Monday, December 01, 2008
The global economic situation is one of entropy, and there seems to be no way to stop the process other than to clear the underbrush and accelerate the PPI drops until global consumer purchasing power rebounds due to falling prices, and thus can overcome the effect of the energy bubble. True, the energy bubble has burst, but the damage done is far from over.
The focus on government action alone is misled in most cases. The government can get out of the way of the consumer, and it can bolster the weaker but still viable industries and companies which have been shocked, but government simply cannot, for example, bolster car companies without a readjustment of the compensation and retiree benefits that make those car companies uncompetitive.
China, btw, looks to me to be entering outright recession. The growth in China is primarily manufacturing, and their November PMIs show recession:
The Purchasing Managers’ Index fell to a seasonally adjusted 38.8 in November from 44.6 in October, the China Federation of Logistics and Purchasing said today in an e- mailed statement. A second PMI, released by CLSA Asia-Pacific Markets, also showed a record contraction.The focus of the Chinese government's plan to fight the trend is increased infrastructure spending and boosting of rural purchasing power. One of the dire problems facing China is that the rural workers have migrated to the cities mostly without official residence permits and the bulk of those workers therefore are not eligible for government payments if they can't find work. If they go back to the countryside, China has a nightmare social scenario of displaced young people with no work and great dissatisfaction. The yuan will have to fall pretty far to gain much in the way of export orders!
An export order index dropped to 29 in November from 41.4 in October, the government-backed survey showed. A reading above 50 reflects an expansion, below 50 a contraction.
The output index fell to 35.5 from 44.3, while the index of new orders dropped to 32.3 from 41.7.
Relatively, India is in a better situation, but October exports fell 12% on the year, and imports rose 10% on the year. Part of the import/export imbalance is due to currency depreciation, but at least currency depreciation allows some industries to compete for market share. However, the impact just from overcapacity in knick-knackery alone is substantial. Anyone want to explain how the Indian PM can do all these jobs? Himself?
China's situation has major implications for Japan and several other Asian powerhouses; Chinese orders were supporting their internal industries as demand in the west dropped. (Malaysia October; Malaysia November.) No more.
Japan's domestic car sales are plummeting:
Sales of cars, trucks and buses, excluding minicars, fell 27 percent to 215,783 in November, the Japan Automobile Dealers Association said in a statement today. Sales dropped 28 percent at Toyota Motor Corp., Japan’s largest automaker, and 30 percent at Nissan Motor Co.Korea is slightly behind the curve, but will follow a similar trend. Car sales are dropping there, and will fall further next year. Morimoto filed, which brings the monetary values of bankruptcies of listed Japanese companies to a post WWII record.
European PMI looked similar to China's:
A manufacturing index dropped to 35.6 from 41.1 in October, remaining below the expansion-threshold of 50 for a sixth month.The European Central Bank (ECB) has finally begun to cut, but it is too little and too late.
Russia is now experiencing a sharp manufacturing downturn, and the impact of layoffs are expected to cause consumer spending to decline in 2009. The bubble washed over the ME with a vengeance, but now that's over too. Here's UAE as an example.
The flow of capital to businesses is going to be hugely constricted, because abruptly private equity stakes are on the block at half price:
Investors led by Harvard University, which manages the largest U.S. endowment at $36.9 billion, may increase so-called secondary sales of private-equity funds to more than $100 billion during the next year, overwhelming available pools of capital. Interests in funds managed by KKR & Co., Madison Dearborn LLC and Terra Firma Capital Partners Ltd. all are being offered at discounts of at least 50 percent, according to people familiar with the sales.Couple that with the outflow of funds from the emerging market countries, and you have the recipe for a really severe global decline.
Germany is seeing a sharp drop off in machinery and capital equipment orders. The situation is already serious enough that Germany's finance minister wants to extend their banking bailout to some insurers who are intermediaries for the auto makers. As for Germany's domestic economy, through Q3 it was pretty good with the exception of inflation judging by household incomes and employment, things seem relatively stable. (I get my stats here. No doubt there is some site where one can find all this in English, but I have never found it.) However the European financial storm is the next axe to fall on the world economy and it will have disproportionate effect on Germany.
I have posted before about the exposure that European banks and PE firms have to eastern European lending (and to a lesser extent, ME lending), and that is the truly major issue for many European economies. The exposures and investment have been growing for a long time (see this 2002 paper about German FDI in eastern Europe and the bank lending involved plus this recent Stratfor public access article on Austrian bank exposures). Europe is already in recession, and thus financial institutions are ill-prepared to withstand the coming shock. The Austrian banks are once again very heavily involved in the PE and foreign lending through carry trading, and I have wondered what is going to happen to Bayern LB after its ill-advised recent purchases of an Austrian bank as well as other European banking units.
My guess is that the Chinese government will support some of their domestic basic industry, such as metals with direct subsidy. In short, I expect China to adopt extremely protectionist measures, and to reply to any questions raised over that action in this manner. Therefore I am adjusting my forecast for other countries dependent on these industries downward, with the expectation that internal demand in China will be redirected into domestic industries, and that therefore world market commodity prices may drop further than they otherwise would.
The bottom line is that many weaker companies have been put out of business by the fuel shock. Debt-loaded consumers and companies are having difficulty redressing their positions in the current environment. Given that undeniable reality, my mind can barely comprehend why they are even bothering to hold the Poznan world climate summit. There is a world food crisis, which must take precedence. To expect developed countries to pledge major carbon emissions cuts while developed countries cannot, and thus commit economic suicide by undercutting their competitiveness, is a tad deranged even for UN bureaucrats.
The bottom line is that India and China are turning to both increased nuclear and coal for fuel, and that these two countries represent about a third of the world's population. There is not one damned thing the EU can do to control world carbon emissions, and it is suicidal to try. Nor are most of the Eurocrats really this stupid - they are pursuing this line in order to justify trade protectionism by using carbon standards as a way to sneak past early treaties on trade.
Thus a global recession with the potential to develop into a global depression, which was caused by a bubble and a fuel shock, now intersects with rabid environmentalism used as a stalking horse for protectionists. Be afraid - be very afraid.
Wind is not economically viable past about 5 percent of energy generation - it appears that after that point, one gets massively diminishing returns due to the variability problem. Solar is at least three to four times more expensive, given the best conditions, than each area's favored fossil fuel. Nuclear is reliable although expensive, and can serve to offset the need to burn fossil fuel for electricity generation. However, trying to mate nuclear power with wind power is a nightmare that raises the net costs of nuclear power, since it is steady output power.
Biofuels are a major cause of the world food crisis, and most probably don't help the environment at all when you look at the net, since we still use fossil fuels for fertilizer and production and we must clear land for production. Undeveloped land is a major carbon sink.
If you raise the cost of energy to consumers in the developed world, you undercut the recovery in consumer buying power that must come before a substantial world recovery. That's about as certain as economics ever gets. Horrific as the Mumbai attacks were, they have inflicted and will inflict much less damage on the Indian economy that environmentalist policies have in the last two years.
I cannot figure out how this will resolve itself, and it all adds uncertainty to the world economic equation.
Update: US ISM manufacturing pegs neatly into Chinese, European etc. 36.2.