Con Ed Lights Up Wall Street

What sort of rally is it that is led by Con Ed (ED) and its electric peers, and natural gas suppliers such as Southwest Gas (SWX) and WGL Holdings (WGL)? 

A strange one.  One that is playing catch-up with the massive decline in yields in Treasuries, munis and other debt instruments over the past months and even years.

If you suspect, as I do, that while said yields will bounce around including in an upward direction, but will stay "low" in general for some time, then you may also suspect as I do that while the ED's of the world look extended, they will trend higher in price simply as bond alternatives.

In other words, utilities of the local, regulated monopoly kind (as opposed to ones that emphasize competitive power situations or wind etc.) may be morphing into this year's mo-mo stocks. 

Very strange.

The Internet, after all, runs on electricity.  Batteries that power mobile devices are charged with electricity.  Who needs gasoline when you have the Internet at home or a short walk or bike ride away at a coffee shop?

There are other good things happening in the US of A investment-wise.  These fit with the theme I announced last summer or early fall after I tired of Europe and also saw TPTB in the US go for growth at the expense of fiscal prudence.  (Not that I necessarily "approve", but my view was not sought.)

MCD sales were weak in China but strong in the US, they revealed today; that's backward from what we were told to expect.  WMT is surging, and it's still largely a US company.  Small local bank stocks are strong, though they don't trade much.  And of course utilities are all US or almost all domestic.

Expect much angst over the upcoming "fiscal cliff".  If interest rates are low and the economy remains challenged, I would note there is an election coming.  If anyone would like to buy utility stocks and is afraid to because of the scheduled rise in tax rates on dividends for high earners, or would like to buy into munis but are afraid of the talk of taxing some portion of that income, I would simply point out that the markets don't appear to share your concerns.  IMHO they are usually right.  Not always, just usually.

I don't have a strong predictive sense here, but I'm just guessing that either the Federal deficit starts shrinking on its own due to an unexpected pick-up in tax receipts or else the economy stays subdued below official expectations; and that in either case, the response will be to defer the fiscal cliff for one year for either a re-elected lame duck President Obama or a President Romney with a "mandate" to take some "courageous" action.

The single main worry sign I see domestically is that ECRI's Weekly Leading Index has been moving down fairly sharply the past few weeks, and has a close correlation with stocks.  Perhaps it's bottoming, or is irrelevant; we shall see.  Here's a link to a 1, 3 or 5 year view of this indicator.  When at that screen click on the + WLIW button.  I suggest looking at the 3-year view.  This shows a series of post-GFC lower highs.  Will this year see a lower low?  If so, some stocks will probably take a hit as recession worries go mainstream.  If this is the bottom of this indicator, it could be a hot summer on the Street.

Current-ly, I'm all charged up for Fast Eddie to shoot out all the lights on the way to ? $70 and beyond.

China Said to Be: "Hand to Mouth"; No, That's Not an Old Chinese Saying, It Means the Commodities Bears Are Feeling Their Oats (If Bears Eat Oats)

Sometimes it just seems as though Groundhog Day got it right.  Almost exactly one year ago, I wrote the following blog post, which soon enough proved highly accurate:  Goldman Wrong on Rates, Zero Hedge Wrong on Oil As Deflationary Side of Biflation Begins Its Ascendancy (June 8).  Well, Zero Hedge might be correct that 2011 is being repeated this year... but it's possible that presidential election years could be starting a new pattern.  Heavens forfend, it could be more like 2008.

Here's a new reason why:

Today (May 21) we see this breaking article from the Financial Times.  Its  focus is on raw materials but it also contains bearish commentary about China’s overall economy.  Here are excerpts:

Singapore/London: Chinese consumers of thermal coal and iron ore are asking traders to defer cargos and – in some cases – defaulting on their contracts, in the clearest sign yet of the impact of the country’s economic slowdown on the global raw materials markets.
The deferrals and defaults have only emerged in the last few days, traders said…

“China is hand to mouth at the moment.”...

Other key economic indicators followed by Chinese policy makers, including electricity consumption, rail cargo volumes and disbursement of bank loans, point to a sharper slowdown, suggesting the risk of a hard landing.

Soft commodities such as soyabeans and cotton have also seen Chinese customers default in the past two weeks, a trader at a third global trading house said…

Highlighting a “worrying” weakness in consumer spending inside China, Kim Youngha, the head of Samsung’s China operations, said he expected the domestic market for technology goods to grow 7 per cent this year in China, down from 10 per cent last year.
Yu Song, analyst at Goldman Sachs, told clients last week that Chinese economic activity was “exceedingly weak”. 

A number of the individual commodities that I follow on the futures boards look technically poised for a relief rally.  The biggie, oil, does not look as promising-similar to last spring.  And, gold is trading at a massive premium to platinum- that should be bearish for gold.  It is indeed possible that since gold trades as a currency and platinum is an industrial metal with important jewelry and investment uses, the traditional discount that gold has carried to platinum ever since catalytic converters came into use may be fading away.  Nonetheless, I'm not brave enough to be favorable to gold prices unless I were even more bullish on platinum.  And all I'm willing to say about platinum is that it's had a huge price drop recently, so short-term it probably a good trade, but given the above news out of China (which echoes the thrust of a NYT article published within the past week), I'm wary that we're going to face a 2008-style commodities liquidation event.  So I'm basically waiting until I see the whites of the oil market's eyes before arguing with the FT per the above report. 

It's the nature of markets to condition investors/traders to one pattern, then do something different.  The resilience of the markets the past three years may simply be failing as real European economic activity continues to surprise to the downside.

Not to overdo the bearishness, but I've been in the markets well over three decades, handled my portfolio well in the 1987 crash and got completely out of stocks in 2000 and again in summer 2007.  So for the many mistakes I've made, I've been lucky re crashes and want to post this from this week's Hussman Market Comment which I just noticed before posting the above:

As John Kenneth Galbraith wrote in 1955, "Of all the mysteries of the stock exchange there is none so impenetrable as why there should be a buyer for everyone who seeks to sell. October 24, 1929 showed that what is mysterious is not inevitable. Often there were no buyers, and only after wide vertical declines could anyone be induced to bid ... Repeatedly and in many issues there was a plethora of selling orders and no buyers at all. The stock of White Sewing Machine Company, which had reached a high of 48 in the months preceding, had closed at 11 on the night before. During the day someone had the happy idea of entering a bid for a block of stock at a dollar a share. In the absence of any other bid he got it."

When the Financial Times publishes the above article on a Sunday, it's my opinion that this news has not made its way into speculative commodities prices.  "Deflation" might be afoot.  Keeping dry investment powder, and being patient with it, is my major current strategy.  To paraphrase Louise Yamada reminds investors (she said it before Jim Cramer):  there's always a bull market somewhere during a decent tape and decent economy.  In other words, prices can rise, and it's OK to be in cash at that time.  I just don't like to lose the most precious financial asset of all:  capital.   
 

Price Increases Coming

Reuters is providing advance notice that goods made in China are going to become a good deal more expensive soon; and this is expected to occur without an upward revaluation of China's currency vs. the U. S. dollar. From the article:


"Apparel prices are going to go up. It's as simple as that," said Perry Ellis Chief Executive George Feldenkreis, who said a rise of up to 10 percent will be seen next year. "The American consumer will have to accept it."

China looks to be raising its prices of manufactured good to the developed world. While this article is specific to apparel, it's hard to see that the same type of price rises will not be general from China.

The massive expansion of credit that occurred in past years in both China and the U. S. is beginning to bite, even while the American economy remains weak. The silver lining for this country is that imports represent a relatively small part of the overall consumer cost structure. Nonetheless, those economists who are predicting an actual and somewhat chronic fall in the general price level in America to justify very aggressive low yield targets on long-term federal securities have just been provided with a real-world counterexample.

Copyright (C) Long Lake LLC 2010

China Follows U. S. in Rating Agency Shopping

From Bloomberg.com, Dagong Says China Ratings Miss Local Government Risks:

Credit ratings assigned to yuan- denominated bonds issued on behalf of local governments in China are misleading and don’t reflect risks investors face, Dagong Global Credit Rating Co.’s chairman said.

Local government-backed borrowers shop around for the best rankings from Chinese ratings companies and “whoever gives them a better rating gets the business,” Guan Jianzhong, chairman of privately owned Dagong, one of China’s five official ratings agencies, said in a Bloomberg Television interview in Beijing yesterday. “This is very dangerous.”

We've seen this movie before . . .

Copyright (C) Long Lake LLC 2010

Bending China: Eating Sweets, Not Bitters

Courtesy of a link on Credit Writedowns, there are some important insights into China's evolution as a manufacturing power in an article by Andy Xie titled Dismantling Factories in a Dreamweaver Nation. What I take as the most important core message is described in the article as follows:

An even more important factor is labor management. What I observed during my visit 10 years ago was actually the key to economies of scale. To put it bluntly, the key competence of a successful OEM in China is to squeeze labor to the maximum extent possible. That skill is developed within an organization. When a company employs hundreds of thousands from all over China, it needs a massive machine that involves recruiting, housing, training, and worker management on the factory floor.

For example, the factory I visited derives its economies of scale from 1) knowing where to find all the 18-year-old girls, 2) convincing them to stay in factory dormitories, 3) training them to put the parts together, and 4) ensuring that no one takes too many toilet breaks. This is all part of a huge system that can derive considerable economies of scale by processing hundreds of thousands of workers. . .

In early 1990s, when I was working in Latin America, I became bullish on China's future. I saw Chinese workers would go much farther than elsewhere to earn a little money for two reasons: a cultural acceptance of "eating bitterness" in life; and familial obligations. . .

Today's young adults are less willing to eat bitterness. They are the first generation to grow up during prosperity, without worrying about food and shelter.

Big changes are coming. If the cost of fuel continues its multi-decade ascent in real terms and if manufacturing labor wage rates continue to equalize across nations, an increasing amount of manufacturing is going to be performed near the consumer.

Copyright (C) Long Lake LLC 2010

Inaccurate Happy Talk on U. S. Fiscal Problems

The MSM continues to misinform its followers. One new example is a column in Forbes by Bruce Bartlett, a former Treasury economist. He says in the conclusion of America's Foreign-Owned National Debt that:

As long as the U.S. national debt is entirely denominated in dollars, there is no risk that we will run into the sort of financial crisis that small countries often run into. What gets them into trouble isn't the debt per se, but an inability to acquire sufficient foreign exchange with their own currency to service it. While the U.S. Treasury has never issued bonds denominated in foreign currencies, it is conceivable that it could be forced to do so if the dollar falls sharply and foreign demand for U.S. bonds wanes. That will be the point at which our debt problem becomes more than theoretical and we are really on the road to national bankruptcy.

This is erroneous on several levels.

Factually, America has in fact issued foreign-denominated debt:

"The idea of issuing foreign currency-denominated US Treasures is not new. The Jimmy Carter administration, buffeted by the two oil crises of the 1970s, sold "Carter bonds", denominated in German marks and Swiss francs, in 1978 to attract foreign investors into Treasuries."

More substantively, innumerable countries have issued debt in U. S. dollars and did not declare national bankruptcy.

Even more important, simply being able to issue debt in one's own currency does not guarantee that there are buyers for that debt. Too much principal and too much interest are quite possible even if the Treasury follows a dollar-only financing policy. No one cares if the U. S. cannot run into the same sort of problem as small countries, as Dr. Bartlett asserts correctly. The U. S. is not a small country!

The point is that the U. S. has become an increasingly irresponsible custodian of the world's reserve currency.

The idea that the Government can safely run large deficits so that the private sector can show large profits or income is the idea that shell games are sound and honest. Either Fannie/Freddie obligations are obligations of the Federal Government or they are not. Based on securities pricing, the market believes they are permanent obligations. Based on that sort of consideration and the possibility of an FDIC bailout, then Federal debt is understated, and an improving economy that pushes up interest rates will limit the cyclical decline in debt repayment costs, since the Feds have chosen to go short-term in issuing debt.

Bartlett ignores the possibility that all lenders to the Feds could in the future be domestic, so that relative values of the dollar vs. other fiat currencies may not be the key to a funding crisis. The key is income vs. expenditures, including debt servicing costs. The risk of getting into a situation where the government has to borrow simply to service its debt has increased. Focusing on Chinese and other foreign holdings of the debt is a misplaced focus. The situation can be remedied but the facts are stubborn things. A government can default on its debt even if all debt is domestically held.

Copyright (C) Long Lake LLC 2010

Being Bullish On China's Future Is Consistent with Bearishness on the Price of Its Stocks

In Is China the Next Enron, Tom Friedman responds to Jim Chanos, answers no and says:

First, a simple rule of investing that has always served me well: Never short a country with $2 trillion in foreign currency reserves.
Mr. Friedman goes on to rhapsodize about China's future.

But he misses Mr. Chanos' point. America had massive foreign reserves in the early 1930s (gold). Its longer-term future was bright. Not so the short-term investment horizon. Japan had massive foreign reserves in 1989. Its future appeared bright. Whoops!

In our more distant past, America in the 1800s was likely the greatest growth sustained growth story the world has ever seen, as massive population growth coincided with the Industrial Revolution. Yet repeated busts meant that foreign investors lost their shirts over and over again.

For a short-seller such as Mr. Chanos, timing is everything. For Mr. Friedman, the long view is bright.

Both may be correct.

Copyright (C) Long Lake LLC 2010

Chaos in Copenhagen as Attendees Freeze Outdoors and Transit System Goes Blooey

The NYT reports that China and U.S. Hit Strident Impasse at Climate Talks:

COPENHAGEN — China and the United States were at an impasse on Monday at the United Nations climate change conference here over how compliance with any treaty could be monitored and verified.

China, which last month for the first time publicly announced a target for reducing the rate of growth of its greenhouse gas emissions, is refusing to accept any kind of international monitoring of its emissions levels, according to negotiators and observers here. The United States is insisting that without stringent verification of China’s actions, it cannot support any deal.

The stalemate came on a day of public and private brinkmanship as the talks moved into their second and final week. Earlier Monday, a group of poor nations staged a brief walkout from the bargaining table, and a chaotic registration system left thousands of attendees freezing outside the conference hall and forced the temporary closing of the subway stop near the Bella Center, where the meetings are being held.

The slow progress of the climate negotiations could pose problems later in the week, when the heads of government begin arriving. It is not customary for so many technical, financial and emotional issues to be unsettled when national leaders sit down to negotiate an agreement.

This appears to be a poorly-produced show. I wouldn't know, but is it possible that that President both has too much on his plate and would be helped by being more decisive?

Copyright (C) Long Lake LLC 2009

China Poisons More Children and Other People; the Reward: T-Bonds?

In 80 kids suffer lead poisoning in E China, China Daily reports that a battery factory has created what is now the 4th lead poisoning cluster in China.

Please also see Mish's current post, Pollution Creates "Cancer Villages" in China for another writeup and a link to a worthwhile Reuters article.

I avoid purchasing any goods made in China, both because I doubt their safety and on moral grounds.

The West has outsourced its pollution to the Chinese Communists, who pretend to be capitalists but for whom workers' rights are much of an afterthought than one would expect in a workers' paradise.

Copyright (C) Long Lake LLC 2009

More on the Obama Tire Tariff

Bloomberg.com has a thorough discussion of some of the facts involved in the 35% tariff that Team O imposed upon tires made in China (see EBR post immediately below). Per the article:

"Four U.S. companies have operations in tire production in China and they account for two-thirds of exports to the U.S."

Let us hope that the U. S. has not shot itself in the foot with this action.

Copyright (C) Long Lake LLC 2009

Protectionism on the March?

The NYT is reporting that President Obama is making a change from the policies of his predecessor and imposing a significant tariff upon imported Chinese tires even though there has been no finding of "dumping". Click on U.S. Adds Punitive Tariffs on Chinese Tires for details.

Has the Administration "cleared" this with China?

There could be real, or faux, anger out of the Chinese.

Worth following.

Copyright (C) Long Lake LLC 2009

Multiple Views of the Economic Situation Continue to Lead to Gold and Treasuries

Courtesy of Zero Hedge:

Interview with Zhu Min, Bank of China Vice President:
Q. Is overconfidence the biggest risk to the recovery?
A. It's not only overconfidence, it's overmyopic: Wall Street feels the crisis never happened. It seems to me the financial crisis is not over yet, but it has stabilized from a cliff drop. That's one thing. The real economic crisis is just starting.

Contrast that comment with ECRI's news release (Reuters) today:

A weekly gauge of future U.S. economic growth hit a year-high in the latest week, sending its yearly growth rate to an all-time high that points to a more vigorous recovery than consensus has shown.

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index rose to 125.4 in the week to Sept. 4 from a revised 124.6 the prior week, which was originally reported at 124.7.

It was the highest WLI reading since Sept. 5, 2008, when it stood at 126.0.

The "growth rate" of the index is probably less important over the long run than the actual level of the index (and the "coincident index", which measures how matters actually are rather than trying to predict the future), and those readings are well off their all-time highs.

And compare the above two with Ed Harrison's measured comments on Credit Writedowns today:

The problem I have with the recent history of growth in the United States, the United Kingdom, Spain and Ireland in particular is that the growth was underpinned by high debt accumulation and low savings. As debt is a mechanism through which we pull demand forward, the debt and consumption has meant we have been growing today at the expense of future growth.

Low quality growth can go on for a long time.

And here are some market-oriented comments from Jesse; others such as Art Cashin and market timers such as Bob Prechter and Paul J. Lamont tend to concur:

There is a strong correlation between this US equity rally and the Fed monetization of debt, which indicates a 'hot money' flow into US stocks but with thin volumes from a significant market bottom. This points to 'technical price trading' by the financial sector, also known was price manipulation, or trading stocks like commodities.

Continued heavy insider selling from those with the best forward view of the real economy is a clear sign of a top.

As regular EBR readers know, this blog has emphasized bottom-fishing in Treasuries, which had a strong week, with both trading and maintaining a core holding in Treasuries and Ginnie Maes suggested for many people; and gold. Gold as tracked by the GLD exchange-traded fund has now gone to an all-time high in its 50-day moving average.

Physical gold had a morning price fix on March 17, 2008 slightly above $1020/ounce. By this measure, it has not hit a new high. However, so far as I'm concerned, it's broken out. As with the Internet boom, every bull needs its new, higher bar to justify bringing (sucking?) in people who didn't buy in earlier. Right now, China is the story: it banned gold ownership until recently, and now is promoting physical gold ownership to its populace. The China gold story is reminiscent of the old, old saw promoted by U. S. shoe manufacturers: just think if every Chinese bought one pair of American shoes . . .

Gold and Treasury bonds: those are the 2 major structural bull markets that can be found. Perhaps oil. (I prefer gold.) An odd couple; but these are odd times.

Copyright (C) Long Lake LLC 2009

Underwater Down Under?

The peaceable continental country known as the Lucky Country may finally be joining the rest of the Anglo-Saxon world in poor economic times, as noted in Bloomberg's Australia Faces the ‘Full Brunt’ of Global Recession:

Australia’s economy, which has so far skirted the global recession, may stall after reports showed exports dropped to a 14-month low, bank lending fell and home- building approvals declined by the most since 2002. . .

This week’s reports suggest the global recession is biting as stimulus efforts fade, which may prompt the central bank to cut interest rates. Reserve Bank Governor Glenn Stevens said last month that slower growth and inflation give him scope to reduce borrowing costs if it helps secure “a durable upswing.”

“The full brunt of the deepest and most synchronized post- war global recession has yet to fully bear down on Australia,” said Su-Lin Ong, Sydney-based senior economist at RBC Capital Markets. “Export income, the terms of trade and business investment are all set to move substantially lower in 2009.”

Weakness in Australia may also imply greater economic weakness in China than the Chinese Government would like to admit.

Copyright (C) Long Lake LLC 2009

China's Real Estate Market Explained

Courtesy of a long Zero Hedge post, a seemingly credible article was referred to about Chinese residential real estate markets, the mindset of buyers/investors there, and the like, in China's Real Estate Riddle. It's not long and worth a read in its entirety. Here are the opening two paragraphs:

"The end is near!” That was the message top government expert Cao Jianhai delivered in April when he predicted that residential property prices in China will plunge by half in the next two years. He reasons that China’s recent run-up in housing—average prices have tripled over the past five years—is unsustainable given the huge volume of new apartments sitting empty throughout the country.

Mr. Cao’s forecast is pretty scary, and not just for homeowners. China’s banks may not have invested in risky mortgage securities like CDOs, but they make most of their business loans based on collateral in companies’ real estate assets, which frequently are pegged to the going price of nearby residential developments. If that collateral were suddenly cut in half, China could face a banking meltdown that makes the West’s financial crisis look like a walk in the park.

Given the L. A. Times article of several months ago detailing immense overbuilding in commercial real estate in Beijing, and suspicions that China has been speculating in the commodities markets, a coherent narrative has emerged that describes a major bubble in China.

Add bursting of a possible Chinese bubble or twin bubbles to the list of possible bits of bad things that could happen to roil either markets and/or real economies in future months.

Copyright (C) Long Lake LLC 2009

Of Green Shoots and Red Ink

Fed Chairman Bernanke espied economic green shoots of economic revival in the U. S. three months ago, in a phrase made famous in part because he said it on Sixty Minutes. Well, here it is almost the ides of June, and the most populous, richest state in the country - California- not only is going to need drastic action to avoid insolvency, but its revenues in May fell well below projections. Thanks to CR, here is an excerpt from a letter from California State Controller John Chiang today to the Governor:

In the letter I sent you on May 29, I indicated we would have a negative cash balance of $1.02 billion at the end of July, and a low point for 2009-10 of $22 billion. The additional deterioration is a result of two factors: (a) May revenues coming in $827 million less than projected by the Governor’s May Revision, and (b) adjustments made by the Department of Finance to its revenue and expenditure projections. Attached is a chart detailing the projected cash low point for each month for the fiscal year starting July 1.

I cannot find the projected revenues for May, but based on information available on the Web, it was expected as of one month ago to equal $7 billion. A fall-off from the estimate of just several weeks earlier of $827 million is- how can we say it- amazing- and distressing.

You don't see an error in revenues to the downside of at least 10% when green shoots are flourishing.

Something is wrong here. It's probably the green shoots story.

Also, the New York Times is reporting that the China commodity story is looking weak, in China's Commodity Buying Spree:

Strong buying by China has helped lift commodity prices around the world this spring, but growing evidence suggests that a sizable portion of this buying has been to build stockpiles in China, and may not be sustainable.

At least 90 large freighters full of iron ore are idling off Chinese ports, where they face waits of up to two weeks to unload because port storage operations are overflowing, chief executives of shipping companies said in interviews this week. Yet actual steel production from that iron ore is recovering much more slowly in China, and Chinese steel exports remain weak . . .

There has been enormous stockpiling of all commodities” by China, and this cannot continue indefinitely, said Tim Huxley, the chief executive of Wah Kwong Maritime Transport Holdings, a big shipping line based here.

Those extra purchases beyond China’s daily needs have helped reverse the price collapse in commodities that followed the economic downturn last fall, but could also limit the scale of the rebound.

Moody’s Investors Service announced on Wednesday that it was putting a negative outlook on the base metals, mining and steel industries in Asia and the Pacific, having previously done so for these sectors elsewhere.

Everywhere I look, the forecasters are getting more optimistic and the data looks more and more sluggish.

With so many manipulated markets, having confidence in any special point of view is difficult, but the situation is most consistent with a gradual shift of economic growth to the creditor (underconsuming, export-driven) countries such as Asia from the indebted countries of North America and Europe.

Since the data out of China continues to be questionable, and that out of the "country" of California looks horrible and is "real-time" more or less, it is hard to question Dr. Roubini's view that the economy remains quite weak in the United States of America.

Copyright (C) Long Lake LLC 2009

Deflation Everywhere Except in Commodity Trades

From Bloomberg: China’s Consumer Prices Decline 1.4%, Aiding Recovery Efforts.
Excerpts:

China’s consumer prices fell for a fourth month, making it easier for the government to maintain its “moderately loose” monetary policy to revive the economy.

Prices dropped 1.4 percent in May from a year earlier, after falling 1.5 percent in April, the statistics bureau said today. The median estimate in a Bloomberg News survey of 16 economists was for a 1.3 percent decline. Producer prices fell 7.2 percent, the most on record. . .

Energy-price increases may help to end deflation by year’s end, said economist (Sherman) Chan.

DoctoRx here. I would comment that since China imports most of its oil, price increases in energy may end deflation, but it would be ending the "good" deflation and replacing it with "bad" inflation.

Out of Japan comes similar deflationary news, in Japan Machine Orders Slide as Companies Cut Costs, as demonstrated:

Orders for Japanese machinery fell to a 22-year low in April as dwindling profits forced companies to cut costs amid the worst postwar recession.

Bookings, an indicator of capital investment in the next three to six months, fell 5.4 percent to 688.8 billion yen ($7.1 billion), the lowest since April 1987, the Cabinet Office said today in Tokyo. Economists predicted a 0.6 percent drop.

A separate report today showed that producer prices, or the costs companies pay for energy and raw materials, tumbled 5.4 percent from a year earlier, the biggest slide since 1987, according to the Bank of Japan. . .

Still, even after showing signs of stabilizing, exports and production have fallen by more than a third from last year’s levels. Only about half the nation’s factory capacity is being used, putting pressure on managers to cut costs and delay investments.

A survey published this week by the Nikkei newspaper showed that Japanese companies plan to cut capital spending by an unprecedented 15.9 percent this business year.

You get the picture. There is oversupply of almost everything right now. The five years from 2003-7 were perhaps the strongest five years of growth in world history. Outside of the U. S., massive investment in productive capacity, much of it for consumers in the West, occurred. In the U. S., Britain, Spain, and Australia, massive overinvestment and speculation in homes occurred.

Governments and central banks could of course cause inflation simply by mandating an extra zero on every salary, transaction, etc. That would, however, destroy the financial system. It is not going to happen. Debt deflation and price competition is everywhere. The price rises in oil and some other commodities is so speculative as to provide no signal as to where prices will be in 1, 3 or 6 months time.

Global interest rates are the lowest in the history of the modern world for a reason. That reason has to go beyond central bank manipulation. Inflation will return, and at some point with a vengeance, for sure. When is impossible to predict.

Copyright (C) Long Lake LLC 2009

Can We Trust Economic News Out of China?

The echo surge in commodity prices is supposed to be coming largely from Chinese demand. EBR remains skeptical that China is doing especially well, given that exports are flat on their back. From Naked Capitalism today is support for that in an article detailing declining electricity demand there (click on link to read the brief article).

In February, the L. A. Times ran an article detailing the immense amount of overbuilding in Beijing in commercial real estate in recent years. They built more office space in just a few years than exists in all of Manhattan. Most is empty. If you have not, consider clicking here and reading the article.

It's hard enough to know what's really going on in one's own country. When the engine of marginal world demand for oil and copper is supposedly out of a totalitarian country far away, and when we have recent scars from the deceptions that have been revealed in former icons of American capitalism that lied through their teeth, how are we supposed to risk/invest our money based on stories coming out of China?

I feel safer and "smarter" having purchased an almost 5% zero coupon U. S. Treasury bond with a 15 year maturity, which I did yesterday, than risking my hard-earned money on what may be lies out of Asia.

Copyright (C) Long Lake LLC 2009

China: Forget the Hype

Econblog Review has criticized the easy and optimistic story that China is doing great and will be the next engine of growth in an important way for the global economy. Today, Bloomberg.com supports this view in one of the first mainstream articles to take this viewpoint, in China Sees ‘Grim’ Job Market, Deeper Impact From Global Crisis. The article begins:

June 3 (Bloomberg) -- China’s government said unemployment is worsening, a quick rebound in trade is becoming less likely, and the nation is yet to feel the full effects of a global slump.

The foundations for an economic recovery aren’t solid, the State Council said in a statement on a government Web site today. Trade faces “unprecedented difficulties,” Vice Commerce Minister Zhong Shan said separately.

Commodities are selling off, as are stock markets.

More later.

Copyright (C) Long Lake LLC 2009

Not Content With Ruining the Western and Japanese Economies, the U. S. is Working on Ruining China's as Well

From the WSJ, U.S. to Urge China To Shop, Not Save:

The (Chinese) government has compelled state-run banks to unleash a flood of credit, lending more in the first four months of this year than in all of 2008. And officials have announced a series of subsidies and other measures to encourage rural dwellers to splurge on such items as small-engine cars, home appliances and electronics.

The article makes clear that Treasury Sec'y Geithner, who visits China this weekend, is going to urge China to be more like us and borrow and spend more while saving less.

Because we've done so well having unleashed a flood of credit upon ourselves and splurging on stuff.

Copyright (C) Long Lake LLC 2009

More Evidence of Ongoing Recession in China

Courtesy of Naked Capitalism comes a link to an article from China Stakes, titled Falling Power Generation in April= China’s Economy Still in the Woods. Now that we are all skeptics, let us consider whether it is even possible for China's economy to have grown much at all over the past year, much less the amount claimed, when tax receipts are down 10% year on year. Has an epidemic of tax evasion swept a totalitarian country? One suspects not, and the lack of growth of power generation year on year supports the view that the same forces that have kept over-exaggerating U.S. economic performance have been doing the same regarding China.

Here is most of the article:

Power generation and consumption is a leading economic indicator, a wind vane for future economic trends. A February bounce in power generation that continued in the first half of March was welcomed by economic policy makers, not least Premier Wen Jiabao, as a sign of recovery. It was, perhaps, a false hope as power generation again declined in late March. China Electricity Regulatory Commission officials predict a 4% decline in power generation in April.

Nationwide first quarter tax revenue totaled 1.302 trillion yuan, a fall of 10.3%, year on year. Consumption tax maintained rapid growth of 38.5%, year on year, in the first quarter, but other major taxes all declined. Domestic VAT, import linkage tax, corporate income tax, and personal income tax dropped by 2.4%, 15.8%, 16.7%, and 0.3%, respectively.

According to Vice-Minister Lou Qinjian of Industry and Information Technology, important industries such as cars and steel face serious production surpluses and 9 among the 12 key industries are seeing year-on-year profit decreases.

Rumor has it that the National Development and Reform Commission released an urgent notice on April 15, after an executive meeting of the State Council, requiring local governments to submit a third batch of qualified projects for central government investment as soon as possible. Projects funds are expected to be allocated in the first half of May at the earliest.

According to statistics from the State Grid, power generation dropped 0.7% year on year in March, after a rise of 5.9% in February and a fall of 12.3% in January. Experts believe the fallback indicates economic uncertainties. State Grid figures also show that power generation in the first quarter of this year dropped 2.25%, year on year.

In keeping with this winter's L. A. Times expose of massive overbuilding of commercial real estate in Beijing, one consideration that is not in the Street's worldview is true ongoing economic weakness in China rather than an ordinary growth recession. More and more evidence keeps surfacing to question the accuracy of the consensus viewpoint.

Copyright (C) Long Lake LLC 2009