Just three days after my grim warning of 1 October 2010, Saturday, October 2, 2010 - Update 6 - Global Economies Heading for Turbulence, US stock market and US Dollar heading in divergent directions. Watch out for gold, of the threats of continuing European sovereign and banking woes, Nobel laureate economist, Joseph Stiglitz, warned a "wave of austerity" is sweeping across Europe could trigger a new recession.
http://sg.news.yahoo.com/afp/20101004/tts-finance-economy-stiglitz-c1b2fc3.html
But despite Stiglitz’s warning and somewhat “relaxed” banking regulations, the truth remains that EU’s inchoate recovery, rising from sovereign debt swamp, is faltering.
S & P already downgraded Ireland’s long-term sovereign debt rating to AA-minus on 25 August, 2010 raising its Government’s cost of borrowing money. Its severe recession induced by huge investment property bubble proved intractable to sustained recovery.
http://www.earthtimes.org/articles/news/340889,rating-irelands-sovereign-debt.html
Fitch Ratings lowered Ireland’s credit risks from A+ to AA- on 6 October 2010, citing bailout costs of its banking system.
http://www.bloomberg.com/news/2010-10-06/ireland-sovereign-debt-rating-cut-one-level-by-fitch-outlook-is-negative.html
Moody’s Investors Service is again reviewing Ireland’s Aa2 credit rating, so soon again after downgrading it from Aa1 on 19 July 2010 - citing the rising cost of recapitalizing the nation’s crippled banking sector, as well as an uncertain domestic outlook and rising borrowing costs.
http://www.marketwatch.com/story/moodys-puts-ireland-on-review-for-rating-cut-2010-10-05
Spain ( to AA from AAA) , Portugal ( to A minus ) and Greece ( to BB plus) – all last downgraded by S & P in late April 2010, are most likely to be on close watch list again – given how fast the situation deteriorates in Ireland, particularly if economic conditions worsen in the third- quarter. Current indications are NOT PRETTY. Spain and Ireland economies showed contraction in September according to Markit composite PMI read.
http://www.theaustralian.com.au/business/markets/sp-downgrades-spains-sovereign-debt/story-e6frg91o-1225859714169
Spanish gross domestic product grew at a slightly faster pace in the second quarter, expanding by 0.2% compared to the first three months of 2010.
http://www.marketwatch.com/story/spain-second-quarter-gdp-grew-02-bank-of-spain-2010-08-06
Portugal's economic growth slowed down sharply in the second quarter to just 0.2 percent from the preceding three-month period when gross domestic product grew 1.1 percent.
http://uk.reuters.com/article/idUKTRE67C1E520100813
Greece gross domestic product contracted by a downwardly revised 1.8% in the second quarter compared to previous quarter 2010.
http://www.marketwatch.com/story/greece-second-quarter-gdp-revised-down-to-18-2010-09-08
Stiglitz cautioned on Spain in particular, warning that deep spending cuts being introduced could prompt the country's economy to slow down and enter a "death spiral." similar to Argentina a decade ago. At present, Spain has not been attacked by speculators, but it may be only a matter of time."
http://www.hurriyetdailynews.com/n.php?n=top-economist-warns-of-european-wave-of-austerity-2010-10-04
Euro Zone – risks on the downside
Retail sales volumes fell 0.4% in the 16-nation euro zone in August, according to figures released by the European Union statistics agency Eurostat.
http://www.marketwatch.com/story/euro-zone-retail-sales-fall-04-in-august-2010-10-05
Euro-zone September composite private sector activity PMI slips to 7-month low according to the final reading of the Markit composite purchasing managers. The composite PMI fell to 54.1 from 56.2 in August.
http://www.marketwatch.com/story/euro-zone-sept-composite-pmi-slips-to-7-month-low-2010-10-05
The slowdown was broad-based, with growth easing in Germany, France and Italy, while Spain and Ireland saw renewed contractions.
Germany's industrial production rose 1.7% in August from the previous month.
http://www.marketwatch.com/story/german-industrial-production-up-17-in-august-2010-10-07
International demand orders, particularly from Euro area countries, rose 3.4% underpinned by unusual big contract orders for transportation equipment. These add to fluctuations in month-to-month industrial orders but unlikely to be repeated.
http://sg.news.yahoo.com/afp/20101006/tts-germany-economy-industry-orders-509a08e.html
Germany's August exports dropped 0.4%. It is the second consecutive drop in German exports supporting skepticism about the durability of its export-led recovery.
http://www.marketwatch.com/story/germanys-exports-drop-04-in-august-2010-10-08
British retail sales values rose 0.5% in September compared to the same month last year, the British Retail Consortium reported.
http://www.marketwatch.com/story/uk-sept-same-store-sales-up-05-brc-2010-10-11
British house prices continued to fall in September, according to the Royal Institution of Chartered Surveyors' monthly survey released Tuesday.
http://www.marketwatch.com/story/british-house-prices-fall-in-september-rics-2010-10-11
US Economy - Corporate results points to sluggish conditions
U.S. factory orders falling 0.5% in August offset 4.3% improvement in pending home sales. US stocks meander as concerns about European fiscal woes overhanged the market. There were strong autos sales in September and strength of aircraft sales was notable at Boeing in the September quarter when it delivered 124 commercial airplanes.
http://www.marketwatch.com/story/boeing-delivers-124-passenger-jets-in-3rd-quarter-2010-10-07?tool=1&dist=bigcharts
Despite these strong downstream demand, Alcoa reported steep fall, though much-better-than-expected, September quarter. Margins have been squeezed even as Alcoa remains upbeat of global aluminum consumption to rise 13% in 2010 over 2009, citing growing demand for the metal in countries such as Brazil, India and Russia and particularly Chinese auto sector.
http://www.reuters.com/article/idAF0717101720101007?rpc=44
Alcoa reported revenue raise of 2 percent to $5.287 billion from June qtr of $5.187 billion on higher volumes in aerospace sector and increased market share in the building and construction market. Net income was $61 million, or 6 cents per share was mean and lean, compared with $136 million or 13 cents per share in the June quarter when it eliminated $311 million in overhead costs. It also compared unfavorably with $77 million or 8c per share in the same qtr last year despite significantly higher throughput volume sales to third parties by some 15%.
Alcoa results, in the view of this author, are disastrous. It was lower than September qtr in 2009! And despite weaker dollar advantage in overseas market – which was the strength of its previous qtr’s strong performance - earnings tumbled substantially and contrary to bullish forecast by its management. Over the one year interval, though fluctuating between the ranges of US$0.82 per lb to US$1.10 per lb, aluminum price actually rose from US$0.87 to US$1.04 per lbs in the 2010 September qtr in contrast to the opposite direction in June qtr. Factoring that into account, Alcoa’s performance is rather disappointing.
http://www.kitcometals.com/charts/aluminum_historical.html
Notwithstanding the impact of adjustment to derivatives contracts marked-to-market, these results indicate tougher trading conditions in global market and competitive pressures of market share build at home. Strong demand, increased market share and falling earnings collectively adds to illogic of earnings calculus and positive outlook ahead for Alcoa and bode ill for global economy ahead.
In retailing sector, one positive development is the pick-up in apparel and footwear “necessities” retail sales in September identical store sales.
http://www.marketwatch.com/story/september-retail-sales-better-than-expected-2010-10-07
Looking further out from a year-on-year comparison, the underlying trend did showed marked improvement in the all-important holiday shopping season rise of nearly 2.3% in 2010 from ” from last year’s tepid 0.4% rise and the 3.9% decline of 2008”.
http://www.marketwatch.com/story/sept-retail-sales-look-to-be-positive-2010-10-06?link=MW_related_stories
September same store sales were up 5.1% in J.C. Penny, 4% in Kohl,7.5% in Nordstrom, 2% in Ross Stores, 6.5% in Saks, 3% in Dillards, 1.3% in Target, 4.8% in Macy’s and down 1.3% in Walgreen and 2% fall in Gap. US retail sales increased by 0.6% over August’s revised growth of 0.7% (from 0.4% earlier estimate) to make it three consecutive months of gain.
But the big supermarket food retailing deteriorated on a sequential quarterly basis. Kroger Co, US largest supermarket chain, first quarter sales of $24.8 billion returned a net income of $373 million saw a steep decline in its second quarter performance, which ended 14 August 2010, of $18.8 billion which earned $261.6 million.
http://www.marketwatch.com/story/lower-costs-solid-sales-boost-kroger-profit-2010-09-14
Safeway, the third largest US supermarket chain, reported June quarter sales of $9.52 billion and net income of $141.3 million were better than its September quarter’s reported sales of $9.44 billion and net income of $122.8 million.
http://www.marketwatch.com/story/us-stocks-drop-after-rise-in-joblessness-2010-10-14
Safeway Chief Executive Steve Burd said ““Deflation has been extraordinarily stubborn,” although price declines in Safeway’s sales at existing stores are abating at lower than the HUGE 2%. It is now closer to the 1.5% range as was also reported by Kroger Co. This is big margin difference because supermarket operation typically earns 3c to 4c per dollar of sales in good times. Americans are cutting down their grocery and personal care expenditures indicating consumption spending in US continue to decline.
Samsung Electronics, the world’s largest technology company by sales, issued earnings warning past week. It forewarned slowing European and US demand for consumer electronics goods. Instead of a traditionally strong third quarter selling season for the tech sector, the slowdown is a rude shock that consumers are withdrawing purchases sooner than expected. This is a warning of possible bleak Christmas.
http://www.theaustralian.com.au/business/news/samsung-electronics-earnings-warning-fuels-demand-concerns/story-e6frg90o-1225935486738
Intel Corp’s September quarterly results are equally disappointing. Intel reported strong corporate demand but it is believed increased sales there were due to businesses continuing to replace aging PCs and servers and embrace new more power-efficient data-center technologies.
http://www.marketwatch.com/story/intel-shares-rally-as-investors-embrace-results-2010-07-14
Sequentially, Intel struck a 3.1% top line revenue gain over the June quarter to reach $11.1 billion which itself registered a higher 4.5% jump over the March quarter. Net income growth of 3.4% in September quarter compared most unfavorably with 18% achieved in the June quarter over March quarterly results. This indicates clearly stress on margin as Intel struggles to push corporate sales volume on thin margin. Earnings per share of 52c in September were almost flat in comparison to 51c in June. The distress in pressure threw up a marginal increment in net earnings of $3 billion when compared to June quarter net income of $2.9 billion. Taking into account the fall of US dollar adding to competitiveness and pricing strength, the 3.8% gain in Asia Pacific ex- Japan, 2.4% rise in Europe of its revenue base and a flat sale growth in Japan, the reported results are disappointing. It points to very tough external trading conditions in hard sell and stagnating profits. Analysts have been pointing to signs of a weakening PC market amid concerns of another major economic downturn.
http://www.marketwatch.com/story/intel-profit-surges-on-solid-corporate-demand-2010-10-12
In conference call with analysts post the release of its June quarterly result, Paul Tortellini, Intel’s CEO, painted an upbeat picture of the global economy, saying "the economies of the world continue to reflect renewed economic momentum."
http://www.marketwatch.com/story/intel-shares-rally-as-investors-embrace-results-2010-07-14?pagenumber=1
Well, he is WRONG on both counts. Global economies were slipping and Intel fumbled badly in the September quarter.
Advanced Micro Devices Inc, competing in the same line at Intel, posted a poor set of results in the third quarter. Its most recent quarterly sales of $1.62 billion is sequentially down 2% from June quarter and net loss of $118 million is a huge jump from the June quarterly net loss reported of $43 million same year. AMD cited lower consumer demand and has forecast forward revenue to be flat sequentially.
http://www.marketwatch.com/story/amd-posts-narrower-loss-as-sales-rise-2010-10-14
Taiwan’s statistic bureau is already forecasting a very steep fall in December Quarter GDP growth to a mere 1.4% after registering a phenomenal GDP growth of 13.1% in the first half of 2010.
http://noir.bloomberg.com/apps/news?pid=20601068&sid=aK0tMx1WQ0Yw
Analysts spoke of semiconductors are at the end of the electronics food chain and thus are the last to feel any inflection in demand. It is some indications of how badly the electronic export-dependent industry in Taiwan had been hit by slumped demand; expecting to hurt Taiwan’s final quarter GDP growth. And Singapore won’t be any different.
JP Morgan Chase & Co September quarterly results came in higher than analysts’ expectations which itself is nothing much to crow about. A profit of $4.42 billion, or $1.01 a share, in the quarter, was the outcome of “credit costs continued to fall, mortgage-delinquency rates held steady and credit-card chargeoffs dropped.” In the year-earlier period comparison, revenue actually dropped to $23.8 billion from $26.6 billion, indicating the continuing trend of shrinking organic growth in business volumes, deleveraging by consumers and deleveraging of financial institutions.
http://www.marketwatch.com/story/jp-morgan-profit-jumps-23-2010-10-13
“Our mortgage-delinquency trends remained relatively flat compared with the prior quarter, and we expect mortgage credit losses to remain at these high levels for the next several quarters,” Chief Executive Jamie Dimon said. “If economic conditions worsen, mortgage credit losses could trend higher.” J.P. Morgan said its provision for credit losses in the third quarter was $3.22 billion, compared with $8.10 billion a year earlier - a drop of $4.88 billion. Yet a posted profit of $4.42 billion this current quarter compared with $3.55 billion in the quarter prior showed only a $0.87 billion jump in net earnings on an after tax basis.
In other words, the 23% “improvement” in September quarter earnings compared to same period last year is due to prior period’s aggressive accounting in writing off credit card charge-offs, with no underlying growth in business top-line revenue. The US economy, by JP Morgan’s results indications, is NOT improving.
On quarter-over-quarter comparison, General Electric Co 3Q 2010 results also disappointed badly. Revenue of $35.9 billion struck was 4% lower than June quarter sales of $37.4 billion. Net attributable earnings to the company were $2.05 billion in September quarter as compared to $3.1 billion in June quarter. Translated on per share basis, GE’s earnings per share fell to 18c, down from 28c per share achieved in the quarter prior. Consensus analysts’ expectation was 27c per share.
http://www.marketwatch.com/story/ges-third-quarter-net-profit-sales-drop-2010-10-15
GE Capital, its sore thumb, did showed some healing – thanks to hollow log accounting in prior quarters, it turnaround to show a net earnings of $0.9 billion even though GE Capital’s revenue base declined 4.6% to $12.5 billion from the quarter prior of $13.1 billion. Net losses from discontinued operations were $1.1 billion following disposition of its former Japan consumer finance business. The results reflect no growth in GE core business including GE Capital where earning volatility encapsulate the flow of write-off of possible loan losses. Overall backlog remained flat at $172 billion compared to September 2009.
General Electric Co, Intel and JP Morgan Chase & Co’s share prices dipped on result announcements – the market was NOT impressed despite strong self-praises.
Elsewhere, U.S. factory orders declined 0.5% in August and pending home sales increased by 4.3% in the same month.
http://www.marketwatch.com/story/us-stocks-drop-on-eurozone-concerns-2010-10-04
Institute for Supply Management's non-manufacturing index climbed to 53.2 in September from 51.5 in August.
http://www.marketwatch.com/story/dollar-down-treasurys-up-after-ism-services-2010-10-05-109180?tool=1&dist=bigcharts&symb=DXY&sid=3044712
U.S. wholesale inventories rose 0.8% in September and the inventory-to-sales ratio was 1.24.
http://www.marketwatch.com/story/us-wholesale-inventories-rise-08-in-august-2010-10-08
Auto sales in September were strong despite cutback in incentives among domestic manufacturers and importers alike. A bullish stock market helps.
http://www.marketwatch.com/story/us-car-makers-slash-deals-and-still-log-sales-2010-10-07.
The economy lost more jobs in the September.
http://noir.bloomberg.com/apps/news?pid=20601103&sid=aKpc.UqcvLt0
Fiscal deficits forced Government to cut more jobs, by 95,000 workers after a revised 57,000 decrease in August, according to Labor Department figures in Washington. Private payroll added 64,000 incremental jobs demonstrating the adverse impact of fiscal austerity.
The Fed Reserve forecast is for a “modest” growth in the coming months. Growth, while clearly still unsatisfactory, is positive according to Larry Summers. Most recent indications showed US manufacturing expanded at a slower pace while consumer spending increased slightly.
UK Economy – unstable, risks on downside & easier monetary policy
The PMI for the services sector, which accounts for more than 70% of the nation’s economic output, rose to 52.8 in September from a 16-month low of 51.3 in August, according to the Chartered Institute of Purchasing and Supply and Markit.
http://www.marketwatch.com/story/services-pmi-eases-uk-double-dip-fears-2010-10-05
Stronger PMI read in September help easing fears of a double dip recession for now. Tesco’s Chief Executive, Terry Leahy said improving sentiment in slightly higher sales of upscale fine food, urging similar positive outlook for non-food sales going into Christmas
http://www.marketwatch.com/story/uk-consumer-in-recovery-mode-tesco-ceo-2010-10-05
British industrial production rose 0.3% in August from July 2010.
http://www.marketwatch.com/story/british-industrial-output-up-03-in-august-2010-10-07
Britain Conservative-Liberal Democrat Government will scale back public spending cuts aimed at reining in a record deficit if the economy starts to deteriorate. Its Energy Minister, Chris Hulne warned that “a double-dip recession is not impossibility”
http://sg.news.yahoo.com/afp/20101009/tts-britain-politics-economy-cac1e9b.html
Staggering out the austerity cuts in Government’s spending over 4 years might be the only option available.
Bank of England Governor, Mervyn King, is also less optimistic. There are some signs that the recovery in June quarter growth – the fastest pace in 9 years of June quarterly performance – is cooling off. House prices has cooled off 3.6% in September from a month earlier and jobless claims increased for the first time in 7 months this year. Easing by US and Japanese Central Banks is likely to strengthen the British Pound, eroding the UK’s competitiveness and undermining its recovery. Britain is now leaning toward monetary easing as well given increasing concern of downside possibility ahead.
http://noir.bloomberg.com/apps/news?pid=20601085&sid=aMhEFAi0zvOA
In a similar vein, ECB meeting, President Jean-Claude Trichet said on the 7 October 2010, economic risks for the euro area are still to the downside, but that the monetary stance was “accommodative.”
http://www.marketwatch.com/story/european-stocks-drop-renault-shares-rally-2010-10-07
Japan Economy – rising Yen & losing steam
A recent economic panel warned that Japan’s economy will worsen through next year, as benefits from the government stimulus program fade, and as the U.S. economy continues to languish.
http://www.marketwatch.com/story/japan-experts-see-economy-worsening-report-2010-10-05
As the Yen head for a 15-year high against the US dollar in August, Japan's export growth slowed for a sixth straight month in August, in a sign that the recovery is losing steam.
http://www.bbc.co.uk/news/business-11416470
Yen has headed higher since despite BOJ recent failed intervention.
China’s GDP – renewed threats of bubble & slower growth pace
Meanwhile, the Chinese Government continues to pile downward pressure on property bubble. The latest move involves banning ownership of more than one residential accommodation per family for those living in metropolitan Shanghai as a way of curbing what the authorities called “irrational demand”. This is the same as the restriction imposed in Beijing since April 2010.
http://www.theaustralian.com.au/news/world/shanghai-imposes-one-home-per-family-policy/story-e6frg6so-1225935995572
The September trade figures just released showed China is slowing down with both exports and import growth slowing sequentially from August. Imports rose 24.1 percent on-year in September to a record high of 128.11 billion dollars, but slower than the 35.2 percent growth recorded in August. China's exports rose by 25.1 percent in September year-on-year to 144.99 billion dollars, compared with an increase of 34.4 percent in August.
http://sg.news.yahoo.com/afp/20101013/tts-china-economy-exports-a73cdd6.html
Overall – currency war damaging, big risks for all but options limited
The silent currency “war” now underway underscores the global economic imbalance. The global economy needs to be rebalanced, Larry Summers warns. “It can’t have the United States consumer being the single engine of global economic growth.”
http://noir.bloomberg.com/apps/news?pid=20601109&sid=aZ5qJB8WRSIk
But this won’t be easy. Japan is grinding to a slowing halt. Under pressure to shore up its economy hard hit by deflationary consumer spending at home and adverse impact of strong Yen rapidly slowing Japanese exports, Japanese Cabinet on 8 October 2010 approved a new 5.05 trillion Yen (US$ 61.3 billion) emergency stimulus package. When implemented, it will add 0.6% boost to Japan GDP.
http://www.france24.com/en/20101008-cabinet-approves-billion-dollar-stimulus-package-naoto-kan-japan-yen
Likewise, not much compensating uplift can be expected from Chinese economy. A decade of emphasis on exports and investments have pared down domestic consumption to 35 percent of gross domestic product from 45% ten years ago, the lowest of any major economy, Societe Generale AG says.
http://noir.bloomberg.com/apps/news?pid=20601068&sid=agagn6YHRQiA
That is about US$1 trillion. As a relative comparison, US private consumption is around US$10 trillion – that is 10-folds higher.
http://seekingalpha.com/article/195410-nouriel-roubini-on-the-coming-commodities-correction
It is therefore unrealistic to expect any significant increase in Chinese consumption to be capable of offset even a small fall-off in US aggregate demand. China cannot be the engine of growth either replacing any slackening of US demand.
The ratio of consumption to Japanese and European economies is around 60% but retail spending in both is pretty sick. Germany, EU strongest economy, experienced 3 consecutive months of decline in retail sales – 0.3% in June, 0 4% in July and 0.2% in August.
Retail sales volumes in the 16-nation euro zone fell 0.4% in August after 0.1%, 0.2% 0.4% rises in July, June and May respectively – the declining positive momentum of retail sales faded into negative as austerity drive bites. Euro zone recovering is heading southwards.
August retail sales declined 0.5% over July in Britain – the first since January 2010 and a warning sign that consumer spending may be slipping just as spending cuts is about to take effect.
http://www.irishtimes.com/newspaper/breaking/2010/0916/breaking23.html
On a month-to-month basis, Japanese retail sales increase 1.4% in August, 0.7% in July 0.4% in June - after huge 2% decline in May. Consumer spending in September will see the beneficial lift of the Government’s US$10.9 billion stimulus spending impact approved in early September.
http://www.moneynews.com/Headline/japanstimulus/2010/09/10/id/369796
The evidences point to declining consumption spending in EU/Britain matched by modest gains in consumption in US, Japan and China. There should be modest, but much more subdued rate of growth in Britain, Germany, the rest of EU and US and a slight fall in Chinese GDP growth numbers in the September quarter.
Looking forward, the major key challenges now would be currency market discipline, the rebalance of austerity pressures and further stimulus spending in all major developed economies – is much harder to achieve. The global structural imbalance of trade and fiscal surplus enjoyed by developing economies and China in contrast with massive fiscal and trade deficits in EU, US and Japan will take much longer to rework if ever.
Japan had reverted back to stimulus spending since August 2010 posts the Toronto G20 meeting of June. Britain is also swinging back to stimulus from austerity bringing all major economies into alignment with the US and China for the first time whilst much of the rest of EU members struggles on with austerity discipline.
The IMF meeting in Washington last weekend failed to eliminate the spectre of a damaging global “currency war” derailing recovery. It was almost theatrical. China just won’t budge to US pressure but were more visible making their case in media conferences, speeches and public seminars – sorts of playing to the public gallery. Whilst this visibility sought to ease tensions, the Chinese were careful not to venture beyond the promised undefined “gradual” ascent of the Yuan. The only thing US succeeded was to keep the burning issue of the Yuan’s exchange rate policies alive in the next G20 meeting in Seoul this November.
http://www.theaustralian.com.au/business/news/us-to-turn-up-currency-pressure-on-china/story-e6frg90x-1225937139306
That failure in Washington is not totally unexpected. IMF has been notoriously failing of encouraging China’s Yuan appreciation since 2006 when it was arguing for “gradual” Yuan appreciation in Tokyo instead of a free float.
http://www.thefreelibrary.com/IMF+adviser+calls+for+gradual+yuan+flexibility.-a0109331963
''No, we are not arguing for a free-float Renminbi (Yuan), I think that would be a big mistake in China's circumstances, it doesn't have the infrastructure to deal with that,'' That position has not changed now, so how is it going to be any different in Washington over the failed past weekend meeting? The Chinese exploited that to advantage making it a theatrics rather than engaging in politics or economy, leaving the US to either pursue its agenda unilaterally or multi-laterally via G20 in Seoul this November. China is now really too big and dangerous to offend unless US wants to provoke a trade war when its economy is weakest to confront and neither side can afford one. The Chinese also know that playing the hard ball risk the trade and currency issues might move these US domestic politics beyond the deft handling of the President’s hand in the US Congress, making future resolutions even more difficult. Even in amicable times, we see the unilateral initiatives in US often fell on their own political weight with Congressional wrangling and fearful reactions, combining often both. Congressional findings on “China issue” of trade and currency issues often find it too difficult a hot potato to handle for both past Democrat and Republican administrations and mostly got nowhere. This is real politics. The unspoken fear is full-scale trade war escalating into the UNLIKELY Chinese “nuclear option” retaliatory dumping on US Treasury bonds, rushing yields and interest rates up, deflating US economy. A massive sudden sell-off and/or a steep fall in the US Dollar will greatly diminish the value of its remaining holdings for China. Obama is left with no cards to play and the Chinese walking on egg shells knowing it cannot sustain the twin impacts of stronger Yuan and the risks of a double dip recession EU ravaging its European export market at the same time.
The only other route available to the US is the multi-lateral option via G20 and even that route found little appetite for the Chinese palate. Treasury Secretary, Mr. Timothy Geithner, actually suggested a Chinese currency boost reciprocated by other Asian currencies found Yi Gang, deputy governor of China's central bank, dismissed that notion out of hand as "very unlikely.” The presumption, rejected by the Chinese, is that China fears rising Yuan without matching Asian currency appreciation, could attract American investments to re-locate elsewhere in Asia competing against Chinese exports into US.
http://www.theaustralian.com.au/business/news/us-to-turn-up-currency-pressure-on-china/story-e6frg90x-1225937139306
Lost in the midst of these political posturing is economic rationality. Joseph Stiglitz, Nobel Prize economist, warned of perverse negative risks of forcing the Yuan up actually aggravating the US/China trade imbalance
http://www.marketwatch.com/video/asset/economist-joseph-stiglitzs-take-on-china-2010-10-09/C3577DCF-EA87-4F29-883E-471C27AB65BE
Stiglitz argued correctly that if the actual US demand for Chinese goods are relatively inelastic, rising Yuan merely forced the quantity demanded down at a SLOWER pace than price rise with the net effect of Americans paying more for Chinese goods and aggravating US trade deficits vis-à-vis China. When Chinese goods are so “cheap” and the ease of counterfeit as substitutes, the rising Yuan may found its perversity imploding to full effects hostile American Congressmen may soon discover to their regret.
http://www.cnbc.com/id/38504275
EU, whilst dissatisfied with both US and Chinese intransigence, are less confrontational. The EU see a twinning of interlocked problems – US internal and external deficit reduction pressures and Chinese needing to boost internal consumption to be less dependent on EU and US export markets and a rising Yuan is a necessary component instrument of reaching that goal. THE CRUNCH IS SPEED – the Americans desperate to speed up this process and the Chinese recalcitrant of pacing faster than economically feasible of adjustment pains and risks of internal unrest of massive Chinese unemployment.
On the way, a trade/currency clash seems inevitable and each country has become more and more nationalistic and less of emphasis on multi-lateral cooperation as the currency battles spreads globally. Wen Jiaobao warned EU in Brussels, against pushing China harder to raise the Yuan ahead of the IMF Washington last week reminding all that Chinese exporters operate on very thin margin and unable to cope with Yuan appreciation nor a tariff imposition.
http://www.marketwatch.com/story/chinas-wen-warns-europe-not-to-push-on-yuan-2010-10-07
Undue pressure on Yuan, he warned, could sink Chinese manufacturing sector “bringing disaster to China and the world.” In fact, Chinese manufacturing sector is facing tremendous wage costs escalation lately, leaving China lesser scope to flexibility on the Yuan appreciation going forward. And there is no general consensus among economists if a rapid appreciation of the Yuan is a cure-all of US/China trade deficit and unemployment problems. At a consumption ratio of mere 35% of the GDP, China can hardly lift that ratio or its aggregate consumption higher especially if bankruptcies and unemployment rise accompany a Yuan appreciation decimating part of its industrial base. Unlike US, wages are low in China and savings rate – a lifelong habit of low demand elasticity – do NOT change overnight. American politicians, in my judgment, simplistically, way over-estimate the potential for Chinese consumption uplift via a rapid shift in Yuan appreciation on Chinese domestic consumption.
European countries are equally not extremely sanguine of American’s position of Chinese Yuan exchange rate policy. They too had been hard hit by rapid fall in US dollar as evident from the drastic fall in US Dollar Index Future (DXY). Americans are looking for one-way adjustment from everyone else except themselves. Currently at an eight-month high of 1.4 US dollar, European Union Economic Affairs Commissioner Olli Rehn complained that "the euro is currently bearing a disproportionate burden in the adjustment of the global exchange rate,"
http://sg.news.yahoo.com/afp/20101008/tts-eu-economy-forex-currency-c1b2fc3.html
EU sees China's export strength was underpinned "much more than the currency "but aided by massive subsidies and other "unfair trade practices." Checking these subsidies and unfair trade practices are more cumbersome and even harder of substantiation whilst the US is clearly looking at a more simplistic, even outcome-doubtful faster solution of pressuring China on lifting its Yuan.
http://sg.news.yahoo.com/afp/20101008/tts-eu-economy-forex-currency-c1b2fc3.html
Chinese, of course, can play the game sweet and dirty, making some adjustment on ‘subsidies” like export rebates as pressures mounting in Europe, soothing anger and resorting back to protectionism again when the protests die down. The complaints of “undervalued” Yuan, whilst most vocal amongst US politicians, have found some sympathetic echoes - in Europe, East Asian and BRIC countries. China cannot remain completely oblivious to these international pressures. Bogged down by a sickly domestic economy, Japan’s growth now depends more than ever on exports. Face is so important in Chinese politics – China cannot be seen as bowing to international pressure and Chinese President have made it amply clear its gradual currency reform will be “under the principle of independent decision-making” i.e. don’t tell us what to do!
http://www.bbc.co.uk/news/10150810
Chinese negotiation tactics tends to do nothing from the beginning until forced into making last-minute changes but that pushes both sides into very difficult position and narrowed perspectives of limited achievable outcome possibilities.
http://www.marketwatch.com/story/how-china-can-manage-yuan-exchange-rate-pressure-2010-10-06
The Chinese are also smart in playing the exchange rate outside the realm of DIRECT exchange rate manipulation. We see that happening before our eyes. Besides pledges of expanded trade and investment ties, China recently provided a $5 billion credit facility to enable Greek shipping companies buy Chinese ships – playing the role of paid banker and trade partner, earnings on two streams.
http://seekingalpha.com/article/228480-china-shows-its-currency-hand?source=dashboard_macro-view
The Chinese has plenty of financial power to fulfill that role, circumventing European acrimonious accusation of “unfair trade practices”. “We hope that by intensifying cooperation with you, we can be of some help in your endeavor to tide over difficulties at an early date,” Wen told Greek lawmakers recently. By buying EU bonds issued by Greece and other sovereign debt members, the Chinese are shoring up the Euro relative to the Yuan. It all looks very neat, generous yet cunning but the intended outcome isn’t too far from close scrutiny - a higher Euro to benefit Chinese exports. Here is the simple mathematics.
For the People’s Bank of China, China’s Central Bank, to diversify away from the dollar by selling rapidly its holdings of US Treasuries, it will create a self-reinforcing decline in the US currency, resulting in it suffering enormous losses. The best strategy is by slow measured liquidation and in line with this touted “diversification” moves, instead buy EU and Japanese sovereign debt, boosting their currencies upwards. It is killing two birds with one stone – all above board, legitimate even respectable.
Latest US data shows China’s holdings of US Treasury bonds to be to $846.7 billion – a decline of about 10 percent from a peak of $939.9 billion in July 2009. It is simple risk “DIVERSIFICATION” moves – so what the Chinese wants the world to believe.
http://noir.bloomberg.com/apps/news?pid=20601103&sid=aY_hBy23fRJ4
A “gradual” rise in Yuan tied to a weak US Dollar against a strong Euro favored Chinese exporters into EU market in the same way as its “diversification moves” buying into Japanese sovereign debt places Japanese exporters at an elevated Yen exchange rate disadvantage in overseas markets. THE CHINESE ARE WAITING FOR US DOLLAR to decline rather than appreciating its own currency sharply against all currencies – that perhaps explains why China refused a regional currency appreciation with its Asian trade partners proposed by the US in Washington last week.
The US is momentarily checked in the currency chess board stalemate as the Chinese has a lot of ammunition to play this hardball over the long haul. In the short term, massive quantitative easing from Japan, US (and any sudden roundabout turn in EU) could have strong inflationary impact on China undermining its own ability to control interest rate and liquidity policies. Chinese capital controls too, may not be effective in stalling inflow of excess hot money as China is now also an open economy. What could happen to its own property bubble if it escalates further from this point?
A currency war is “not for the good of the global economy," IMF managing director Dominique Strauss-Kahn and There's no domestic or national solution to global problem,” The IMF is understandably very concerned at the spectre of an escalating currency war. IMF’s managing director spoke at Yalta on 3 October 2010 also commented on troubling developments in a dozen of countries as far apart as Singapore and Columbia admitted to buying domestic currencies to make export cheaper. Japan last month intervened for the first time in six years to restrain the yen but Yen has now risen above the pre-intervention level. South Korea, Brazil and Switzerland are among the countries that have also acted this year.
http://noir.bloomberg.com/apps/news?pid=20601103&sid=awefq0OGcPhc
"Most countries in Asia are moving in the direction of capital controls," said Dariusz Kowalczyk, a strategist at Crédit Agricole. Analysts do not think it will work successfully either – the incoming tide of capital inflow of “hot money” is too high.
http://edition.cnn.com/2010/BUSINESS/10/12/currency.wars.latest.ft/index.html?hpt=Sbin
Willingness for international consensus and cooperation for fiscal and monetary policies among major economies have decreased, making the sustenance of the “very uneven recovery’ difficult to hold.
http://sg.news.yahoo.com/afp/20101002/tts-imf-economy-finance-forex-ukraine-509a08e.html
These disturbing developments underscore my earlier warning 3 weeks earlier of the inherent “difficulty of coordinating fiscal and monetary policies adjustments globally is proving hard of achieving results” on 16 September 2010, Update 5 – Global Economies heading for turbulence, watch out the falling US Dollar. The disintegration of discipline has its root in the Toronto G20 meeting in June 2010. Ni Sha Ju Xia – analogous Chinese proverb, fluid downhill wasting of mudslides brings with it both mud and sand together – combination of both negatives and positives – necessarily brings with it both positive recovery and negative imbalanced outcomes that is unsustainable.
http://www.independent.co.uk/news/world/politics/g20-applauds-fiscal-austerity-but-allows-for-national-discretion-2012292.html
In that meeting, the G20 applauded austerity but allowed national discretion in preference of austerity to reduce their deficits at different paces according to their national circumstances or further stimulus as each nation sees fit. Different countries will be able to phase in the tough new international banking regulations at different times according to their economies' needs and countries should continue fiscal stimulus measures to boost economic recovery, or make moves to cut ballooning public deficits.
http://www.independent.co.uk/news/business/news/g20-compromises-on-plans-for-tougher-banking-rules-2012247.html
Britain along with EU nations, including Germany opted for steep spending cuts after sovereign debt crisis spooked financial markets whilst understanding that "synchronized fiscal adjustment across several major economies could adversely impact the recovery". China along with US favored additional stimulus fearing that the stampede to cut state spending in Europe could choke off a global recovery. The end result is an economic recovery neither “strong” nor “balanced” and maybe unsustainable. The United States, Europe and Japan continue to struggle and China remains overly dependent on exports to Europe, Japan and USA.
http://sg.news.yahoo.com/afp/20101007/tts-imf-economy-outlook-world-c1b2fc3.html
The irony is that India, China and East Asian robust economies cannot sustain their rebound unless US private consumption picked up and US is now relying on “cheaper” dollar strategy to suck out growth in these heavily-export dependent countries to sustain and boost its own recovery. The “outlook forecast can be described as “Mei Kuang Yu Xia ( to get worse and worse) is the most likely outcome going forward” as I did cautioned last mid September, Update 5 – Global Economies heading for turbulence, watch out the falling US Dollar.
Stiglitz warned in early September that if Germany, France and Britain maintained its spending cuts, it will have slower growth impact in the European zone and contagious to the strength of US recovery.
http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=aKQ.X9YAxId4
That prognosis seems to be emerging of current evidence – European sovereign debt and banking crisis have re-ignited in Ireland and German Deutsche Bank needing additional recapitalization despite the acclaimed success of banking “stress” test now proven weak of quality control as suspected all along for Ireland at least.
http://www.theaustralian.com.au/business/news/did-irelands-banks-lie-over-losses/story-e6frg90o-1225935307475
The IMF GDP figures and forecast below show it.
ACTUAL FORECAST
2009 2010 2011
Global growth -0.6% 4.8% 4.2%
Advanced economies -3.2% 2.7% 2.2%
United States -2.6% 2.6% 2.3%
Euro zone -4.1% 1.7% 1.5%
United Kingdom -4.9% 1.7% 2.0%
Japan -5.2% 2.8% 1.5%
All advanced economies have NOT recovered from their GDP downturn of 2009 despite talk of global “recovery”. Even the “strong” first half growth of 3.5% for developed countries was “low” given they are emerging from the deepest recession. The IMF statement of 6 October 2010 warned that economies in developed countries such as the United States and Europe will slow during the second half of 2010 and the first half of next year and in this period, there is of “downside” risks of not being sustained.
http://www.marketwatch.com/story/developed-economies-to-slow-imf-says-2010-10-06
The OECD is also predicting slower growth and downside risks. Economic momentum in the world's leading industrialized countries slowed in August when a key index showed "negligible or negative growth," Its composite leading indicators (CLI) for August 2010 reinforce signals of slowing economic expansion already seen" in July noting further that CLI indices for Canada, France, Italy, Britain, Brazil, China and India pointed "strongly to a downturn."
http://www.oecd.org/document/40/0,3343,en_2649_34349_46166824_1_1_1_1,00.html
Economic expansion was continuing in Germany, Japan and Russia and stronger signals of a peak are emerging in the United States.
Impacts & implications
The renewed quantitative easing, nicknamed QE2, will not resolve the slowing pace of US economic expansion. There are many reasons. The most intractable causes, of course, are what Ben Bernanke called “poor demography” liability impacting inescapably on recovery. Tax revenues declined sharply confronting ballooning fiscal demand. In both US and EU, it is the baby boomers who got badly hit. The unemployed among them cannot survive with massive benefit cuts and the rests are adverse to further consumption binge based on property bubble, credit easing or spending incentives. They are de-leveraging, busy building their banking account because they know very well they don’t have time to make up lost grounds. Analyst often forgot that the US stimulus package is flawed because it is mostly tax-cut, unemployment relief, TARP bailing out banks and autos, housing purchase incentives and “Cash-for-Clunkers”. It is all what Chinese would call “fire-cracker” treatment of a big bang and impact is extinguished from the moment of explosion. Chinese strategy is based on different mindset- you build infrastructures and support facilities to outreach economic opportunities and sustaining it over the long haul.
The US stimulus spending transform long-term problems into short-term perspectives and US consumers behave exactly in induced response. You see that exactly in US September retail sales statistics and JP Morgan Chase & Co results. The up market “The Gap” reported lower same store sales sequentially while the necessities cheaper end of retail shows up with higher same-store sales results. JP Morgan headline revenue fell consecutively and fell off in delinquency of credit card demonstrate ample proof of consumer spending retrenching as time prolongs. The US consumer is unable to undertake the consumption boost filling the void to uplift the economy as the fiscal stimulus and fast diminishing restocking cycle of the big 2008/2009 downturn driving the economy are coming to an end. The “lazy consumer” is painting a faltering economic expansion story in all major economies, except China, as businesses struggle to pick up where Government sector is phasing out.
The transition from stimulus to the needed austerity now looks increasingly distant of achievable outcomes. But the impending QE2 in US, China, Japan and leaning backwards from austerity in Britain and Europe (except PIIGS) is not and cannot possibly a solution when the current stimulus is demonstrably failing. Extremely loose monetary policies have very limited impact on sustaining economic development except in the very short-term but flood global economies with unwanted speculative liquidities – the major effects of which roil currency and financial markets.
Businesses have all to find exports to take up slack demand but aggregate global demand is slow to quantitatively respond. Having all but exhausted traditional monetary and fiscal policies, industrial nations are looking for new ways to spark growth amid subdued domestic demand, best achieved for depreciating one’s currency.
http://noir.bloomberg.com/apps/news?pid=20601103&sid=awefq0OGcPhc
It is the “beggar-thy-neighbor” politics and economic strategy. US Treasury Secretary Timothy F. Geithner warned of a “damaging dynamic” of competitive weakening that could limit global growth
http://noir.bloomberg.com/apps/news?pid=20601103&sid=a8QzC3V7wC_k
While pointing fingers at China, “Helicopter” Ben Bernanke conveniently forgot that he is also dumping cash all over America’s countryside by the QE2 with newly minted cash straight from the hot printing press of heaps of US dollar which investment guru, Jim Rogers, described as money printing by developed economies until all the trees are gone! This loose monetary stimulus starts with a big flood will soon build into a tsunami tide swarming all economies around the world with cheap, near zero interest costs, in search of economic opportunities or merely seeking short-term speculative risks in property, commodity or currency speculation – all unhealthy of bubble forming wreaking destructive havoc once they reversed the flow.
We already have seen massive havoc of that already. The incoming flood tide lifted currencies across the world, hitting export-dependent Asian economies particularly hard. Asian currencies rose for a sixth week, the longest winning streak in a year, on speculation the Federal Reserve will pump more money into its economy, increasing funds available to invest in higher-yielding assets.
http://noir.bloomberg.com/apps/news?pid=20601080&sid=aVHuQ_bbpEeU
And the same is happening in the commodities market. The fast depreciating US dollar and currency fears globally is driving commodity prices varying from 8% to 12 % up north, notably hard metals and most soft agricultural produce even as economies around the world is fast losing steam. NOW THAT FUELS INFLATION GLOBALLY AND DRIVING UP SPOT GOLD PRICE relentlessly.
http://money.cnn.com/2010/10/05/markets/dollar_gold_oil/index.htm?cnn=yes
Inflation is above target in Britain, Germany, China, USA, Australia, South Korea and the last two have raised interest rate to cool of inflationary threats while China raised its banking reserves ratio recently to 17.5% and banning those living in Shanghai from owning a second property regardless of financial affordability just like in Beijing. Contrary of all others countries putting up capital controls, selling dollars in the forex market or engaged in their own stimulus QE2 like Japan and maybe shortly UK as well, Singapore did an about turn this week. It will move up the bandwidth of Singapore dollar relative to US dollar to contain inflation even as rising domestic currency must hurt Singapore’s external competitiveness as the economy shrank in the September quarter and gloomy conditions prevailing forward.
http://noir.bloomberg.com/apps/news?pid=20601087&sid=aQ09wYmg5R0o&pos=1
There is no domestic solution of global economic imbalance. The shadowy currency war in competitive devaluations is risking triggering a major European sovereign debt and banking crisis at any moment now. As Timothy Geithner put it correctly, “I think you have to distinguish the challenges faced by Greece, by Spain, Portugal, Ireland,” Those countries need “to move very, very aggressively to bring their commitments more in line with their resources. In other words, these weakest economies in EU has NO CAPACITY for a QE2 without endangering their sovereign debt rating downgrading triggering yet another bigger banking crisis and a meltdown of financial market confidence that potentially could wreck the entire global economic recovery.
The IMF is now tasked with the responsibility of watching supervision that this “damaging dynamics” do not escalate further and to developing rules of the road or guidelines with respect to how countries deal with their currencies.”
http://noir.bloomberg.com/apps/news?pid=20601085&sid=a6oYjItJmDZE
Bernanke himself also warned that surging annual deficits presented a "real and growing threat" to the US economy as tax revenues dried up and the government splurged on economic bailouts and stimulus spending.
http://www.cbsnews.com/stories/2010/10/04/politics/main6927476.shtml
The assumptions are that borrower might suddenly require higher rate of interest making borrowing unsustainable – confidence issue here of borrowers. Bernanke said, “"The only real question is whether these adjustments will take place through a careful and deliberative process... or whether the needed fiscal adjustments will be a rapid and painful response to a looming or actual fiscal crisis." Two creatures are involved here – the “sweetness” fiscal stimulus spending and the other is the “bitterness” austerity creature. Like the Chinese saying, sweetness preceding must bring long-term bitterness or short-term bitterness precedes the long-term sweetness. This dilemma of difficult policy choice is increasing coming into sharp focus now than ever for Obama and the Federal Reserve.
In the interim, the pressure is enormous for the US to reduce its trade deficits by a cheaper dollar policy – even it is unofficial and has damaging consequences for the US and the rest of the world.
The dollar index has lost 7.8% since the end of August and the euro is almost 11% higher.
http://www.marketwatch.com/story/dollar-pressured-by-singapore-tightening-2010-10-
There are signs that even a weaker dollar does NOT alleviate US trade imbalances. As its trade deficits deepened to $46.3 billion, China is running a record surplus in August.
http://money.cnn.com/2010/10/14/news/economy/trade_balance/
The deficit with China widened to a record $US28bn in August from $US25.9bn in July WHEN THE YUAN/USD EXCHANGE RATE HARDLY MOVED in that interval. American propensity to imports of Chinese goods had other market dynamics beyond simplistic assumed exchange rate differential.
http://www.theaustralian.com.au/business/news/soaring-us-trade-deficit-adds-fuels-to-china-trade-tensions/story-e6frg90x-1225939032957
Obama hopes to double exports in the next five years, creating an estimated two million jobs domestically. As the economic momentum weakens, renewed splurge on QE2 spending heighten risks of inflation as Government has no option of stimulating the bubble but printing money. Printing money equals cheaper dollars as supply increased. The danger risks of no action are if you slow down too much, free-fall is next.
For now, the dollar violent decline could help US avoid a double dip recession by simply sucking out growth from China, East Asia, and the EU economies. The rest of the world will now swim in asset inflation, rising food and commodities prices, currency markets roil whilst US stock market kept bubbly effervescent driven by influx of massive liquidity injection with no investable home otherwise and gold price heading higher in conspiracy as QE2 risks creating permanent damage to all devalued currency and inflationary economy.
Anyone disagreeing?
Zhen He
15 October 2010
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