Tuesday, July 01, 2008
You Don't Have To Run Faster Than The Bear
Chicago PMI improved - since February it has moved from 44.5 to 49.6. ISM Manufacturing is up slightly this month (although if you look at the details, they look very pessimistic). Exports are still high, even as imports slow.
Value of total construction is only down 5.1% over the year, although residential is down 27%. The difference is the big growth in a lot of private capacities, such as power, hotels, and manufacturing.
The energy shock will have dire effects on second half growth in the US, but in all honesty it seems to me that Europe and big hunks of Asia are worse off.
The situation in India is that a lot of banks have dropped RE development funding, and interest rates are jacking higher on mortgages. See this article for an assessment of how that affects mortgages. The Indian press has reported that many developers are resorting to moneylenders who charge 20-30%. Talk about hard money! Part of the problem is that the banks are involved in financing the oil imports with the bonds/loan bit. Their prime rate is over 13% now; inflation is over 13%, and they will have to raise energy prices again soon unless the international spot market breaks. Their currency continues to devalue, which helps them on some export markets such as textiles and information but is making inflation worse. So they should be more competitive than marginal Chinese businesses in those areas, which will become more important as this wears on.
China has its own fuel problems. Of course both of these stock markets are generally declining.
The UK has contracting manufacturing (small segment, though, but 45.8 is not good), its household debt continues to escalate, and mortgage apps and home sales are collapsing. Needless to say, so are home prices in most areas. Their household credit problems are getting worse, and according to the link, tightened bank lending to businesses is causing some of the manufacturing contraction.
Japan is hurting. Tankan has now declined for three quarters. Japan's domestic economy is quite sensitive to both downturns in global manufacturing and to inflation in food and fuel, so this is a pretty intimidating combination. Japan also has a huge public debt. My theory is that Japanese conglomerates will start investing outside of Japan to try to trade into markets, and I think I have seen the first indications of that in purchases and deals. That is not good for the Japanese economy at all, nor for the yen.
Denmark's in recession, France is showing growing signs of weakness (French RE sales down about 30% YoY), particularly in domestic demand, Spain's in real and rapidly increasing trouble (car sales down 30% on the year, now), Italy's in less but real trouble, there is a big debt problem in some of the developing economies that had provided a lot of the growth in Europe which are also impacted by weak Eurozone growth, the Irish economy contracted 1.5% in the first quarter, and is probably still contracting, and Germany - Germany which until recently was doing well appears now to be following the downward path. If its economy can remain in the minimal growth range it will be doing well, but it doesn't have enough oomph to hold the region up. One problem for German businesses is bank credit. In recent years, Europeans have been crazy for corporate junk bonds, and they are now getting slammed. German businesses normally have a greater reliance on bank lending, but the lending surveys indicate a real tightening going on, so one would expect that the pace would slow.
In the meantime, the US economy retains some growth impetus. There will be another big leg down in third quarter. The northeast region is getting a double whammy this second half, with the impact of the financial sector downturn multiplied by the home heating oil shock.
In the meantime, the major world growth commodity is COAL. There are shipping bottlenecks all over now. When this oil bubble busts it's going to be a shocker, and with every week that passes my estimate for the depth of the bust gets higher.
The US has quite a bit of coal, and could expand. The US is still attracting foreign investment, and those buyins are going to help. What's really going on is a global war for money, and more and more money is being shifted to paying for essentials and debt. The US is going to do quite decently in that war.
I have laughed myself nearly silly over the last week about dire forecasts for the dollar. The bottom line is that the thing can only go so far down, because everyone's buying oil in it, there is a stealth gain in manufacturing and production market share, and strapped businesses can find some expansion here. The oil shock is putting the US in a nasty recession, but it's going to be worse for the global economy by far.
If only the ECB government and central bank would catch a clue, leave interest rates alone, and cut fuel taxes and these stupid CO2-oriented bells and whistles, I think the area could ride out the storm decently for the most part. Yes, a recession, but it wouldn't have to be a terrible recession. The impact on the debt-loaded economies with big bubbles can't be avoided, but surely Germany could escape! And if Germany could stay above water, then France would stumble through. But no, their officials seem to believe that the peasants are disgusting and need to get poorer so that the wealthy do not have to pay higher prices.... It is such a self-destructive policy.
The mood in China is getting somewhat dark. Read this editiorial. BIS is now forecasting global economic trouble, but I think China is already feeling the impact of the fuel situation in its manufacturing sector:
The official purchasing managers' index (PMI), compiled by the China Federation of Logistics and Purchasing, fell to a nearly three-year low of 52.0 in June from 53.3 in May and 59.2 percent in April.A major move. My guess is that Indian exporting businesses in several categories will tend to gain share from China because of their depreciating currency. India may have hit the wall, but China will feel some of the impact. It can no longer afford to let the yuan rise to offset some of its problems.
Two guys are camping. They see a what looks to be a very angry bear running down the hill towards their camp. The first guy calmly begins to put on his shoes. The second guy says, "You idiot! You fool!! You cannot outrun the bear!" The first guy says, "I don't need to outrun the bear. I just need to outrun you."
In the international war for money, one no longer has to make money, one just has to lose the least.
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