UPDATE 9 - GLOBAL ECONOMIES HEADING FOR TURBULENCE, WATCH OUT CHINA.

Global economy turning red from amber

Global economy turned amber this week, I warned of this on 21 May 2011 at http://www.temasekreview.com/2011/05/21/what-is-next-in-economic-policy-rethinking/. Seemingly 8 weeks “behind the curve”, our most learned Finance Minister, Mr. Tharman Shanmugaratnam, shared the same sluggish global economic thoughts on 17 July 2011 Sunday Times headline read. He, however, eviscerated the possibility of another 2008 global financial meltdown as remote. I certainly disagree with that. METAPHORICALLY SPEAKING, I BELIEVE THE PREVAILING ECONOMIC CONDITIONS WILL “PAINT THE WHOLE TOWN RED” soon. We came close to US sovereign debt default disaster, had it not for the down-to-the-wire compromise in the “love-making” between OBAMA (the flea?) and the “elephants” on the upward revised US debt ceiling over the previous weekend. The global economy, to me, is turning red from amber. The share market carnage has already begun globally; the next chapter could be the banking meltdown of risks aversion, taking global economies down the rapid slippery slide.

Until this 17 July 2011 shift, the Monetary Authority of Singapore had been bullish on global economy despite the repercussions of the Fukushima nuclear/earthquake disaster and oil supply disruption emanating from the Libyan civil war. MAS’s half-yearly macro-economic review released on 27 April 2008 had been very bullish – GLOBAL ECONOMY ON SUSTAINABLE PATH: MAS, written by Joanne Lee, page C28, Straits Times, 28 April 2011.

What is the reality in the interlude?

Firstly, there was a HUGE DISCONNECT between the bubbly financial markets and the underlying global economies. Nestle, which spent 60 billion Swiss francs on food raw materials in 2010 reported strong buying by investment funds into commodities because these offer better return than equities.

http://www.theaustralian.com.au/business/news/nestle-faces-big-commodity-price-rises/story-e6frg90o-1226071786151.

Not surprisingly, US corporate insiders have been selling their shareholdings in entities they manage since June, even as stock market was declining – an ominous sign of shift in insider behavior and loss of confidence in the real economy.

http://blogs.marketwatch.com/thetell/2011/06/07/corporate-insiders-are-selling/

And they recently accelerated the selling of their companies’ shares.

http://www.marketwatch.com/video/asset/corporate-insiders-are-selling-faster-than-usual-2011-07-28/51167DFD-4376-4EC6-AD0D 41BBCB755638?siteid=bigcharts&dist=bigcharts.

Insiders obviously don’t believe in the sustainability of the debt-funded rally in the equities markets or the sustainable benefits of the much-hyped hoped-for recovery arising from the QE2 spending boost.

• THE FAILURES OF QE2 MONETARY STIMULUS

Contrary to what Professor Linda Lim, Professor of Strategy, Ross School of Business, University of Michigan, said in Straits Times read – What’s up with the world economy, Monday, July 11, 2011, A17, the US Federal Reserve’s second round of “quantitative easing” (QE2 monetary stimulus) did NOT averted the feared “double-dip” recession, and deflation. In my view, it merely delayed it. The US first qtr GDP plunged steeply to a shocking final 0.4% growth compared to the US Bureau of Economic Analysis (BEA) final estimate of 3.1% preceding qtr.

http://useconomy.about.com/od/economicindicators/a/GDP-statistics.html.

The final qtr of 2010 GDP boost had the benefit of seasonal upturn of increased consumer spending over Christmas but the long term deceleration remains. The revised 0.4% first qtr 2011 GDP statistics is also a big fall from the third estimate of 1.9% GDP growth of the BEA.

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

And this weak performance of the US economy had not yet been even negatively impacted upon by the supply chain disruptions to US manufacturing resulting from the Fukushima earthquake/tsunami disaster of 7 April 2011.

About the only “successful damage” of this US QE2 injection did was it successfully triggered a speculative liquidity-driven global commodities and share market boom in the first quarter of 2011 The negative impact of that on the real economy was partnered only by inflationary spiral globally and a falling US dollar. In just 6 months, the US currency depreciated about 8% against Euro, Australian dollar, Singapore dollar, Korean Won, 4% against Canadian Loonie, Malaysian Ringgit, UK Sterling Pound, Japanese Yen and an awesome 16% against the Swiss Franc. Against the Chinese RMB, it depreciated only 2.5% and remains unchanged against the HK dollar. This author had forewarned of big fall of the US dollar since 16 September 2010.

http://global-economies-outlook.blogspot.com/2010_09_01_archive.html.

The US Dollar index future had fallen from 82.74 since end-August 2010 to currently around 74.26 – more than 10% decline in less than a year! Any further steep decline in the greenback from this point risks a steep rise in the US interest rate to support the dollar and forestall imported inflation. That could potentially wreck the US economy.

• BASE METALS SHOWED NO EFFERVESENCE AS CHINA TOOK TO MONETARY POLICY TIGHTENING

Base metal prices had been falling for much of the last 6 months even as the US dollar is falling instead of moving in the opposite direction. The reasons included among many – the Chinese have been destocking their stockpile of base metals. Rising industrial & infrastructural construction demand from recovering economies globally, excluding China, have not kept pace evidencing global recovery momentum had been dogged by Fukushima tragedy and the aftermath of political crisis in Middle East and North Africa (MENA). Global economies were struggling, feeling the impact of Fukushima’s natural disaster and MENA’s political turmoil, and in China, the slowdown of economic activity consequent upon increasing tightening of banking credit. This author has no recollection of major natural disaster having no durable impact on global economies – Cyclone Yasi (Feb. 2011), Chilean earthquake (Feb 2010) Chinese snowstorm (December 2008) all left negative impact. So why is Fukushima “Black Swan” event any different – particularly no reconstruction of earthquake damaged zone is possible given durable radiation damage to environment? Even with the recent steep rebound, 6 month base metal prices were down for nickel but are now at the same level for copper, nickel, zinc and aluminum despite big fall in the US dollar. Latest trade figures show Chinese demand elasticity to and negative imports of copper and tin in the face of rising prices. Metals with falling prices attracted Chinese buying, notably aluminum, nickel, lead and zinc. The “effervescence” in Chinese demand for base metal seems to have taken a momentary freeze. There are two tell-tale signs. Societe Generale warned recently that the Chinese construction boom could be stalling.

http://www.marketwatch.com/story/china-construction-boom-may-be-stalling-socgen-2011-06-24.

That is bore out in Chinese June PMI statistical read. Consumer spending on autos were sharply down and forecast to continue the only on a moderate growth rebound trend forward.

http://www.channelnewsasia.com/stories/afp_asiapacific_business/view/1139733/1/.html.

China’s import growth decelerated sharply in June to a 19.3 percent annual pace from May’s 28.4 percent – the slowest pace in 20 months. June exports rose 17.9 percent from a year ago, slowing from a 19.4 percent rise in May. The former evidenced how fast the Chinese economy is slowing as a result of broadening impact of monetary tightening and the latter points to slower global demand as rising material and labor costs squeezed margin.

http://sg.news.yahoo.com/china-june-import-growth-weakest-20-months-063939188.html.

Chinese may be getting tired of building more ghost towns beyond the notorious Kang Ba Shi

http://www.bloomberg.com/news/2011-07-13/china-cities-sell-land-at-winnetka-values-with-bonds-seen-toxic.html

There are no positive economic news coming out of China. Only big negative news – namely hiking its banking reserve ratio for large institutions for the 6th to 21.5% effective June 20 2011.

• GLOBAL BANKING STILL GOING THROUGH HARD TIMES

Thirdly, there was hardly any compelling reason to celebrate stock market ebullience anywhere even before this week’s financial market turmoil. Banking stocks have been underperforming wider markets in North America, Australia and in Europe since year beginning. Eight European banks recently failed the stress test.

http://finance.yahoo.com/news/8-banks-flunk-controversial-apf-202243619.html?x=0&sec=topStories&pos=7&asset=&ccode=.

And another 16 barely scrapped through. Except for JP Morgan Chase, all major US banks continued to report revenue slides. If major US banks are not expanding its business and revenue base, how could the US economy is growing beyond a tepid pace? Two years after the GFC, Bank of America’s second qtr results is still “absorbing our legacy of mortgage issues” while Citibank “improved” results has been “ driven by a continued release of loan loss reserves” – legacy of hollow log accounting, leaving Vikram S. Pandit still to hunker down the rest of Citigroup’s troubled business .

http://www.thestreet.com/story/11186409/1/citi-blows-out-the quarter.html?puc=tscmarketwatch&cm_ven=tscmarketwatch.

Banking is dog’s business in current economic climate, particularly in EU. Resurgent spreading sovereign debt crisis cut Barclays first half earnings by 1/3 and it is retrenching another 3,000 employees before this year is out.

http://finance.yahoo.com/news/Barclays-to-cut-3000-jobs-as-rb-3164624384.html?x=0&.v=2.

Despite unveiling stronger pre-tax results of $370 million compared with the first six months of 2010, while total revenues edged ahead to $35.7 billion, HSBC, Europe’s biggest lender, announced staff cutbacks of 30,000 globally over the next 2 years but also selectively recruiting. Banking business have changed from retail focus to big computerisation and focussing on relationship management, and more than ever so, the criticality of prudent risks containment. One cannot help it but noticed that HSBC’s razor-thin pre-tax margins translated to 1.03c in a dollar of risks exposure forcing the massive restructuring of its banking operation to save $2.5-3.5 billion in costs by 2013. This is indicative of how tough the global economic landscape is.

http://sg.news.yahoo.com/hsbc-axe-30-000-jobs-bumper-profits-131344054.html

• FUKUSHIMA NUCLEAR DISASTER TOSSED JAPAN INTO A RECESSION

Over in Japan, the economic story is even more somber. In the first quarter, the economy shrank an annualized real 3.5 percent. Private sector economists forecast another 2.6% real annualized rate of economic decline for the April-June qtr, noting the drag in industrial production and export shrinkages arising from the Fukushima earthquake and tsunami impact. Technically, Japan is in recession.

http://mdn.mainichi.jp/mdnnews/business/news/20110801p2g00m0bu087000c.html

Japanese auto industry is recovering from Fukushima but there is greater worry that its steel industry could be constrained by further nuclear power shutdowns leading to power shortages ahead.

http://www.steelguru.com/international_news/Japanese_earthquake_-_Fukushima_nuclear_power_shutdown_may_impact_steel_industry_-_JISF/216428.html

• RISING OIL AND STEELMAKING FEEDSTOCK PRICES EXACERBATED WORSENING INFLATION

Growing economic strength in developing countries face strong headwinds of rising inflation as oil price spiked to triple-digits again not seen since 2008. In contrast to base metals, crude oil and coking coal, priced in US dollar terms, rose sharply. Brent crude oil is up 24% over 6 months to currently around US$118 per barrel.

http://www.indexmundi.com/commodities/?commodity=crude-oil-brent

Wesfarmers recently reported 58% increase in Australian hard coking coal prices for the April to June qtr. to roughly US$320 per tonne FOB.

http://phx.corporateir.net/External.File?item=UGFyZW50SUQ9ODgxNTR8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1.

All thanks to the damaged coal fields and infrastructure in Queensland after the February 2011 Cyclone Yasi. The International Energy Agency (IEA) June 2011 release of 60 million barrels of oil spread of over 30 days from strategic reserves of 27 member countries was an exercise of futility.

http://www.epmag.com/2011/June/item84535.php.

It can only be a case of false positive negative impact. False positive is because the quantum would not even satisfy a single day consumption of roughly 85 million barrels and not one of the oil consuming countries would be prepared to release more since.

http://www.cnbc.com/id/43849352/Oil_Consumers_Decide_Against_New_Stocks_Release.

And it is a negative because the depletion of stockpiles needs to be replenished against a background of supply/demand imbalance still incapable of solution in the immediate future. Libya’s shutdown of oil production has short term supply shortfall impact and long-term enduring damage to its oil production capacity. Libyan oil production is mainly light sweet crude while the Saudis pumping more, are mainly sour heavy sulphur crude more demanding of costly refining process . Libyan oilfields are likely to have been significantly damaged without properly-managed shut-down procedures undertaken as foreign workers fled the civil war in a hurry.

Of course, these rises in oil and steel-making feedstock input costs hurt China more than anyone else and, pertinently, most unhelpful to Chinese costs of steel production. Average steel production costs for Chinese steel mills rose 27.5 percent in the first quarter from a year ago. Coking coal costs climbed 15.17 percent and iron ore import costs surged 54.4 percent. It is still on the rising uptrend. Average profit margin is razor thin, at around 6% pre-tax currently.

http://www.mineweb.com/mineweb/view/mineweb/en/page39?oid=126020&sn=Detail.

China is the world’s largest steel producer and exporter – so manufactured costs of consumer and industrial durable goods must escalate going forward. Now who says inflationary pressures are temporary?

The above observations tell me the recent Chinese raging and escalating inflation has its origin other than volatile base metal prices. It is crude oil and critical feedstock in steelmaking that translate into higher production costs. As the Chinese Yuan fluctuates around 2.5% of the falling greenback, Chinese currency is also falling relative to all other major currencies like the Euro, Australian, Canadian, Sterling Pound and particularly Swiss Franc, imported consumer goods and raw material imports into China have become a lot more expensive than the 6.4% June CPI suggests. As we all know, the cost of living devil rises much higher on the supermarket shelves than the statistical CPI ghost. Adding to that is the Chinese seemingly insatiable cravings on all consumer goods foreign-made, consumer inflation spiked up will continue to uptrend though much will not captured in CPI calculation. That pressure is amply reflected in unprecedented wage cost spiral across China.

ttp://www.financialpost.com/opinion/businessinsider/wage+inflation+mess+breaking+over+China/5058536/story.html .

With labor shortages in coastal industrial zones, wage Inflation is unlikely to let up any time sooner as food prices also continue to escalate. Both wheat and corn – the staples of global food system – have rebounded as so is oil price.

http://www.cnbc.com/id/43762905.

Livestock sector demand adds to total consumption despite rising prices for wheat. And likewise, competitive bio-fuel demand for corn is underlying long-term pressures – these are unavoidable and escalating. The much hoped for inflation breather for the 2nd half of 2011 seems to have evaporated. . Inflation has taken a strong hold in China and China is exporting inflation to the rest of the world instead of deflation previously.

• TEPID US ECONOMIC RECOVERY LARGELY BYPASSED AMERICAN CONSUMERS.

All the major economies – EU, Japan, China and USA saw slumping consumer confidence but much of the world didn’t notice at all. It is amazing to this author that record corporate profit in US corporate history in the so-called “economic recovery” were matched by the slowest pace of new home sales ever- according to data released by the BEA. Sales of existing home fell again in June to a 7-months low, in effect, signaling a housing second dip. This economic recovery bypassed US consumers, leaving fearful consequences ahead of the likely un-sustainability of forward recovery efforts and outlook.

http://www.wsws.org/articles/2011/mar2011/econ-m26.shtml

• CHANGED CAUTIOUS AMERICAN CONSUMERS POST-GFC ADD TO A MISERABLE RECOVERY AFTER MISERABLE RECESSION.

Equally astounding is that US consumers’ new found thriftiness. American consumers, particularly the baby boomer generation, with little prospect of re-employment and income generation forward, has changed substantially, post the GFC - but not their dependency on credit card for groceries spending. Cheaper US dollar means higher food, energy and clothing prices are at record levels as imported inflation hits home. Consumers in US are relying on credit to pay for necessities such as food and gasoline as inflation and cheaper greenback erodes disposable income.

http://www.bloomberg.com/news/2011-07-21/consumers-in-u-s-relying-on-credit-as-inflation-erodes-incomes.html.

Poorer segments of US consumers are living hand-to-mouth and the wealthier ones trickled down to simplicity of shopping at Wal-Mart in place of more expensive specialty outlets.

http://www.marketwatch.com/story/discount-stores-attract-plenty-of-wealthy-shoppers-2011-06-24.

Discount stores now attract plenty of wealthy shoppers. Retail sales excluding autos, gasoline stations and building materials, had the smallest gain in June in 11 month are signs of deteriorating economic conditions, not an improvement. What is good for Wal-Mart is not necessary a good indicator of the true state of the US economy in terms of consumer spending.

The US is now seeing stronger corporate earnings with stronger balance sheets but dying consumers, oppressed also by inflated housing burden, energy and food prices and no increase in disposable income to spend. In the words of Martin Wolf, the US economy is a story of “miserable recession and a miserable recovery.”

http://finance.yahoo.com/blogs/breakout/economic-downturn-years-unravel-wolf-180823003.html.

External stimulus via QE1 and QE2 has been proven not to be working, so the recovery would need to be a long drawn out process. Large investors in the US are getting nervous just as US businesses were near the end of its 2nd qtr corporate results season.

http://finance.yahoo.com/banking-budgeting/article/113238/large-investors-nervous-marketwatch?mod=bb-budgeting

• CONSUMERS GLOBALLY ARE ALSO RETRENCHING DEBT AND SPENDING

Elsewhere, falling US dollar means rising costs of imported consumer goods driving consumers out of shopping malls. It is the same retailing sentiment even in places like Canada.

http://business.financialpost.com/2011/06/21/canadian-retail-sales-lacklustre/.

Statistics Canada showed the inflation rate hit an eight-year high of 3.7% in May. As incomes are unlikely to exceed inflation, Canadian consumers are shopping frugally to reducing debt
level.

http://www.financialpost.com/personalfinance/Consumers+shop+around+prices+rise/5131151/story.ml .

And Australia is no different.

http://www.bbc.co.uk/news/business-14009797.

Over in Australia, the mining boom created a two-track economy prospering on a resource sector boom but Interest rate hikes to curb inflationary pressure on housing had strong negative impact on retailing. There is now a global slump in consumer confidence - the lowest since late 2009, according to a Nielsen survey.

http://www.newsdaily.com/stories/tre76g1lh-us-nielsen-confidence-survey/

Whilst it is true that a lot of corporate worldwide have eclipsed pre-recession profit levels, this was achieved only after having gone through aggressive cost-cutting restructuring exercises since 2009. Strongly negative interest rate environment also subsidized corporate earnings but people forget that this is a finite phenomenon that can’t last forever. For most of the rest, it has been largely a jobless recovery and one accompanied by falling living standards for bargain-driven consumers. This is even true of Chinese retailing sector.

http://www.cnbc.com/id/43712712.

Luxury retail malls are largely deserted.

• EURO ZONE SWIMMING IN SOVEREIGN DEBT CRISIS SINKING AGAIN

Euro zone is constantly challenged of its debt overhang. Weak growth in slowing economy amid bouts of eruption of sovereign debt crisis threatens the funding requirements of European banks. IMF warns of capitalization of banks in Europe as relative low, especially compared to US.

http://online.wsj.com/article/BT-CO-20110714-712179.htm.

This makes financial systems in Europe less resilient to systemic shocks. As of current indication, Italy, Euro zone’s third largest economy and too big to rescue by the ECB in any crisis, suffered a deep contraction and Spain moved into negative territory.

http://business.financialpost.com/2011/08/03/for-world-investors-its-the-economy-stupid/

The 17-nation Euro zone’s service PMI slid to 51.8, as Germany and France which had propped up the tepid EU’s growth also fell closer to the 50 contraction divide. Italy services sector suffered two consecutive qtrs of decline and Spain’s service index fell to 46.5 compared to June reading of 50.2. The Markit Euro zone manufacturing PMI fell to 52.0 from 54.6 in May which itself declined 3.4 from preceding April read of 58.

http://www.ourbusinessnews.com/euro-zone-june-manufacturing-pmi-falls-to-52-0/.

The two months consecutive output weakness is the greatest extent of decline since late 2008. Under threat of inflation and despite the weak growth, the ECB hiked interest rates by 25 basis points to 1.5% on 7 July. It aimed at tackling inflation now running at 2.7% (against an ECB target of 2%) despite Euro zone’s intensifying debt crisis. Higher currency and interest rates prevailing relative to the US must dampen its competitive prospect for recovery as US economy itself also showing increasing signs of stalling.

WHAT PROSPECTS GOING FORWARD?

• MANUFACTURING PMI ARE FALLING

Let us take a peek into the July-September qtr early economic indicator. US manufacturing activity barely grew in July. Its Institute of Supply Management gauge in July declined 4.4 points to 50.9, the worst reading since July 2009.

http://www.marketwatch.com/story/ism-manufacturing-gauge-falls-to-two-year-low-2011-08-01?siteid=bigcharts&dist=bigcharts.

China, Russia, UK, Spain, Greece all reported sub-50 PMI readings of manufacturing contraction. HSBC Brazil July PMI reading came in at 47.8, the second consecutive sub-50 reads below the no-change 50 line. India’s factory growth slide for the third consecutive months. The HSBC Markit Business Activity India Index fell to a 20-month low of 53.6 in July from 55.3 in June. India’s 10-year benchmark bond yield shot past 8.3% making Government borrowing prohibitively expensive to fund development projects.

http://sg.news.yahoo.com/high-bond-yields-impact-govt-borrowing-source-062942568.html

These figures are universally bad, stretching from US, EU, to developing economies like Russia, Brazil, China and India.

• STEELMAKERS ARE TELLING US MORE BAD NEWS OF GLOOMY OUTLOOK

If steel-making is any reliable early signpost of possible turnaround in manufacturing, it does not look good either. China is the world’s largest steel producing and consumer nation. Chinese steel production peaked in May, is expecting a seasonal slowdown as summer power outages in July/August due to nationwide “load shedding” reduction of pressure on its overwhelmed power grid as consumption peaks.

http://www.mineweb.com/mineweb/view/mineweb/en/page39?oid=129259&sn=Detail

After posting a 17% fall in qtrly earnings, POSCO, the world’s third largest steelmaker warned of weakening demand growth and high input costs. Record Chinese production is flooding the market. POSCO warned of high prices of iron ore and coking coal, which rose between 25 and 47 percent quarter on quarter in April-June, show no signs of a sharp retreat due to tight supply. POSCO is only expecting a gradual recovery after it bottoms (if any) out in the third qtr. Autos, appliances and construction accounts for nearly 70% of aggregate customer base of steelmakers. Despite seasonal slide in Chinese production in July-September qtr, POSCO is not expecting an improved outlook of demand and pricing resistance in the market-place.
American producers U.S. Steel and AK Steel also warned of reduced earnings in the July-Sept period, echoing comments last week from Korea's POSCO.

http://www.reuters.com/article/2011/07/27/steel-idUSL3E7IR18K20110727.

Contrary to earlier bullish outlook by all three Detroit automakers, US car manufacture is much less upbeat after a tepid sales growth in July as American consumers are pulling back on car purchase.

http://biz.thestar.com.my/news/story.asp?file=/2011/8/3/business/20110803084851&sec=business

Acelor Mittal, the world’s largest steelmaker, supplying 6% to7% of the world’s steel production but not dependent on Chinese market, also forecast a seasonal dip in this coming qtr. http://www.bbc.co.uk/news/business-14304503. All steel producers are expecting Chinese public housing sector construction for long steel products to offset expected decrease in private sector housing. Short steel products used in autos and household appliances in China may still weaken if consumer confidence is further adversely affected by inflation. Just like Singapore, the authorities in China placed limits on new car in Beijing hampering demand growth. And right now, consumer confidence is also under severe attack in US and EU. There is real fear and doubt whether the euro zone can overcome its sovereign debt woes. Italian and Spanish bond yields have surged to 14-year highs.

http://www.reuters.com/article/2011/08/03/us-eurozone-idUSTRE7712HB20110803.

And Chinese auto production picked up only marginally in June after huge decline in April and May. Only Chinese steel consumption surged past the pre-crisis level since early 2009 but developing economies are approaching. See page 9 at

http://www.arcelormittal.com/rls/data/upl/627-55-0-0 110303FinlaPresentationAutoInvestorDay.pdf

Developed economies still have a long way to climb to reach there. As steel consumption typically lags economic recovery, the steel consumption pattern post-GFC shows how little the developed economies have recovered of capital investment and consumer durable spending in the last 2 years. If Chinese steel consumption stumbles badly, it would indicate that the world economies are in big trouble.

Steelmakers and consumer confidence are telling us no good times ahead.

AT THE MACRO LEVEL, CHINA IS YET THE LAST DEFENCE BUT A WORRISOME ONE.

• MONEY PRINTING, GOLD, INFLATION, INTEREST RATE & DEBT UNSUSTAINABILITY.

Bernanke attributed the slow interim US GDP growth to temporary factors like gasoline prices pulling back consumers spending and supply disruption caused by Japan’s disaster slowing industrial production. But the real culprits were depressed housing market, credit tightening, and stubbornly unyielding unemployment. These are longer durable malaise undermining consumer confidence. Moreover, elevated gasoline is only part of a generalized imbalanced demand-driven (relative to supply) inflation and, more serious is the liquidity-driven price speculation sweeping the entire world ranging from real estate, base metals to food and traded equities. After QE2, the world is flooded with borderless liquidity stimulating assets bubbles across much of Asia and these are debt-funded. EU, USA, and China were big on printing money to spend on stimulus BUT NO ONE THOUGHT ABOUT THE CONSEQUENCES NOR THE EXIT STRATEGY THAT WON’T UNDERMINE THE REAL RECONOMY if it fails. It is too late now to stare at failures right before our eyes.

The evidences are plenty. In Europe and US, consumers refuse to spend, banks refuse to lend, businesses refuse to hire, corporate refuse to invest in fixed capital investment, the economies either stalled, stalling or crawling at a pace little faster than stagnation but Central bankers clueless on what to do next other than buying gold bullion in fear of doubtful value of paper money in a sea of raging seemingly unstoppable inflation surging beyond target rate, rising debt worries, volatile treasury yields, waning faith safe-haven currencies like greenback and euro etc. Even central banks from poor developing countries like Mexico, Blanga Desh, Bolivia, Sri Lanka, India, Brazil, and most recently, Thailand and Russia are buying gold which promises only risks but no coupon or interest return by gold leasing to gold producers.

http://www.reuters.com/article/2011/08/03/businesspro-us-gold-reserves-idUSTRE7722IK20110803.

Bank of Korea bought bullion for the first time recently – its first purchase of gold since the Asian currency crisis of 1997-1998 as gold price keeps hitting new peaks. Central bankers are fearful of the brittle global economic recovery and the precarious debt situation in Europe and USA, the implied volatile currency yield risks of US 10-year bond yields, and waning faith in so-called safe-haven paper currencies such as the US dollar, euro. Inflation too, has been rampantly running ahead of target in India, China, Europe, Canada, and Australia and is at multi-year high. From net negative sellers of gold in the last decade, central bankers turned net positive net buyers globally. It is easy to understand the bearish sentiment prevailing among economists of prospects for near-term recovery of economies of USA, Europe and Japan.

Interest rate is set to rise globally, despite tough economic conditions. The reason, this author, argues is that, rising food, material, energy prices are feeding into wage inflation which seeps into inputs of manufacturing costs WITH VICIOUS CIRCLE OF FEEDBACK LOOPS INEVITABLY. The speed at which oil price rebound from two-digits back to triple-digits of Brent sweet crude despite the IEA stockpile release proves my point. Coking coal, iron-ore price seems immune to the glut of global steel supply and see how fast wheat and corn price bounced up steeply again. The Asian and Australian property bubble s are set to burst and needs to be so before Asian finds itself envelops by the same sub-prime intractable crisis engulfing them in a banking crisis and wrecking their economies exactly the same way much of Europe and USA followed Japan’s lost decade.

With rising interest rates, the debt profile of USA and most of EU (except Germany) raises question about their debt sustainability. So where the hope for sustained recovery pathway for USA and Europe is for the next few years as fiscal discipline must take hold to avoid insolvency default risks? FISCAL DISCIPLINE IN US AND EUROPE MEANS SLOWER GROWTH. In the environment of slow growth, where is the capacity of sovereign to service their debt liabilities? Greece has seen two bailouts in deepening recession and that aggravates its sovereign borrowing costs adding further pressure of risks default going forward even more intensely. Greece’s 10 year bond rate is now close to 14% and this will escalate its debt to GDP ratio further from 142.8 in 2010. Italian Govt 10 year bond gross yield of 6.13% is at decade high

http://www.tradingeconomics.com/italy/government-bond-yield

Spain 10-year bond yield is now 6.28% - also ten year high

http://www.tradingeconomics.com/spain/government-bond-yield.

And their most recent economic growth rates? Italy’s GDP rose 0.3 percent in the second quarter, up from a 0.1 percent pace in the first quarter, while Spain’s GDP expanded 0.2 percent in the second quarter, down from 0.3 percent the previous quarter.

http://www.bloomberg.com/news/2011-08-05/german-10-year-bunds-advance-11th-day-on-debt-crisis-italian-bonds-slump.html

Estimated debt-to-gross-domestic-product ratio is 120 percent this year for Italy, the second-highest level in the euro region, compared with 68.1 percent for Spain. Inflation in Italy and Spain is running at 2.7% and 3.1% respectively, above ECB target rate of 2%. Inflation restrains policy makers from loosening monetary policy. Italy, Spain, Greece has all found themselves stuck in an economic quagmire. Growing debt to GDP ratio in circumstances of sustained weak economic performance triggers risks of continuing contagion spread. On market ‘s concern of a possible EU’s 'Double Dip' recession, credit-default swaps (CDS) on Spain surged 30 basis points to 420 and Italy jumped 34 to 367 in early August. What is CDS? CDS function like a default insurance contract for debt. A widening of one basis point in a five-year CDS spread equates to a $1,000 increase in the annual cost of protecting $10 million of debt for five years. The cost of insuring against default on Spain and Italy surged to records, leading an increase in European sovereign bond risk, on concern indebted governments will struggle to fund themselves as the global economy slows.

http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2011/08/02/bloomberg1376-LPAH800YHQ0X01-0UR9RE0LR6A178JI2UTIEGC9IA.DTL

Europe will remain buffeted in slow growth, mired in recurring sovereign debt crisis and constrained by continuing pressures of fiscal tightening. Presently, about 20% of the US S& P earnings originate from Europe. That spells disaster for US businesses which also face a much weakened economy of consumer demand pullback within US and the much awaited fiscal impact of budgetary cutbacks to local government and municipality funding. Meredith Whitney could be proven right to have warned of local government debt may be at the doorstep of a major crisis. States and local governments, which make up 12 percent of US GDP, are really pulling back,"

http://www.cnbc.com/id/43973763

The austerity drive forward could be a thunderbolt strike at the heart US economy after it could only be sustained to such disastrous outcome following the failed QE2 stimulus. Another orgy of US stimulus will almost certainly drive the US dollar down lower, adding to inflation, raising interest rate and sinking US into a delayed but much deeper recession.
CHINA – YOUR LAST FRONTIER OF LITTLE HOPES AND TERRIFYING RISKS
ECB President Jean-Claude Trichet, Ben Bernanke, US Federal Reserve Chairman and Christine Lagarde might have sleepless nights worrying about the state of sinking global economies, PBoC governor, Zhou Xiaochua has immediate worries of how to better deploy China’s 3 trillion plus FX reserves and rising, adding big pressures on PBoC’s sterilization.

http://asianbankingandfinance.net/foreign-exchange/in-focus/pboc-governor-china-needs-reduce-fx-reserves

Mr Zhou, unlike other central bankers around the world, does NOT seems to have such a big hurried appetite for gold bullion buying beyond China’s current holdings of under 1200 tonnes.

http://www.commodityonline.com/news/China-to-raise-gold-silver-reserves-in-2011-36118-3-1.html.

For fair comparison of relativity, the Mexican Central bank bought 100 tonnes of physical gold recently.

http://www.ft.com/cms/s/0/cbc02e10-7637-11e0-b4f7 00144feabdc0,s01=1.html#axzz1U4Miu3Ew.

Perhaps, Chinese got bigger risk appetite – come what may of global economic turbulence - as they are of managing of risks. Life is cheap in China. Chinese will build and happily operates nuclear power plants far more dangerous of accident risks than Fukushima. Chinese economic model is like its super high-speed rail network linking Shanghai to Beijing which recently had a big crash at Wenzhou. True to Chinese grit and political humor, they quickly buried the derailed carriages with the corpses inside of incriminating evidences – relenting only on a barrage of cyberspace howling protests from its millions of disapproving netizens! That is how Chinese psyche works – defying gravity, and so far on the economic front, all previous forecasts of hard landing by doomsayers have found their grief of disbelief. Less known to economists, however, is the suspect that China’s GDP figures are "man-made" and therefore unreliable, said Li Keqiang, according to leaked U.S. diplomatic cables released byWikiLeaks.

http://www.reuters.com/article/2010/12/06/us-china-economy-wikileaks-idUSTRE6B527D20101206. .

Li is widely expected to succeed Wen Jiabao as China’s next premier in early 2013.

But all that gravity-defying economic miracle achievements were before the GFC and before the world gets to know of GDP-boosting infrastructural white elephants like Kang Ba Shi besides and beyond already well-known and publicized empty commercial and residential blocks in major developed cities.

http://www.businessinsider.com/pictures-chinese-ghost-cities-2010-12#there-are-no-cars-in-the-city-except-for-a-few-dozen-parked-at-the-glamorous-government-center-2.

Chinese ghost cities were built out of debt mountains. And this white elephant real estate is located in a smallish countryside township of Loudi, Hunan Province.

http://www.bloomberg.com/news/2011-07-13/china-cities-sell-land-at-winnetka-values-with-bonds-seen-toxic.html .

And in Yinchuan in northwest China's Ningxia Hui sparsely-populated autonomous region, it built a 25-km long eight-lane highway running through the city, with wide forest belts on both sides years ago.

http://www.chinadaily.com.cn/opinion/2009-09/01/content_8646607.htm.

All of these are sub-prime bursting in-the-making scatters across the entire spread of China from north to south and west. Now this is the real China that never got into print of official media release nor got the attention of foreign economists’ publishing.

So how much can one trust of Chinese GDP statistics and its measure of underlying sustainable real economy? I will give some credit of reliability to official sources – at least those on the downside, even if these are most likely to be understated. China does not have a sophisticated banking system in place, unlike the developed countries. The State Council is the policy decision-makers on major macro-economic decision as interest rate. From the somewhat detached position, governing China and managing its economy suffer from the tyranny of size, geography and cumbersome bureaucratic layering. It is as like frying a very small fish in a big wog of very hot frying oil – removing too soon leaves it uncooked and too late burnt it. In both instances, the fish is not deliciously edible. The contextual sometimes contradicts the holistic and that is how this author believes Chinese statistics should be interpreted of its usefulness and reliability. China is not one uniform monolith but a mosaic of evolving landscape. Compounding these complications is the lack of transparent statistics. A lot of guesswork, glimpses of China’s policy making decisions and anecdotal evidence necessarily framework of assessment of the true picture of the state of affairs inside China.

SO IS THERE A REAL ESTATE BUBBLE & GROWTH BUBBLE INSIDE CHINA?

Beyond the obvious deserted empty luxury retail malls, ghost towns, vanity projects dispersed over China, affordability has become a real issue in big cities. It is said that in today’s inflated price climate, only 20% of Beijing top earners can afford their own housing. While the mass migration towards urbanization continues, prohibitive costs of living in big cities like Beijing, Shanghai, Guangzhou have encouraged migration to Chinese second-tier and even some third-tier cities where technology will allow of similar conveniences that big cities has of comfort-providing infrastructure. Beijing, Shanghai etc have seen restrictive measures on property investment such as property taxes, increases in down-payment requirements, and raised interest rates. As at the time of writing this article, China Banking Regulatory Commission (CBRC) is urging commercial banks to lend healthy local government financing vehicles (LGFC) to support state-sanctioned projects including the building of subsidized housing. THIS CONTRADICTS CBRC’S RECENT DIRECTION TO BAN ALL LENDING TO LOCAL GOVERNMENT after they chalked up an estimated 10.7 trillion yuan ($1.66 trillion) in debt, stirring fears of widespread loan defaults that could shake the world's No.2 economy.

http://in.reuters.com/article/2011/08/05/china-economy-housing-idINL3E7J50K520110805.

Under this new directive, loans issued for the construction of affordable housing should not be priced below 0.9 percent of the central bank's benchmark lending rate and should have maturities no longer than 15 years. CBRC dictates also that provincial government should step in to assist in repayment of local governments which encounter loan repayment difficulties. That leaves enough room for meaningful conjecture, not definitively, that there is price bubbles in residential accommodation to varying degree across China.

Peter A. Sands, CEO, Standard Chartered, insisted this week there is no growth bubbles inside China.

http://www.cnbc.com/id/43972390.

“There is asset inflation in China and property bubbles in some parts, but that doesn't mean that Chinese growth is a bubble,” I, substantially dispute him! The CBRC’s quick about turn of bank lending assistance to affordable public housing amid credit clampdown on all bank lending to local government points to desperation need of housing affordability across China. There is real estate PRICE BUBBLES in top 10 Chinese cities, and certainly, to varying degrees in second-tier Chinese cities as well. Affordable public housing is in dire needs. The massive scale of subsidized public housing project over the next 5 years illuminates my contention. Housing construction and supporting infrastructure is a big driver of capital formation spending supporting China’s economic growth. So, if LGFC are financially-strapped or worst still technically insolvency of loan repayment liabilities as they fall due, and provincial government also unable to assume that liability, prudential lending by banks must necessarily deflate the growth bubble!

Another aspect and extent of real estate bubbles not seen in public eyes is the prevalence of vacant residential apartments. That became public sometime in March 2010. A report emerged of some power entities – that 64.5 million urban electricity meters registered zero consumption over a recent, six-month period.

http://english.caing.com/2010-08-03/100166589_3.html.

Not all are permanently unoccupied available space but there is certainly a lot of speculative buying of price bubbles overlaying this QUANTITY bubble. Asset inflation is leading the bubbles and quantity bubble is leaning on the price bubbles for viability support. The magnitude is scary; the vacancy rate of occupancy is enough to house close to 200 million Chinese. What would happen to these unoccupied, residential accommodations when affordability public housing fills the void which this 64.5 million vacant apartments waiting to be filled? Wouldn’t there is a gigantic banking crisis of massive mortgage defaults in a real estate crash, beyond the banking sector’s lending to nearly insolvent LGFVs?

• TIDES, TORRENTS, TSUNAMI - SHIFTING FROM PLACID CLUSTERED TO TURBULENT ENVIRONMENT WILL HAVE EARTHQUAKE EFFECTS.

Hong Kong sits just next door to China. If booming Chinese economy is so resilient, why are so many real estate developers lately have been talking about the risk prospects of a property crash? Plenty of Chinese buyers could literally walk across the Shenzhen border and snapped all the “bargains” which locals either can’t afford or unwilling to pay? Robin Chan, Chairman of Hong Kong’s third largest property developer, has this warning.

http://www.cnbc.com/id/43966773

Every market tanks; what doesn't change is cycles….. "Each time the reason may be different, but (prices) will come down." That is exactly right with all financial market cycles. Will China’s push for massive affordable public housing squeeze private developer’s margin? Will the correction in asset inflation drives overleveraged developers and speculators there over the edge of the cliff hurting banks and destabilizing its economy?
There is also a chorus of views inside China that the real estate in China is due for a correction. IT COULD COME SOONER than many expect. Three official interest rate rises this year have pushed mortgage rate over 7%, leaving an expanding inventory of unsold properties. There are now signs of a price stalemate as Chinese home price teetering on a precipice. http://www.smh.com.au/business/china-home-prices-teeter-on-a-precipice-20110722-1hs94.html. Home price could fall this qtr and it may be a question of what extent and timing .Whilst it is true that escalating cooling measures had been in place since last October such as increased credit lending rates and jacking up banking reserve requirements, these policy initiative have not worked well correcting prices downwards as yet. Its subdued impact is because of the more “benign” global economic environment even if there is some degree of at least some degree of disturbed reactive environment. There is a measure of financial stability prevailing in global financial markets at least until recent weeks to give speculators and aspiring owners some confidence of continued buying support. That confidence stability impact could well turn devastatingly toxic now. IT IS LIKE THE SHIFT FROM TIDES, TO TORRENTS AND NOW THE TSUNAMI – MOVING UP THE CHAIN OF ESCALATION FROM THE PAST OF PLACID CLUSTERED ENVIRONMENT. POST –GFC, TO DISTURBED REACTIVE ENVIRONMENT AT YEAR BEGINNING TO NOW UNPREDICTABLE TURBULENT FIELDS! The financial rout in global financial markets late this week will leave tsunami impact as severe as the last GFC, this author must sadly reminds. As I wrote this line above, breaking news on my desktop reads – S & P downgrades US to AA+ rating with negative outlook on a Saturday morning. Last night, Australia’s central bank slashed the country’s GDP growth for 2011 down to 2% - a far cry from its most recent estimate of 3.25%. That itself is a significantly lower than earlier estimates of revised 4% down from 4.25%. Australia is a leading commodity export nation depending on China. The expectation within the Reserve Bank of Australia must be China will slow down significantly for the rest of 2011.

A BANKING BUBBLE ON ALONGSIDE A REAL ESTATE BUBBLE?

The IMF released its annual review of China a fortnight ago, warning that inflation, real-estate bubbles and weak monetary controls pose "significant risks to financial and macroeconomic stability" in the world’s second-biggest economy.

http://www.theaustralian.com.au/business/economics/chinas-manufacturing-activity-contracts-hsbc-survey-shows/story-e6frg926-1226099012286.

Food inflation is currently running round 17% and real estate inflation compounding. Inflation surged higher to 6.4% in June even as the 5th interest rate hike in eight months lifted the Yuan lending rate to 6.56% and deposit rate to 3.5% last month. The PBoC is obviously “behind the curve” trying to slow the inflationary spiral.

http://www.theaustralian.com.au/business/interest-rates/chinese-scholars-state-case-for-higher-rates-agenda-in-beijing/story-fn91wad8-1226089890.

Yet it can’t raise interest rate too fast without the rest of the world lifting their own interest rate first, given comparative interest rates are much lower in EU and particularly in US. Raising interest rate too frequently also risks the inflow of hot money into China via Hong Kong looking for higher yields in a strong Yuan which therefore offer the advantage of lower risk. As Hong Kong dollar is pegged to the greenback, it is easy for banking channels in Hong Kong to access very cheap money near zero interest rate costs in the US. That influx could easily defeat China’s inflation fight. Indeed, it has already been happening. This week, PBoC stops offshore Yuan borrowing of hot money by Chinese companies through Hong Kong. Until this week, there was a growing trend among mainland companies of borrowing relatively cheap offshore Yuan in Hong Kong and remitting it home for business purposes to circumvent tight domestic cash conditions in the mainland.

http://www.cnbc.com/id/43982853.

Yet another source of credit flowing into business and real estate speculation has now been shut. As deposit rates in China remain well below inflation, people are encouraged to spend or invest in speculative assets. As luxury malls are empty, a lot of money went to other assets. Stripped of property affordability, a lot of money went into physical gold and short-term bubble investment of certificates of deposits.

The 6th reserve requirement hike this year took China’s reserve requirement ratio to 21.5% for large institutions effective 20 June 2011.To fund their tightened loan-to-deposit below the 75% regulatory threshold, banks now offer a whole range of “wealth management products” akin to short term investment certificates of deposits with maturity duration of 2 days and up 31 days. The rates of interest offered as high as 8% are much higher than the one-year benchmark bank deposit rate of 3.25%. Big banks and smaller financial institutions are circumventing the reserve requirement ratio to build their deposit base and expand their lending portfolio. Instead of managing their asset side (lending), banks are now managing their liability side of their balance sheet deposits taking making regulatory control harder for China Banking Regulatory Commission. Banks must roll over these “wealth management products” to keep their cash rolling i.e. in effect they are increasingly supporting illiquid long-term lending with short-term cash flow. The moment this customers stop buying, it is tantamount to withdrawal of funding supply. There is a real risk of a sudden run on all bank deposits in any sudden banking crisis.

http://www.cnbc.com/id/43585557.

A fuller descript of Chinese banking woes can be found at

http://www.temasekreview.com/2011/07/13/temasek-holdings-change-of-direction-needed/

The China Banking Regulatory Commission (CBRC) boasts China’s banking system has a bad loan coverage ratio of about 220 percent, or 1.2 trillion yuan. It certainly looks impressive on paper. The big Chinese banks boast some of the lowest loan-to-deposit ratios and some of the highest coverage ratios on bad loans in the world.

The BIG QUSTION is what constitute “bad” loan when banks in China are known to have been pushing a variety of off-balance sheet lending?

http://finance.yahoo.com/news/Analysis-Chinas-big-banks-rb-261135357.html?x=0&.v=1.

Lending to LGFVs of local government for infrastructural construction with long and uncertain payback is prime suspect. “What bank would want to take re-possession of a toll road” is the repose. There are signs many entities created by local governments to finance infrastructure projects could face trouble repaying their loans.

http://finance.yahoo.com/news/Analysis-Chinas-big-banks-rb-261135357.html?x=0&.v=1

It will all become non-performing only when massive defaults occur en masse. By then it will be too late of rescue efforts.
China's state auditor said in June that local governments held a massive 10.7 trillion yuan ($1.53 trillion) in debt at the end of 2010, warning there was a risk some might default.

http://www.theaustralian.com.au/business/economics/chinas-growth-unsustainable-say-analysts/story-e6frg926-1226100929751.

By that sum, local governments owed debts equal to a quarter of its gross domestic product.

http://www.theaustralian.com.au/business/markets/china-bears-sharpen-tools-amid-debate-over-worlds-second-biggest-economy/story-e6frg94o-1226086903484.

And this is not the end of its banking woes. Lending to LGFVs of local government is not valid compartmentalized analysis. There are lending to local government and related entities NOT included in this 10.7 trillion yuan exposure. All that lending to SMEs could also turn toxic to add to the banking wreckage if the economy turns badly sour. That moment could be now as EU scrambles for some semblance of financial stability and the faltering US economy stalling to negative outlook. The signs are ominous.

CHINA’S NEAR TERM RISKY OUTLOOK – MANY NEGATIVES

Europe remains China's first export destination and the US second, but growth in the West remains stubbornly anaemic. Not surprisingly, China lambasted US handling of the recent raised debt ceiling debate. China’s Foreign Minister Yang Jiechi said his nation will support Europe and the euro. It is in China’s own self-interest to do so.

http://www.bloomberg.com/news/2011-08-05/china-s-scope-for-supporting-global-growth-limited-as-inflation-reaches-6-.html.

At the same time, the Chinese are restricting their exposure to US treasury when it comes to investing its huge US$3.2 trillion of foreign reserve.

http://www.smh.com.au/business/world-business/china-to-limit-us-exposure-blasts-debt-bomb-20110803-1iarg.html.

Whatever, its domestic banking crisis, China would not find it easy to liquidate its foreign reserve holdings to prop up its own economy in a precipitated crisis. This is hard reality. And even if the Chinese Government is unable to shores up its banking sector’s non-performing loans of yet indeterminate size, what would happen to the decimated savings of ordinary Chinese citizenry deposited in its banking system? A banking crisis some reasonable magnitude hitting, even rescued with state capital injection, will be weakened and may not be strong enough to revitalized its stalled economy and underwrite Chinese future growth prospect. Without massive bailout in any banking distress, China will not recover to positive growth. It needs domestic consumption to sustain its economy instead of reliance on exports to EU and US. Domestic consumption now accounts for 30% of China’s GDP base and manufacturing around 40% according to market estimates.

Meanwhile, the rout and bloodbath in global financial markets could not have come at a worse time for China. US and EU consumers’ confidence so brittle in the fragile recovery has now taken a big hit. Meanwhile, massive retrenchments will cause big pullbacks in consumer spending worldwide dampening consumption with severe negative impact expect to hit China in the third qtr. This author is forecasting no good Christmas in 2011. Now that darks clouds are sweeping the global economic landscape, the loss of momentum in the qtr is also unlikely to inspire a seasonal upturn in the final qtr. There is also a seasonal slowdown in China itself in the hot summer. The cost push in material, energy and labor input and falling global currencies (relative to Yuan and US dollar) have squeeze manufacturing margins to razor thin. China's power companies are hemorrhaging cash, losing $2.3 billion in the first half of the year compared to $1.4 billion in the same period last year. They can’t raise energy prices without permission from Beijing. So without a bailout, power cut is inevitable to contain losses and energy shortage could undermining China’s economy.

http://www.financialpost.com/opinion/businessinsider/China+facing+energy+crisis/5192570/story.html

Since 2007, coal prices have climbed 80% but they are allowed to raise prices by a mere 15%. And coal price is still increasing along with recent spike in oil price. Any energy price rise will hit its margin-stricken over-supplied steel sector with flow-on negative effects into autos, industrial and consumer durable manufacture. The vulnerable steel sector poses threat to China’s sustained recovery.

China is not immune to the developed-world debt overhang on global growth. Foreign direct investment slowed to just 2.8% annual growth rate but which was running at 13.4% in May and 15.2% in April.

http://www.marketwatch.com/story/china-faces-slowing-foreign-investment-2011-07-17.

Going forward, that could evaporate as corporate worldwide cut fixed capital investments in the wake of expected shrinkage in earnings and uncertain economic outlook ahead.

HSBC’s preliminary Purchasing Managers’ Index survey read of 48.9 signals China’s manufacturing contraction – the first first contraction in manufacturing activity since July 2010, and the lowest reading in 28 months – and a DOUBLE DIP. HSBC economist Qu Hongbin said: "The July preliminary PMI implies that June's rebound in industrial production was just temporary. We expect industrial growth to decelerate in the coming months as tightening measures continue to filter through."

http://www.theaustralian.com.au/business/economics/chinas-manufacturing-activity-contracts-hsbc-survey-shows/story-e6frg926-1226099012286

The US first half GDP growth is sub-par – the worst since March 2009.

http://www.tradingeconomics.com/united-states/gdp-growth.

And the financial market rout this week is set to keep it on a downward trajectory. US July ISM manufacturing survey came in at a shocking 50.9, down from 55.3 the month earlier – very close to contraction. Manufacturing is the strongest consistent pillar of the US recovery story till now and that is faltering.

http://www.cnbc.com/id/43980631

Anaemic US economy would be detrimental to China exports as the US is its second largest market after EU.

China's growth has been over-stimulated since its 2008 RMB4 trillion ($581 billion) stimulus package, which focused on physical capital investment. Infrastructure spending has long-term payback period and adds little to continual multiplier effect. Investments make up a record 48 per cent of GDP. It is unsustainable. What is worst is these were funded out of debt borrowings with little capacity for repayment unless money can be continuously raised via land sales by local government. The economic model is spending first via debt financing and then paying back later by taxing consumers via housing squeeze of inflated land costs which inevitably sucked the savings out of citizenry. This policy cannot last forever and China is now facing up to it. LIKE THE US, EU, THERE WAS NO PRE-PLANNED EXIT STRATEGY.

http://www.theaustralian.com.au/news/world/we-must-be-ready-for-china-slowdown/story-e6frg6ux-1226097819349

A real estate crash in highly bubbly Hong Kong not only damage its own banking sector’s liquidity but also could have important ripple effects for China as many big Chinese conglomerates raise money there.

http://www.theaustralian.com.au/news/world/we-must-be-ready-for-china-slowdown/story-e6frg6ux-1226097819349

China is past its sizzling 11% to 14% annual GDP growth rates seen just before the GFC.

http://en.wikipedia.org/wiki/Historical_GDP_of_the_People's_Republic_of_China

Without stimulus support of autos and white goods spending of its consumer, it is unlikely that China could have returned to the plus 10% annual growth rate in the last two years. With this end of economic stimulus, it is now settling on a slower growth trend. Auto sales growth slumped steeply in the first half and the forecast forward till end of this year is only moderate gain expected. Economists have also noted “sharp declines” in growth in investment in infrastructure, property and manufacturing in June. China is heading for a slowdown, though not yet a contraction except manufacturing. After its economy grew 9.5 percent in the second quarter, the balance of meaningful probability must he further slowdown from credit tightening.

http://www.bloomberg.com/news/2011-08-05/china-s-scope-for-supporting-global-growth-limited-as-inflation-reaches-6-.html

Meanwhile, China's central bank chief Zhou Xiaochuan vowed to maintain a "prudent policy" to fight stubbornly high inflation. It is consistent with Chinese Premier Wen Jiabao’s exhortation that China must “treat stabilizing overall price levels as the top priority of our macro-economic controls and keep the direction of macro-economic adjustments unchanged," Mr. Zhou comment that the central bank would work to "avoid big fluctuations" in the economic growth, indicating some concerns over downside risks to the economy is a CLEAR REFERENCE TO THE DOWNSIDE PROSPECTS OF SLOWER GROWTH FOR THE BALANCE OF THIS YEAR EVEN BEFORE THE CURRENT UPHEAVEL SWEEPING GLOBAL FINANCIAL MARKETS.

http://www.cnbc.com/id/43708346

CONCLUSION

China led the rebound from the global recession in 2009 This time, it faced very strong headwinds of financial turbulence originating in its key export markets as it CONCURRENTLY struggles to contain domestic inflation amid escalating worries of its own banking vulnerability to local government debt and a residential real estate perching on the knife edge. China now may have limited room to counter weakening growth in the U.S. and Europe as inflation restrains policy makers from loosening monetary policy.

China’s only option available could be just watching the rapidly evolving financial turbulence and keeping its own financial house from catching neighborly economic fires originating from Europe, USA and the rest of Asia. I can’t imagine the dire consequences to global economies, if China hit the hard landing

WATCH OUT CHINA, the last sustaining bastion in this global turbulence could be a time-delayed cluster bomb waiting to explode of double-blow impact damage after EU and US have both meltdown into deep recession.

Anyone disagreeing?

ZHEN HE

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

US CORPORATE RESULTS - STRONGER BUT CONSUMER SPENDING LAGGING

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

BRITISH ECONOMY – GROWING STRONGER BUT AUSTERITY WAITING

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

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

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

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

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

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

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

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

EURO ZONE ECONOMIES – INDUSTRIAL STRONGER BUT SOVEREIGN DEBT WORRIES PERSIST

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

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

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

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

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

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

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

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

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

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


CHINESE AND EAST ASIAN ECONOMIES - WEAKER

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

OVERALL – CORPORATE STRONGER BUT CONSUMER SPENDING PATCHY

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

The FOMC minute confirms

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

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

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

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

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

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

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

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

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

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

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

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

Zhen He
7 November 2010