some distress.

Taking the 4 consecutive qtrs of growth recovery starting December qtr 2009 to the latest of 1.6%, 5.6%, 3.7% and 1.6%, US GDP recovery has peaked and now ebbing in the June Qtr to way below sub-par trend of 3.12%. average. It is the weakest qtr since the 2009 recovery. The momentum of economic downslide (from peak 2009 December Qtr) has accelerated in the last qtr compared to March qtr. July pending home sales plunged 27.2% - a record 15-year low. It augurs a very weak start to the 3rd qtr growth prospects. These are proofs that the US economy is delicately poised on tipping point.

The sense of urgent desperation is painted in the words Bernanke uttered at Jackson Hole. The Federal Open Market Committee "is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly," Bernanke said.

Asked if the Fed is trapped in a corner of no substantial solution options available, Bernanke shot back with this vigour - "The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation," he said. "We do.

"The issue is instead whether, at any given juncture, the benefits of each tool, in terms of additional stimulus, outweigh the associated costs or risks of using the tool," he stressed.

http://sg.news.yahoo.com/afp/20100827/tts-us-economy-c1b2fc3.html

And a senior official with the vacationing President Barack Obama’s on the same date has these lesser-then-assuring thoughts to share. "Four consecutive quarters of economic growth is positive news, but the revised numbers mean there is still much more we need to do to continue on the path to recovery and that remains the focus of the president and the economic team every single day,". In simple layman’s term, the US economy is teetering on the edge, Ben Bernanke and Barrack Obama are busy at fire-fighting.

And Bernanke, facing this “unusual uncertainty” dilemma, can only offer “tactical” rather than “substance” of solutions to assuage market nervousness.

Bernanke said "I expect the economy to continue to expand in the second half of this year, albeit at a relatively modest pace,"…….."the preconditions for a pickup in growth in 2011 appear to remain in place," …………..we do not rule out changing the reinvestment strategy if circumstances warrant." and the FOMC "has not agreed on specific criteria or triggers for further action."

http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=ae7_8.YCqknc

These words spoke of chaos, confusion and some nervousness of prospects of strategy success or failure forward.

Bernanke is well aware that the US economy is now slowing again at a time when the Fed has already cut interest rates to close to zero. Since March 2009, the Fed has promised to keep rates low for an "extended period." Monetary policies in place, since last March, don’t seem to work to desired effects and positive impact of recovery path sustaining. THAT IS WORRYING.

Bernanke seems to be playing to the press gallery two golden rules of investment banking of secrecy

Rule No. 1. Don't tell anyone anything until after you've done it.

Rule No. 2. Don't tell anyone anything.

In spite of these uncertainties, Bernanke’s bravado promise of unyielding Fed support of the economy if conditions worsen further, sent all three US major indices, DJIA, SPX, Nasdaq up a uniformly 1.65% even though he does NOT know precisely which particular economic or contingency or an amalgam of contingencies that could erupt forward, tipping the economy over the cliff, forcing the FOMC to respond aggressively to prevent the economy from derailing!. The strength of equity rebound, despite the lacking conviction in market volume, drove US 10-year Treasury bond reeling lifting yields by 153 basis points to 2.65%. The US Dollar index future eased slight to 82.74 down an uneventful 0.02%. The stock market euphoric applause, however, did not last a day beyond one sunset.

Long before Bernanke’s sobering prognosis of slower recovery than expected to date, anecdotal hints of even tougher times worse than the June qtr are aplenty. Marius Kloppers, BHP-Billiton’s CEO, talking of the over-capacity steel sector, warned last October of commodities demand (and by implication of that economic activity) are mainly stimulus-related of restocking.

"We ... believe it won't be until mid-2010 before we see clean underlying demand that is not masked by inventory effects,''

http://www.theaustralian.news.com.au/business/story/0,28124,26279832-5005200,00.html

And true to the dark side of these prophetic caution, iron-ore and metallurgical coal fell since June 2010 – just as US Cash-for-Clunkers and housing credit incentives expired and the Chinese tightening up bank credit to property speculation hurting also manufacturing.

Most recent report from Australia disclosed further deterioration in Chinese demand for iron-ore and metallurgical coal, darkening prospects forward. BHP-Billiton and Rio Tinto at Diggers and Dealers Mining Conference in Kalgoorlie on 2 August 2010 warned that spot prices for iron ore are trading well below the new $160 a tonne CIF third quarter contract price.

http://graphics.thomsonreuters.com/10/diggersdealers.pdf

Chinese import of iron-ore in July, whilst 8.5% gain on June, was still below the level seen in year-on-year comparison same month. It is soft of demand.

http://www.chinamining.org/News/2010-08-17/1282013615d38325.html

The same gloomy prospect extends to October. CVRD confirms plan to cut ore price 10 percent this coming October as if in affirmation that Chinese demand for iron-ore and metallurgical coal is still drawing on stocks and not entirely on fresh primary imports of new production.

http://www.reuters.com/article/idAFSPG00302520100827?rpc=44

CVRD had warned as recent as February 2010 that restocking demand placed it in “a tight situation as even running its iron ore mines and pellet plants at full capacity we still struggle to satisfy client demand ." and that “Pacific market for thermal coal has been increasingly tight while the market scenario for coking coal is similar to iron ore.” CONDITIONS HAVE APPARENTLY CHANGED DRASTICALLY SINCE THE FIRST QTR 2010. Codelco also warned in August of copper demand slowing in China, at least until the end of current calendar year.



http://www.chinadaily.com.cn/business/2010-08/07/content_11114381.htm

As both zinc and metallurgical coal prices in China are now marginal costs-driven of Chinese producers, any significant drop in metal prices for either one or both commodities must signal a sudden steep weakness in pace of Chinese economic activity.

But China, itself, cannot be the main engine of global growth. China's GDP is $3 trillion; the U.S.' GDP is $15 trillion. The GDP of the U.S., Europe and Japan is $40 trillion. In addition, 300 million Americans consume $10 trillion per year in terms of private consumption, while 1.3 billion Chinese consume only $1 trillion. Even India—900 million Indians consume only $600 billion. The total consumption of 2.2 billion Chinese is $1.6 trillion—only 1/6th that of the U.S. It's just not enough.

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

There are plenty of signs of global investors’ pessimism growing and spread since I last wrote. Investors of global-tracked equity funds continue to withdraw relentlessly – mostly reinvested into bonds and to a small extent emerging markets amid concerns of economic numbers suggesting US and Japan are also involuntarily slowing together besides the China’s deliberately-controlled slow-down.

European Economy – Germany only bright spot

Germany is the only bright spot among leading economies but even unsteady industrial production growth in July is not entirely re-assuring of continuation of 2nd Qtr growth as public sector’s prior construction-driven demand gives way to progressive fiscal discipline taking shape. German Chancellor, Merkel has set for itself an 85 billion euro budget spending cuts hurting public spending. German’s budget deficit slip under 60 bln euro this current fiscal year relieving some pressures, all thanks to a strong upturn in its economy, said German Finance Minister Wolfgang Schaeuble in an interview last week.

http://sg.news.yahoo.com/afp/20100822/tts-germany-finance-economy-deficit-509a08e.html

The rest of EU is still pretty sick. The outlook for Britain is also less sanguine despite a slight upward revision of its June qtr GDP growth to 1.2% from 1.1% earlier – the best qtrly growth attained since 2001 and a good leap from a more modest 0.3% gain in the March qtr. Derailment also looms ahead. Charles Davis, economist at the Centre for Economics and Business Research.

"Looking into 2011, notable headwinds lie ahead as VAT (sales tax) rises and public spending cuts start to bite and concerns remain over the state of key export markets."

The more somber cautious outlook forward is shared by the UK Treasury. Whilst the overall GDP data is much welcomed, the Treasury remains cautious regarding the outlook given massive cuts in government spending which are expected to dampen the economy.

"While the government is cautiously optimistic about the path for the economy, the job is not yet done," a Treasury spokesman said. June Qtr recovery is built upon pretty fragile foundations of expanded government sector (0.3% gain) and private consumption (0.7% increase) spending – unsustainable as fiscal squeeze kicks in the coming qtrs.

http://uk.finance.yahoo.com/news/british-economy-steams-ahead-but-derailment-looms-afp-a7db48e3be75.html?x=0

The Chinese Economy – likely to be weak beyond September Qtr

Latest filings to the Shanghai Stock Exchange from China's Baoshan Iron & Steel, the country's biggest listed steelmaker, warned on last Friday that steel demand would slow in the second half.

"Domestic steel demand growth from downstream industries including autos and home appliances will slow…” and one analyst spoke of forward "Steel prices will be mainly supported by persistently high iron ore costs, rather than being demand-led..”

http://www.chinamining.org/Companies/2010-08-30/1283134535d38680.html

Baosteel general manager, Ma Guoqiang, said Chinese steel prices are still under pressure as a result of slowing domestic demand partly due to many uncertainties in economic trends, in downstream demand …. and the possibility still exists that prices will weaken still further".

http://www.miningweekly.com/article/baosteel-says-still-in-talks-on-q4-ore-price-2010-08-30

China is still to see the full impact of major restructuring of its energy-intensive metallurgical and construction-related cement production shutdowns to take full effects by the September Qtr close.

The prognosis is tougher times in the September qtr and even tougher time in the final qtr of this calendar year consistent with iron-ore pricing negotiations ahead into the final qtr of 2010, as already forewarned by BHP-Billiton, Rio Tinto and CVRD. THESE ARE REALITIES OF MARKET DRIVEN ECONOMICS PREVAILING UNDERPINNING THE CHINESE STEEL SECTOR impacting on heavy industries and infrastructural sectors. Deutsche Bank, in a recent report said it expected economic data to worsen in the next two to three months. July industrial production slowed again. Last week China Unicom's first half profits fell 62%, with competition and higher marketing and sales costs to blame reflecting tougher consumer spending conditions prevailing.

http://www.marketwatch.com/story/time-to-reappraise-china-growth-outlook-2010-08-29?amp%3Bsiteid=rss&SiteId=djm_HAMWRSSGMktgsH

In the Far East, Japanese economy has stalled to almost a standstill, growing at a mere 0.1% in the June Qtr. PC sales in Taiwan has fallen over the other side of the cliff. Computershare is seeing lower corporate activity in Hong Kong, India, and Australia early in the new financial year starting July. The lack of transactional activity points to a more subdued business climate forward.

US Economy – sickly as conditions clearly deteriorate

So what does the most recent diagnostics of US economic data says of its health? After an income rise of 0.2%, consumer spending edged up a very modest 0.4% in July after a flattish June. The monthly figures showed the US 2nd ended on a soft note and precious little sparkle of rebound uptick despite a strong July equity market. August economic statistics to date are depressing, there is no upside for US consumer spending in the current month as unemployment is expected to bump higher. Admitting that growth “too slow” and unemployment “too high”, Bernanke insisted that a handoff from fiscal stimulus and inventory re-stocking to consumer spending and business investment “appears to be under way.” paving the pre-conditions for a 2011 upturn.

http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=ae7_8.YCqknc

But this author sees no evidence of that nor of some in the corporate results pronouncements. Consumer spending gain of 0.4% gain in July was the best in between irregularities since March 2010 and unemployment rising of late. Ample emerging evidences show manufacturing weakening of late along with business investment. Bernanke is picking and choosing what he wants to tell us. US stock markets slapped him hard yesterday, giving up most of the euphoric applause the day before – the classic 2-day reversal in the parlance of technical analysis. Bernanke hopes for rising wages to spur consumer demands in the coming qtrs.

http://noir.bloomberg.com/apps/news?pid=20601068&sid=aSehtnCHeZl0

Where are the rising income effects when unemployment is increasing? The contradictions in Bernanke’s aspiration could not be more starkly obvious in these haunting words of his…” it (high unemployment) also poses risks to the sustainability of the recovery itself through its effects on households' incomes and confidence." Compounding Bernanke’s woes is that almost 50% of 2nd quarter GDP growth in consumer spending and corporate investment came from Obama’s stimulus spending effects. Most of these are now tapered off – Cash-for-Clunkers, housing credits and corporate auto fleet purchases incentives, computers and software repurchase cycle.

http://www.theaustralian.com.au/business/markets/federal-reserve-chief-ben-bernanke-short-on-ammunition/story-e6frg926-1225911183676

State and municipal employment is likely to see some more off-loading, forced by balanced budgetary constraints along with layoff in private sector as manufacturing loses momentum.

So this author must conclude, most unfortunately but realistically honest, that Bernanke’s ardent aspiration of “a handoff from fiscal stimulus and inventory re-stocking to consumer spending and business investment” really exist in his nightmare dream.

No matter what ammunition Bernanke claims to have in his arsenal, these could still be utterly futile except in desperate reactive response when disaster strikes. Uncertainty and higher unemployment are the two enemies of the recovery – THE FED’S BLINDSPOTS. Which one – the general global economic malaise and volatile financial market are going to rock the US economy out of balance, hitting employment and taking it into a recession tailspin or rising unemployment cut consumer spending and manufacturing, tipping the economy over the cliff – Bernanke does not know. But I gave full credit to Bernanke’s wisdom – his arsenal of monetary quantitative easing might not be enough or provide the solution the economic contingencies may arise. Mr Bernanke admitted, "Central bankers alone cannot solve the world's economic problems."

Ahead of his Jackson Hole news conference, Bernanke had already been aware that pending home sales plunged 37.2% July over June 2010 announced on 25 August 2010. It was the drawn-out lagged impact of the end of Obama’s housing stimulus package. Home prices improved by 1% in June but activity level remains very low.

http://richrosa.typepad.com/massachusetts_real_estate/2010/08/us-home-sales

That means any hope of the 2% rise in the revised 2nd Qtr GDP growth repeating has been blunted and negative of forward outlook.

http://news.yahoo.com/s/ap/20100827/ap_on_bi_go_ec_fi/us_economy

On corporate investment spending, conditions have become adverse very quickly. Cisco Systems Inc., the world’s largest maker of networking equipment, reported weaker-than-forecast first-quarter sales. It’s CEO, John Chambers, warned of “unusual uncertainty” and getting “mixed signals” about the health of the US economy. Cisco dominates the market for routers and switches, products that direct the flow of internet traffic. If Cisco’s sales tumbles, it means big corporate spending on business investment, particularly technology has fallen off. The economy must be dimmer by the extent of weakness in the Cisco’s weaken outlook forward.

http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=ae7_8.YCqknc

IBM, the world’s biggest computer-services company, also reported lower-than-expected revenue in June Qtr., citing a decline in services-contract signings of 12 percent to $12.3 billion - the second straight quarterly drop in contracts for services. Services contracts make up more than half of IBM’s total revenue. They are symptoms of broader weakness in capital spending emerging.

http://noir.bloomberg.com/apps/news?pid=20601103&sid=a6OpoI2vS3hY

Intel’s mid-qtr business outlook for 3rd qtr has now revised its sales forecast downward, having been adversely affected by demand for consumer PCs in mature markets. Inventories across the supply chain appear to be in-line with lower sales forecast. Its July 13 forecast at the time of June Qtr earnings release was more upbeat. Just 6 weeks later, all those optimism evaporates.

http://www.intc.com/releasedetail.cfm?ReleaseID=503033

Dell 2nd Truly results reported strong continuing corporate replacement cycle sales but flat consumer demand for PCs. Market conditions for PC deteriorated rapidly of late in the Far East and that sharp decline in PC order trends continuing into August, after a below expectation July month.

http://www.kreative-technology.co.uk/whats-in-the-news/19-kreative-technology-hardware-news/6997-is-pc-market-falling-off-a-cliff

Investment in equipment and software will almost certainly increase much more slowly over the remainder of this year as Ben Bernanke also forecast.

Retail sales are not any better despite consumer confidence perked up slightly in August to 53.5. Wal-Mart, Home Depot, Target and Lowes all had demand issues going forward. Wal-Mart’s depressed 2nd Qtr sale performance illuminates that sector and consumer’s confidence. Same-store sales in the U.S. fell 1.8% in the June quarter. One troubling sign at Wal-Mart U.S. stores was the quarter's rise in inventory, which grew faster than sales pointing to very soft consumers’ confidence.

http://www.marketwatch.com/story/wal-marts-profit-rises-forecast-boosted-2010-08-17?pagenumber=1

What Bernanke has NOT told us?

Quantitative easing by the Fed of limited scope and scale is unlikely to offer much relief given the lack of demand and slowing business investment. Huge fiscal spending is out of the question – at least until after the Congressional election on November 2. Ben Bernanke and the Fed has little ammunition left to resuscitate an economic recovery rapidly losing its momentum but the recovery must urgently hinge now on corporate sector turnaround more than ever before.

An unspoken publicly option still available to the Fed, this writer believes, include a preferred orderly decline dollar to boost exports competitiveness. As trade is NOT such a huge part of the US economy, any inflationary impact of deflationary dollar is likely to be modest.

http://www.cnbc.com/id/33621641

Diversification by foreign central banks, particularly, might well smoothen the path of US dollar decline. China worries about its foreign reserves exposure to a weakening US dollar, eating away the value of its record $US2.1 trillion of foreign-exchange reserves.

http://www.theage.com.au/business/strong-dollar-pledges-discounted-20091008-goqt.html

Recent months saw Chinese selling US bonds but buying Japanese and EU sovereign originated debt instruments. There has been long talk of ditching the dollar-centric world of international trade.

http://www.google.com/hostednews/afp/article/ALeqM5iOW4DmbqkjihYMpJaQK53ts2GvFQ

Market talk since last October spoke of Gulf Arabs are planning -- along with China, Russia, Japan and France, the largest foreign investors of US Treasury bonds -- to end dollar dealings for oil". But not much has eventuated even as China slowly pushing towards Yuan-denominated trading relationships in Asia. But China recently did a US$20 billion deal with Venezuela to be repaid in oil instead of US dollar.

http://www.businessweek.com/news/2010-04-18/china-lends-venezuela-20-billion-secures-oil-supply-update1-.html

Chinese moves to value the Yuan according a weighted-basket of foreign currencies are the clearest yet indication that US dollar is losing dominance as the sole global reserve currency

http://www.marketwatch.com/story/chinese-yuan-likely-tracking-15-currencies-2010-06-28

China regards the composition of the currency basket as a state secret, and officials haven't publicly disclosed what currencies are being used.

Secular trend of the US Dollar Index Future shows a downward decline since 2002 until mid June 2008, just before the global financial crisis.

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=dxy&sid=0&o_symb=dxy&freq=2&time=13

Against a weighted basket of 6 major currencies, US dollar oscillates right through the GFC till now, tending stronger as global economic conditions worsen and declining as global uncertainties mellowed. It is the typical flight to “safe haven” lemming mentality. Contrary to popular beliefs of pessimists, the US dollar showed little sensitivity of escalating budget deficits and rising public debt in relation to its GDP base. If it did otherwise, the US dollar would have plunged precipitously in the last 12 months. US dollar direction seems to be more of a function of US trade competitiveness and by extension of that US corporate competitiveness in global markets. So it is the equity market driving the secular US dollar exchange rate and its short-term fluctuations a function of foreign buying or selling of US securities. In that respect, I believe that weakness in the greenback would be welcomed and timely now, because it provides a needed catalyst for the sluggish US economy weakened by foreign imports.

Like the once mighty Sterling Pound, US dollar is slowly losing support as the sole reserve currency. Given the extent of recent euro’s recent month decline, the US has lost some competitiveness vis-à-vis EU, some downward adjustment of US dollars seems likely. China's State Administration of Foreign Exchange, better known as SAFE, reportedly said that ``the gold market is too small, illiquid and volatile to be considered suitable for asset allocation.''

http://www.mineweb.com/mineweb/view/mineweb/en/page72068?oid=107396&sn=Detail&pid=92730

Gold will, therefore, not be part of China external reserves. Given the Yuan’s international non-convertibility but now tied to a weight basket of foreign currency, Chinese trade surplus is likely to continue sustain even escalating as US economy weaken in the June Qtr. Chinese buying of US Treasury will continue. US dollar is likely to resume its downward trajectory going forward,

An orderly falling US dollar would pleasing to the US because the Fed have it both ways – weaker dollar helps US economy and some level of continuing foreign buying will help drive away fear of creditors will suddenly all heading for the exit door. In any case, China cannot afford to abandon completely its support of US Treasury; it will hurt itself as much. Out of its external reserves of US$2.5 trillion, some US$850 billion is in US Treasuries.

As the US dollar depreciates in balancing adjustments of US competitive position, hard commodities, commodity currency, all investments in commodity-rich countries and gold could be seen more increasingly as a “monetary” asset rather than a safe-haven hedge. These will be in demand. Global trade and investment patterns will also change as US dollar will, in those new competitive circumstances, discourages a lot of its investment in some remotely ( to markets or production base ) located parts of Asia. Some pullback in reshoring back to US will be inevitable.

Those Asian countries with an unofficial government policy of asset inflation like Singapore, unable to sustain competitively, will fall the way of Ireland – a collapsed property sector wrapping up and strangulating a near collapsed banking sector. Singapore Government is now worried of a property bubble.

http://www.banktech.com/core-systems/showArticle.jhtml?articleID=215900298

The only way to “correct” that external competitiveness is for it to massively devalue domestic currency lifting up inflation as all food and material imports become painfully expensive.

Zhen He

30 August 2010.

Update 3 - Global economies heading for turbulence, are we right at the door of “autumn” of a double-dip and a recession just waiting?

Ni Sha Ju Xia, Intel, Agrium, BHP-Billiton, Ssangyong Motor, Centennial Coal and increased volatility/ divergence of risks appetite, Mau Ku Lau Su, Mau Kou Tong Mein


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, aptly describes Wall Street stock market behaviour since my last update on global economy outlook, but since then, the slide continues. US stocks slided down, paused and slide again, in two consecutive weeks of decline, just as I did lamented on 14 August 2010 at 11.08 am post in further comments to my last write-up, Update 2 – GLOBAL ECONOMIES HEADING FOR TURBULENCE, ARE WE EDGING CLOSER TO TROUBLE HEADING FORWARD?, published in Temasek Review on 13 August 2010.

At its Aug. 10 meeting of the Federal Open Market Committee, the FMOC were sharply split about move to further stimulate the faltering U.S. economy. Modest 1.6% rise in consumer spending in 2nd Qtr GDP, was largely sated by overseas production found US producers saw their stocks piling up on the shelves, lifted US GDP growth. With the build-up of “involuntary” inventory gain rising faster than retail sales, forward US production will be constrained. That explains partly the faltering manufacturing-led recovery. Initial onslaught of these “mud” trigger downhill came from FMOC’s negative downgrade of US economic outlook. “The pace of economic recovery is likely to be more modest in the near term than had been anticipated,” the Federal Open Market Committee said in a statement after meeting Aug. 10.

http://noir.bloomberg.com/apps/news?pid=20601103&sid=aj9jBSab.4XE

That eerie pronouncement drove down US stock indices of between 3% to 5%. Oil prices fell 7%. US 10 year Treasury bond yields fell to a 16 months low of 2.58% , way down from 2.82% the week earlier. In the midst of these gloom, stronger-than-expected GDP statistics coming out of EU, particularly Germany, along with UK’s GDP growth of 1.1% and some big merger & acquisition news provided the silver linings.

A slew of corporate takeover moves including Canadian agribusiness giant, Agrium Inc. C$1.1 bln takeover bid for Australian agribusiness giant on 16 August, AWB Ltd agribusiness, BHP-Billiton’s surprise US$38.45 bln hostile takeover move on Potash Corp. of Satskatchewan Inc on 18 August, Intel’s US$7.68 bln takeover of McAfee on 19 August, South Korea’s state-owned oil company, Korea National Corporation making a 1.87 billion Pound hostile takeover bid for UK North Sea oil and gas EXPLORER, Dana Petroleum PLC on 20 August 2010. These takeover moves and strength of German 2nd Qtr economic rebound succeeded in providing the US and European stock markets with positive leads of some initial rebound and a MOMENTARY PAUSE in stability, only to be disappointed by stunning worse-than-expected surge in US unemployment numbers announced on 19 August 2010. On the same date, the Philly Fed's business activity index fell to NEGATIVE 7.7 in August from positive 5.1 in July, well below the positive 7.0 expected by economists.

http://www.marketwatch.com/story/philly-fed-index-negative-for-first-time-in-year-2010-08-19

As recently as March, the Philly Fed index stood at a healthy 21.4. Negative readings in the Philadelphia index indicate a majority of firms in the region are experiencing deteriorating conditions. Together with much weaker unemployment numbers, they strongly suggest some parts of the US manufacturing-led sector recovery are faltering. This collective news rattled US stock market – triggering the second leg mudslide of Ni Sha Ju Xia – burying the prevailing benign calm, even modestly hopeful, sentiments in global stock markets in its wake.

A trifecta of stocks, commodities including spot gold, euro fall in tandem and ( this author noted) US 10-year Treasury bond yields, in PERVERSE stunning reverse, actually backed up 33 basis points or 12.8% to 2.61% from 2.57% sequentially for the Friday at week ended 20 August 2010.

http://www.smh.com.au/business/markets/stocks-commodities-retreat-on-worldwide-growth-worries-20100821-139b6.html

BOND PRICES SHOULD RISE IN OPPOSITE DIRECTION OF EQUITIES BUT THEY FELL TOGETHER TO LIFT YIELDS!! China was said to be selling some US Treasury bonds since June worrying about the future direction of US dollar and looking for diversification. The rebound on the 10 year US Treasury bond yield, and seeming stabilisation at 2.61% since (until yesterday), is surprising especially when retail investors have been flocking to bonds and hedge-fund trading volume in U.S. government bonds have surged by more than 70% in the past year. Where is the 10 year Treasury bond support?

http://www.marketwatch.com/story/hedge-funds-pile-into-treasury-bond-market-2010-08-11

Was it Chinese selling or hedge fund exiting the explanation of this seemingly perverse US 10 year Treasury bond yields or something else underlying more sinister such as loss of confidence in all US dollar- denominated assets by all investors cashing out?

This observation led this writer to wonder if it was Mau Ku Lau Su ( Chinese proverb meaning the cats cry when the rats die in utter hypocrisy) or Mau Kou Tong Mein ( cats and dogs living in harmony). They tell a conflicting story. Either the bond or equity market lied or both are telling the truth of gloomier uncertain outlook ahead. That is to say, equities tell of pessimistic corporate growth foreshadowing double dip and bond is denying ( Mau Ku Lau Su) or investors are so pessimistic that they are cashing out of bonds to keep cash agreeing with equity market ( Mau Kou Tong Mein).

This author takes a view that it is more likely to be “Mau Kou Tong Mein” of two “false negatives” at work for a couple of reasons

a) Cyclicals are out of stock market favour – particularly technology stocks Cisco, Intel, Nvidia, AMD, Hewlett-Packard, Juniper, etc

b) Defensives are favoured in stock market – MacDonalds, Coca-Cola, Wal-Mart, Home Depot, Target, Tupperware etc are doing better

c) Recent Asian corporate takeovers are favouring basic utilities, telecommunication, food, resources sectors – defensives over cyclicals

d) Dollar recent rebound over euro and the unrelenting drives for yen despite a stalled Japanese economy and accelerating slowdown of the US economy to match – put it simply, it is cash over everything else seems to be in the investors ‘mindset.

e) Outside slowing China, fast deteriorating US and stalled Japan, Germany and the emerging economies of Brazil, Russia, Mexico, Australia, Canada, Taiwan, South Korea, Chile Turkey are too small, collectively, to provide “food” sustenance and durability to prop up the declining overwhelmingly much larger economies of US, China, Japan and EU (ex-Germany) – acknowledging mutual causations and interdependency. THERE IS MORE DOWNWARD PRESSURE ON GLOBAL ECONOMIES OUTLOOK AHEAD.

f) The U.S. Dollar Index ( DXY ) which tracks the currency against a basket of six others, jumped 0.8% in response and Yen surged – a flight to safe-havens from stocks, bonds, and commodities.

Or was that stock/bond perverse market behavaiour indicative of savvy market investors have some “ordered” clarity of thoughts in “cloud thinking”?. As in IT, cloud means change but it is NOT necessary confined to IT alone nor spiritualism.

http://energymatters.typepad.com/greenit/2010/02/cloud-thinking.html

That is to say, economies of the world are deploying assets differently, operating differently because goods and services are consumed differently. That means investing including M & A, as impliedly so, must also think differently because the “cloud” of turbulent change could come suddenly, violently and from unexpected triggers of both threats and opportunities. Small battered investors might rush for the exit doors when lightning strikes but corporates are on the prowl, hunting voraciously competitive assets like the Hewlett-Packard/Dell fight for 3Par Inc. Hewlett Packard depends on 1/3 of its earnings in the declining PC sector whilst Dell is 1/2 its revenue base. Cash deposits and investment in bond yields earn paltry return unlikely to meet the clamour of investors’ dividend demand, forcing them into acquisition drives for future earnings growth.

Indeed, it is arguably valid to suggest that the global economic landscape and architecture have changed – post the GFC. Granted cross-fertilisation across transnational borders, emerging economies have been the consistent key supporting pillars of much-stronger export-driven June quarter corporate results of multi-nationals across Europe, USA, South Korea and Japan, ranging from more German cars and machineries been sold outside Germany than within. Likewise, Caterpillars sold more construction equipments to mining industries outside USA in the same way as Alcoa, 3M, Dell Computers, Coco-cola, MacDonalds, Wal-Mart, Tupperware, JP Morgan Chase, Fedex etc sold more revenue toplines abroad into faster growth markets than economically malaise-struck USA and EU. Without these topline gains and tighter costs controls in place, most MNCs would not have achieved better sales and earnings in 2010 to date, compared to 2009 and would also find it very difficult to achieve growth sequentially as Europe tumbled into banking and currency crisis in the June quarter and US GDP growth already peaked in the final quarter of 2009.

European Economies – brighter outlook but unstable.

German economy cheered European markets with an exceptional 2nd Qtr growth of 2.2% announced on 13 August 2010 , its best qtrly growth since reunification. Capital expenditures, seasonal summer pent-up construction uptick and stronger foreign export trade helped the German economy recovered its lost momentum at the turn of 2009/2010, putting it back on a steeper recovery trajectory.

http://www.marketwatch.com/story/german-economy-expands-at-fastest-pace-in-20-years-2010-08-13

Much of the rest of EU is lumbering in varying distressed growth. Spain grew sequentially by a mere 0.2%, Italy by 0.4%, France by 0.6% but negative growth was recorded in Greece of 3.5% annualized. Gross domestic product in the 16-nation euro zone expanded 1% in the second quarter compared to the first three months of the year – signs of continuing lopsided improvement centred on Germany and France while most of the rest of EU practically stagnated.

http://www.marketwatch.com/story/euro-zone-second-quarter-gdp-up-1-tops-forecast-2010-08-13?link=MW_related_stories

They lend some support to glimmer of hope that Europe is not sinking fast as analysts feared and the slightly wider-than-expected margin of EU-wide 2nd qtr growth added a little more cushion to the risks of it slipping back into recession in the coming quarter as austerity bites. The 2nd half of 2010 was expected to be more challenging as fiscal austerity EU-wide spending to tackle bloated budget deficit bites deeper into employment, income and weak consumer spending. Unemployment EU-wide remains at 12 year high, forcing consumers spending curbs. France has already revised its 2011 GDP growth from 2.5% to 2%, pledging spending cuts to trim its public deficit from 8% of its GDP in 2010 to 6% in 2011.

Germany’s manufacturing-focused did very well in the June quarter but the seasonal construction’s steep upturn past the harsh winter slowdown are unlikely to be repeated. Domestic consumption is still weak . ECB warned that the 2nd half of 2010 is likely to be far less buoyant than the 2nd qtr super fast clip. Although many economists expect the German economy to slow down in the 2nd half, the German Central Bank, the Bundesbank, is far more optimistic. A week later, Friday 20 August, it revised the German forecast GDP growth for 2010 to 3% from previously 1.9% growth and it predicted little chance of another recession for the US. The announcement, conspicuously enough, had no positive impact on financial markets in neither Germany nor Europe. This upward revised forecast brings the German economy closer to the Pre-Crisis 2006 record GDP growth of 3.6% but it came up from a deep trough of 4.7% GDP decline in 2009.

http://www.marketwatch.com/story/bundesbank-lifts-german-growth-forecast-2010-08-19

Elsewhere, EU’s PMI, announced on 4 August 2010, edged up slightly in July to a 3-month high of 56.7 from 55.6 in June – lifted by manufacturing PMI. It fell back to 56.1 in August.

June German factory orders rose strongly in rebound by 3.2% over May which declined by 0.1% in April. Export sales climbed 5.7% in June helped by an 11.3% of new orders from the euro area.

http://noir.bloomberg.com/apps/news?pid=20601068&sid=aRSQTvxYbS3Y

Asia has the crucial driving-force for global demand and Germany profits from its export strength via a 13% cheaper euro. German business confidence surged to a three-year high in July. Bayerische Motoren Werke AG, the world’s largest luxury-car maker, said on Aug. 9 that sales rose 9.1 percent in July, spurred by demand in China.

http://noir.bloomberg.com/apps/news?pid=20601085&sid=akW7nftCtgqA

German manufacturing PMI manufacturing PMI slipped to a six-month low at 58.2 from a reading of 61.2 in July – a negative backdrop and warning sign.

http://www.marketwatch.com/story/german-composite-pmi-hits-four-month-high-in-aug-2010-08-23

German manufacturing boom is showing signs of instability, there are real continuing concerns in its principal markets. China is slowing and US manufacturing is weakening as well. Factory orders in the U.S., the world’s biggest economy, fell more than economists forecast in June, while China’s industrial output rose the least in 11 months. We need to monitor the German trade figures in August to assess the continuing strength of its trade dependent export sector. A pertinent question to ask - will Germany export strength and continuing manufacturing boom sustain if its major markets in China and US weaken further?

German investors and consumers are NOT equally bullish of its economic outlook. German retail sales fell in June and its investors’ confidence declined three consecutive months in a row to July. Volkswagen AG’s Audi unit and Daimler AG are countering weakening sales at home by selling more cars in China.

http://noir.bloomberg.com/apps/news?pid=20601085&sid=akKJ0Dkl45oo

Outside Germany, production of durable consumer goods in the euro area fell 0.9 percent in June from the prior month, when they rose 3.2 percent over April. Output of intermediate goods such as car engines and steel decreased 0.6 percent from May, when it gained 0.8 percent the month preceeding. As what Chris Williamson of London-based Markit economists said correctly, this author believes,

“It remains to be seen if the buoyancy of the euro zones core spills over to the periphery, or whether the periphery drags the core down.”

http://sg.news.yahoo.com/afp/20100813/tts-finance-economy-europe-509a08e.html

Whilst Europe is bathing is better times, the story across the Atlantic deteriorates significantly. Two words – “spectacularly terrible” sums up the somber mood. New Data showed a much worse trade imbalance.

“This is spectacularly terrible,” said Ian Shepherdson of High Frequency Economics, explaining that rising imports will eat into already anemic domestic growth as cash drains out of the economy.”

http://sg.news.yahoo.com/afp/20100812/tts-us-economy-trade-c1b2fc3.html

Chinese steeper-than-expected slow-down and terrified US consumers drawing oxygen out of the tepid US recovery as fiscal stimulus effects in both countries taper off. Financial markets are increasing nervous, particularly the Yen and Euro.

“The global markets have taken a turn for the worse on the back of an intense escalation in risk aversion,” added Joel Kruger, currency strategist at foreign exchange site Daily FX.

http://sg.news.yahoo.com/afp/20100812/tts-finance-economy-world-stocks-forex-c1b2fc3.html

Investors’ confidence have also drastically swung from a collective positive overweight in US stocks in July to net negative underweight of 14% in August according to a Bank of America Merrill Lynch fund manager’s survey. Fund Managers were decidedly gloomiest about US stocks since the Lehman Brothers’ collapse.

http://www.ft.com/cms/s/0/4bcd457e-aa33-11df-9367-00144feabdc0.html?ftcamp=rss

Fund managers portfolio mix, however, remains largely intact – keeping their proportion of equities to bond (safe haven) and slightly increasing their exposure to commodities and emerging market stocks. Are fund managers still playing for an upturn?. The honest answer is - I don’t know - for good reasons and information gaps. It is not known what percentage is cash now and if this varied over recent times. Given prevailing much-lower-than-average-trading volumes in global financial markets as both retail and institutional investors fled to bonds, it must be much easier for fund managers to re-weight the sectoral mix within equities than to liquify most of their equities into cash in risks aversion if that had been their preference. And of commodities, the mix is unknown if these are industrial base metals or in gold, the former is betting on economic recovery gaining momentum and the latter on a double-dip scenario. What this author found interesting is the apparent institutional investors’ appetite for gold, even at elevated prices. John Paulson and George Soros are both known to be bullish on gold.

Interesting to note that for Japan, a net 27 per cent of investors were underweight in August compared with 11 per cent in July, which made Japan the least-favoured investment destination.

Japanese economy - stalled

Over in the east, Japanese economy practically stalled in the 2nd qtr. To a mere 0.1% growth – all thanks to export moderation hanged by a rising Yen, which rose to a 15-months high against the US dollar, and fast fading of stimulus-driven recovery of consumption.

http://www.reuters.com/article/idCATOE67F01520100816?rpc=44

Translated on annualised basis, it is 0.4% against economists’ forecast of 4.4% annualised at the beginning of 2010. IT POINTS TO POSIBLY NO JAPANESE RECOVERY IN 2010 FROM THE 2009 global financial meltdown. This steep fall off also points to pretty tough journey ahead going forward. Seventh straight monthly increase in exports in July, albeit at a slower pace in June, proved insufficient to maintain its first qtr 1.1% growth in GDP. Declining export growths are now struggling to offset continuing weakness in domestic economic picture.

http://www.financemarkets.co.uk/2010/07/26/japanese-exports-continue-to-rise-in-june/

The strength of Yen surging to a recent 15-year high continues to stalk competitiveness of Japanese exports as its key markets in China and US weaken. More worrisome of this fact becomes more obvious when one notes that the slowing of Japanese exports coincides with the recent accelerating slowdown of Chinese manufacturing PMI closer to contraction – both reveals tough trading conditions in export markets.

Chinese economy - slowing faster

China’s General Administration of Customs reported a July import of 51.2 mln tonnes of iron ore, down 11.8% year-on-year comparison but 8.5% gain over June.

http://www.chinamining.org/News/2010-08-17/1282013615d38325.html

On a year to year basis, Chinese export growth had been shrinking in June to 21.7% from 32% in May and 30.5% in April.

http://www.cdeclips.com/en/business/fullstory.html?id=45998

The rate of growth in imports, applying similar measure slowed from 50% in April to 40% in May and 14.2% in June.

http://www.chinadaily.com.cn/china/2007-07/10/content_5430541.htm

As trade volume in unit and value terms continue to grow strongly and import felling steeply in June, it is not surprising that the dollar value of June iron-ore import was lower than July and it is surprising that the value of both July and June iron ore imports were below 2009 levels despite much higher import prices for this commodity in this year. Iron-ore volume import fell drastically as I correctly flagged in my earlier write up of UPDATE on Global economies are heading for turbulence, ARE WE IN TROUBLE GOING FORWARD? 24 July 2010. Coal import in July also fell. The picture painted is that the third qtr GDP figure could come in lower than the official forecast 9.2%, noting the steep fall in Chinese PMI in the last 3 months to July to 51.2 and new orders component of that PMI barely expanding at 50.9.

Chinese exports to the EU rose 5.4 per cent to $US28.67bn in July from $US27.2bn in June

http://www.theaustralian.com.au/business/markets/chinas-imports-slow-sharply/story-e6frg926-1225903490075

In that interval, the Yuan/Euro conversion fell from 0.12041 to 0.11312 representing a 9.4% appreciation of Euro. Chinese exports to Euro have slipped significantly in volume terms even though overall exports increased in July and maintained its growth path.

http://www.chinadaily.com.cn/busiess/201008/03/content_11085652.htm

Chinese auto sales rose 17.2 percent to 1.05 million units, according official Xinhua News Agency, down from the 19.4 percent growth reported in June. August sales are forecast to weaken further.

http://finance.yahoo.com/news/Report-Chinas-July-auto-sales-apf-559676424.html?x=0&sec=topStories&pos=2&asset=&ccode=

There other anecdotal evidence that the current credit squeeze had significant negative impact on its manufacturing sector. Demand for base metals slowed. Zinc price rise over the last 6 months have not kept pace with copper and zinc is heavily used to galvanise steel needed in construction industry and autos. Chinese farmers, who previously stockpiled metals for speculative gains, are now buying fertilizers instead, bringing cheers to potash demand globally. Idle factories in China trapped by loss of export market demand are now busy making cheaper “knock-off” counterfeits, selling to recession-weary US customers via internet on an industry-wide scale. You get a sense of desperation within the Chinese manufacturing sector, even though it grew consecutively for 11 months and retail sales growth eased in July.

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

ASIAN TAKEOVERS – surge in business confidence outside Asia

In fact, in the few weeks before the first US stock market downslide ended 13 August 2010, many Asian corporates were on a quiet burst of hunting spree. Except Japan and China, most Asian stock markets performed generally better over the last 12 months despite bouts of weak intervals underlining stronger regional corporate fundamentals.

Li Ka-shing, Hutchison Whampoa Ltd bid for Telecommunications International Ltd, Electricité de France’s UK electricity-distribution networks for about $US5bn., Thai coal giant Banpu A$2.06 bln bid Australia’s Centennial Coal, Thai Union Frozen’s 568 million Pounds purchase of John West., India’s Mahindra & Mahindra bidding for South Korea’s cash-strapped Ssangyong Motor, Japan’s Kirin Holdings bought a stake in Singapore F & N Ltd, Malaysian sovereign-wealth fund Khazanah Holdings acquisition drive for Singapore health-care group Parkway Holdings, Singapore-listed Wilmar International’s $US1.5bn bid aimed for Sucrogen, Australia’s CSR’s sugar business and Bharti Airtel’s $US9bn acquisition of most of the African assets of Kuwait’s Mobile Telecommunications were emerging bright spots of confidence.

http://www.theaustralian.com.au/business/news/currencies-drive-asian-ma-rebound/story-e6frg90x-1225906441185

Cash-rich Asian business leveraging on stronger exchange rates and lack of competitive bidding spurred M & A activities. In all, Asian-Pacific companies have made $US132.7 billion of offers for companies outside their home country this year, compared with $US142.7bn – almost the same level in the same period of pre-crisis 2008 and that is already more than double last year’s recession-hit pace. But on a global basis, Asian M & A is proportionally small, barely 14% of global M & A activity. Up till late June 2010, global M&A this year was worth just under $976 billion, according to Thomson Reuters data, the worst level in 6 years.

http://www.reuters.com/article/idUSTRE65O0JL20100625

They show how little weight the so-called “bustling” Asian corporate activity as a leverage strength and possible lifting factor of global economic recovery upturn. The traffic of investment and GDP growth still flows essentially from “fork-spoon & knife” economies into “chopsticks” and “hand” economies. With few exceptions of Germany, Canada, Australia and Brazil, most of the “fork, spoon & knife” economies are weak.

WHILE MONEY SEEMS TO BE IN ACTIVE REVIVAL IN ASIA, MOST OF THE ACQUSITIONS ARE OUTSIDE current “high-growth” CHOPSTICK ECONOMIES AND FOCUSSED ON BASIC INDUSTRIES SUCH AS UTILTIES, FOOD AND RESOURCES SECTORS. Businessmen with long shrewd accumulated experiences do NOT seems to be overly positive of Asian economies and they all going into basics. This author reads their mind are of some shared conclusion, perhaps, that the tech-driven growth in the decade just past, is at least some time long distance away to merit a close look.

US economy – structurally deficient 2nd Qtr growth and sickly forward

Flash estimate of US 2nd Qtr GDP growth is hardly durable “growth”. Looking back in hindsight now, capital spending on computers and software were the only “bright” spot of technological upgrade replacement – one off cycle underway. A modest 1.6% rise in US consumer spending input sucked in a lot of foreign imports gave false illusion of manufacturing-led recovery instead of “involuntary” restocking of shelves as retail sales slowed. The US consumer- as highlighted in my preceding write-up was the missing “chicken” looking for the “egg” of recovery in the revival economic equation. Wal-Mart’s recent results painfully demonstrated these. Last quarter inventory rise was faster than sales.

http://www.marketwatch.com/story/wal-mart-customers-in-for-rude-awakening-2010-08-17

In store deep discounting at Wal-Mart’s “roll-backs” attracted new customers but as soon as it reverted back to its “everyday low prices”, customers fled to its competitor, Target Inc for better deals. It was like opening a new restaurant drawing crowds at the beginning but the business does NOT know how many “satisfied” customers will come back. American consumers are living from pay-check to pay-check. Both Home Depot and Lowes Cos are forecasting lower sales growth for 2010 and earnings growth will have to come from holding down expenses.

http://noir.bloomberg.com/apps/news?pid=20601103&sid=aTK4GhGx9NN8

Cisco, a technology bellwether seen as a proxy for broad corporate spending, reported revenue that fell short of forecasts and offered a gloomy sales outlook. Cisco's report is "throwing a large question mark across the issue of acceleration of technological capital goods spending," said Stephen Lieber, chief investment officer at Alpine Dynamic Balance Fund.

http://www.marketwatch.com/story/us-stocks-slump-as-growth-worries-intensify-2010-08-12

Dell 2nd Qtrly results reported strong continuing corporate replacement cycle sales but flat consumer demand for PCs. In the Far East, market conditions deteriorated rapidly of late. “PC orders falling off the cliff in Taiwan,” JP Morgan analyst Christopher Danely. Another independent source noted that the sharp deterioration in PC order trends continuing into August, after a below expectation July month.

http://www.kreative-technology.co.uk/whats-in-the-news/19-kreative-technology-hardware-news/6997-is-pc-market-falling-off-a-cliff

Not surprisingly. US industrial output fall 0.5% in June could only afford a 1.1% compensating gain in July, due mainly to autos. Auto sales will not be good as stock prices fell in August. US leading economic index fell 0.3% in June and grew 0.5% in May.

July also saw only a slight gain in economic leading indicator of 0.1% – hardly encouraging of trend and more like a pause in a stalled economy than cheering uptick forward.

http://www.marketwatch.com/story/leading-indicators-point-to-slowing-economy-2010-08-19

The Institute for Supply Management index fell to 55.5% in July from 56.2% in June showing conditions for the nation's manufacturers slowed for the third straight month.

http://www.marketwatch.com/story/july-ism-factory-index-slows-to-lowest-2010-level-2010-08-02

This came after shipment of and unfilled orders of manufactured goods declined for two consecutive months AND inventories of manufactured durable goods rose again in June, up six consecutive months

http://seekingalpha.com/article/217588-june-durable-goods-tipping-point-for-the-tech-sector

It would be interesting to see what the durable goods order for July 2010 will be like.

Four banks failures were reported on 19 August 2010, bringing the year total of 114, reminding that the banking woes in US is NOT yet over.

http://www.marketwatch.com/story/three-bank-failures-bring-2010-total-to-113-2010-08-20?dist=bigcharts

Adding to this gloom is the sale of pre-owned U.S. homes tumbled 27.2% in July, the biggest one-month drop ever — largely because of the phase-out of a federal tax credit. The National Association of Realtors said inventory of unsold homes jumps to 11-year high.

http://www.marketwatch.com/story/existing-home-sales-plunge-272-in-july-2010-08-24-101400

This downbeat housing report compounds stock markets fear over last week’s unexpected surge in unemployment claims exceeding 500,000 (the highest since last November) and the Philly Fed's business activity negative August 7.7 index from positive 5.1 in July. All European and American markets tumbled tonight and US Treasury bond yields fell 91 basis point to 2.51%. This time it is two true negatives – no more Mau Ku Lau Su. Both equity and bond “confirming” negative economic outlook ahead.

US Treasury Department showed that net foreign purchases of US long-term assets still increasing at a much subdued rate in May and June, they are much lower than the same in March and April this year. Foreign investors were, however, net sellers of U.S. equities for the second straight month and look set to continue.

http://www.marketwatch.com/story/foreign-buying-of-us-debt-up-in-june-treasury-2010-08-16

US stalled manufacturing is adding to employment woes eroding consumer confidence and housing prices. Falling home prices -- coupled with the drops in stock prices -- will trigger a new tumble in household wealth, gnawing away consumer spending hurting corporate profits and discouraging capital investments. A vicious circle of downward economic spiral has now been re-established.

This author believes that the US is now right at the door of the “autumn” of a double dip and only one more shock downbeat “news” to tip it over into a recession, taking the rest of the world with it.

Anyone disagreeing?

Zhen He

24 August 2010.

Update 2 – GLOBAL ECONOMIES HEADING FOR TURBULENCE, ARE WE EDGING CLOSER TO TROUBLE HEADING FORWARD?

Alan Greenspan, Stock Market Perspectives, Warren Buffet and Contrary Views.


Post my last write up “Update Global economies heading for turbulence, are we in trouble going forward?” published on Temasek Review 24 July 2010, stocks again flew up north in the direction of Arctic as the economic weather vane pointed southward towards Antarctica. It was a repeat performance following my earlier writing – Global economies heading for turbulence, are we heading for trouble going forward ? ( Temasek Review, 5th July 2010). A distinct sense of déjà vu enveloped me, momentarily. Or was it simply Murphy’s law at work of economic logic coming to grief of reaching the “wrong” conclusion with great confidence? One blogger, provocatively of instinct perhaps, asked of the then bullish stock market sentiments prevailing, if I should change my conclusion as seemingly lack in “accuracy” of forecast overshadowing the dissecting length of my economic “thesis”.

I forewarned of “dying US housing market” as a possible trigger of the next shock spinning the US economy downward, sending global economies into another turbulence and a double dip recession. Fortunately, as if to save my embarrassment, former Federal Reserve Chairman, Alan Greenspan, long in denial of US housing bubble until that burst in the GFC and much-blamed for sowing the seeds of the GFC, came to my “rescue”.

http://www.foreclosureconnections.com/blog/article/1774/alan-greenspan-expresses-concerns-about-the-state-of-the-economy

Pressed by NBC’s “Meet the Press” broadcast on 1 August 2010 of the likelihood of a double dip, Greenspan said this – “It is possible if home prices go down. Home prices, as best as we can judge, have really flattened out last year.” I also warned of economic data “SUGGESTS THAT THE US ECONOMIC RECOVERY IS STALLING OR HEADING FOR A STEEP DECLINE.”

In a similar vein Alan Greenspan added weight to this warning. He said, “We're in a pause in a recovery, a modest recovery but a pause in the modest recovery feels like a quasi-recession."

http://www.telegraph.co.uk/finance/economics/7921353/Alan-Greenspan-warns-that-US-could-be-heading-for-double-dip-recession.html

Alan Greenspan spoke of a US two-tier economic recovery - confined to mainly big businesses, large banks and wealthy net worth individuals – the rest of the economy saw little or no benefits. There is no “trickle down” beneficial impact.

But Alan Greenspan wasn’t alone of bearish afterthoughts. Warren Buffett's Berkshire Hathaway Inc’s recent second-quarter profit announcement took a 40 percent haircut, as they accepted $1.41 billion of losses on derivatives, mainly because of long-term contracts tied to equity indexes. Under new revised accounting convention, they need NOT do so now especially that US stock market rose by 7% and EU stock markets rose by an average of around 5% in July but they did. Warren Buffet must have evaluated prospects for stock prices recovery forward and their possible beneficial impact on its long-term contracts tied to equity indexes but concluded negatively.

http://finance.yahoo.com/news/Berkshire-net-down-40-percent-rb-1094284586.html?x=0&.v=4

But what is lesser known to most stock market participants is the suspect unusual low volume of stocks trading on all asset classes whilst lifting equities up north – EXACTLY DÉJÀ VU OF THE SAME RALLY SUCCEEDING MY FIRST WRITE-UP of 5 July 2010. One market source has it that in the past 12 weeks to the first week of August – there have been continuous outflows of more than US$40bn invested funds despite the July equities market rally. Both institutional and retail investors have largely sat on their cash or were on strike in the equities market. Some retail buying of bonds were noted – an indication of aversion to risks and investors unimpressed of corporate earnings, stronger balance sheet and all manners of improving economic statistics.

http://www.ft.com/cms/s/0/5ac2207e-a0ae-11df-badd-00144feabdc0.html?ftcamp=rss

Why the flight to bonds? The baby boomers, once over-confident generation, have been badly wiped out by the equities whiplash of 2008 and 2008. Their appetite for risks has faded as re-employment prospects dimmed by a jobless and slowing recovery story. In fact, news of the fall in non-farm payroll on Friday, 6 August 2010 saw the yield on US 10 year Treasury bond plumbed to a new 16-months low of 2.82%.

http://www.marketwatch.com/story/treasurys-up-after-payrolls-fed-action-foreseen-2010-08-06

Many tired and badly-hurt equities investors remain haunted by the so-called fat finger “flash crash” of 6 May 2010 – the beginning of the stale consistent liquidation by retail investors in the equities. In times of economic uncertainty and extreme volatility of exchange rates, especially US Dollar to the Euro distorting US corporate earnings, investors’ fled to treasury bonds tells me that the bond market is a better predictor of economy than the direction of equities markets. IT IS BEARISH. Over a 45-year interval, yields on US 10-year treasury bond have never fall below this depth except for the first qtr of 2009 global financial meltdown. That does not leave us with a much clearer lever to read the staid lack of confidence in the US economy from this depth of gloomy despair. We need to look at other most recent economic parameters of housing, employment, manufacturing, consumer confidence, PMI indices etc. where the US economy is drifting to. The picture this author got is NOT pretty – in fact barely anemic growth, not just in US but also in Europe, except Germany. Stock market indices as forward “indicators” in emerging economies like Russia, Brazil, Turkey are doing far better in July than even India which slowed to a crawl . Deflationary concerns continue to weigh on the Japanese economy troubled by rising Yen, slowed wholesale price increase and its volatile machinery orders slumping again in June rising to a slow 1.6% over May compared to market expectation of a 5% increase. New data set from China is disturbing of how fast its economy is deteriorating.

US economy

Latest Fed Beige Book report released on 29 July 2010 pointed to the gloomy outlook. It showed that the US economy may be running out of steam. Economic activity slowed or stalled in four of the Fed’s 12 regional districts.”

http://www.theaustralian.com.au/business/markets/modest-advances-in-us-economy-says-federal-reserves-beige-book/story-e6frg926-1225898239948

And IMF made urgency plea that the US spend further on fiscal stimulus

http://sg.news.yahoo.com/afp/20100730/tts-imf-us-economy-972e412.html

Not surprisingly, US 2nd Qtr GDP statistics, announced two days later, deteriorated sequentially from 3.7% annualized growth rate to 2.4% annualized in the June Qtr – THAT IS A 35% SEQUENTIAL FALL IN GROWTH MOMENTUM. As the US economy is entered into the 3d qtr on a weakening note, Obama warned “we’ve got to keep on increasing that rate of growth and keep adding jobs so we can keep moving forward,”

http://www.theaustralian.com.au/business/news/slow-us-growth-sparks-political-debate-over-gfc-recovery/story-e6frg90o-1225899326792

That signals tougher challenges ahead. Improving employment will be harder to achieve going forward for several reasons. Some semblance of stability of unemployment levels in the June qtr had been helped substantially by temporary hirings of national census workers. All these jobs were gone in June. Partially alleviating these job losses were growth in services sector which continued into July – 7 consecutive months in a row. US Institute for Supply Management's non-manufacturing index rose to 54.3% in July from 53.8 in June indicating modest expansion in the services sector.

http://www.marketwatch.com/story/services-sector-expands-slightly-in-july-ism-says-2010-08-04

Its contribution to employment growth, however, slowed in June and modestly added another 71,000 jobs in July.

http://www.marketwatch.com/story/millions-have-simply-given-up-on-a-job-2010-08-06

Evidently, the gains in private services sector were insufficient to be more than offsetting of job losses elsewhere including 38,000 Government sector jobs in July alone, according to US Government Labour statistics.

Except for Vermont, all 49 states have balanced budget rules keeping expenditure within falling revenue base from sales tax (as housing sector deteriorates) aggravated by depletion of jobless insurance funds from high unemployment. Further layoffs are looming as states prefer to trim labour at the start of new fiscal year than waiting till late of trapped revenue shortfall.

http://www.cnbc.com/id/38593974

The pace of layoffs could gather pace if the economy weakens further and/or stimulus spending money drying up. Indeed there are already signs that employment market deteriorates significantly further of late.

Initial jobless claims climbed by a much higher than expected 19,000 to 479,000 in the week ended July 31 even though there were no special factors influencing last week’s report. Compared against the four-week moving average of claims, a less-volatile measure, the figure is projected to be around 453,250. The higher initial jobless claim ended 31 July lifted the moving average to 458,500 and that signaled employers are RETRENCHING STAFF AS THE ECONOMY IS SHOWING SIGNS OF SLOWING.

http://noir.bloomberg.com/apps/news?pid=20601068&sid=aNmRu9_Trax0

A cooling economy means that employers will resist adding staff in the coming months thereby risking a fall in consumer spending ahead – in simple algorithm, the adverse cycle of increasing unemployment depressing consumer spending repeating itself is being re-established bringing on elevated risks of the much feared recession.

A CRITICAL WATCH VARIABLE IS EMPLOYMENT LEVEL AND ITS IMPACT ON CONSUMER SPENDING FORWARD. The latest figures are NOT pretty.

July job losses were 131,000 after 221,000 jobs were lost in June – worse than economists expected, driving the yield on the 10-year US Treasury bond to 2.82% , a 16 months low. Further evidence of gloomy consumer outlook can be seen from falling participation rate - the percentage of the working-age population who are working or looking for work. That fell in July to 64.6%, the lowest rate since 1985.

http://.marketwatch.com/story/millions-have-simply-given-up-on-a-job-2010 www -08-06

Employment statistics past and employment outlook forward cannot be looked at in isolation. We need to look at other macro-economic variables to assess the state of the economy which could either confirm or refute this pessimistic prognosis to date.

Here is a sample

• Consumer durable goods order decline 1% in June, the second straight decline in 3 months and steepest fall in 10 months. Fall was steepest in autos and the gains in computers. Economist expected a 1% increase.

http://www.marketwatch.com/story/surprise-drop-in-june-us-durable-goods-orders-2010-07-28?dist=bigcharts

• Home prices rose 1.3% in May compared with April in 20 major U.S. cities on a seasonally unadjusted basis. This is at least some signs that home prices are bouncing at depressed levels instead of continuing slide. But May pending home sales actually fell 30% over April in erratic economic conditions prevailing and expiry of tax credit incentives. It slumped again in June.

http://www.marketwatch.com/story/us-home-prices-rise-13-in-may-from-april-2010-07-27?dist=bigcharts

• Consumer confidence plummeted in July on concerns about jobs and business conditions, following a sharp decline in June. July's consumer confidence index fell to 50.4 - the lowest level since February -- from an upwardly revised 54.3 in June.

http://www.marketwatch.com/story/job-worries-darken-july-consumer-confidence-2010-07-27

This came after non-farm payrolls declined by 125,000 in June but prior to that, consumer confidence had risen for three straight months.

http://money.cnn.com/2010/07/27/news/economy/consumer_confidence/index.htm?postversion=2010072712

That suggests a shift in consumer confidence sentiment from positive to strong negative.

• US auto sales, however, increased in July on a monthly basis – that is a positive. It is a welcome relief for the top US automakers after a disappointing May sales and consecutively again in June.

http://www.marketwatch.com/story/gm-sales-see-big-rebound-in-july-2010-08-03?pagenumber=1

May auto sales decline, the first since August 1998, was particular heart-rending as the Cash for Clunkers ended and it had a 5-Saturdays and 5-Sundays in that month. July sales have one Saturday less than June, so the unadjusted sales improvement superficially looks encouraging at the outset.

http://www.marketwatch.com/story/us-auto-sales-decline-for-june

New model introductions and the commencement of the new fiscal year replacement buy were thought to be the key reasons for the uplift in July sales as top three US automakers gain on market shares against imports facing unfavorable exchange rate movements. Historically, there seems to be a strong correlation between stock prices and auto sales in US. A gain of 7% in US stock price in July was expected to be another positive influence. But this was NOT the case – regardless of the expiry of Cash for Clunkers incentive.

http://money.cnn.com/2010/08/03/news/companies/autosales/index.htm?postversion=2010080316

George Papas, Ford's director of sales analysis, estimated that much of the improvement came from lower priced fleet sales to businesses like rental car companies, rather than strong consumer demand. Industry wide sales to consumers rose only 1% in the month, while fleet sales shot up 35% - a continuation of 2nd qtr trend of business investment and consumers remaining in the chill of spending.

• Pending home sales fell another 2.6% in June as consumers sat on the sideline. It fell to a record low of 75.5 from a revised 77. 7 in May and that was the lowest on records dating back to 2001 and down nearly 19 percent from the same month a year earlier. Market analysts predicted a gain of 0.6%. Weak economy and tight lending standards kept consumers away from the housing market. May sales fell 30% from April 2010 after the expiry of tax credit. There seems to be no relief in sight.

http://www.cnbc.com/id/38536966

• While the Commerce Department retail sales for July 2010 is still pending, retail sales fell by 0.5% in June – the second consecutive monthly fall after a downwardly revised 1.1% fall in May. With two consecutive months of falling retail sales, there must be some concerns that consumers may not lead this recovery.

http://www.financemarkets.co.uk/2010/07/14/us-retail-sales-fall-in-june/

• The national PMI for manufacturing industries decreased 0.7 points in July to 55.5 from June’s index of 56.2. It demonstrated that US manufacturing has been growing for 12 consecutive months in a row but July’s score of 55.5 is the lowest the index has been since December 2009. Factory orders fell 1.2% in June. Manufacturing growth is SLOWING.

http://www.missourieconomy.org/indicators/pmi/index.stm

Meanwhile, the new orders index plunged to 53.5 in July, down 5 notches from June and way below May’s reading of 65 – suggesting weaker manufacturing in the latter half of 2010. Steeply plunging order since May 2010 implies an anemic economic recovery for the remainder of this year.

http://www.financemarkets.co.uk/2010/08/02/us-manufacturing-activity-expands-for-12th-straight-month/

• Over three consecutive qtrs to June 2010, US GDP growth fell in succession from 5% in Dec 2009 qtr to 3.7% in the March qtr and now down to 2.4% in the June qtr. The US economic recovery is sputtering downwards at a consistent 35% each qtr and the June qtr is significantly sub-par at 2.4%. If the same trend persist and no compelling statistical evidences available to refute otherwise of a reversal of this adverse economic direction, the third qtr GDP growth could come in at a mere 1.6%.

• http://money.cnn.com/2010/07/30/news/economy/gdp/index.htm?cnn=yes

Other anecdotal evidences showed a strong change in US consumer habits, Savings were up as deleveraging gaining momentum. McDonald posted better-than-expected-earnings growth of 12% in second qtr in the downturn and bullish on forward prospects as “consumers trade down from more expensive restaurant fare.” Its July’s 7% sales outperformance gain was stronger in Asia, Middle East and Africa gaining more than 10.1% than Europe’s gain of 5.1%.

http://www.marketwatch.com/story/mcdonalds-profit-rises-12-on-worldwide-demand-2010-07-23

Procter & Gamble fourth qtr and full year lacklustre results announced on 3 August 2010 showed how tough trading conditions were. Net sales grew five percent to $18.9 billion for the fourth quarter and three percent to $78.9 billion for fiscal 2010. Organic sales, which exclude the impact of acquisitions, divestitures and foreign exchange, grew four percent for the quarter and three percent for the fiscal year. Unit volume accelerated throughout the fiscal year and was up eight percent in the fourth quarter.

http://www.pginvestor.com/phoenix.zhtml?c=104574&p=irol-newsArticle&ID=1455483

In other words, 8% of volume gain bought only 4% of net sales on the topline implying very tough trading conditions within consumer staples in all its global market segments. P & G reported gaining market share in all segment yet its diluted net earnings per share were $0.71 for the fourth quarter and $4.11 for the fiscal year. Accelerated gain in market share in the 4th qtr was bought with decelerating earnings, diluting 4qtr proportional earnings contribution. The results are consistent with the 2nd qtr reported earnings and difficult trading conditions forward guidance of Tupperware and Coca-Cola.

With notable exceptions, early indications for July retail “back-to-school” retail sales were generally disappointing in the teens sector – both on the same-store basis and nationally.

What Ben Bernanke is expecting?

As weak job conditions continued to drag consumer confidence and spending, Ben Bernanke is still hoping that “rising wages will probably spur household spending in the next few quarters.” His latest prognosis of 2 August 2010 is that “rising demand from households and businesses should help sustain growth” Consumer spending, which accounts for about 70 percent of the economy, “seems likely to pick up in coming quarters from its recent modest pace,” Bernanke forecast.

http://noir.bloomberg.com/apps/news?pid=20601068&sid=aSehtnCHeZl0

The personal savings rate rose to 6.4% in June, the highest level in a year. Consumer spending, adjusted for inflation, increased by only 0.1% in June over May.

http://www.marketwatch.com/story/income-stays-flat-as-spending-remains-sluggish-2010-08-03?link=MW_related_stories

But what does the 2nd Qtr GDP official release tells us?

Data from the 2nd Qtr GDP official release only two days earlier seems to contradict him.

http://www.bea.gov/newsreleases/national/gdp/2010/gdp2q10_adv.htm

Real personal consumption expenditures increased 1.6 percent in the second quarter, compared with an increase of 1.9 percent in the first. Trend is working against Bernanke’s projection.

The change in real business inventories added 1.05 percentage points to the second-quarter change in real GDP after adding 2.64 percentage points to the first-quarter change. That shows business investment in inventories is also decelerating – contradicting Bernanke’s expectation forward.

Real business fixed investment increased 17.0 percent in the second quarter, compared with an increase of 7.8 percent in the first – mainly equipment and software – indicating accelerating capital goods and productivity gains.

Real residential fixed investment increased 27.9 percent, in contrast to a decrease of 12.3 percent BUT HOUSING SECTOR IS FADING FAST as Alan Greenspan had warned. Viewed in the context of steep decline in pending home sales, Greenspan is right to suggest that slowing U.S. recovery feels like a “quasi-recession” and the economy might contract again if home prices decline.

MOST ITEMS ON BERNANKE’S WISHLISTS ARE EITHER OVER OPTIMISTIC OF AN EARLY TURNAROUND EXPECTATION OR FAST FAILING OF FRUITION AS THE ANEMIC RECOVERY CONTINUES TO SPUTTER TOWARDS A PAUSE.

China

Global stocks took another beating on 29 June 2010 when the US Conference Board again revised its leading economic index for China to show the smallest gain in five months during April. The reading, which is a strong gauge of the economy’s outlook, rose 0.3% -- far less than the 1.7% previously revised on June 15.

http://www.minyanville.com/businessmarkets/articles/china-data-conference-board-economic-index/6/29/2010/id/28966?camp=syndication&from=yahoo

Fears swept financial markets that the world’s fastest growing economy is slowing faster than expected – something consistent with reports of steep decline in material imports discussed in my previous writing of 24 July and also apparent from the plunging dry bulk cargo freight rates and the Baltic Dry Index. Capsize vessel freight rates for dry bulk cargo fell 78% since early June 2010.

http://noir.bloomberg.com/apps/cbuilder?ticker1=BDIY%3AIND

Yet another sign of deteriorating external condition is Singapore’s manufacturing side have collapsed in June by a huge 24.3% over May which itself grew by a mere 5.2% in April.

http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=asy1C9np.K9g

It is a massive tumble following a slowed growth. Singapore’s manufacturing sector is very sensitive bellweather to shifts in external demand conditions.

Comparing all these statistics to China’s manufacturing PMI since December 2009, it is NOT entirely surprising of the fast slowing down of Chinese manufacturing sector previously noted in my earlier writings.

Manufacturing PMI for each respective months (in brackets) are as follow – December 2009 (56.6), January 2010 (55.8), February 2010 (52.0) March 2010 (55.1), April 2010 (55.7), May 2010 (53.9), June 2010 (52.1) and July 2010 (51.2). The pattern show a double-dip over a seven-month interval and a steeper three consecutive months decline since May, the lowest in 17 months, marking the distinct turnaround from the strong performance from the beginning of the year.

http://www.chinadaily.com.cn/business/2010-08/03/content_11085652.htm

Manufacturing slipped concurrently and coincided with the tough credit squeeze on lending since April 2010 without the lagged effect expected. Looking at the July PMI component, finished goods inventory index fell from 55.8 in June to 52.7 indicating slower manufacturing activity and an aggressive rundown of inventory. More importantly. New orders declined to 50.9 in July compared to 2.1 in June pointing to possible contraction forward as conditions in EU and US deteriorate. Current expectations must be further deceleration of growth in the coming months ahead.

Report from Australia disclosed further deterioration in Chinese demand for iron-ore and darkened prospects forward. BHP-Billiton and Rio Tinto at Diggers and Dealers Mining Conference in Kalgoorlie on 2 August 2010 warned that spot prices are trading well below the new $160 a tonne CIF third quarter contract price.

http://graphics.thomsonreuters.com/10/diggersdealers.pdf

With another two months ahead awaiting, both the world’s largest and third largest miners' forecast continuing fall in iron-ore pricing. This is somewhat surprising to me.

Market sources said China accounts for 64% of the global iron ore import of 961 million tonnes or roughly 625 million tonnes. And what is the inventory level now?

“iron-ore stockpiles at Chinese ports. Inventory expanded for four consecutive weeks to almost 74 million tons by July 16.”

Now that stocks at Chinese ports is about 1.5 months supply but it does not include those that are in ocean shipping transport nor in wharfage transit depots in Brazil and Australia awaiting shiploading loading and shipment or in storage sheds close to production steelworks.

Therefore, China needs to start importing iron-ore some time in September or at latest in late October – more likely to be sooner than later. Yet the Australia’s BHP-Billiton and Rio Tinto are so bearish in this September quarter when landed costs of iron-ore from Brazil are more expensive on account of distant transport!! CHINA IS DEFINITELY SLOWING DOWN AT LEAST FOR THIS QUARTER.

China cancelled preferential power tariffs in 22 provinces to all energy-intensive industry on 7 August 2010 but backdated to 14 July 2010. That would include steelworks, aluminum smelters, calcium carbide plants and ferroalloy industries. The move, as part of its efforts in meeting 5-year energy conservation targets ending 2010, will adversely burden industrial production with higher energy costs, particularly smaller companies and those employing outdated manufacturing facilities.

http://www.chinadaily.com.cn/business/2010-08/07/content_11114159.htm

Local governments have not been deemed sufficiently stringent enough of enforcing targets centrally directed since May 2010. Official statistics showed that energy intensity rose by a paltry 0.09% in the first six months of 2010 in year-on-year comparison. First qtr 2010 energy intensity was much stronger. It rose by 3.2%. Both stacked poorly against a 20% reduction benchmark in energy intensity in 2010. In late development, announcement from the Chinese Ministry of Industry and Information Technology on 9 August 2009, ordered 2087 steel, aluminium mill, cement mills, paper mills, coking plants and other factories with poor energy efficiency to close as it struggles to cut waste and improve the country's battered environment.

http://www.theaustralian.com.au/business/news/china-to-shut-thousands-of-energy-wasting-factories/story-e6frg90f-1225903073694

There is no flexibility on this directive as all state utilities have been directed at cutting power supplies and all banks to stop dealing with them by the end of this September.

Compliance with these tough curbs across industries to contain energy use in the 2nd half of 2010 will adversely affect industrial production in the coming quarters till end of 2010 at least.

China’s State Information Center said in its economic review quarterly just released forecast its gross domestic product (GDP) would grow by 9.2 percent in the third quarter from the same period last year. This is slower than the crackling pace of 11.9% in the first qtr and 10.3% struck in the second.

http://english.china.com/zh_cn/news/china/11020307/20100804/16062953.html

The Centre forecast a 9.2% 3rd qtr GDP growth, down from 10.3% in 2nd Qtr and 11.9% in the last Qtr. Reasons advanced include the continuing impact of the housing credit squeeze, tail end of inventory restocking, and the tapering of impact of fiscal stimulus for cars and white goods purchases. 2010 forecast is 9.5% GDP growth in line with 30 year average.

http://www.cnbc.com/id/38548180

Assuming this forecast target of 9.5% GDP growth will be met with gradual withdrawal of fiscal stimulus and stiff cutback in industrial production via rigorously enforced stringent energy intensity reduction measures in place, China’s 4th qtr GDP must, by definition shrink to a low of 6.6%!!. Therefore any downward revision of GDP annualised growth by the Chinese Government, from this point of my writing, must imply a massive fall-off in 4 qtr GDP growth. I believe the energy-intensive curb is a politically-motivated move to forcibly cool off the Chinese economy from overheating.

The worries, I believe, is that the fiscal stimulus impact was way overdone ,with lingering fears of resurgent inflation and massive overloads of bad loans in property, construction-related sectors and commodities speculation. Inflation in June of 2.9% is near a two-year high and recent wage inflations reflect costs-of-living pressures. Inflation could go higher with rising food prices. Households borrowed 2.5 trillion Yuan, almost four times more than a year earlier and much of these went into multi-property speculation unproductive to, even threatening to damage, long-term real economic growth.

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

One cannot help it but noticed that the shut down entities are confined almost exclusively (except paper mills) in construction related entities – steel, aluminum, cement industries. Confronted with a highly uncertain outlook of its principal export markets of EU and US, the Chinese could NOT afford to risk a strong Yuan appreciation now, potentially having decimating impact across its entire manufacturing sector. The Chinese are doing selective surgery and pruning – doing stress tests of its banking, steel and cement and property sectors, assuming a worst case scenario of 60% fall in residential asset values in 7 top-tier cities. The much tougher and expanded stress test underscores the Chinese Government’s determination to hold tightening policies in place of higher down payment and no lending for multiple housing speculation since April 2010, leaving no prospect of easing monetary policies in the near term. Analysts are now speculating forward of next easing of tightening policies won’t be earlier than end 2010 or even mid-2011 depending on prevailing global economic conditions. This author does NOT believe any easing of monetary policies at least until significant fall in property prices in big cities of up to 30% - otherwise there is no beneficial effect to the economy except collateral damage to industry by its April 2010 lending tightening measures. Price GROWTH has slowed and sales plummeted since then. Market analysts are looking for a price DECLINE of 30% from current levels in top 7 cities. This property asset bubble is placing China’s economy between the proverbial devil and the deep sea. Giant state-owned enterprises all have their fingers in the dirty pie of this property price spiral and they are fearful of steep fall exposing their own indebtness after orgies of huge spending spree of seemingly “free” money from stimulus package last year. Recent stress tests conducted by the China Banking Regulatory Commission (CBRC) showed 20% of all outstanding loans to state-owned companies were "in trouble" as of the end of June.

http://www.marketwatch.com/story/chinese-banks-reportedly-facing-wave-of-bad-loans-2010-08-08

EUROPEAN ECONOMIES

UK economy shines a little growth blip, up 1.1% in June qtr, four times the pace the preceding qtr but all sector of the economy slowed again in July. Britain’s manufacturing PMI slipped marginally from 57.6 in June to 57.3 in July – that is a five-month low. Manufacturing export fell 3 months in a row, said to be reflecting the British pound recent rebound

http://www.marketwatch.com/story/uk-euro-zone-factory-activity-beats-forecasts-2010-08-02

Inflation is running higher 3.2% in June above the Government target of 3% annualised due to higher sales tax.

http://noir.bloomberg.com/apps/news?pid=20601205&sid=a9vH7g4Fp4ts

Cameron’s planned spending cuts may slice 85 billion pounds from expenditure, equivalent to 5.7 percent of GDP. It is the highest budget cut since World War II. Even in moderately good times, it is hard to attain such a cumulative sequential aggregate growth over two years. There is a need to walk the tightrope balancing between monetary policy and fiscal tightening. And that is true for a number of EU members as well, even Germany.

Consumer spending remains weak in the 16 members EU countries. On a month-to-month basis, retail sales were flat in June after a 0.4% gain in the month prior - the biggest fall recorded in France and, most surprising, in Germany. This gives little encouragement for self-sustaining growth.

http://www.cnbc.com/id/38552423

So far, the economic recovery in the eurozone has been heavily reliant on exports from Germany, Europe's economic powerhouse. As the fiscal squeeze already underway tightens and grips the economy, any revival of consumer spending will evaporate quickly. One must remember that the strength of the German economy had been fueled mainly by US and Asian (mainly China) demand for cars and machines, helped by a 13% cheaper euro relative to US Dollar since last November.

http://noir.bloomberg.com/apps/news?pid=20601068&sid=aRSQTvxYbS3Y

German factory order rose by 3.2% in June over May 2010 but June manufacturing production actually declined 0.9% over May, somewhat disappointing considering a 2.9% monthly gain in May over April.

http://www.marketwatch.com/story/german-industrial-production-sees-unexpected-slip-2010-08-06

Fluctuating industrial production indicates the inconsistency stability of export demand. Business confidence, however, surged to a three-year high in July. The evidences available point to gradual broadening recovery of export-led German economy but that optimism needs to be tempered with falling investors’ confidence over the last 3 months and falling retail sales in June. The lack of progress in visible reduction of “slower work week” of less than full-time employment in many sectors of the German economy hampers consumer confidence – much like the US is now.

ITS RESURGENT EXPORT DEPENDENT MANUFACTURING SECTOR UNTIL NOW IS NARROWLY FOCUSSED ON LUXURY CAR AND CAPITAL GOODS INVESTMENT DEMAND FOR INDUSTRIAL MACHINERY FOR SUSTAINABILITY. Trade boom that Germany enjoys now is due to the lagging impact of fallen Euro which lifted German exports in June.

http://www.marketwatch.com/story/german-exports-surged-in-june-2010-08-09

Economist now forecast German 2nd Qtr GDP to grow by 1.4% sequentially compared to first qtr growth of 0.2%. While order book remains good, the pace of export surge is not expect to last if either or both China and USA weakens significantly further.

Elsewhere, EU’s PMI, announced on 4 August 2010, edged up slightly in July to a 3-month high of 56.7 from 55.6 in June - lifted by manufacturing PMI.

http://www.marketwatch.com/story/euro-zone-services-pmi-rises-less-than-expected-2010-08-04

Economists, however, noted that the euro-zone PMI jump was driven largely by a big surge in German activity, with that nation's manufacturing index surging to a three-year high of 61.2 from 58.4 in June.

http://www.marketwatch.com/story/uk-euro-zone-factory-activity-beats-forecasts-2010-08-02

Notwithstanding that lop-sided gain, EU services PMI continue to improve. Together with consistent improvement in services PMI of 11 months, it shows the risks of an EU-wide double dip seems a little bit more in check. Without the strength of German economy, especially manufacturing exports pacing the “improvement” statistics, much of the rest of EU is lumbering in varying distressed growth. Spain which grew by a mere 0.2% on a truly basis is forecast to be the first to fall into a double dip when fiscal austerity takes hold of its economy. Italy reported a sequentially 2nd truly growth of 0.4% over its first qtr.

http://www.marketwatch.com/story/italy-second-quarter-gdp-up-04-up-11-on-year-2010-08-06

EU-wide, the GDP growth for the 1st qtr on a year-on-year comparison to 2009 was only 0.2% - this meagre growth being a constant reminder of how thin the margin of cushion the EU has of risk it collapses back into a double-dip recession. Even the strong narrowly-focused manufacturing-led German recovery is forecast to reach an annualised growth rate of just 1.5% in 2010. German and EU 2nd qtr growths are expected to be announced on the 13 August 2010. Both are expected to be significantly better. Meanwhile, the European Central Bank cautioned that second-half growth would be "much less buoyant" than the second quarter.

Currency and metals front.

The USDollar shed roughly 6% against most major currencies except the Chinese Yuan in July. By the first week of August, the USDollar was at an eight-month low against the Japanese yen.

http://www.cnbc.com/id/38547819

Depreciation of the US Dollar since July is in contrast to the June qtr which negatively impacted on US export competitiveness. US 2nd Qtr GDP official announcement on 30 July 2010 made the following observation.

“Real exports of goods and services increased 10.3 percent in the second quarter, compared with an increase of 11.4 percent in the first. Real imports of goods and services increased 28.8 percent, compared with an increase of 11.2 percent”

Increased import subtracted from the 2nd Qtr US GDP figure should now be partly reversed in the September qtr if current lower exchange rate of the US Dollar sustains. Indeed the evidence is already seen in US automakers gaining on US market share against foreign imports in July. Japanese Finance Minister Yoshihiko Noda said Monday, 9 August that he is watching the foreign-exchange market as the U.S. dollar is marking multi-month lows against Japan's currency citing "excessive, disorderly foreign exchange moves would have adverse effects on the stability of the economy.” The implication of that is gain in US export over import via cheaper US Dollar could be at the expense of Japanese GDP loss.

http://www.marketwatch.com/story/japan-finance-minister-warns-again-on-yen-strength-2010-08-09

The Chinese are watching too with more than casual interest of slide in US dollar. Chinese are seeking settlement of loan via repayment of commodities supply. China agreed to lend the Latin American nation US$20 billion in April to finance development projects in return for future oil supplies. China is seeking to lower its risks exposure to US Dollar in its foreign lending.

China announced on June 19 its abandonment the Yuan’s decade-long peg to the dollar to link the Yuan to a basket of currencies, one that includes USD, Euros, Yen, and various other currencies. It will help to de-politicise trade tensions with the US, diversify the currency base of its foreign reserves and allow for wider considerations of overall balance-of-payments to rebalance the Yuan exchange relative to US Dollar. The Chinese Yuan has since appreciated only 0.77 percent. Any depreciation of the US Dollar, henceforth, could have less impact in the future, even as trade surplus China enjoys between the two economic giants continued to expand in July. This leaves US less scope for monetary policies alternatives like a gradual consistent de facto devaluation to lift its long-term export competitiveness vis-à-vis China. Obama administration now has less leeway of pressuring China to allow rapid appreciation of the Yuan in his macro-economic trade policy formulation – something with Geithner has been imploring for some time already.

A peculiar contradiction in the metals’ market in recent times shows rising LME inventory levels coincide with higher metal prices. Recent depreciation of the US Dollar had been a small contributing factor. Metallurgical coal price has been easing off slightly but steep fall in iron ore and magnetite prices contrast against strong uptrend in the prices of oil and other base metal complex, namely copper, nickel, lead, zinc, aluminum. This author, believes, in part of the explanation, for now at least, lies in the continuing development demand for metals from emerging economies like Russia, Turkey, Indonesia, India, Brazil and east Asian economies alongside infrastructural constructions generated by Chinese mining investments in Africa, Indonesia, PNG to South America.

http://www.marketwatch.com/story/emerging-markets-on-healing-path-climb-in-july-2010-07-30?pagenumber=1

Gold price in July is a rebel of its own wandering direction – thanks to gold-trading liberalisation in China made available to its banks, talk of Saudis buying physical gold and volatile bond and equities markets.

Analysis

This author cut his near term economic outlook for both US and China.

US July macro-economic statistics published were almost UNIFORMLY DISMAL. We saw consecutive monthly decline in PMI readings after 12 months of consecutive growth path. New manufacturing orders plunged steeply – again two in a row – indicating the strength and pillar of recovery is weakening. The much depressed activity in pending home sales continued to slide mirroring spending weakness in consumer durable such as autos and evidence of record savings rate. Retail sales show no signs of revitalisation and changed spending habits of US consumers saw downgrading of even food consumption from restaurants to prefer cheaper fare at fast food outlet like McDonald. The tapering end of federal fiscal stimulus impact coincides with state and municipal budgetary pressures add to looming deterioration in labour market, not sufficiently supported by private sector employment growth. Americans generally worry about their job security. Consumer confidence in July plummeted sharply to near contraction. The “cockerels” of corporate spending failed to find the “egg” of consumer spending to lift the economy’s dependency on federal stimulus spending onto a sustained growth trajectory. Bernanke’s “unusual uncertainty” assessment of the US economy may have misjudged the economic recovery lever – THE AMERICAN CONSUMER IS MISSING. And without the “egg” of consumer, where is the next “hen” of economic growth and employment to lay the next “egg” of consumer ?

16-months record low yield in the bond market is confirming of an “unusual uncertain” outlook forward. The US economy is struggling to hold on to its fading momentum. The Fed Reserve has very little room of interest rate adjustments buying up mortgage and bonds but major quantitative easing of printing and added fiscal stimulus, besides inflationary risks that means, may be very difficult to persuade Congress ahead of the mid-term US Congressional election due 2 November. The Federal Open Market Committee meeting yesterday announced that it would reinvest maturing mortgage-backed securities back into the government debt. The aggregate amount of that maturing in the next 12 months in the Fed’s portfolio is estimated around $200 billion as compared to its domestic debt of $2.05 trillion, about 10 percent. The FOMC also pledged to keep its exceptionally interest rate low for extended period whilst weighing its option to exit fiscal stimulus.

CHINA's trade surplus announced today, 10 August, soared again in July - due to much slower-than-expected growth in imports. The “positive” announcement is telling a story of accelerating pace of economic deceleration sent the Shanghai Stock Exchange index down 2.89%, the biggest one-day decline since beginning of July.

http://www.theaustralian.com.au/business/markets/chinas-imports-slow-sharply/story-e6frg926-1225903490075

July trade statistics show imports rose 22.7 per cent, down dramatically from June's 34.1 per cent increase. This author believes that the larger-than-expected slowdown in imports was due MUCH MORE to a slowdown in overall domestic demand and investment, than falling global commodities prices. Base metals in July were up, thermal coal eased slightly, even as iron-ore fallen significant. Two consecutive monthly big drop in imports showed China has slowed down dramatically and signalling a diminished contribution to world’s growth. Thanks to an 8% appreciation of Euro to Yuan exchange rate, Chinese export to EU rose by 5.4 per cent to $US28.67bn in July from $US27.2bn in June – the underlying conditions in EU remains very tough, probably contracting in volume terms. Any upward revision of the Yuan post this much higher-than-expected trade surplus could hit Chinese exports to EU ahead. Base metal prices and commodities-laden Australian, Brazilian and Canadian stock exchanges actually fell on the Chinese July trade announcement.

Beyond this unhealthy latest July figures, Chinese macro-economic statistics and evolving policy changes in the last few weeks are very worrying. Most recent (twice-revised) leading economic indicators down to 0.3% announced on 29 June 2010 by the US Conference Board shook global financial markets. That proved China’s economy had been slowing faster-than-expected as manifested later in the substantially wider-than-expected fallen June import. July PMI read of 51.2, barely above contraction, extended to a three consecutive months decline – breaking its uptrend trajectory since last December. More damaging detail analysis of its July PMI reveals aggressive inventory destocking accompanied by steep decline of new orders to 50.9 – very close to contraction in manufacturing. That will, most likely, in this author’s best considered judgment, assumes a negative growth trajectory in the September qtr for the following reasons.

The big fall in imports in July echoed BHP-Billiton & Rio Tinto’s warnings of slowed materials demand must point to lower Chinese industrial production this quarter. Secondly, pressure on energy intensity targeting already adversely impacting on industrial production such as aluminium in the 2nd qtr lifting Alcoa’s exports there, will accelerate as China aims for a 20% reduction in energy intensity use by end of this calendar year. Current half-year read of energy intensity is 0.9% increase compared to 3.2% in the first qtr. This relentless pressure will shut down over 2087 steel, aluminium mill, cement mills, paper mills, coking plants and other factories by end September and closed down countless number of smaller factories with inefficient energy production technology. Whilst property sales have plummeted since mid-April, and price growth slowed significantly, there is no evidence of significant broad price decline in all major cities as yet. There must be significant risks of further tightening of lending to slow the economy further particularly if China’s trade surplus continues to expand. I believe there is some risks that the impact toll on property prices could fall by more than 30% which explains why Chinese authorities have extended stress tests beyond property sector to collateral sectors like steel and cement manufactures.

Elsewhere the brightest spot is Germany, particularly its better-than-pre-crisis performance of its export sector US and Asia in July. But that pace may not last. There is some hint of that already in Chinese July trade figures.

HSBC economists headed by Hongbin Qu noted that "the bulk of the July trade surplus came from [trade with] emerging markets countries,"

http://www.marketwatch.com/story/chinas-july-trade-surplus-at-287-billion-2010-08-09?dist=beforebell

That must mean that Chinese is sucking growth out of emerging countries. The excess of imports over exports is a deduction of GDP growth statistics – a leakage in effect. Singapore’s manufacturing exports collapsed by 24.3% in June following a 5% gain in April. Yesterday, Intel and AMD shares fell steeply on the NY stock exchange after analysts warned of signs of slowing personal computer market. JP Morgan analyst Christopher Danely warned that "checks in Taiwan indicate PC orders falling off a cliff."

The big picture of global economic outlook says the US economic recovery evidently losing momentum, Chinese economy poised to steeper deceleration, Japanese economy tending towards deflationary stalling and some signs of softening in Asia. The only bright spot is Germany, depending on weak euro, US and Asian demand to sustain its robust export manufacturing. That may falter soon too.

On balance, the downside risks of a double dip in global economies have increased, in my best judgment, to at least 80/20 and most likely sooner than later.

Anyone have disagreeing thoughts to add to this discussion paper?



Zhen He

11 August 2010.