Wednesday, July 16, 2008
Hump Day Very Humpy Indeed
One pattern that provides a small grain of hope is the Japanese CP mariket which is rising. On the one hand, it is true (as this article comments) that higher input costs raise short term operating credit needs. On the other hand, rising short-term borrowings are rarely the sign of a slowing heavy industrial economy even with import costs rising this high:
One-month borrowing costs for companies with the highest credit rankings rose to a two-week high of 0.665 percent today, pushing above interbank rates for the second day, Tokyo Tanshi Co. prices show. The amount of debt outstanding in the market rose in June to a five-month high of 22.3 trillion yen ($213 billion), Japan Securities Depository Center data show.Japan matters a lot right now. The consumer side of its economy is weakening further, but overall jobs have held up. With corporate profits generally under pressure, corporate demand for some services is slackening as well:
The balance between the supply of money from investors and demand for funds could ``collapse,'' pushing rates even higher, if companies continue borrowing in such large volumes, said Hiroshi Seki, market economist at Totan Research Co. Import prices for producers rose in June for the fourth month, climbing 17 percent, a July 10 central bank report showed.
Corporate demand was also a drag on the index as higher prices crimped profits and left firms with less to spend. Civil engineering and architectural services fell in May, according to Katsuya Shimura, a spokesman at the trade ministry.I think Japan will feel the impact of the European slowdown. UK unemployment claims are rising and the flood of retail consolidation activity presages tight times. That's always the sign of consumer tightness. European car sales as a whole took a big drop in June - 7.9%. But the total for the entire first half is just a 2% decline, showing how quickly this is moving. Toyota got hit hard, and Honda did too. Car sales in Spain and Italy had been very weak, but the big drop recorded in June came from the faltering of the stalwarts:
Sales growth all but evaporated in Germany and France, which together had supported Western European registrations in the first five months with respective gains of 4.2 percent and 5.2 percent. Germany, Europe's largest car market, grew just 1 percent to 304,036 registrations in June, while France advanced 1.5 percent to 219,753.So it's a widening of the economic pressures. UK June sales fell 6.1%. This isn't good for GM either.
Japan's small currency traders are getting out of the yen.
According to the Canadian Real Estate Association, Canadian existing home prices fell YoY:
Canadian home resale prices fell for the first time in almost a decade in June, as the number of dwellings for sale increased to a record, a realtors' group said.Sounds familiar, doesn't it? The decline in US auto sales is rough on Canada. The UK continues its inexorable slide; the latest is that June retail spending is down.
The average price fell 0.4 percent to C$341,096 ($340,900) in June from a year earlier, the first decline since January 1999, the Canadian Real Estate Association said today.
New housing starts fell for the third time in four months in June, and new home prices stalled for a second month in May, according to Statistics Canada figures.
The US gets CPI figures today, but I won't believe them. How about Europe?
Inflation in Europe accelerated to the fastest in more than 16 years in June, led by a 53 percent surge in the cost of heating oil.May was 3.7% and June was 4.0%. No kidding that it's out of their reach! So why try to reach it? The decline in consumer spending power is so significant that it will have plenty of restraining power, and the number of pensioners in the EU's major economies are so huge that even if companies raise wages somewhat, overall purchasing power will keep declining. In general, the aim of effective monetary policy should be to counterbalance underlying economic trends a bit, rather than reinforce them. JUST CUT ENERGY TAXES. That will restrain inflation without suppressing growth more than necessary. According to German estimates, German GDP contracted at least 0.75% in the second quarter. If that is true, the Euro market GDP should have contracted. German industry is extremely dependent on bank lending and bank lending was tightening, so it is very possible.
``This all has to do with this oil-price surge and for central bankers, it's a most frustrating source of inflation because it's out of their reach,'' Janwillem Acket, group chief economist at Julius Baer Holding AG in Zurich, said in a Bloomberg Television interview. ``We will probably see in the months ahead growth momentum going lower and then allowing the ECB, probably early next year, to cut rates.''
See, Europe appears to be the key to me. If Europe can keep lumbering along, then Japan won't get in too much trouble. One of the benefits to the world economy is that two very large economies - Japan and Germany - were slowly emerging from a long term cycle of economic weakness. That means there is built-up need for replacement investment in these two economies, especially in the industrial sector. And that can be a powerful countertrend force if the flow of credit is such that these companies can invest in equipment. Furthermore, France has relative insulation from oil shocks because of its high percentage of nuclear power. Lastly, the addition of the enlargement countries now should serve as a resource bank for Europe as a whole. These countries provide some backstop for demand. Sarkozy is making some sense to me; the ECB appears whacked.
I think Greenspan's legacy is such that the role of monetary policy is somewhat overblown in many central banker's minds. When and where inflation is caused by increases in money supply, it can be addressed by decreasing money supply. When inflation is caused by bubbles or pricing differentials, the picture becomes far murkier. The world bubble in emerging stocks is well on its way to bottom, which will have its own healthy effects. What one expects to see is reinvestment in local markets in order to control market share, and that probably will continue to happen, and should even happen in Europe - as long as it is not choked off.
US CPI is reported at 5.0%. I don't think anybody knows what it really is. For one thing, it varies hugely across income levels. For another thing, I see weird price movements in stores as the market tries to adjust to declining purchasing power. I've seen prices drop 30% on some items, meat at half price, etc. With the rise in diesel prices, transport differentials are far more significant so effective price increases on various commodities vary hugely across areas as well.
What will dominate the US economy starting about now and through Jan/Feb will be energy costs that have soared and the onset of winter. The withdrawal of cash to deal with home heating needs is very different by region, but since NG has soared, it will be affecting huge swathes of the country by December. In the NE, the shock hits NOW, as many consumers prepurchase heating oil in July or August. By December, households from about the Tennessee line on up will be reeling from the shock. It's a very, very bad time to be a Chinese shoe manufacturer.
US Industrial Production: A small expansion in June (0.5), really based on utilities and autos. The YoY is .3, which is a nice positive. The annualized drop in IP for the second quarter was 3.1%. Not bad, considering. Capacity utilization stayed below 80 all during the quarter. At 79.9 it is recessionary but mildly so, and capacity growth over the year was 1.8%. The US two-stage recession muddles along in a fashion that would make Stephen Leacock laugh until his eyes teared up. Now US industrial production could turn again if the global situation gets too bad. As it is right now, we have stabilized that and are now gearing up to deal with the consumer collapse.
Conditions on the ground level of the US economy seem to be surprisingly good. There is a wave of investment coming from energy/small business. The focus is shifting from consumer goods, which the US doesn't produce in huge quantities, to fundamental investment running from energy efficient cars to household insulation to wood stoves. I feel an updraft which will never be visible in NYC. Many of the smaller conservative banks have plenty of money to lend and rates are very reasonable. We may be close to the bottom in the short term for auto production.
The US Fed has done a great, great job at preventing credit shocks from blowing up viable business. The investment banks have, on the other hand, produced a poor showing.
US freight volumes still look decent.
Still, US oil consumption will continue to drop for several years. What will happen to the world economy when the energy bubble blows? I cannot get a clear picture.
Tentatively, I'm raising my bottom forecast for US rates to 1.5% in 2009. World events could change that.
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