Econ 2009

[ewmayer]

Treasury’s £100bn lifeline: New bailout of British lenders will take the government stake in Royal Bank of Scotland to 70%

The [UK] Treasury will tomorrow drastically revise the terms of last October’s bank bailout and say it will guarantee at least £100 billion of new lending.

Britain’s bank bosses are on standby to be called to Downing Street today or tomorrow to hear details of the new rescue plan.

Three key proposals are being finalised. The government will offer guarantees on new consumer loans, outline plans to ringfence “toxic” assets on bank balance sheets and propose to refinance the preference shares that were used to rescue Royal Bank of Scotland and HBOS.

My Comment: Note that RBS just reported a record loss of $30 Billion, much of it related to their own speculative bubble investment, the ill-fated purchase of ABN AMRO in 2007. If the UK government thinks throwing ever-increasing amounts of public funds at the insolvent banks will spur lending they are as mistaken as the U.S. Federal Reserve - banks will hoard the cash in expectation of further losses in their rotten loan portfolios to come, just as they are doing here.


California's Unemployment Empire Finds Public Works Spending No Cure-All: An hour’s drive through California’s Riverside County takes in neighborhoods of deserted homes, boarded-up businesses, busy unemployment offices -- and crews working on millions of dollars in new public projects.

Only four years ago, Riverside and nearby San Bernardino, often called the Inland Empire, were California’s economic powerhouse, accounting for more than a fifth of the state’s new jobs. Today, unemployment reigns in the sprawling region east of Los Angeles. The 9.5 percent jobless rate in the two counties matches Detroit’s as the highest of any major metropolitan area in the U.S.

Riverside also has almost $1 billion worth of public-works projects underway or planned, from widening roads to building a new jail. The county illustrates both the promise and the limitations of the spending President-elect Barack Obama proposes to pull the U.S. economy out of a recession that may become the longest since the Great Depression.

...

Riverside County didn’t set out to create jobs through public projects, which were needed in any case to accommodate a rapidly growing population that’s now 2.09 million, said Bill Luna, the county’s chief executive. Still, it became clear that such spending, if pushed through years sooner than originally planned, could help offset rising unemployment, said Roy Wilson, immediate past chairman of the board of supervisors.

“Creating one job is making a difference,” said Leroy Mathews, project superintendent on a new $12 million fire station and training center in the unincorporated Thousand Palms area, which employs 30 to 40 construction workers a day. “I just don’t know how much.”

The county’s largest project, a new $300 million jail in the unincorporated Whitewater area, will take up to two years to build and create as many as 4,500 jobs, officials said. It’s being paid for in cash after the county sold investors its share of future revenue from the 1998 tobacco-industry settlement, Luna said.

“Infrastructure investments are absolutely the best way to respond,” said [consultant John] Husing, who has studied the Inland Empire for 44 years. Even so, “it will take some time for money to change hands and for people to add jobs outside construction.”

My Comment: Wasting one-time-windfall money on bridges-to-nowhere-style projects and to build more prisons which will mainly be used to turn nonviolent drug offenders into hardened career criminals (all at taxpayer expense) doesn`t strike me as being in any way, shape or form "absolutely the best way to respond".


Ukraine Bonds Point to Default as Putin Takes `Upper Hand' in Gas Dispute: Four years after Ukraine embraced the West with the election of President Viktor Yushchenko in the Orange Revolution, the former Soviet nation’s economy is collapsing and investors expect the country to default.


Spain's Long-Term Sovereign Credit Rating Lowered to AA+ From AAA by S&P: Spain had its AAA sovereign credit rating removed by Standard & Poor’s in the second downgrade of a euro-region government in five days, as the country’s first recession in 15 years swelled the budget deficit.

The risk of losses on Spanish government debt rose to a record today, credit-default swaps showed, after S&P lowered the rating one step to AA+ and assigned it a “stable” outlook. It was S&P’s first reduction in Spain’s rating and puts it on the same level as Belgium and Hong Kong.

The cost of economic stimulus packages and bank bailouts is boosting budget deficits around the euro-region, fueling concern governments will have difficulty paying their debt. S&P cut Greece’s rating one step to A- on Jan. 14. A day earlier, it threatened to downgrade Portugal’s debt. S&P also reduced the outlook on Ireland’s rating to negative from stable.

“The only country that should be able to keep its AAA rating is Germany,” said Jose Carlos Diez, chief economist in Madrid at Intermoney SA, Spain’s largest bond dealer. “There should be a question mark over the rest.”

My Comment: The metaphorical elephant in the proverbial bedroom here is the U.S.'s credit rating, which also deserves to be cut. But since the U.S. government is effectively the Godfather of the ratings cartel, you know that won`t ever happen, except possibly - just as happened with the subprime-mortgage-bond-rating racketeering fraud - long after it would actually serve any of its intended purposes.

[only_human]

My Comment: Wasting one-time-windfall money on bridges-to-nowhere-style projects and to build more prisons which will mainly be used to turn nonviolent drug offenders into hardened career criminals (all at taxpayer expense) doesn`t strike me as being in any way, shape or form "absolutely the best way to respond".

Off the cuff, the latest cost figures I believe for incarceration in California are about $42,000 per prisoner, per year. Health Care for them is about $15,000 per year.

[ewmayer]

Economist Paul Krugman sets aside his all-too-frequent Keynesian "stimulus up da wazoo!" blather for once and has some sensible things to say about government policy toward zombie financial institutions:

New York Times | Wall Street Voodoo

Old-fashioned voodoo economics — the belief in tax-cut magic — has been banished from civilized discourse. The supply-side cult has shrunk to the point that it contains only cranks, charlatans, and Republicans.

But recent news reports suggest that many influential people, including Federal Reserve officials, bank regulators, and, possibly, members of the incoming Obama administration, have become devotees of a new kind of voodoo: the belief that by performing elaborate financial rituals we can keep dead banks walking.

To explain the issue, let me describe the position of a hypothetical bank that I’ll call Gothamgroup, or Gotham for short.

On paper, Gotham has $2 trillion in assets and $1.9 trillion in liabilities, so that it has a net worth of $100 billion. But a substantial fraction of its assets — say, $400 billion worth — are mortgage-backed securities and other toxic waste. If the bank tried to sell these assets, it would get no more than $200 billion.

So Gotham is a zombie bank: it’s still operating, but the reality is that it has already gone bust. Its stock isn’t totally worthless — it still has a market capitalization of $20 billion — but that value is entirely based on the hope that shareholders will be rescued by a government bailout.

Why would the government bail Gotham out? Because it plays a central role in the financial system. When Lehman was allowed to fail, financial markets froze, and for a few weeks the world economy teetered on the edge of collapse. Since we don’t want a repeat performance, Gotham has to be kept functioning. But how can that be done?

Well, the government could simply give Gotham a couple of hundred billion dollars, enough to make it solvent again. But this would, of course, be a huge gift to Gotham’s current shareholders — and it would also encourage excessive risk-taking in the future. Still, the possibility of such a gift is what’s now supporting Gotham’s stock price.

A better approach would be to do what the government did with zombie savings and loans at the end of the 1980s: it seized the defunct banks, cleaning out the shareholders. Then it transferred their bad assets to a special institution, the Resolution Trust Corporation; paid off enough of the banks’ debts to make them solvent; and sold the fixed-up banks to new owners.

The current buzz suggests, however, that policy makers aren’t willing to take either of these approaches. Instead, they’re reportedly gravitating toward a compromise approach: moving toxic waste from private banks’ balance sheets to a publicly owned “bad bank” or “aggregator bank” that would resemble the Resolution Trust Corporation, but without seizing the banks first.

Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, recently tried to describe how this would work: “The aggregator bank would buy the assets at fair value.” But what does “fair value” mean?

In my example, Gothamgroup is insolvent because the alleged $400 billion of toxic waste on its books is actually worth only $200 billion. The only way a government purchase of that toxic waste can make Gotham solvent again is if the government pays much more than private buyers are willing to offer.

Now, maybe private buyers aren’t willing to pay what toxic waste is really worth: “We don’t have really any rational pricing right now for some of these asset categories,” Ms. Bair says. But should the government be in the business of declaring that it knows better than the market what assets are worth? And is it really likely that paying “fair value,” whatever that means, would be enough to make Gotham solvent again?

What I suspect is that policy makers — possibly without realizing it — are gearing up to attempt a bait-and-switch: a policy that looks like the cleanup of the savings and loans, but in practice amounts to making huge gifts to bank shareholders at taxpayer expense, disguised as “fair value” purchases of toxic assets.

Why go through these contortions? The answer seems to be that Washington remains deathly afraid of the N-word — nationalization. The truth is that Gothamgroup and its sister institutions are already wards of the state, utterly dependent on taxpayer support; but nobody wants to recognize that fact and implement the obvious solution: an explicit, though temporary, government takeover. Hence the popularity of the new voodoo, which claims, as I said, that elaborate financial rituals can reanimate dead banks.

Unfortunately, the price of this retreat into superstition may be high. I hope I’m wrong, but I suspect that taxpayers are about to get another raw deal — and that we’re about to get another financial rescue plan that fails to do the job.

My Comment: Ah, the high cost of political taboo-word avoidance in America - in this case the taboo word is "nationalization", which is alas too close to that other pariah word, "socialism". I suspect to most Americans, any traces of "nationalization" and whiffs of "socialism" inevitably combine to yield "national socialism".

[S485122]

Originally Posted by ewmayer

My Comment: Ah, the high cost of political taboo-word avoidance in America - in this case the taboo word is "nationalization", which is alas too close to that other pariah word, "socialism". I suspect to most Americans, any traces of "nationalization" and whiffs of "socialism" inevitably combine to yield "national socialism".

I suspect that any whiff of "socialism" reeks like the worst pariah word : communism^*. The consequence is that the government is happily socialising debts.

Jacob

^*Since this is an all public forum, should I have used spoiler tags and a warning before using that word ? :-)

[ewmayer]

Analysts Cut Estimates by Record as S&P 500 Gets Off to Second-Worst Start: The Standard & Poor’s 500 Index is off to its second-worst start as analysts cut profit estimates by a record 83 percentage points and companies signal worse to come.

The benchmark index for U.S. equities fell 5.9 percent in the first 11 trading days of 2009, second only to last year’s 6.5 percent drop, according to data compiled by Bloomberg going back to 1928. The decline erased about half of a 24 percent rally since Nov. 20 as optimism that government spending would revive the economy evaporated.

“Analysts’ expectations have to come down, and they have to come way down,” said Roland Lescure, who oversees $128 billion as chief investment officer of Groupama Asset Management in Paris. “The fourth quarter has been dreadful.”

Stocks tumbled as Wal-Mart Stores Inc., Alcoa Inc. and Time Warner Inc. cut profit forecasts and signaled the U.S. recession that began in the banking industry spread through the economy. Wall Street stock pickers, who were cheerleaders for equities as the S&P 500 tumbled the most since 1937, now forecast a 28 percent drop in profits for the fourth quarter after saying in March that earnings would rise as much as 55 percent.

Forecasts have been too optimistic since the period ended September 2007, when the profit slump began. Analysts failed to anticipate the S&P 500 earnings decline by an average 7.7 percentage points, based on estimates at the beginning of each reporting season compiled by Bloomberg.

My Comment: "The analysts" were wrong all last year, at every turn, on every issue of substance. Despite the dreadful news about job losses and continued deterioration in virtually every barometer of economic fundamentals, "The analysts" for the most part were making bottom calls in December, "time to start buying is now", "foresee a robust recovery in 2nd half of 2009", "don't want to miss the recovery train once it leaves the station", et cetera. As I noted around new year, the one scenario nothing in current market "experts" lifetimes has prepared them for is a multiyear plunge in economic conditions, accompanied by a continued selloff in all these "bottom has been hit, or at least is near" equity indices. Whoopsie! Sorry `bout that, folks, hope you got a vegetable garden planted to help see you through your retirement years, because that 401(k) we`re managing for ya? Well, it ain`t doing so well.

“There is a lot of noise out there that causes you to doubt what you are doing,” said Brian Piccioni, an analyst at BMO Capital Markets who covers technology companies. Piccioni reduced his estimate for Santa Clara, California-based Intel’s earnings by half on Jan. 16.

My Comment: Given that January 16th was the date that Intel announced its Q4 earnings had plunged 90% year-over-year, not a terribly perspicacious or ballsy call by Mr. Piccioni there, was it? Note to Brian P: We have seen the "lot of noise", and most of it is coming from you and your fellow non-analyzing, after-the-fact-restating-of-the-obvious analysts. Must be great to get paid handsomely for being wrong about everything that isn't already in your rear-view mirror, though.


How big is California`s budget hole? Try these numbers on for size

SACRAMENTO — If Gov. Arnold Schwarzenegger were to fire every employee in state government tomorrow, it would easily patch California`s enormous deficit, right? Not even close.

But surely shutting down all state prisons would do the trick? That, too, would only get him about a quarter of the way there.

Now what if he were to close every prison and cut off funding for health care and other services for the poor? Now we`re in the ballpark.

Schwarzenegger on Thursday delivered his annual State of the State address, and there was only one topic on his mind: A budget deficit that`s ballooned to $40 billion through mid-2010.

How does the average taxpayer begin to make sense of that sum? Not easily.

"It`s like a number that`s out there, but it`s so big that it almost becomes meaningless," said Adrienne Gates, a 50-year-old San Jose resident who keeps fairly close tabs on news out of Sacramento. "It`s like hearing stories about how fast the universe is expanding."

Even state lawmakers seem only now to be coming to grips with the enormity of their problem, after months of finger-pointing. No matter how big the shortfall got over the past year, Democrats and Republicans hewed to their long-held opposition to deep program cuts or tax increases.

It`s been only this month, with the state literally on the verge of not being able to pay many of its bills, that signs have emerged that both sides realize they`re going to have to make major concessions.

"There isn`t a real will to hunker down until you have to," said Barbara O`Connor, director of the Institute for the Study of Politics and Media at Sacramento State University. "But it`s reached the point where they don`t have a choice. Polemics don`t work."

Still, even a governor and Legislature in perfect ideological harmony would struggle to close a deficit this big. Consider that $40 billion is the amount the state shells out of its general fund each year for the public school system.

Payroll for California`s roughly 230,000 civil servants tallies a mere $18 billion — not including legislative aides or people who work for the state`s courts or university systems. (Those 149,000 additional folks aren`t under the governor`s control, but even if Schwarzenegger could fire them, their salaries wouldn`t be enough to patch the $40 billion deficit.)

California`s shortfall is larger than the entire yearly budget of every other state except New York. It exceeds the gross domestic product of more than 100 countries, including Syria, Costa Rica and Kenya.

My Comment: No provision in U.S. law for a state-level bankruptcy ... we are so screwed. Government will likely be forced to step in and construct what amounts to an "effective chapter 11 filing", by forcing the state, its major creditors and the various employee unions to the table to share the fiscal pain. At least I hope that`s what Washington does - I suspect even the Keynesian "stimulus checks for all!" crowd are starting to get the idea that it might be good to attach some strings to all that "free money" they`re throwing at the problem.


On a Humorous Note...

Saw this pithy comment in a Yahoo! Finance message board thread titled "Investors await Obama`s signals on China`s yuan":

"Obama dont know his mama when it comes to economics, so they key question is, `who are his advisors, and what are they going to advise?`"

They will advise doing everything to keep the spigot of Chinese credit open - in the final analysis, China sends us free crap, and we pretend we are going to pay them back with real exports sometime in the distant future. The entire American military is predicated on foreigners sending the US lots of free crap.

That is what an empire is.

This will continue to work until the day it doesn`t any longer, then - Kaput! An economic implosion will pull both countries into the black hole of a sudden economic singularity the like of which you could not imagine on your most pessimistic day.

My Comment: An interesting "heard on the street" definition of an empire there. If one relaxes the "consenting countries" aspect of the above example and allows for coerced "sending of free crap" (the now-out-of-fashion term for this is "tribute", in the "render unto Caesar" sense of the Christian gospel) and "coerced cut-rate labor", it does seem to accurately describe most empires, ancient and more recent.

[ewmayer]

Reform plan raises fears of secret money-printing by BofE: The Bank of England will be able to print extra money without having legally to declare it under new plans which will heighten fears that the Government will secretly pump extra cash into the economy.

The Government is set to throw out the 165-year old law that obliges the Bank to publish a weekly account of its balance sheet – a move that will allow it theoretically to embark covertly on so-called quantitative easing. The Banking Bill, which is currently passing through Parliament, abolishes a key section of the law laid down by Robert Peel's Government in 1844 which originally granted the Bank the sole right to print UK money.

The ostensible reason for the reform, which means the Bank will not have to print details of its own accounts and the amount of notes and coins flowing through the UK economy, is to allow the Bank more power to overhaul troubled financial institutions in the future, under its Special Resolution Authority.

However, some have warned that it means: "there is nothing to stop an unreported and unmonitored flooding of the money market by the undisciplined use of the printing presses."

My Comment: Can you say "Weimar"? Or perhaps Zimbabwe is a more up-to-date analogy, as in, "If printing money were a route to economic prosperity, then Zimbabwe would be an economic superpower." This reeks of desperation.


U.S. Stocks Slide to Worst Inauguration Day Drop in Dow Industrial History: U.S. stocks sank, sending the Dow Jones Industrial Average to its worst Inauguration Day decline, as speculation banks must raise more capital sent financial shares to an almost 14-year low.

State Street Corp., the largest money manager for institutions, tumbled 59 percent after unrealized bond losses almost doubled. Wells Fargo & Co. and Bank of America Corp. slumped more than 23 percent on an analyst’s prediction that they’ll need to take steps to shore up their balance sheets. The Dow’s 4 percent slide was the most on an Inauguration Day in the measure’s 112-year history, according to data compiled by Bloomberg and the Stock Trader’s Almanac.

“All the banks are going to have to recapitalize,” said Greg Woodard, portfolio strategist at Manning & Napier Advisors Inc., which manages $16 billion in Fairport, New York. “That’s not done. That’s in front of them, and we don’t want to try to get in front of that trade.”

The S&P 500 plunged 5.3 percent to 805.22. The S&P 500 Financials Index fell 17 percent to below its lowest closing level since March 1995 as concern European banks need more capital also weighed on the group. The Dow average slid 332.13 points to 7,949.09. Both the Dow and S&P 500 retreated to two- month lows.

The S&P 500 is off to its worst start to a year, shattering the biggest rally since World War II, as analysts cut earnings estimates by a record 83 percentage points and companies signal worse to come.

The S&P 500 is down 11 percent in the first 12 trading days of 2009, exceeding last year’s 9.2 percent drop, according to data compiled by Bloomberg going back to 1928. The decline helped erase more than two-thirds of a 24 percent rally since Nov. 20 as optimism that government spending would revive the economy evaporated.

‘Effectively Insolvent’

U.S. financial losses from the credit crisis may reach $3.6 trillion, according to New York University Professor Nouriel Roubini, who predicted last year’s economic and stock-market meltdowns.

“If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion,” Roubini said at a conference in Dubai today. “This is a systemic banking crisis.”

Europe’s Dow Jones Stoxx 600 Index retreated 2.1 percent today, led by banks and technology companies. It fell almost 2 percent yesterday after Royal Bank of Scotland Group Plc forecast the biggest-ever loss by a U.K. company. The MSCI Asia Pacific Index retreated 2.1 percent today.

My Comment: A fitting welcome for Preident Obama, from his good friends Bush, Greenspan & Co.


Intel May Report First-Quarter Loss, Breaking 21-Year Run of Profitability: Intel Corp., the world’s largest chipmaker, may report a loss in the first quarter, breaking a more than 21-year run of profitability, Chief Executive Officer Paul Otellini told employees.

[cheesehead]

The Dow’s 4 percent slide was the most on an Inauguration Day in the measure’s 112-year history

Note that in those 112 years there were only 28 previous Inauguration Days, so let's not assign too much significance to this latest example of financial pages' constant desperation to cite "records".

- - -

OTOH, 4 percent in one day ... makes me glad I procrastinated in my "get-back-into-the-market" plan.

[ewmayer]

Ha, ha, various morons on the Yahoo! finance Citigroup message board are already blaming Obama for their getting a huge haircut today ... that's right, Obama was instigating this whole worldwide housing-bubble Ponzi finance scam years ago...and the fact that things are still broken, here, a whopping 8 hours into his presidency, clearly makes him a failure.

Heard a joke yesterday, based on a recent poll showing that 27% of Americans (or some similar number) still believe Bush did a good job: "They say you can fool some of the people of of the time - well, now we know who those people are."

[ewmayer]

Today`s Lesson in Bubble Economics: From Tulip Bulbs to Tea Leaves

A County in China Sees Its Fortunes in Tea Leaves Until a Bubble Bursts

MENGHAI, China — Saudi Arabia has its oil. South Africa has its diamonds. And here in China’s temperate southwest, prosperity has come from the scrubby green tea trees that blanket the mountains of fabled Menghai County.

Over the past decade, as the nation went wild for the region’s brand of tea, known as Pu’er, farmers bought minivans, manufacturers became millionaires and Chinese citizens plowed their savings into black bricks of compacted Pu’er.

But that was before the collapse of the tea market turned thousands of farmers and dealers into paupers and provided the nation with a very pungent lesson about gullibility, greed and the perils of the speculative bubble. “Most of us are ruined,” said Fu Wei, 43, one of the few tea traders to survive the implosion of the Pu’er market. “A lot of people behaved like idiots.”

A pleasantly aromatic beverage that promoters claim reduces cholesterol and cures hangovers, Pu’er became the darling of the sipping classes in recent years as this nation’s nouveaux riches embraced a distinctly Chinese way to display their wealth, and invest their savings. From 1999 to 2007, the price of Pu’er, a fermented brew invented by Tang Dynasty traders, increased tenfold, to a high of $150 a pound for the finest aged Pu’er, before tumbling far below its preboom levels.

For tens of thousands of wholesalers, farmers and other Chinese citizens who poured their money into compressed disks of tea leaves, the crash of the Pu’er market has been nothing short of disastrous. Many investors were led to believe that Pu’er prices could only go up.

“The saying around here was ‘It’s better to save Pu’er than to save money,’ ” said Wang Ruoyu, a longtime dealer in Xishuangbanna, the lush, tea-growing region of Yunnan Province that abuts the Burmese border. “Everyone thought they were going to get rich.”

Fermented tea was hardly the only caffeinated investment frenzy that swept China during its boom years. The urban middle class speculated mainly in stock and real estate, pushing prices to stratospheric levels before exports slumped, growth slowed and hundreds of billions of dollars in paper profits disappeared over the past year.

In the mountainous Pu’er belt of Yunnan, a cabal of manipulative buyers cornered the tea market and drove prices to record levels, giving some farmers and county traders a taste of the country’s bubble — and its bitter aftermath.

At least a third of the 3,000 tea manufacturers and merchants have called it quits in recent months. Farmers have begun replacing newly planted tea trees with more nourishing — and now, more lucrative — staples like corn and rice. Here in Menghai, the newly opened six-story emporium built to house hundreds of buyers and bundlers is a very lonely place.

“Very few of us survived,” said Mr. Fu, 43, among the few tea traders brave enough to open a business in the complex, which is nearly empty. He sat in the concrete hull of his shop, which he cannot afford to complete, and cobwebs covered his shelf of treasured Pu’er cakes.

All around him, sitting on unsold sacks of tea, were idled farmers and merchants who bided their time playing cards, chain smoking and, of course, drinking endless cups of tea.

The rise and fall of Pu’er partly reflects the lack of investment opportunities and government oversight in rural Yunnan, as well as the abundance of cash among connoisseurs in the big cities.

Wu Xiduan, secretary general of the China Tea Marketing Association, said many naïve investors had been taken in by the frenzied atmosphere, largely whipped up by out-of-town wholesalers who promoted Pu’er as drinkable gold and then bought up as much as they could, sometimes paying up to 30 percent more than in the previous year.

He said that as farmers planted more tea, production doubled from 2006 to 2007, to 100,000 tons. In the final free-for-all months, some producers shipped their tea to Yunnan from other provinces, labeled it Pu’er, and then enjoyed huge markups.

When values hit absurd levels last spring, the buyers unloaded their stocks and disappeared. [Continued]

[ewmayer]

Edit: A snappy title for my post yesterday about the Chinese tea mania only occurred to me this morning: "For richer or Pu`er". Ah, well, better late than never. :)

Jobless claims surge to 26-year high: Number of Americans filing unemployment insurance hits 589,000, highest since November 1982.

My Comment: If those kinds of numbers persist through the rest of the year, we are looking at 7 million job losses, more than 3 times what "most economists" have predicted.


China`s economic growth slows sharply: Gross domestic product slumped in the fourth quarter as the global financial crisis deepened.

BEIJING (Reuters) -- China`s economic growth slumped to 6.8% last quarter, dragging down the pace of expansion for all of 2008 to a seven-year low of 9% as the full force of the global financial crisis struck home.

Fourth-quarter growth in gross domestic product, measured from a year earlier, dropped from the 9% clip of the July-September quarter but was close to market expectations of a 7% reading.

The slowdown in 2008 snapped a five-year streak of double-digit growth that has turned China into the third-largest economy in the world after the United States and Japan.

"The international financial crisis is deepening and spreading with continuing negative impacts on the domestic economy," the National Bureau of Statistics said in a statement on Thursday accompanying the release of the figures.

A record 35% plunge in Japanese exports in December from year-earlier levels, as well as a sharp contraction in South Korea`s economy in the fourth quarter, suggests there will be no relief any time soon for Asia`s export-dependent economies, including China.

Many economists, especially those at Western banks, believe China will expand by no more than 5-6% this year, which would be the weakest performance since 1990.

My Comment: 5-6% sounds ravingly optimistic ... but given that we have to rely on the Chinese government for these statistics, whatever their internally-greed-upon economic growth target is, is what "economic growth" will be.

Others agree the economy will remain weak in the first half but think Beijing will hit its target of 8% growth for all of 2009 as November`s $585 billion stimulus package and much easier monetary policy kick in.

My Comment: government stimulus != economic growth.

"The government has realized the fact that the economy is declining and regards the 8% target as a political task. Therefore, I think we can achieve the goal," said Jin Yanshi, chief economist at Sinolink Securities in Shanghai.

My Comment: Of course you can achieve it - just get some top bureaucrat to write "8% GDP growth in 1Q2009!" on a piece of paper, announce it to the media, and there you go.

This was the line taken by the head of the statistics office, Ma Jiantang, who said the swoon in growth would be short-lived.

"As long as we can boost domestic demand and increase investment, we can absolutely achieve the 8% GDP growth target in 2009," he told a news conference.

My Comment: Good luck with that, but it hasn`t worked here in the U.S., and with millions of Chinese workers getting laid off each month, it won`t work there, either.

Ma acknowledged that December`s data showed the economy had been hit hard. Still, inflation-adjusted retail sales and fixed-asset investment held up well, while annual industrial production growth recovered to 5.7% from November`s record low reading of 5.4%.

My Comment: Right - the bad November numbers spooked investors and consumers, so you came up with some better ones for December. See how easy that was?

Many economists are skeptical about the quality of China`s statistics, which they say are susceptible to political manipulation. The result, these critics say, is that trends in various data series often appear too smooth to be convincing.

Still, Thursday`s GDP figures were consistent with recent data showing falling power consumption and declines in November and December in both exports and imports as the bottom fell out of the world economy.

My Comment: 6.8% announced GDP growth is most certainly *not* consistent with "falling power consumption and declines in November and December in both exports and imports". What, did you simply copy the official Xinhua bulletin?

"Q4 GDP growth of 6.8% holds little water," said Bian Xubao, an analyst with Qilu Securities in Jinan, using the Chinese phrase that describes when figures are artificially inflated.

My Comment: Or better - using the Chinese phrase that describes when figures are "total bullcrap". The reality is, Asian governments are panicking about the collapse of their export economies and most have little domestic consumption they can ratchet up. One more nail in the coffin of the decoupling hypothesis.

Of course, it would also be helpful if the Chinese government discontinued their bizarre practice of "measuring in 2007 and announcing for 2008":

Roubini Says China Is in Recession Despite `Massaged' Economic Growth Data: i]China is in a recession despite government statistics today showing the world’s third-largest economy expanded in the fourth quarter from a year earlier, according to Nouriel Roubini, the New York University professor who predicted last year’s economic crisis. [/i]

“China is in a recession regardless of what the highly massaged official numbers claim,” Roubini, a professor at NYU’s Stern School of Business and the chairman of consulting firm Roubini Global Economics, wrote in a note today on his Web site. “When growth is slowing down sharply the Chinese way to measure GDP is highly misleading.”

Unlike the U.S. and western Europe, China’s figures on gross domestic product measure growth from the same quarter a year ago rather than the previous three months. The year-on-year figures fail to capture the economy’s slowdown at the end of 2008 because growth was so high in the preceding quarters, Roubini wrote.

...

Investors should buy China’s agriculture, water treatment, power generation and infrastructure stocks because the companies won’t be hurt by the nation’s slowing economy, investor Jim Rogers said in an interview today.

My Comment: I generally respect Rogers, except when he talks about Asia - he moved to Asia years ago with his lovely wife Paige and has become a notorious China permabull.

“There is a lot happening in China and there will be those that will hold up well,” said Rogers, who correctly predicted the start of the commodities rally in 1999 and wrote books on investing including “A Bull in China: Investing Profitably in the World’s Greatest Market.”

My Comment: And didja correctly predict the abrupt and brutal *end* of the commodities bull market last year? Yah, thought not.


Gordon Brown brings Britain to the edge of bankruptcy: Iain Martin says the Prime Minister hasn't 'saved the world' and now faces disgrace in the history books

They don't know what they're doing, do they? With every step taken by the Government as it tries frantically to prop up the British banking system, this central truth becomes ever more obvious.

Yesterday marked a new low for all involved, even by the standards of this crisis. Britons woke to news of the enormity of the fresh horrors in store. Despite all the sophistry and outdated boom-era terminology from experts, I think a far greater number of people than is imagined grasp at root what is happening here.

The country stands on the precipice. We are at risk of utter humiliation, of London becoming a Reykjavik on Thames and Britain going under. Thanks to the arrogance, hubristic strutting and serial incompetence of the Government and a group of bankers, the possibility of national bankruptcy is not unrealistic.

The political impact will be seismic; anger will rage. The haunted looks on the faces of those in supporting roles, such as the Chancellor, suggest they have worked out that a tragedy is unfolding here. Gordon Brown is engaged no longer in a standard battle for re-election; instead he is fighting to avoid going down in history disgraced completely.

This catastrophe happened on his watch, no matter how much he now opportunistically beats up on bankers. He turned on the fountain of cheap money and encouraged the country to swim in it. House prices rose, debt went through the roof and the illusion won elections. Throughout, Brown boasted of the beauty of his regulatory structure, when those in charge of it were failing to ask the most basic questions of financial institutions. The same bankers Brown now claims to be angry with, he once wooed, travelling to the City to give speeches praising their "financial innovation".

Does the Prime Minister realise the likely implications when the country joins the dots? He has never been wild on shouldering blame, so I doubt it. But Brown is a historian. He should know that when a nation has put all its chips on red and the ball lands on black, the person who made the call is responsible. Neville Chamberlain discovered this in May 1940 with the German invasion of France.

We're some way from a similar event. But do not underestimate the gravity of the emergency and potential for disgrace.

The Government's bail-out of the banks in October with £37 billion of taxpayers' money was supposed to have "saved the world", according to the PM, but now it is clear that it has not even saved the banks. Our money kept the show on the road for only three months.

As the Liberal Democrats' Treasury spokesman Vince Cable asks: where has the £37 billion gone? The answer, as Cable knows, is that it has disappeared down the plug hole.

It is finally dawning on the Government that the liabilities of the British banks grew to be so vast in the boom years that they now eclipse the entire economy

[only_human]

A Sea of Unwanted Imports [The New York Times. November 18, 2008]

The mothballing of cars is nothing new for Detroit, where thousands of unwanted American-made cars have been parked over the last two years at Michigan’s state fairground and in lots at its airports.

It is more unusual to see a lot at the California port filled with thousands of unsold Mercedeses, most of them gathering dirt on the plastic white film that protects their hoods and trunks. Some appeared to have been stashed at the port for several months.

Not far away, metal, cardboard, paper and plastic are piling up in the lot of Corridor Recycling. The company takes in refuse from around the country, then bales it for shipment to China. The cardboard is used to make new boxes while used shrink wrap is turned into shoe soles and insulation for sleeping bags and coats.

For much of this year, the company shipped about 25 containers a day, each filled with 23 tons of refuse to be recycled. But after the Olympics, demand slowed for recycled metal. In October, demand for everything else took a sharp downturn, and for the last two weeks the company has not shipped a single container.

Slideshow: Pileup at the Port
I like the slide show of temporary storage of recyclables and imported cars and the chart showing the increased auto supply accumulation (3 or 4 months versus 2 months in '07). Also interesting is that the recyclable materials economy actually involves shipping bulk material to China where this material has plummeted in demand. I looked for some remembered slide shows of giant lots of unsold Hummers but didn't find them. Anyway they predated the recent economic events and were more a manifestation of gas prices. So where are big cars selling now?:‘Nobody buys those things anymore, but Saudis love them’

It so happens that all three models – the Marquis, the Town Car and the Crown Victoria – are made by a single company, the Ford Motor Company, at a single factory in Ontario, Canada. Saudi Arabia has emerged as Ford’s largest market for these cars anywhere. Their popularity helped push Ford’s sales in the Middle East up 23 per cent last year.

Some Saudis say they will keep buying the Fords as long as they are made, that there is no better choice for long Saudi drives, such as the 846km, seven-hour drive separating Riyadh from Jeddah. “American cars are more comfortable for long trips across Saudi,” said Riyadh resident Essam Bukhamseen of his own cross-country commutes. “When you sit in an American car you feel like you’re sitting at home.”