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.