TR EMERITUS – Untold Hard Truths From Around The World – 淡马锡评论 – formerly Temasek Review

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

Alan Greenspan, Stock Market Perspectives, Warren Buffet and Contrary Views. Post my last write up “Update Global economies heading for turbulence, are we in trouble going forward?” published on Temasek Review 24 July 2010, stocks again flew up north in the direction of Arctic as the economic weather vane pointed southward towards Antarctica. It was a repeat performance following my earlier writing – Global economies heading for turbulence, are we heading for trouble going forward ? ( Temasek Review, 5th July 2010). A distinct sense of déjà vu enveloped me, momentarily. Or was it simply Murphy’s law at work of economic logic coming to grief of reaching the “wrong” conclusion with great confidence? One blogger, provocatively of instinct perhaps, asked of the then bullish stock market sentiments prevailing, if I should change my conclusion as seemingly lack in “accuracy” of forecast overshadowing the dissecting length of my economic “thesis”. I forewarned of “dying US housing market” as a possible trigger of the next shock spinning the US economy downward, sending global economies into another turbulence and a double dip recession. Fortunately, as if to save my embarrassment, former Federal Reserve Chairman, Alan Greenspan, long in denial of US housing bubble until that burst in the GFC and much-blamed for sowing the seeds of the GFC, came to my “rescue”. http://www.foreclosureconnections.com/blog/article/1774/alan-greenspan-expresses-concerns-about-the-state-of-the-economy Pressed by NBC’s “Meet the Press” broadcast on 1 August 2010 of the likelihood of a double dip, Greenspan said this – “It is possible if home prices go down. Home prices, as best as we can judge, have really flattened out last year.” I also warned of economic data “SUGGESTS THAT THE US ECONOMIC RECOVERY IS STALLING OR HEADING FOR A STEEP DECLINE.” In a similar vein Alan Greenspan added weight to this warning. He said, “We're in a pause in a recovery, a modest recovery but a pause in the modest recovery feels like a quasi-recession." http://www.telegraph.co.uk/finance/economics/7921353/Alan-Greenspan-warns-that-US-could-be-heading-for-double-dip-recession.html Alan Greenspan spoke of a US two-tier economic recovery - confined to mainly big businesses, large banks and wealthy net worth individuals – the rest of the economy saw little or no benefits. There is no “trickle down” beneficial impact. But Alan Greenspan wasn’t alone of bearish afterthoughts. Warren Buffett's Berkshire Hathaway Inc’s recent second-quarter profit announcement took a 40 percent haircut, as they accepted $1.41 billion of losses on derivatives, mainly because of long-term contracts tied to equity indexes. Under new revised accounting convention, they need NOT do so now especially that US stock market rose by 7% and EU stock markets rose by an average of around 5% in July but they did. Warren Buffet must have evaluated prospects for stock prices recovery forward and their possible beneficial impact on its long-term contracts tied to equity indexes but concluded negatively. http://finance.yahoo.com/news/Berkshire-net-down-40-percent-rb-1094284586.html?x=0&.v=4 But what is lesser known to most stock market participants is the suspect unusual low volume of stocks trading on all asset classes whilst lifting equities up north – EXACTLY DÉJÀ VU OF THE SAME RALLY SUCCEEDING MY FIRST WRITE-UP of 5 July 2010. One market source has it that in the past 12 weeks to the first week of August – there have been continuous outflows of more than US$40bn invested funds despite the July equities market rally. Both institutional and retail investors have largely sat on their cash or were on strike in the equities market. Some retail buying of bonds were noted – an indication of aversion to risks and investors unimpressed of corporate earnings, stronger balance sheet and all manners of improving economic statistics. http://www.ft.com/cms/s/0/5ac2207e-a0ae-11df-badd-00144feabdc0.html?ftcamp=rss Why the flight to bonds? The baby boomers, once over-confident generation, have been badly wiped out by the equities whiplash of 2008 and 2008. Their appetite for risks has faded as re-employment prospects dimmed by a jobless and slowing recovery story. In fact, news of the fall in non-farm payroll on Friday, 6 August 2010 saw the yield on US 10 year Treasury bond plumbed to a new 16-months low of 2.82%. http://www.marketwatch.com/story/treasurys-up-after-payrolls-fed-action-foreseen-2010-08-06 Many tired and badly-hurt equities investors remain haunted by the so-called fat finger “flash crash” of 6 May 2010 – the beginning of the stale consistent liquidation by retail investors in the equities. In times of economic uncertainty and extreme volatility of exchange rates, especially US Dollar to the Euro distorting US corporate earnings, investors’ fled to treasury bonds tells me that the bond market is a better predictor of economy than the direction of equities markets. IT IS BEARISH. Over a 45-year interval, yields on US 10-year treasury bond have never fall below this depth except for the first qtr of 2009 global financial meltdown. That does not leave us with a much clearer lever to read the staid lack of confidence in the US economy from this depth of gloomy despair. We need to look at other most recent economic parameters of housing, employment, manufacturing, consumer confidence, PMI indices etc. where the US economy is drifting to. The picture this author got is NOT pretty – in fact barely anemic growth, not just in US but also in Europe, except Germany. Stock market indices as forward “indicators” in emerging economies like Russia, Brazil, Turkey are doing far better in July than even India which slowed to a crawl . Deflationary concerns continue to weigh on the Japanese economy troubled by rising Yen, slowed wholesale price increase and its volatile machinery orders slumping again in June rising to a slow 1.6% over May compared to market expectation of a 5% increase. New data set from China is disturbing of how fast its economy is deteriorating. US economy Latest Fed Beige Book report released on 29 July 2010 pointed to the gloomy outlook. It showed that the US economy may be running out of steam. Economic activity slowed or stalled in four of the Fed’s 12 regional districts.” http://www.theaustralian.com.au/business/markets/modest-advances-in-us-economy-says-federal-reserves-beige-book/story-e6frg926-1225898239948 And IMF made urgency plea that the US spend further on fiscal stimulus http://sg.news.yahoo.com/afp/20100730/tts-imf-us-economy-972e412.html Not surprisingly, US 2nd Qtr GDP statistics, announced two days later, deteriorated sequentially from 3.7% annualized growth rate to 2.4% annualized in the June Qtr – THAT IS A 35% SEQUENTIAL FALL IN GROWTH MOMENTUM. As the US economy is entered into the 3d qtr on a weakening note, Obama warned “we’ve got to keep on increasing that rate of growth and keep adding jobs so we can keep moving forward,” http://www.theaustralian.com.au/business/news/slow-us-growth-sparks-political-debate-over-gfc-recovery/story-e6frg90o-1225899326792 That signals tougher challenges ahead. Improving employment will be harder to achieve going forward for several reasons. Some semblance of stability of unemployment levels in the June qtr had been helped substantially by temporary hirings of national census workers. All these jobs were gone in June. Partially alleviating these job losses were growth in services sector which continued into July – 7 consecutive months in a row. US Institute for Supply Management's non-manufacturing index rose to 54.3% in July from 53.8 in June indicating modest expansion in the services sector. http://www.marketwatch.com/story/services-sector-expands-slightly-in-july-ism-says-2010-08-04 Its contribution to employment growth, however, slowed in June and modestly added another 71,000 jobs in July. http://www.marketwatch.com/story/millions-have-simply-given-up-on-a-job-2010-08-06 Evidently, the gains in private services sector were insufficient to be more than offsetting of job losses elsewhere including 38,000 Government sector jobs in July alone, according to US Government Labour statistics. Except for Vermont, all 49 states have balanced budget rules keeping expenditure within falling revenue base from sales tax (as housing sector deteriorates) aggravated by depletion of jobless insurance funds from high unemployment. Further layoffs are looming as states prefer to trim labour at the start of new fiscal year than waiting till late of trapped revenue shortfall. http://www.cnbc.com/id/38593974 The pace of layoffs could gather pace if the economy weakens further and/or stimulus spending money drying up. Indeed there are already signs that employment market deteriorates significantly further of late. Initial jobless claims climbed by a much higher than expected 19,000 to 479,000 in the week ended July 31 even though there were no special factors influencing last week’s report. Compared against the four-week moving average of claims, a less-volatile measure, the figure is projected to be around 453,250. The higher initial jobless claim ended 31 July lifted the moving average to 458,500 and that signaled employers are RETRENCHING STAFF AS THE ECONOMY IS SHOWING SIGNS OF SLOWING. http://noir.bloomberg.com/apps/news?pid=20601068&sid=aNmRu9_Trax0 A cooling economy means that employers will resist adding staff in the coming months thereby risking a fall in consumer spending ahead – in simple algorithm, the adverse cycle of increasing unemployment depressing consumer spending repeating itself is being re-established bringing on elevated risks of the much feared recession. A CRITICAL WATCH VARIABLE IS EMPLOYMENT LEVEL AND ITS IMPACT ON CONSUMER SPENDING FORWARD. The latest figures are NOT pretty. July job losses were 131,000 after 221,000 jobs were lost in June – worse than economists expected, driving the yield on the 10-year US Treasury bond to 2.82% , a 16 months low. Further evidence of gloomy consumer outlook can be seen from falling participation rate - the percentage of the working-age population who are working or looking for work. That fell in July to 64.6%, the lowest rate since 1985. http://.marketwatch.com/story/millions-have-simply-given-up-on-a-job-2010 www -08-06 Employment statistics past and employment outlook forward cannot be looked at in isolation. We need to look at other macro-economic variables to assess the state of the economy which could either confirm or refute this pessimistic prognosis to date. Here is a sample Consumer durable goods order decline 1% in June, the second straight decline in 3 months and steepest fall in 10 months. Fall was steepest in autos and the gains in computers. Economist expected a 1% increase. http://www.marketwatch.com/story/surprise-drop-in-june-us-durable-goods-orders-2010-07-28?dist=bigcharts Home prices rose 1.3% in May compared with April in 20 major U.S. cities on a seasonally unadjusted basis. This is at least some signs that home prices are bouncing at depressed levels instead of continuing slide. But May pending home sales actually fell 30% over April in erratic economic conditions prevailing and expiry of tax credit incentives. It slumped again in June. http://www.marketwatch.com/story/us-home-prices-rise-13-in-may-from-april-2010-07-27?dist=bigcharts Consumer confidence plummeted in July on concerns about jobs and business conditions, following a sharp decline in June. July's consumer confidence index fell to 50.4 - the lowest level since February -- from an upwardly revised 54.3 in June. http://www.marketwatch.com/story/job-worries-darken-july-consumer-confidence-2010-07-27 This came after non-farm payrolls declined by 125,000 in June but prior to that, consumer confidence had risen for three straight months. http://money.cnn.com/2010/07/27/news/economy/consumer_confidence/index.htm?postversion=2010072712 That suggests a shift in consumer confidence sentiment from positive to strong negative. US auto sales, however, increased in July on a monthly basis – that is a positive. It is a welcome relief for the top US automakers after a disappointing May sales and consecutively again in June. http://www.marketwatch.com/story/gm-sales-see-big-rebound-in-july-2010-08-03?pagenumber=1 May auto sales decline, the first since August 1998, was particular heart-rending as the Cash for Clunkers ended and it had a 5-Saturdays and 5-Sundays in that month. July sales have one Saturday less than June, so the unadjusted sales improvement superficially looks encouraging at the outset. http://www.marketwatch.com/story/us-auto-sales-decline-for-june New model introductions and the commencement of the new fiscal year replacement buy were thought to be the key reasons for the uplift in July sales as top three US automakers gain on market shares against imports facing unfavorable exchange rate movements. Historically, there seems to be a strong correlation between stock prices and auto sales in US. A gain of 7% in US stock price in July was expected to be another positive influence. But this was NOT the case – regardless of the expiry of Cash for Clunkers incentive. http://money.cnn.com/2010/08/03/news/companies/autosales/index.htm?postversion=2010080316 George Papas, Ford's director of sales analysis, estimated that much of the improvement came from lower priced fleet sales to businesses like rental car companies, rather than strong consumer demand. Industry wide sales to consumers rose only 1% in the month, while fleet sales shot up 35% - a continuation of 2nd qtr trend of business investment and consumers remaining in the chill of spending. Pending home sales fell another 2.6% in June as consumers sat on the sideline. It fell to a record low of 75.5 from a revised 77. 7 in May and that was the lowest on records dating back to 2001 and down nearly 19 percent from the same month a year earlier. Market analysts predicted a gain of 0.6%. Weak economy and tight lending standards kept consumers away from the housing market. May sales fell 30% from April 2010 after the expiry of tax credit. There seems to be no relief in sight. http://www.cnbc.com/id/38536966 While the Commerce Department retail sales for July 2010 is still pending, retail sales fell by 0.5% in June – the second consecutive monthly fall after a downwardly revised 1.1% fall in May. With two consecutive months of falling retail sales, there must be some concerns that consumers may not lead this recovery. http://www.financemarkets.co.uk/2010/07/14/us-retail-sales-fall-in-june/ The national PMI for manufacturing industries decreased 0.7 points in July to 55.5 from June’s index of 56.2. It demonstrated that US manufacturing has been growing for 12 consecutive months in a row but July’s score of 55.5 is the lowest the index has been since December 2009. Factory orders fell 1.2% in June. Manufacturing growth is SLOWING. http://www.missourieconomy.org/indicators/pmi/index.stm Meanwhile, the new orders index plunged to 53.5 in July, down 5 notches from June and way below May’s reading of 65 – suggesting weaker manufacturing in the latter half of 2010. Steeply plunging order since May 2010 implies an anemic economic recovery for the remainder of this year. http://www.financemarkets.co.uk/2010/08/02/us-manufacturing-activity-expands-for-12th-straight-month/ Over three consecutive qtrs to June 2010, US GDP growth fell in succession from 5% in Dec 2009 qtr to 3.7% in the March qtr and now down to 2.4% in the June qtr. The US economic recovery is sputtering downwards at a consistent 35% each qtr and the June qtr is significantly sub-par at 2.4%. If the same trend persist and no compelling statistical evidences available to refute otherwise of a reversal of this adverse economic direction, the third qtr GDP growth could come in at a mere 1.6%. http://money.cnn.com/2010/07/30/news/economy/gdp/index.htm?cnn=yes Other anecdotal evidences showed a strong change in US consumer habits, Savings were up as deleveraging gaining momentum. McDonald posted better-than-expected-earnings growth of 12% in second qtr in the downturn and bullish on forward prospects as “consumers trade down from more expensive restaurant fare.” Its July’s 7% sales outperformance gain was stronger in Asia, Middle East and Africa gaining more than 10.1% than Europe’s gain of 5.1%. http://www.marketwatch.com/story/mcdonalds-profit-rises-12-on-worldwide-demand-2010-07-23 Procter & Gamble fourth qtr and full year lacklustre results announced on 3 August 2010 showed how tough trading conditions were. Net sales grew five percent to $18.9 billion for the fourth quarter and three percent to $78.9 billion for fiscal 2010. Organic sales, which exclude the impact of acquisitions, divestitures and foreign exchange, grew four percent for the quarter and three percent for the fiscal year. Unit volume accelerated throughout the fiscal year and was up eight percent in the fourth quarter. http://www.pginvestor.com/phoenix.zhtml?c=104574&p=irol-newsArticle&ID=1455483 In other words, 8% of volume gain bought only 4% of net sales on the topline implying very tough trading conditions within consumer staples in all its global market segments. P & G reported gaining market share in all segment yet its diluted net earnings per share were $0.71 for the fourth quarter and $4.11 for the fiscal year. Accelerated gain in market share in the 4th qtr was bought with decelerating earnings, diluting 4qtr proportional earnings contribution. The results are consistent with the 2nd qtr reported earnings and difficult trading conditions forward guidance of Tupperware and Coca-Cola. With notable exceptions, early indications for July retail “back-to-school” retail sales were generally disappointing in the teens sector – both on the same-store basis and nationally. What Ben Bernanke is expecting? As weak job conditions continued to drag consumer confidence and spending, Ben Bernanke is still hoping that “rising wages will probably spur household spending in the next few quarters.” His latest prognosis of 2 August 2010 is that “rising demand from households and businesses should help sustain growth” Consumer spending, which accounts for about 70 percent of the economy, “seems likely to pick up in coming quarters from its recent modest pace,” Bernanke forecast. http://noir.bloomberg.com/apps/news?pid=20601068&sid=aSehtnCHeZl0 The personal savings rate rose to 6.4% in June, the highest level in a year. Consumer spending, adjusted for inflation, increased by only 0.1% in June over May. http://www.marketwatch.com/story/income-stays-flat-as-spending-remains-sluggish-2010-08-03?link=MW_related_stories But what does the 2nd Qtr GDP official release tells us? Data from the 2nd Qtr GDP official release only two days earlier seems to contradict him. http://www.bea.gov/newsreleases/national/gdp/2010/gdp2q10_adv.htm Real personal consumption expenditures increased 1.6 percent in the second quarter, compared with an increase of 1.9 percent in the first. Trend is working against Bernanke’s projection. The change in real business inventories added 1.05 percentage points to the second-quarter change in real GDP after adding 2.64 percentage points to the first-quarter change. That shows business investment in inventories is also decelerating – contradicting Bernanke’s expectation forward. Real business fixed investment increased 17.0 percent in the second quarter, compared with an increase of 7.8 percent in the first – mainly equipment and software – indicating accelerating capital goods and productivity gains. Real residential fixed investment increased 27.9 percent, in contrast to a decrease of 12.3 percent BUT HOUSING SECTOR IS FADING FAST as Alan Greenspan had warned. Viewed in the context of steep decline in pending home sales, Greenspan is right to suggest that slowing U.S. recovery feels like a “quasi-recession” and the economy might contract again if home prices decline. MOST ITEMS ON BERNANKE’S WISHLISTS ARE EITHER OVER OPTIMISTIC OF AN EARLY TURNAROUND EXPECTATION OR FAST FAILING OF FRUITION AS THE ANEMIC RECOVERY CONTINUES TO SPUTTER TOWARDS A PAUSE. China Global stocks took another beating on 29 June 2010 when the US Conference Board again revised its leading economic index for China to show the smallest gain in five months during April. The reading, which is a strong gauge of the economy’s outlook, rose 0.3% -- far less than the 1.7% previously revised on June 15. http://www.minyanville.com/businessmarkets/articles/china-data-conference-board-economic-index/6/29/2010/id/28966?camp=syndication&from=yahoo Fears swept financial markets that the world’s fastest growing economy is slowing faster than expected – something consistent with reports of steep decline in material imports discussed in my previous writing of 24 July and also apparent from the plunging dry bulk cargo freight rates and the Baltic Dry Index. Capsize vessel freight rates for dry bulk cargo fell 78% since early June 2010. http://noir.bloomberg.com/apps/cbuilder?ticker1=BDIY%3AIND Yet another sign of deteriorating external condition is Singapore’s manufacturing side have collapsed in June by a huge 24.3% over May which itself grew by a mere 5.2% in April. http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=asy1C9np.K9g It is a massive tumble following a slowed growth. Singapore’s manufacturing sector is very sensitive bellweather to shifts in external demand conditions. Comparing all these statistics to China’s manufacturing PMI since December 2009, it is NOT entirely surprising of the fast slowing down of Chinese manufacturing sector previously noted in my earlier writings. Manufacturing PMI for each respective months (in brackets) are as follow – December 2009 (56.6), January 2010 (55.8), February 2010 (52.0) March 2010 (55.1), April 2010 (55.7), May 2010 (53.9), June 2010 (52.1) and July 2010 (51.2). The pattern show a double-dip over a seven-month interval and a steeper three consecutive months decline since May, the lowest in 17 months, marking the distinct turnaround from the strong performance from the beginning of the year. http://www.chinadaily.com.cn/business/2010-08/03/content_11085652.htm Manufacturing slipped concurrently and coincided with the tough credit squeeze on lending since April 2010 without the lagged effect expected. Looking at the July PMI component, finished goods inventory index fell from 55.8 in June to 52.7 indicating slower manufacturing activity and an aggressive rundown of inventory. More importantly. New orders declined to 50.9 in July compared to 2.1 in June pointing to possible contraction forward as conditions in EU and US deteriorate. Current expectations must be further deceleration of growth in the coming months ahead. Report from Australia disclosed further deterioration in Chinese demand for iron-ore and darkened prospects forward. BHP-Billiton and Rio Tinto at Diggers and Dealers Mining Conference in Kalgoorlie on 2 August 2010 warned that spot prices are trading well below the new $160 a tonne CIF third quarter contract price. http://graphics.thomsonreuters.com/10/diggersdealers.pdf With another two months ahead awaiting, both the world’s largest and third largest miners' forecast continuing fall in iron-ore pricing. This is somewhat surprising to me. Market sources said China accounts for 64% of the global iron ore import of 961 million tonnes or roughly 625 million tonnes. And what is the inventory level now? “iron-ore stockpiles at Chinese ports. Inventory expanded for four consecutive weeks to almost 74 million tons by July 16.” Now that stocks at Chinese ports is about 1.5 months supply but it does not include those that are in ocean shipping transport nor in wharfage transit depots in Brazil and Australia awaiting shiploading loading and shipment or in storage sheds close to production steelworks. Therefore, China needs to start importing iron-ore some time in September or at latest in late October – more likely to be sooner than later. Yet the Australia’s BHP-Billiton and Rio Tinto are so bearish in this September quarter when landed costs of iron-ore from Brazil are more expensive on account of distant transport!! CHINA IS DEFINITELY SLOWING DOWN AT LEAST FOR THIS QUARTER. China cancelled preferential power tariffs in 22 provinces to all energy-intensive industry on 7 August 2010 but backdated to 14 July 2010. That would include steelworks, aluminum smelters, calcium carbide plants and ferroalloy industries. The move, as part of its efforts in meeting 5-year energy conservation targets ending 2010, will adversely burden industrial production with higher energy costs, particularly smaller companies and those employing outdated manufacturing facilities. http://www.chinadaily.com.cn/business/2010-08/07/content_11114159.htm Local governments have not been deemed sufficiently stringent enough of enforcing targets centrally directed since May 2010. Official statistics showed that energy intensity rose by a paltry 0.09% in the first six months of 2010 in year-on-year comparison. First qtr 2010 energy intensity was much stronger. It rose by 3.2%. Both stacked poorly against a 20% reduction benchmark in energy intensity in 2010. In late development, announcement from the Chinese Ministry of Industry and Information Technology on 9 August 2009, ordered 2087 steel, aluminium mill, cement mills, paper mills, coking plants and other factories with poor energy efficiency to close as it struggles to cut waste and improve the country's battered environment. http://www.theaustralian.com.au/business/news/china-to-shut-thousands-of-energy-wasting-factories/story-e6frg90f-1225903073694 There is no flexibility on this directive as all state utilities have been directed at cutting power supplies and all banks to stop dealing with them by the end of this September. Compliance with these tough curbs across industries to contain energy use in the 2nd half of 2010 will adversely affect industrial production in the coming quarters till end of 2010 at least. China’s State Information Center said in its economic review quarterly just released forecast its gross domestic product (GDP) would grow by 9.2 percent in the third quarter from the same period last year. This is slower than the crackling pace of 11.9% in the first qtr and 10.3% struck in the second. http://english.china.com/zh_cn/news/china/11020307/20100804/16062953.html The Centre forecast a 9.2% 3rd qtr GDP growth, down from 10.3% in 2nd Qtr and 11.9% in the last Qtr. Reasons advanced include the continuing impact of the housing credit squeeze, tail end of inventory restocking, and the tapering of impact of fiscal stimulus for cars and white goods purchases. 2010 forecast is 9.5% GDP growth in line with 30 year average. http://www.cnbc.com/id/38548180 Assuming this forecast target of 9.5% GDP growth will be met with gradual withdrawal of fiscal stimulus and stiff cutback in industrial production via rigorously enforced stringent energy intensity reduction measures in place, China’s 4th qtr GDP must, by definition shrink to a low of 6.6%!!. Therefore any downward revision of GDP annualised growth by the Chinese Government, from this point of my writing, must imply a massive fall-off in 4 qtr GDP growth. I believe the energy-intensive curb is a politically-motivated move to forcibly cool off the Chinese economy from overheating. The worries, I believe, is that the fiscal stimulus impact was way overdone ,with lingering fears of resurgent inflation and massive overloads of bad loans in property, construction-related sectors and commodities speculation. Inflation in June of 2.9% is near a two-year high and recent wage inflations reflect costs-of-living pressures. Inflation could go higher with rising food prices. Households borrowed 2.5 trillion Yuan, almost four times more than a year earlier and much of these went into multi-property speculation unproductive to, even threatening to damage, long-term real economic growth. http://noir.bloomberg.com/apps/news?pid=20601068&sid=agagn6YHRQiA One cannot help it but noticed that the shut down entities are confined almost exclusively (except paper mills) in construction related entities – steel, aluminum, cement industries. Confronted with a highly uncertain outlook of its principal export markets of EU and US, the Chinese could NOT afford to risk a strong Yuan appreciation now, potentially having decimating impact across its entire manufacturing sector. The Chinese are doing selective surgery and pruning – doing stress tests of its banking, steel and cement and property sectors, assuming a worst case scenario of 60% fall in residential asset values in 7 top-tier cities. The much tougher and expanded stress test underscores the Chinese Government’s determination to hold tightening policies in place of higher down payment and no lending for multiple housing speculation since April 2010, leaving no prospect of easing monetary policies in the near term. Analysts are now speculating forward of next easing of tightening policies won’t be earlier than end 2010 or even mid-2011 depending on prevailing global economic conditions. This author does NOT believe any easing of monetary policies at least until significant fall in property prices in big cities of up to 30% - otherwise there is no beneficial effect to the economy except collateral damage to industry by its April 2010 lending tightening measures. Price GROWTH has slowed and sales plummeted since then. Market analysts are looking for a price DECLINE of 30% from current levels in top 7 cities. This property asset bubble is placing China’s economy between the proverbial devil and the deep sea. Giant state-owned enterprises all have their fingers in the dirty pie of this property price spiral and they are fearful of steep fall exposing their own indebtness after orgies of huge spending spree of seemingly “free” money from stimulus package last year. Recent stress tests conducted by the China Banking Regulatory Commission (CBRC) showed 20% of all outstanding loans to state-owned companies were "in trouble" as of the end of June. http://www.marketwatch.com/story/chinese-banks-reportedly-facing-wave-of-bad-loans-2010-08-08 EUROPEAN ECONOMIES UK economy shines a little growth blip, up 1.1% in June qtr, four times the pace the preceding qtr but all sector of the economy slowed again in July. Britain’s manufacturing PMI slipped marginally from 57.6 in June to 57.3 in July – that is a five-month low. Manufacturing export fell 3 months in a row, said to be reflecting the British pound recent rebound http://www.marketwatch.com/story/uk-euro-zone-factory-activity-beats-forecasts-2010-08-02 Inflation is running higher 3.2% in June above the Government target of 3% annualised due to higher sales tax. http://noir.bloomberg.com/apps/news?pid=20601205&sid=a9vH7g4Fp4ts Cameron’s planned spending cuts may slice 85 billion pounds from expenditure, equivalent to 5.7 percent of GDP. It is the highest budget cut since World War II. Even in moderately good times, it is hard to attain such a cumulative sequential aggregate growth over two years. There is a need to walk the tightrope balancing between monetary policy and fiscal tightening. And that is true for a number of EU members as well, even Germany. Consumer spending remains weak in the 16 members EU countries. On a month-to-month basis, retail sales were flat in June after a 0.4% gain in the month prior - the biggest fall recorded in France and, most surprising, in Germany. This gives little encouragement for self-sustaining growth. http://www.cnbc.com/id/38552423 So far, the economic recovery in the eurozone has been heavily reliant on exports from Germany, Europe's economic powerhouse. As the fiscal squeeze already underway tightens and grips the economy, any revival of consumer spending will evaporate quickly. One must remember that the strength of the German economy had been fueled mainly by US and Asian (mainly China) demand for cars and machines, helped by a 13% cheaper euro relative to US Dollar since last November. http://noir.bloomberg.com/apps/news?pid=20601068&sid=aRSQTvxYbS3Y German factory order rose by 3.2% in June over May 2010 but June manufacturing production actually declined 0.9% over May, somewhat disappointing considering a 2.9% monthly gain in May over April. http://www.marketwatch.com/story/german-industrial-production-sees-unexpected-slip-2010-08-06 Fluctuating industrial production indicates the inconsistency stability of export demand. Business confidence, however, surged to a three-year high in July. The evidences available point to gradual broadening recovery of export-led German economy but that optimism needs to be tempered with falling investors’ confidence over the last 3 months and falling retail sales in June. The lack of progress in visible reduction of “slower work week” of less than full-time employment in many sectors of the German economy hampers consumer confidence – much like the US is now. ITS RESURGENT EXPORT DEPENDENT MANUFACTURING SECTOR UNTIL NOW IS NARROWLY FOCUSSED ON LUXURY CAR AND CAPITAL GOODS INVESTMENT DEMAND FOR INDUSTRIAL MACHINERY FOR SUSTAINABILITY. Trade boom that Germany enjoys now is due to the lagging impact of fallen Euro which lifted German exports in June. http://www.marketwatch.com/story/german-exports-surged-in-june-2010-08-09 Economist now forecast German 2nd Qtr GDP to grow by 1.4% sequentially compared to first qtr growth of 0.2%. While order book remains good, the pace of export surge is not expect to last if either or both China and USA weakens significantly further. Elsewhere, EU’s PMI, announced on 4 August 2010, edged up slightly in July to a 3-month high of 56.7 from 55.6 in June - lifted by manufacturing PMI. http://www.marketwatch.com/story/euro-zone-services-pmi-rises-less-than-expected-2010-08-04 Economists, however, noted that the euro-zone PMI jump was driven largely by a big surge in German activity, with that nation's manufacturing index surging to a three-year high of 61.2 from 58.4 in June. http://www.marketwatch.com/story/uk-euro-zone-factory-activity-beats-forecasts-2010-08-02 Notwithstanding that lop-sided gain, EU services PMI continue to improve. Together with consistent improvement in services PMI of 11 months, it shows the risks of an EU-wide double dip seems a little bit more in check. Without the strength of German economy, especially manufacturing exports pacing the “improvement” statistics, much of the rest of EU is lumbering in varying distressed growth. Spain which grew by a mere 0.2% on a truly basis is forecast to be the first to fall into a double dip when fiscal austerity takes hold of its economy. Italy reported a sequentially 2nd truly growth of 0.4% over its first qtr. http://www.marketwatch.com/story/italy-second-quarter-gdp-up-04-up-11-on-year-2010-08-06 EU-wide, the GDP growth for the 1st qtr on a year-on-year comparison to 2009 was only 0.2% - this meagre growth being a constant reminder of how thin the margin of cushion the EU has of risk it collapses back into a double-dip recession. Even the strong narrowly-focused manufacturing-led German recovery is forecast to reach an annualised growth rate of just 1.5% in 2010. German and EU 2nd qtr growths are expected to be announced on the 13 August 2010. Both are expected to be significantly better. Meanwhile, the European Central Bank cautioned that second-half growth would be "much less buoyant" than the second quarter. Currency and metals front. The USDollar shed roughly 6% against most major currencies except the Chinese Yuan in July. By the first week of August, the USDollar was at an eight-month low against the Japanese yen. http://www.cnbc.com/id/38547819 Depreciation of the US Dollar since July is in contrast to the June qtr which negatively impacted on US export competitiveness. US 2nd Qtr GDP official announcement on 30 July 2010 made the following observation. “Real exports of goods and services increased 10.3 percent in the second quarter, compared with an increase of 11.4 percent in the first. Real imports of goods and services increased 28.8 percent, compared with an increase of 11.2 percent” Increased import subtracted from the 2nd Qtr US GDP figure should now be partly reversed in the September qtr if current lower exchange rate of the US Dollar sustains. Indeed the evidence is already seen in US automakers gaining on US market share against foreign imports in July. Japanese Finance Minister Yoshihiko Noda said Monday, 9 August that he is watching the foreign-exchange market as the U.S. dollar is marking multi-month lows against Japan's currency citing "excessive, disorderly foreign exchange moves would have adverse effects on the stability of the economy.” The implication of that is gain in US export over import via cheaper US Dollar could be at the expense of Japanese GDP loss. http://www.marketwatch.com/story/japan-finance-minister-warns-again-on-yen-strength-2010-08-09 The Chinese are watching too with more than casual interest of slide in US dollar. Chinese are seeking settlement of loan via repayment of commodities supply. China agreed to lend the Latin American nation US$20 billion in April to finance development projects in return for future oil supplies. China is seeking to lower its risks exposure to US Dollar in its foreign lending. China announced on June 19 its abandonment the Yuan’s decade-long peg to the dollar to link the Yuan to a basket of currencies, one that includes USD, Euros, Yen, and various other currencies. It will help to de-politicise trade tensions with the US, diversify the currency base of its foreign reserves and allow for wider considerations of overall balance-of-payments to rebalance the Yuan exchange relative to US Dollar. The Chinese Yuan has since appreciated only 0.77 percent. Any depreciation of the US Dollar, henceforth, could have less impact in the future, even as trade surplus China enjoys between the two economic giants continued to expand in July. This leaves US less scope for monetary policies alternatives like a gradual consistent de facto devaluation to lift its long-term export competitiveness vis-à-vis China. Obama administration now has less leeway of pressuring China to allow rapid appreciation of the Yuan in his macro-economic trade policy formulation – something with Geithner has been imploring for some time already. A peculiar contradiction in the metals’ market in recent times shows rising LME inventory levels coincide with higher metal prices. Recent depreciation of the US Dollar had been a small contributing factor. Metallurgical coal price has been easing off slightly but steep fall in iron ore and magnetite prices contrast against strong uptrend in the prices of oil and other base metal complex, namely copper, nickel, lead, zinc, aluminum. This author, believes, in part of the explanation, for now at least, lies in the continuing development demand for metals from emerging economies like Russia, Turkey, Indonesia, India, Brazil and east Asian economies alongside infrastructural constructions generated by Chinese mining investments in Africa, Indonesia, PNG to South America. http://www.marketwatch.com/story/emerging-markets-on-healing-path-climb-in-july-2010-07-30?pagenumber=1 Gold price in July is a rebel of its own wandering direction – thanks to gold-trading liberalisation in China made available to its banks, talk of Saudis buying physical gold and volatile bond and equities markets. Analysis This author cut his near term economic outlook for both US and China. US July macro-economic statistics published were almost UNIFORMLY DISMAL. We saw consecutive monthly decline in PMI readings after 12 months of consecutive growth path. New manufacturing orders plunged steeply – again two in a row – indicating the strength and pillar of recovery is weakening. The much depressed activity in pending home sales continued to slide mirroring spending weakness in consumer durable such as autos and evidence of record savings rate. Retail sales show no signs of revitalisation and changed spending habits of US consumers saw downgrading of even food consumption from restaurants to prefer cheaper fare at fast food outlet like McDonald. The tapering end of federal fiscal stimulus impact coincides with state and municipal budgetary pressures add to looming deterioration in labour market, not sufficiently supported by private sector employment growth. Americans generally worry about their job security. Consumer confidence in July plummeted sharply to near contraction. The “cockerels” of corporate spending failed to find the “egg” of consumer spending to lift the economy’s dependency on federal stimulus spending onto a sustained growth trajectory. Bernanke’s “unusual uncertainty” assessment of the US economy may have misjudged the economic recovery lever – THE AMERICAN CONSUMER IS MISSING. And without the “egg” of consumer, where is the next “hen” of economic growth and employment to lay the next “egg” of consumer ? 16-months record low yield in the bond market is confirming of an “unusual uncertain” outlook forward. The US economy is struggling to hold on to its fading momentum. The Fed Reserve has very little room of interest rate adjustments buying up mortgage and bonds but major quantitative easing of printing and added fiscal stimulus, besides inflationary risks that means, may be very difficult to persuade Congress ahead of the mid-term US Congressional election due 2 November. The Federal Open Market Committee meeting yesterday announced that it would reinvest maturing mortgage-backed securities back into the government debt. The aggregate amount of that maturing in the next 12 months in the Fed’s portfolio is estimated around $200 billion as compared to its domestic debt of $2.05 trillion, about 10 percent. The FOMC also pledged to keep its exceptionally interest rate low for extended period whilst weighing its option to exit fiscal stimulus. CHINA's trade surplus announced today, 10 August, soared again in July - due to much slower-than-expected growth in imports. The “positive” announcement is telling a story of accelerating pace of economic deceleration sent the Shanghai Stock Exchange index down 2.89%, the biggest one-day decline since beginning of July. http://www.theaustralian.com.au/business/markets/chinas-imports-slow-sharply/story-e6frg926-1225903490075 July trade statistics show imports rose 22.7 per cent, down dramatically from June's 34.1 per cent increase. This author believes that the larger-than-expected slowdown in imports was due MUCH MORE to a slowdown in overall domestic demand and investment, than falling global commodities prices. Base metals in July were up, thermal coal eased slightly, even as iron-ore fallen significant. Two consecutive monthly big drop in imports showed China has slowed down dramatically and signalling a diminished contribution to world’s growth. Thanks to an 8% appreciation of Euro to Yuan exchange rate, Chinese export to EU rose by 5.4 per cent to $US28.67bn in July from $US27.2bn in June – the underlying conditions in EU remains very tough, probably contracting in volume terms. Any upward revision of the Yuan post this much higher-than-expected trade surplus could hit Chinese exports to EU ahead. Base metal prices and commodities-laden Australian, Brazilian and Canadian stock exchanges actually fell on the Chinese July trade announcement. Beyond this unhealthy latest July figures, Chinese macro-economic statistics and evolving policy changes in the last few weeks are very worrying. Most recent (twice-revised) leading economic indicators down to 0.3% announced on 29 June 2010 by the US Conference Board shook global financial markets. That proved China’s economy had been slowing faster-than-expected as manifested later in the substantially wider-than-expected fallen June import. July PMI read of 51.2, barely above contraction, extended to a three consecutive months decline – breaking its uptrend trajectory since last December. More damaging detail analysis of its July PMI reveals aggressive inventory destocking accompanied by steep decline of new orders to 50.9 – very close to contraction in manufacturing. That will, most likely, in this author’s best considered judgment, assumes a negative growth trajectory in the September qtr for the following reasons. The big fall in imports in July echoed BHP-Billiton & Rio Tinto’s warnings of slowed materials demand must point to lower Chinese industrial production this quarter. Secondly, pressure on energy intensity targeting already adversely impacting on industrial production such as aluminium in the 2nd qtr lifting Alcoa’s exports there, will accelerate as China aims for a 20% reduction in energy intensity use by end of this calendar year. Current half-year read of energy intensity is 0.9% increase compared to 3.2% in the first qtr. This relentless pressure will shut down over 2087 steel, aluminium mill, cement mills, paper mills, coking plants and other factories by end September and closed down countless number of smaller factories with inefficient energy production technology. Whilst property sales have plummeted since mid-April, and price growth slowed significantly, there is no evidence of significant broad price decline in all major cities as yet. There must be significant risks of further tightening of lending to slow the economy further particularly if China’s trade surplus continues to expand. I believe there is some risks that the impact toll on property prices could fall by more than 30% which explains why Chinese authorities have extended stress tests beyond property sector to collateral sectors like steel and cement manufactures. Elsewhere the brightest spot is Germany, particularly its better-than-pre-crisis performance of its export sector US and Asia in July. But that pace may not last. There is some hint of that already in Chinese July trade figures. HSBC economists headed by Hongbin Qu noted that "the bulk of the July trade surplus came from [trade with] emerging markets countries," http://www.marketwatch.com/story/chinas-july-trade-surplus-at-287-billion-2010-08-09?dist=beforebell That must mean that Chinese is sucking growth out of emerging countries. The excess of imports over exports is a deduction of GDP growth statistics – a leakage in effect. Singapore’s manufacturing exports collapsed by 24.3% in June following a 5% gain in April. Yesterday, Intel and AMD shares fell steeply on the NY stock exchange after analysts warned of signs of slowing personal computer market. JP Morgan analyst Christopher Danely warned that "checks in Taiwan indicate PC orders falling off a cliff." The big picture of global economic outlook says the US economic recovery evidently losing momentum, Chinese economy poised to steeper deceleration, Japanese economy tending towards deflationary stalling and some signs of softening in Asia. The only bright spot is Germany, depending on weak euro, US and Asian demand to sustain its robust export manufacturing. That may falter soon too. On balance, the downside risks of a double dip in global economies have increased, in my best judgment, to at least 80/20 and most likely sooner than later. Anyone have disagreeing thoughts to add to this discussion paper? Zhen He 11 August 2010. Read More →