GDP & Japan: Imperfect Together

Asian equity markets are not responding kindly to the latest economic data out of Japan. Second quarter GDP growth came in at 3.66% (annualized), the market was looking for a number closer to 3.9%.

This means that economic activity in Japan is where it was in December, 2004. Yep, no growth in over 4 years. No wonder why the Nikkei is down over 2% and Chinese stock indices are down between 2% and 3%.

U.S. equity futures are trading lower as well, pointing to a drop of about 0.4% at this time.

....And By The Way...

(Eurozone Data immediately above)

It may be the same situation overseas. Pleas don't forget:

2008 GDP Estimates (Courtesy of the CIA World Factbook):

European Union: $14.8 trillion

USA: $14.3 trillion

Japan: $4.3 trillion

These 3 entities comprise 48% of the world's GDP. I dare say they determine the path.

Another Poor Showing For U.K. GDP

The U.K.'s GDP number for the second quarter surprised to the downside: 0.8% decline. Some forecasters were actually predicting an expansion. Remember, this number is not annualized: our BEA would have reported this number as a drop of 3.2% (please see the post on June 30, 2008 regarding calculation methods).

Sweden Jumps The Shark

http://www.riksbank.com/templates/Page.aspx?id=32047

"The deposit rate is at the same time cut to -0.25 per cent and the lending rate to 0.75 per cent. "


-0.25%


The deposit rate is the "overnight rate of interest paid by the Riksbank on money held in accounts with banks."

So the central bank of Sweden is charging banks money to accept deposits. This is simply astounding. That is what I call deflationary fear.

U.K. Slowed More Than Expected

The GDP of the United Kingdom dropped 2.4% in the first quarter of this year. Please check the link below for all of the gory details.

The graph above is courtesy of the Office for National Statistics and tracks the growth in real GDP: quarterly change and annual change. Unlike the U.S. report, the headline number IS NOT ANNUALIZED. This number is the quarter to quarter change. To make it apples and apples:

U.S. first quarter: -5.5% annualized growth rate of real GDP

U.K. first quarter: - 9.3% annualized growth rate of real GDP

Not even industrialized nations report data in the same fashion, so please, read carefully when analyzing overseas data.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aqeTpadboF9c

China: Cautionary Tale

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5675198/Chinas-banks-are-an-accident-waiting-to-happen-to-every-one-of-us.html

China's banks are an accident waiting to happen to every one of us


It's not just quantity of loans that is important, it's quality too (as we have just learned). Chinese equity markets have rebounded smartly from their recent lows, due in large part to easy money. It may be best to take a breather. Pundits first claimed that the economic crisis would be contained in the U.S., not spreading to the faster growing emerging markets. This was a faulty premise, these emerging markets depend on the U.S. for exports. It seems highly unlikely to me that these same economies can recover without a significant recovery in the U.S.

Catching Up With Japan

No doubt can possibly remain, Japan is in the midst of deflation. The graph on the left tracks the year over year change in Japanese CPI. The price index is at the same level it was in August of 1993.

The graph on the right tracks Japan's current account position. As an exporting nation, Japan typically holds a current account surplus. This supply of foreign currency (i.e. US dollars) provides the fodder for the purchase of foreign assets. This is a volatile series, but the trend is clear: slowing global economies are decreasing their purchases of Japanese products. Perhaps this is why prices are falling in Japan.

China Taking Up The Slack for the U.S. Consumer?

China's GDP: 54% of U.S. GDP

China's per capita GDP: 12.8% of U.S. per capita GDP

China's largest export destination: U.S. (19.1% of exports)

"Buy China" policy set to raise tensions

http://www.ft.com/cms/s/0/66454774-5a7c-11de-8c14-00144feabdc0.html

I think the rookies will stumble.

U.K. Banks React to Rising Rates

http://www.timesonline.co.uk/tol/money/property_and_mortgages/article6457271.ece

Wow, story about U.K. lenders increasing loan to value ratio to keep the business going.

Back to China

http://www.bloomberg.com/apps/news?pid=20601087&sid=al8v4wR00eSo

China’s Exports Fall by Record After Global Demand Dries Up


...and they are buying iron ore like it's going out of style.

Falling Prices In China

http://www.bloomberg.com/apps/news?pid=20601087&sid=aKjsntVGsECo

China’s Consumer Prices Decline 1.4%, Aiding Recovery

That is some interpretation by Bloomberg. Anyway, as I said earlier today: China is playing a dangerous game. Falling prices mean that there are too many goods.

Deflation & Debt: Japan

Japanese producer prices dropped by 5.4% (year over year) as announced by the Bank of Japan today.

There are several structural differences between our economy and the Japanese economy. However, their sovereign debt to GDP ratio is approximately 1.4:1 (they have 1.4 yen worth of debt for each yen of GDP) and they are experiencing deflation. Please keep this in mind if you are considering the reflation trade.

More On China

http://www.mgn.com/news/dailystorydetails.cfm?storyid=9975

PRECIOUS SHIPPING EXPECTS DRY RATES CRASH

In conversations over the last few days, I have discussed the risks that China is taking with regards to their stimulus package. It was a significant amount of money and it is being deployed in the real economy: manufacturing & production.

It seemed to me that stockpiling was not the way to deal with a global slowdown. Does China know when this will end? It may seem like a good idea to buy industrial commodities when prices drop significantly, but I think it is a rookie mistake. How far will prices drop if the global economy does not rebound when China thinks it will?

China: Land of the (un)Free

http://www.nytimes.com/2009/06/09/world/asia/09china.html?_r=1&hp

China Requires Censoring Software


I get the whole China argument, I do. However, if this is indicative of the state of the State......

Chinese democracy (aside from an album over 10 years in he making) doesn't exist. A republic doesn't exist.

The truly frightening thing is that our country may not be far off from this behavior:

http://www.huffingtonpost.com/james-love/obama-administration-rule_b_174450.html

Just When You Thought It Was Safe...

Latvian Debt Crisis Shakes Eastern Europe

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5438615/Latvian-debt-crisis-shakes-Eastern-Europe.html


European Banks in Spotlight as Baltic Crisis Hits Sweden

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5446658/European-banks-in-spotlight-as-Baltic-crisis-hits-Sweden.html

More debt markets collapsing.....I can hear you now: Latvia ? Sweden? How can this really be a problem? Umm, remember this: sub-prime is the only problem, all else is contained.

A lack of liquidity is not what the world needs right now.

More on Japan

For good measure: consumer prices in Japan today are no different then they were in 1993.

Japanese GDP Plummets

I simply don't know what to write about this. The casual nature with which the press is treating this topic is astounding. Japan trails only the USA in terms of GDP: this is a major economy going through a major restructuring.

Real GDP fell at an annualized rate of 15.2% after falling 14.4% in the fourth quarter of 2008. I will be back with comments once I wrap my head around this.