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Friday, September 05, 2008

US Politicians Do Not Know Or Understand The Economic Laws

Both presidential candidates are advocating a mix of suicidal policies, especially carbon cap and trade.
This is what is happening around the world; this is reality; the US is going to be governed by reality no matter what the politicians say

first: Chicago PMI, ISI, factory orders, and B2B credit measures all looked good, and of course Q2 GDP over 3.0% looked good. But all are misleading, because the consumer side of the economy is crumpling, which is suppressing retail spending on non-necessities, and therefore the large retail segment of the economy will be heavily impacted. The healthy growth of production is going to limit this downturn, but will not prevent further recession. The monthly employment report was clearly bad, with the headline unemployment rate rising to 6.1%, private real wages declining, aggegate weekly hours falling, and losses in manufacturing and services. According to FUT, which is a very strong leading indicator, this is going to get worse. If unemployment were now calculated the way it used to be, it would be up around 7.5%. It's going higher, too. I am still thinking that the US trough will be second quarter 2009, but we will see because in part that depends on ROW. So on to ROW:

UK: Same old same old. Some projections now show about 18% of UK mortgages going underwater and an average valuation fall of 35% or so in homes. Losses are expected to mount steadily for some time, and the weaker banks will take it in the kisser. Their average home price drop for the year ending in August is now calculated at 12.7%. This is an economy heading into an unambiguous recession ( I admit that the US recession is ambiguous if you are not paying attention), and it is not helped by Ireland's larger relative slide. Also, the UK economy is burdened by levels of household debt considerably higher than in the US. For an excellent, ongoing and very detailed look at the UK economy, I recommend UK Bubble. And start with this post:

If you are a US person, take heed. Current account deficits combined with government budget deficits and high levels of household and business debt = VERY BAD ECONOMIC NEWS. The borrowing defers the day of reckoning, but exacerbates it when it comes.

Japan: Second quarter GDP should be revised lower as business capital spending dropped 7.6%, and the Q2 annualized contraction is now estimated between 3.0 ~ 4.0%, down from the mid-2% range. Industrial production is still showing YoY growth but current surveys show softening expectations. What does this mean? It means that all those hopeful prognostications that businesses would spend through this downturn out of necessity (aging plants, etc) were so much nonsense. The US and Japanese economies are 1 and 2 in the world, so a substantial Japanese downturn is bad news indeed. Relative to GDP, Japan also has the largest public debt in the developed world (OECD estimate 182% of GDP). Therefore, the government is going to have a very difficult time sustaining spending, and will probably sell bonds to finance its own internal stimulus package. The Japanese PM just resigned.

Japan has to cut its taxes on corporations and probably on lower income persons, and Japan is planning on increasing government spending. It is not easy to tell how this will end. I am not strong on the yen over the longer term because of inexorable forces (including demographics) within that economy. Japan is a very open country and some of their most important stats are published here in English. Direct Investment here. I also suggest this 2006 presentation for those who want to think about what is likely to happen based on this and this. If Japan can expand trade rapidly with China, it may be able to avoid some of the more painful aspects of the current adjustment. This is a very complex topic, but it is one that cannot be ignored.

Hong Kong: Q2 estimated GDP shrank an estimated 1.4%, which may be revised. However the decline is sharp and sudden, considering that Q1 expansion was still over 7%. Current 2008 forecasts are being revised lower again to 4-5%. Not good for Japan, obviously.

Singapore: Singapore's industrial production in June fell over 20% YoY! Everyone still seems to be estimating that Singapore will continue a slower expansion in 2008, but I have my doubts and believe it will fall into outright recession by the end of 2008. There is still a lot of building and spending, but overcapacity in pharmaceuticals is going to hurt Singapore substantially.

China: Haha. The Olympic curse rules all of us. The best current summary I have seen of dynamics is this article:
The Western world's mantra that China is "decoupled" from the OECD market crisis and the growth pause it is producing is not a mantra inside China.

There is a recognition that China is partially coupled, and partially decoupled. Domestic consumption is accounting for an increasingly large share of activity as living standards rise, but it is still only responsible for about a third of growth, with investment supplying another third, and exports the final third.
If the US were in recession but Europe were not, China's government might be able to goose growth to ride over this tight spot. However, Europe is marching grimly into a recession. It's by no means all negative, because China is upgrading the sophistication of its manufacturing base to capture the higher profit margins needed to sustain growth and resource costs. In the short term, energy shortages and resource costs are causing a classic adjustment. I don't think there will be a recession in China, but to many it will feel like one. Expect growth to slow by at least a third.

There is virtually no Asian country which isn't have some collapse in property values, judged by bankruptcies and defaults by property companies.

Europe: Italian light truck sales are taking a substantial drop. It's not surprising, but it reinforces the picture of a slowing economy. Remember Italian GDP shrank in Q2, and nothing since has indicated that the economy will expand in Q3. Spain - Spain is just a sad story. In theory, Q2 GDP expanded around .3%, but Spanish households have very high debt loads, real estate was a huge part of the economy in recent years, and real estate is a long way from trough, and the vaunted vaults of Spanish banks turn out to have been packed with mortgage bonds (now defaulting), which the ECB no longer wants to take at full value in exchange for real money. . Spain's savings bank association is predicting contraction of around .5% in 2009 and an unemployment rate close to 15%, with recovery deferred to 2010. They'll be lucky to see it then; this is an economy in deep trouble combined with a hefty credit contraction and possibly defaulting credit insurers. Industrial production for July only contracted 4.4% YoY, but there's not a bright spot for this economy. Ireland: Same as Spain, except maybe a bit worse. Germany:
German industrial production declined more than economists expected in July, led by a drop in demand for investment goods such as machinery.

Output fell a seasonally adjusted 1.8 percent from June, when it rose 0.1 percent, the Economy Ministry in Berlin said today.
The German economy, Europe's largest, is showing few signs of recovery after contracting in the second quarter. Factory orders fell in July, manufacturing shrank last month and business confidence declined to a three-year low. Still, oil prices have retreated from a record, bolstering spending power.

``The manufacturing industry is in the middle of a strong downturn,'' said Ralph Solveen, an economist at Commerzbank AG in Frankfurt. Today's figure ``increases the risk of a contraction in third-quarter gross domestic product. The second half will be very weak and 2009 won't be much better overall.''
Germany is suffering from the high Euro, world conditions, and generalized European weakness. Also, the German economy needs power; Merkel is now calling for a nuclear/coal power strategy. Wind has failed in Germany, and Denmark, and pretty much anywhere it's been tried. There appear to be limits to wind power, a fact which has not registered on the pea brains of US politicians. There is not an "engineering problem" likely to be solved by US engineers when the northern European engineers have failed at it. France: A funny country, which has resorted to pointing out that its economy is better than that of the UK, but it is not clear that it is. Not that this worries the French; if the Titanic had been a French ship they would still be denying that it had ever sunk, and if another country commenced salvage operations they would promptly file an action with the ECB court claiming piracy. The French economy contracted in the second quarter (and the UK economy didn't) . The hope for a resumption in growth was largely based on Sarkozy's reforms, but enthusiasm appears sharply limited, with workers saying they don't want to work more for more money while 45% of them claim to be buying less meat and fish due to costs, and businesses saying that they don't want to negotiate with the workers. The French like to take life easy; even their labor unions deferred promised strikes about such reforms until after summer vacation. Thus no one is around to worry about the increasing budget deficit. Things have gotten so bad that the French retailer Carrefour is considering trying to enter the vibrant and of course extremely stable Iranian market, and the French air and hotel industries are trying to attract SE Asian tourists.

In the ME, property values in bubble areas are beginning to decline. Oil prices will take some of the fervor out of the air, and the rest will come out as those last petrodollars are spent buying jets just in case they need to get out of the country quickly.

With the deflation of the commodity bubble (always the last bubble), it appears that the world is entering a recession. That doesn't mean that every country will go negative, but it does mean that Asian growth will slow sharply and that equity and property values based on optimism and future expectations will continue to decline. The correlation between high equity markets and real estate bubbles in most of Asia is pretty strong; one feeds the other on the way up, and one starves the other on the way down.

So what are US politicians advocating? Bailouts to support unsupportable property values.
A bad idea if there ever was one, but they love it. Massive new social spending programs, when we haven't even figured out how to pay for the wave of boomer retirements. A carbon cap and trade system, which is a thinly veiled protectionist measure. This would be introduced at a disastrous time for both the US economy and the world economy, because our imports from the energy-inefficient economies are already slowing, and it would boost inflation for US consumers. Also, shortages of electricity are causing production and deficit problems across most of these economies right now, which is forcing a correction. Mandating 20% renewable energy, which is the policy which has inflicted heavy rises in energy costs upon European consumers in countries that have attempted this, and is now quietly being discarded. Instead, European countries are turning increasingly to coal, which is not my idea of a really environmentally beneficial strategy, "clean" or not. Biofuels, when all around the world poorer people are starving or sliding into malnutrition.

Why do we think that we are different? The US needs to produce more of what it consumes, or consume a whole lot less. If we hike energy costs artificially, we hike consumer costs at a time when consumer inflation is the main vector pushing our economy downwards.

Do they have brains? Do they think we don't?

You would think they would have some strong economists advising them on these issues.
Viola, maybe it's a case of just not listening to them, or hearing what they want to hear.
No politician wants to listen to someone explain what a K-wave winter is.
I certainly can see that with all those type A personalities. :-)
A while ago, I heard or read something from a German source about Putin wanted get involved in selling carbon credits. I haven't heard anything since, but that one report set off all my alarm bells.
Of course they have brains, and they know you do but think they can distract you with dumb soundbyes and hyperbole.

There's no way these people are so dumb as to think what they are doing is good. What they want is for us to make energy expensive so we humans must regress to the 18th century. When you have less energy you must spend more of your time meeting your needs, and less time thinking.

We are livestock and have become a bit to hard to rule and persuade.
> The US needs to produce more of what it consumes, or consume a whole lot less.

Geez, this hoary old BS "homegrown" argument?

I don't make anything that my supermarket wants... but somehow we both manage to prosper...

Apparently, it's because they take the money I exchanged for what I DO make.

At BEST your argument would be that we need to make more that others will buy.

Thee underlying problem with that is that the US makes plenty that people want, and has no real competitor at this point -- a huge chunk of it is IP -- movies, games, etc. -- and a lot of that winds up "under the table" -- pirated and otherwise not a part of the official production of the US.

The US doeesn't need to produce more of jack. We need to get paid more accurately for what we make.

OBH - no, we really do need to produce what we have to have. You can't have a big military and a balance of trade dependent on movie royalties. Sorry, but that just doesn't work.

We have to produce more of the basics. There is no reason why we can't. The US is currently quite competitive in manufacturing provided that we have cheap reliable energy and that the environmentalists can't stop any plant for ten years in the courts.
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