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Wednesday, August 03, 2011

Ground Is Coming Up Rather Quickly


Italian banks are under severe pressure, crisis pending. Don't look for Italian sovereign bonds to recover.

European services and combined PMI numbers come in very low. Markit page. This is so bad it could hardly be worse, because Germany, which is the strong spot in Europe, turned in a July services PMI of 52.9, which is -3.8 from June's 56.7. Spain and Italy are in outright contraction, although Italy moved up a bit from June's dismal number. France did the best overall in services at 54.2 which is only a 1.9 contraction from June's 56.1. Spain's service PMI came in at a shocking 46.5.

US is pending today.

We've got a synchronized worldwide downward spiral on fuel costs. Sound familiar? And we have weak chinks in financial sectors which are going to respond. Sound familiar? So US Treasuries are a safe harbor for a while.

Here is where consumption commodities have to drop, and drop hard. Eventually that will put enough impetus in the global economy to return growth signals, but not for quite a while. Mr. Market is going to have to take his hammer and smack up a whole lot of central bank-inserted cash before we can get there. The ride down won't be pretty and it entails high levels of uncertainty. You can't do this sort of thing twice in a few years without major damage. Among the very vulnerable are some of the eastern European countries with huge bad blocs of loans, marginal economies such as Turkey (which just knocked off all its generals, I assume as a preventive measure) and Indonesia.

In the last couple of months, there has been a marked shift in freight trends in Asia. Nor does this seem to be coupled specifically to Japan, where some recovery after the quake is occurring and perhaps even masking the underlying trend. Instead, it is correlated more to US trade, where the capacity withdrawal is roaring along.

Relatively, Asia will be hit harder this time due to Japanese problems and the inability of China to do what they did in 2008. It is hard to tell how India can hold out - we'll have to wait a few months. Production businesses are facing severe margin compression and the pricing compensation is not there.

The Austrian line of eastern loans is going to be problematic this go-round. As for the middle east, the region will continue to experience political upheavals of a dire nature. Brazil is now adopting trade protection measures, so I am becoming a little more concerned about SA trends. Brazil's industrial production is contracting now and its current account deficit bids fair to become a growing problem in the year ahead.

India, too, has a current account problem. I expect that this time around more and more countries will resort to frank trade protectionism. This can only go so far.

Moma, here's to your eyes. Good recovery after they went up in flames a few posts ago!

Thanks for the whirlwind worldwide analysis again - hadn't seen one of those for a while.

The line to take in the UK is that we're a safe haven. Haha. They should see the unpayable debt I deal with every day. Our banks are a joke.
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