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Tuesday, August 23, 2011

As The Asian Data Flows In

If you haven't read Mauldin's latest, it's worthwhile just because of the graphs. One of the issues for us all is that the ability to achieve growth with increased exports is fading fast.

Let's see. Asia. Japan, of course, reported its third quarter of contraction a while ago. At -1.3% annualized, not too bad, but contraction is contraction. Singapore also reported contraction in the second quarter. Thailand reported a mild contraction (-0.2, quarterly). Hong Kong is contracting and over there they are talking about recession quite unambiguously. They also have scorching inflation.

Indonesia is doing very well. The CB is holding off on rate increases for the time being, and they plan increasing domestic infrastructure spending, so I'm thinking it carries through. Indonesia tends to benefit from troubles in some other Asian domestic economies, and it has some pretty big commodity sectors. Malaysia is reporting a slower growth rate than average at 4% on the second quarter with relatively slim manufacturing growth (2.1%) but strong services/consumption growth in the 6-7% range.

India is a laggard reporter. First quarter GDP growth was reported at the end of May, and with a YoY of 7.8% but a Q4 (Jan-March is their fourth quarter) of 8.5%, we'll just have to wait and see. The monsoon started a bit slow but has been picking up, and a lot in India depends on the monsoon! Anyway, it provides hope of controlling inflation which has been a persistent and intractable problem this year despite RBI's best efforts with rate hikes. India's fiscal position is not that good; domestic gold demand alone has a very real impact on their current account balance. Also the energy company problems involved with their fuel subsidy program are forcing changes. India desperately needs a good harvest this year to help it move away from the fuel subsidy system, which is a real and growing threat to its economic future, but which is also a profound need for hundreds of millions of the poor. I realize this is hard for westerners to integrate. Perhaps India's growth in used car sales and the relative weakness of the new car market this year will provide a better conceptual hook.

India, Malaysia and Indonesia are different economies, but they are similar in that they have youthful populations and high relative demand growth. In general, I would expect these three countries to maintain growth but to see moderating growth through 2012.

China: In general, housing price inflation has dropped below CPI on curbs. This has not really slowed much of the demand for housing among the public; the younger bulge wants a breeding territory. The rise of consumerism in China is difficult to comprehend. Reading China Car Times for a while gives you a feel for it. Last year there were big sales incentives for autos, so this year demand has been relatively slack. However, they are still managing to rack up YoY sales gains in July, even if only marginal ones. More. As for economic prospects, one hardly knows what to say when reading something like this:
The Chinese economy will grow by 9.28 percent in 2011 if the United States can stay out of a double- dip recession and the eurozone can steer itself clear of a sovereign debt crisis this year, economists from China's Xiamen University and the National University of Singapore said in their latest forecasts released on Saturday.
One suspects this is their way of saying that growth must slow but it is due to external factors, which is of course partly true. I'm guess that China will dip below 8% and then we'll see. The Chinese government probably won't tolerate growth below 8%. They have an energy supply problem, infrastructure problems, corruption problems, inflation at levels that cause social unrest, and a huge bad debt problem. They are helped relatively by prospects for continuing foreign direct investment and by demographics; it is not clear that FDI will necessarily continue at these levels.

Now that is all the recent past. The US is in a double-dip recession, and the Eurozone is not steering clear of a sovereign debt crisis.

Moving into the current quarter, the scoring begins to look more troublesome. July global PMIs weren't good, and the next round indicates that Q3 is going to be slack at the very least. Chinese manufacturing and output PMI spends its third month below 50. German manufacturing is hanging in at the lower August levels (with the output index up), but services are continuing their slide. New orders for manufacturing have started their fall, and it is due to export weakness. France is the reverse of Germany, with manufacturing dropping and services rising. Overall this suggests continued growth for France, because its servicing sector is relatively larger. There is a sharp deterioration in confidence, however, and the drop in household spending in the second quarter indicates that they will have an increasingly upward slope to climb. Q2 Eurozone GDP was slack to say the least, and Eurozone PMI for August suggests similar to worsening conditions (new orders dropping), with additional negative inputs from the fiscal issues of governments and banks. The UK seems extremely unlikely to be a positive influence with household finances this weak.

Brazil is pacing along with France currently, but economic growth is clearly slowing and it is possible that Brazil will resort to rate cuts by the end of the year. In most of South America, trading sentiment shows such a clear dichotomy with policy pronouncements that I can only believe in a pervasive and broad shift in conditions on the ground. Mexico has been doing relatively well and we will have to wait until October to get a real read on how they can carry through. US remittances have remained positive, which helps domestic demand. That is one to watch.

The raw statistics do not capture one of the underlying global themes for 2011, however, which is that although the regionally well-off are still doing well, all around the world the condition of the poor and moderate-income groups has been degenerating. It's inflation. Despite all the projections, inflation in China has only increased, inflation in the US is still broadening out and it zipping up again on food, and everywhere in the world that I look, margins for producers are too low and indicate that prices should continue to rise. Currency swings are another factor. Japan is in deep trouble over the yen's rise. The Swiss are trying to figure out what to do about their currency's appreciation, which is damaging their economy. The Chinese want to raise the yuan but may not be able to do so due to the problem it poses for exporters. Foreign currency loans are an absolute nightmare for the Eastern bloc and to some extent, for Turkey. The eastern bloc in Europe would still be a growth vector, but I think the foreign currency loans are just sucking the life out of those economies. It's definitely a business factor as well in several of those economies.

Finally, the drop in real wage incomes for most US households is resulting in higher mortgage delinquencies and tightening lending standards ex GSE. This is the second quarter of rising mortgage delinquencies. Lower credit standard CC portfolios are beginning to show the impact; Capital One reported an uptick in card delinquencies this month. US consumer credit utilization patterns are utterly different than they were a few years ago, so I don't expect a big impact except on the GSEs, which are sitting out there with tons of imperiled, marginal mortgages. Auto loan delinquencies continued their drop in Q2, but are probably going to uptick slightly toward the end of the year. Student loan delinquencies, of course, are on the rise.

The reason I bring up delinquencies is that it highlights the very great difficulty that monetary policy has currently in stimulating the US market. The potential demand is there; the ability to afford the required goods has degenerated over the last eight months, and lower interest rates can do almost nothing to stimulate demand in the broader consumer economy.

"The potential demand is there; the ability to afford the required goods has degenerated over the last eight months"

The income required for demand rarely gets mentioned!
But when people are talking about stimulus, they are implicitly bringing in the Keynesian concept of boosting monetary flows in the market and incomes!

Maybe I should retract that. I have to admit that the legislative compromise at the end of 2010 (the last gasp of the Dem-controlled federal government) was rather anti-Keynesian. That's why I predicted a recession as the outcome.

You cannot raise taxes on lower earners and give higher earners big tax breaks at a time of inflating basic living costs without significantly contracting demand among the lower income segment, which feeds through to lower spending (as households have to reserve more income for basics), fewer jobs, lower income expectations, and ultimately, a progression of lower incomes and expectations through to the higher income households. You also can't cut unemployment benefits for millions of people when there are literally not jobs available for a quarter of them without causing a disturbance in the economic universe.

Since we are mostly at an end to the pure spending binge segment of Keynesian theory, perhaps everyone needs to step back and look at the more fundamental aspects of Keynesian theory.

"Since we are mostly at an end to the pure spending binge segment of Keynesian theory, perhaps everyone needs to step back and look at the more fundamental aspects of Keynesian theory."

More easy credit combined with higher gasoline prices for the 45 million on food stamps won't reignite a subprime housing boom?

Can't we just stick to the emotional fundamentals? Easy money sounds so much easier than hard money.
Yeah - but we are now dependent on hard money for growth, so no matter how it sounds....
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