By Ajay Shah, on October 13th, 2009
It seems that we got a good IIP number today? Here’s what the year-on-year growth of IIP Manufacturing says:
| Mar 2009 |
-0.30 |
| Apr 2009 |
0.39 |
| May 2009 |
1.84 |
| Jun 2009 |
7.82 |
| Jul 2009 |
7.41 |
| Aug 2009 |
10.21 |
So it looks like a recovery is gaining traction, with yoy growth going up in each month from March 2009 till August 2009, other than a slight decline in July 2009?
No.
The year-on-year growth is, unfortunately, a highly misleading measure. Here’s what we get when we look at the seasonally adjusted levels and the annualised growth of these:
|
Seas.Adj.IIP |
Ann.Growth |
| Mar 2009 |
296.64 |
1.62 |
| Apr 2009 |
297.69 |
4.24 |
| May 2009 |
299.08 |
5.59 |
| Jun 2009 |
319.78 |
80.32 |
| Jul 2009 |
320.81 |
3.84 |
| Aug 2009 |
322.14 |
4.98 |
This shows a very different picture. It shows one big month — June 2009 — where seasonally adjusted IIP jumped from 299.09 to 319.78. This was an annualised growth rate of 80.32%. This was the month in which the recovery kicked in, where we jumped back from the low state to a better state.
After that, growth has dropped back to anaemic levels, with annualised growth of 3.84% in July and 4.98% in August. So today’s data release was actually not so hot – it was just 4.98% growth (annualised) of seasonally adjusted IIP manufacturing.
Each value of the year-on-year growth rate is the moving average of the latest 12 values of the month-on-month growth. So this one big value of 80.32% is going to elevate each reading of yoy growth up, all the way until we calculate the yoy growth from May 2009 till May 2010. After that, we’ll get to the yoy growth from June 2009 till June 2010 and this jump will go away.
You only get the true picture by looking at point-on-point changes of seasonally adjusted data.
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By Ajay Shah, on October 12th, 2009
In recent weeks, there has been a lot of focus on the appreciation of the rupee against the dollar. In an opinion piece in Financial Express today, I point out that the US dollar has fluctuated considerably in the period after September 2008, and interpret the recent events on the Indian currency market. At first, in the `flight to safety’ into US government bonds that came about after the Lehman shock, the US dollar gained ground. As the global financial system has gained confidence, the reversal of this `flight to safety’ has meant a concomitant decline in the US dollar.
These ups and downs of the US dollar have important implications for our intuition in India about the rupee-dollar rate. If we think the US dollar is roughly fixed, then the pursuit of an inflexible rupee-dollar rate can be interpreted as some kind of `stability’. But if the US dollar itself is a fluctuating yardstick, it is hard to justify efforts at RBI to obtain inflexibility of the rupee-dollar rate. When the dollar declines in value, an attempt at holding on to a rigid rupee-dollar rate is tantamount to forcing a rupee depreciation, and vice versa.
Greater flexibility in the rupee dollar rate will free up monetary policy to pursue the more important goal of stabilising the domestic business cycle. But along the way, for firms to learn to live with greater flexibility of the rupee dollar rate, well functioning currency derivatives markets are required. RBI needs to first step away from the present strategy of banning most of these markets, so as to be able to move forward to greater flexibility of the rupee.
On the macroeconomic arguments about the long-term decline of the US dollar, see Wolfgang Munchau in the Financial Times today.
By Trace Mayer, on October 12th, 2009
United States legal tender nickels present an almost completely risk-free investment. Getting a large 5 gallon bucket and tossing in the nickels from your daily change is an excellent way to preserve your purchasing power, protect your wealth and reduce both counter-party and payment risk. But due to increasingly despotic threats and actions by the United States government this avenue for wealth preservation is being threatened.
PURCHASING POWER
The current melt value of 1946-2009 nickels is about $0.0465604 or 93.12% of the face value. A great resource to track the current melt rates of United States legal tender money relative to Federal Reserve Note legal tender currency is Coinflation.com.
Each nickel is 5.00 grams and consists of 75% copper and 25% nickel. Thus, a $10 box of nickels, or 200 nickels, weighs 1,000 grams or about 2.2 pounds. This would be about the size of two bricks. With some gold spray paint and the unverified shortage of LBMA quality bullion you may even be able to get the problematic GLD ETF to buy a few bars.
COUNTER-PARTY RISK
Nickels are usually available for withdrawal from your local bank. Since so many banks are failing and so many others are in worsening financial shape it makes since to keep minimal cash balances in your account(s) unless you know of their financial soundness. The FDIC’s reserve fund is in horrible shape but the $500B line of credit with the Treasury should keep formal bank runs with lines, like Disney Land used to have, at a minimum.
But a physical nickel in your hand has intrinsic value and can never become worthless which makes it immune to payment risk. By taking possession instead of keeping the electronic digits in your bank account you completely eliminate that degree of counter-party risk. Additionally, you pay no fabrication fees unlike purchasing gold, silver or platinum.
MISH’S MISSTATEMENTS OF FACT
Mike Shedlock of Global Economic Analysis in an article titled Analysis: Ridiculous Hype Over Secret Oil Meetings wrote:
Ten Simple Facts
5) It takes less than a second for Forex trades to take place. 24 hours a day, 7 days a week, one can sell any currency they want and buy any other currency.
6) The above logic applies to any currency and any commodity.
7) Nothing is stopping anyone at any time anywhere from selling dollars for whatever currency they want to hold. Nor is anything stopping anyone anywhere at any time from selling any major currency for U.S. Dollars.
 Because currency conversion is instantaneous no one has to hold U.S. dollars to buy oil, copper, gold, iron, lead, wheat, soybeans, or anything else.
While I will not address the substantive analysis of his article I would like to address several misstatements of fact and offer analysis on potential likely changes to the landscape.
CURRENCY CONTROLS
First, as stated in #5 the ability to ’sell any currency they want and buy any other currency’. Foreign exchange controls are various overt forms of controls imposed by a government on the purchase or sale of foreign currencies. These controls can take many forms including, (1) banning the use of foreign currency within a country, (2) banning locals from possessing foreign currency, (3) restricting currency exchange to government-approved exchangers, (4) fixed exchange rates or (5) restrictions on the amount of currency that may be imported or exported. Section 14 of the International Monetary Fund agreement provides for currency controls for transitional economies.
While Mish may attempt to narrow the discussion from ‘any currency and any commodity’ to any major currency or the currencies of major economies I think doing so fails on both counts as China imposes overt foreign exchange controls, had a 2007 GDP of $3.5T, began to sell sovereign bonds to foreigners in September 2009 and is a formidable force in the global economy. Therefore, to categorically state that anyone can sell or buy any currency or commodity through the extremely liquid FOREX markets is a blatant misstatement of fact. But this surface analysis is even more potent if one keeps digging.
Second, I am unsure what Mish means by ‘Nor is anything stopping anyone anywhere at any time from selling any major currency for U.S. Dollars.’ Drawing upon Dr. Vieira’s previous work I address the issue of what is a dollar as applied to the recent Kahre case. An excellent book on the subject is Murray Rothbard’s What Has Government Done To Our Money. The actionable conclusion for IRS purposes is to distinguish between FRN dollars and U.S. Dollars as found under 31 U.S.C. 5112. This difference leads to a capital gains tax on gold or silver, which are both commodities and currencies.
Interestingly, Section 408(m), applicable to retirement accounts, provides exceptions for legal tender gold and silver coins along with ‘a coin issued under the laws of any State’. The IRS also issued a private letter ruling that ‘The acquisition by an IRA of shares in trusts which hold gold and silver bullion as their only asset will not constitute the acquisition of a collectible under Code Sec. 408(m).’
If a capital gain tax rate greater than 25% is not a draconian currency control in practice then I am not sure what is. Because both FRN$, gold, silver, copper and nickel are legal tender thus in practice this capital gains tax is perhaps the single largest protection of the FRN$’s fiat currency monopoly which leads to its market dominance and world reserve status. Yes, all Dollars are dollars but some Dollars are more equal than others.
Third, as I analyzed in June 2009 the United States Treasury issued additional overt currency controls on United States legal tender in 2006. The announcement provided:
The United States Mint has implemented regulations to limit the exportation, melting, or treatment of one-cent (penny) and 5-cent (nickel) United States coins, to safeguard against a potential shortage of these coins in circulation. … Prevailing prices of copper, nickel and zinc have caused the production costs of pennies and nickels to significantly exceed their respective face values.
“We are taking this action because the Nation needs its coinage for commerce,” said Director Ed Moy. “We don’t want to seeour pennies and nickels melted down so a few individuals can take advantage of the American taxpayer. Replacing these coins would be an enormous cost to taxpayers.”
Specifically, the new regulations prohibit, with certain exceptions, the melting or treatment of all one-cent and 5-cent coins. The regulations also prohibit the unlicensed exportation of these coins, except that travelers may take up to $5 in these coins out of the country, and individuals may ship up to $100 in these coins out of the country in any one shipment for legitimate coinage and numismatic purposes. In all essential respects, these regulations are patterned after the Department of the Treasury’s regulations prohibiting the exportation, melting, or treatment of silver coins between 1967 and 1969, and the regulations prohibiting the exportation, melting, or treatment of one-cent coins between 1974 and 1978.
The new regulations authorize a fine of not more than $10,000, or imprisonment of not more than five years, or both, against a person who knowingly violates the regulations. In addition, by law, any coins exported, melted, or treated in violation of the regulation shall be forfeited to the United States Government.
In conclusion, the assertions in Mish’s “Ten Simple Facts” of substantive statements of fact are actually complete misstatements.
For example, if an individual wants to withdraw a mere $10 of legal tender nickels, or 2.2 pounds, from their bank account and melt the coins down to create a doorstop then they face a fine of $10,000 and imprisonment of not more than five years. If they sufficiently resist then the costumed criminal gang will escalate the unjustified aggressive violence and inflict death. It would be nice to live in the fantasy world Mish describes where ‘Because currency conversion is instantaneous no one has to hold U.S. dollars to buy oil, copper, gold, iron, lead, wheat, soybeans, or anything else.’ but that is simply not the case.
Additionally, I have not addressed other enacted or pending legislation in both the America and the Eurozone that lays a strong foundation for additional currency controls to be implemented.
CONCLUSION
Nickels are made copper and nickel which are tangible assets that have intrinsic value. They are an excellent vehicle for protecting and preserving one’s purchasing power. Nickels are approaching the point where, like gold, silver and copper coins, their face value will be less than their melt value. But in anticipation of and to impede the free flow of capital the United States has imposed overt foreign exchange controls on nickels and pennies with draconian penalties.
Disclosures: Long physical gold, silver, platinum and some nickels with no position in the problematic GLD or SLV ETFs.
By Bron Suchecki, on October 12th, 2009
Adam Hamilton of Zeal LLC is one commentator I have been following for many years. His latest one on the Commitments of Traders Report is essential reading:
“The bottom line is gold futures activity as chronicled in the CFTC’s Commitments of Traders Report is often misunderstood. A minority of analysts choose to interpret facts about week-to-week developments out of the illuminating context of bull-to-date behavior in similar situations. Thus their interpretations of this complex report are often misleading. And sadly many newer traders are swayed by this shoddy analysis.
It is critical to remember gold futures are a zero-sum game. For every short, there is an offsetting long. So if the feared commercial hedgers’ net-short position is surging and hitting records, then so too are speculators’ net-long positions.”
By Claus Vistesen, on October 9th, 2009
I should immediately reassure my readers that I am not going to re-account or even continue Macro Man’s story of 2007 in which Sherlock Holmes was looking for a vanishing bid in risky assets. Also, I am not sure that we are actually looking at a bid which will vanish but one which will perhaps taper off gradually or so at least is the estimated scenario policy makers would like markets to believe in. Of course, recent messages from the BOJ suggested a very cautious stance towards the economic outlook and although the ECB’s chairman Trichet has ardently argued that an exit strategy from extraordinary financing provisions, the statement that, now is not the time to exit, still echoes most of the official messages coming from the ECB.
But perhaps more important than when to exit is the question of how and whether indeed it will be so easy and simple for central banks to simply wind down the supply of medicine. In the context of the ECB for example, I remain rather sceptical.
However, this day is all about the Fed decision and although I only rarely delve into account of US monetary policy decisions (comparative advantage you know!) this one is important since it was always going to be parsed very closely for signs of hawkishness on rates on the one side as well as indications of the future wind down of asset purchases. Now, for those who expected a big bang, I have to side with Macro Man that it seems to be much ado about nothing in the sense that the Fed basically reiterated the general view that although economic activity had been showing positive signs lately and especially in the context of leading indicators pointing to a strong bounce in Q3 and Q4 activity, the fundamentals of very low capacity utilisation and deleveraging across the real economy remain intact. In the context of Fed speak this translates into maintaining the current rate target at the zero bound and the the forward looking statement that rates are to kept low for an extended period;
Conditions in financial markets have improved further, and activity in the housing sector has increased. Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.
With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.
In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.
So far so good then and this was really all we needed, one would imagine, to extent the rally in risky assets as well as the downward trend in the USD as the new funding currency for carry traders and others of their ilk. So far, there has been no signs of panic anywhere and everything seems to be all engines go.
Meanwhile, the Fed did actually give away some details as to how the future bout of asset purchases are to be conducted. On the matter of treasury purchases the Fed will its total purchase of $300 billion by the end of October. Most of us would naturally like to be able to predict what this will to do yields and prices and really you could spin this two ways. In the context of supply side worries, the Fed’s withdrawal from the treasury market should push down yields if we add the, perhaps dubious assumption, that the $300 billion worth of supply of treasury bills has only been there to the extent that the Fed has been the main bidder (Say’s law and everything). On the other hand it could also push up yields in a world where one assumes that there has been a decisive need to issue such bills and now that the Fed is stepping aside new buyers must step in and notwithstanding those with a printing press of their own, it should push up yields. Although this may seem quite innocuous and technical (i.e. unimportant) it may turn out to be important in a general context when it comes to the ability of economies (not just the US) to lift themselves out of the mire without the crutches of stimulus to lean on.
In the context of the Fed’s outright asset purchases, the statement delivered good news for bulls/doves in so far as goes the fact that although the Fed was invariably going to issue a deadline, it seems to have been pushed somewhat out in the distance; well, at least a quarter. Consequently, the Fed will buy $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt, purchases which are set to be concluded by the end of the first quarter and not by year end which was the final date I had been led to believe judged by the points made in various economics report digested over the last week.
So, it is here perhaps that we may be looking at a disappearing bid in the context of the Fed gradually but surely reducing its presence in the market for MBS turds not to mention the agency market which went belly up as Fannie and Freddie crashed and burned. In the nice soothing light of efficient markets it is difficult to expect the decision to wind down purchases to be a big market mover as long as the incoming bout of data continues to provide plenty of upside and no downside. But if we get a setback just around the time when the Fed had envisioned to stand down its most aggressive measures of QE, one finds it difficult not to expect general sentiment and thus, in a forward looking perspective, real economic activity to take a hit which is exactly what we would all like to avoid; the double dip recession or “WL” recession if you will.
Ultimately, it is of course all still a great big mess, something which was neatly conveyed by the way Bloomberg handled the message carried by the IMF envoy to the G20 summit. On the one hand, the IMF was quoted for urging central banks to map a viable and transparent exit strategy and on the other hand Managing Director Dominique Strauss-Kahn was quoting for urging policy makers to not withdraw fiscal stimulus to quickly. Lost in translation are we?
Well, I am perhaps being unfair here to the editors of Bloomberg not to mention the IMF in particular since ultimately; talking about exit strategies is not the same thing as enforcing them. However, I do feel rather strongly about the need to make the following point that the two are of course intimately connected and withdrawing QE cannot but affect the trajectory of fiscal stimulus. This is a point which I believe for example is absolutely crucial to understand in the context of the Eurozone where the ECB’s refinancing operations seem to be implicitly underpinning national governments’ efforts to shore up their capsized economies.
In this context and assuming that both the BOJ and the ECB will be trailing the Fed somewhat, it will be most interesting to see whether Bernanke manages withdraw the bid on financial markets currently offered by the Fed’s policies and indeed whether others may follow in his footsteps and withdraw theirs.
By Rok Spruk, on October 9th, 2009
Recently released data from OECD Economic Outlook (link) suggest that the recessionary period is likely ending as the output in world’s major economies is reversing the trend of the past year. In 2009, the U.S economy is expected to contract by 2.8 percent annually. Germany, suffering from a significant decline in inventory orders and foreign demand, is set to contract by 6.1 percent and Japanese economy is likely to decline by 6.8 percent. The end of the global recession will be continued by a slow recovery as the economic growth in the OECD economies is most likely to reach 0.7 percent in 2010 after a 4.1 percent decline in 2009.
Besides Israel and Estonia, Slovenia is the next country to join the OECD. The macroeconomic outlook for Slovenia, unfortunately, remains sluggish. In Q2:2009, Slovenian economy contracted significantly. The output decreased by 9.3 percent. In Q1:2009, the economic activity decreased by 9.However, the data on GDP decline is too optimistic compared to the real sector. According to the latest availible data, the industrial production in April contracted by 28.26 percent, followed by double-digit consecutive declines each month. Investment, which in 2008 accounted for 28.9 percent of the GDP declined significantly. In Q1:09, the business investment contracted by 32.3 percent.
The pre-crisis boom in business investment was surged by quantitative easing and low interest rate which contributed to historic highs of credit stock. In addition to deteriorating macroeconomic outlook, the export of goods and services, which once used to be the core engine of Slovenia’s economic growth, contracted by 21.1 percent in the Q1:2009. Thus, during 2008, the economic activity experienced unusually high rates of economic growth spurred by investment, foreign demand and historically high consumption spending. Throughout 2008, the economy was starting to exhibit strong signals of overheating.
By the beginning of the crisis, the economic policy pursued a radical debt-driven infusions of liquidity in the banking and bailouts to the real sector. Consequently, the state of public finance changed dramatically. For decades, Slovenia maintained on of the lowest public debt/GDP ratios in Europe. As a fiscal measure, low public debt had been of the merits that enabled the fulfillment of convergence criteria before entering the EMU.
As a result of government intervention, debt guarantees and surging public spending, the public debt is likely to soar from 21.5 percent of the GDP in 2008 to 32.6 percent of the GDP in 2009. The public debt is expected to rise further. If the current trend continues, the public debt is estimated to soar up to 53.7 percent by 2013 (link).
The black line and the left axis on the graph show general government balance while the left axis and yellow bar show public debt. Both categories are expressed in percent of the GDP.
Public debt and general government balance as a percent of the GDP (2004-2013)
 Source: Ministry of Finance (link)
As we can see, the primary budget deficit will move from -0.27 percent of the GDP in 2008 to 6.58 percent of the GDP in 2009. By 2013, the deficit is estimated to move to -7.4 percent of the GDP. Compared to small and open economies, Slovenia’s primary budget deficit is higher than in most small and open economies. It is, for instance, higher than in Denmark, Greece, Austria, Czech Republic, Finland, Luxembourg, Netherlands, New Zealand, Slovakia, Sweden, Switzerland and Norway. As far as I know, Norway is the only developed country without budget deficit in the near future (According to the OECD and Norges Bank, Norway will post 8.6 percent budget surplus in 2009, down from 18.8 percent in 2008. In 2010, the budget surplus will likely increased by 0.4 percentage point).
The government intervention in the real sector further regulated the labor market by introducing subsidies to employers to retain the employees and discourage layoffs to prevent the rise in unemployment. However, recent data suggested that public sector employment grew significantly while private sector employment declined respectively. In Q2:09, private sector employment decreased by 9.3 percent. Public sector employment, on the other hand, increased by 1.4 percent on the annual basis.
For at least two decades of transition, Slovenia’s gradualist economic policy favored rigid and inflexible labor market embodied in collective bargaining, high tax rates on labor supply and barriers to entry. The economic policymakers created discriminatory labor market structure which still discourages young graduates from entering the labor market after graduation. Consequently, unit labor costs are among the highest in the EU. Recently, The Economist snapped a nice chart, showing that tax burden on labor supply in Slovenia is the highest in the world (link). In combination with ageing population and of the youngest retirement generations in the world, the abovementioned labor market dualism further encouraged policymakers to raise health and social security contribution rates. It lead to one of the lowest growth rates of private sector employment in the EU. It further lead to the highest tax wedge in the EU and the unusually high growth of unit labor cost relative to productivity growth. In addition, strongly regulated labor market is the major cause of Slovenia’s low productivity convergence relative to the EU15. The majority of central European and Baltic countries have been lowering the productivity gap behind the Euroarea much faster than Slovenia.
In 2009, Slovenia reach 90 percent level of EU27’s GDP per capita. Compared to the Euroarea, Slovenia reached 83 percent level of the GDP per capita. Compared to EU15, which is a reasonable measure of comparison, Slovenia reached 81.7 percent level of GDP per capita. Compared to Switzerland, Slovenia sustains only 64 percent level of Swiss GDP per capita (link). Interestingly, if Slovenia were a part of the U.S, its GDP per capita would be at the 54 percent of the U.S level, even lower than in Mississippi and West Virginia – the least developed states in the U.S.
Although Slovenia is often cheered as being the “Switzerland of the East” and the most developed former communist country, its economy will likely resemble slow growth in Italy, Germany and France rather than dynamic growth in Singapore, Hong Kong, Australia and Switzerland. Current economic policies are the recipe for eurosclerosis, experienced by pre-Thatcher Britain. If such pattern of economic policy will continue, the Slovenian economy will, sooner or later, exhibit economic stagnation with low economic growth, onerous tax burden, high structural unemployment and rapidly ageing population.
By Russ Nelson, on October 9th, 2009
Paul “MIT wants its PhD back” Krugman is at it again.
Chen government action causes an economy to go bust, people need to
adjust their spending (recalculating). This includes employers and employees. So
unemployment goes up. Krugman can’t understand why this process doesn’t
apply equally to boom times.
His claim is comparable to saying that because the distance between
two floors is equal (the amount of spending adjustment), that it should
take an equal amount of effort (unemployment, as some jobs are destroyed
and others created) to climb the stars as go down. By this metaphor he’s
obviously lost all shred of his former Nobel-inducing glory. All that’s
needed is to show that gravity exists in economies as well as houses.
Causes of gravity: information (in a boom, everybody knows where the jobs
are; in a bust that information is hard to get), confidence (people take
more risks with their jobs if they know a replacement is easy to get),
egoism (everybody wants to get paid more; nobody wants to get paid less),
time (booms happen slowly and busts quickly), and probably a few more
that I can’t think of, but really, these are sufficient on their own. Four
reasons why recalculation results in unemployment on the bust side rather
than the boom side.
It must suck to be Krugman.
By Claus Vistesen, on October 8th, 2009
Much pomp and circumstance was certainly made in relation to the fact that Japan actually grew in the second quarter at a full annualized 3.7 percent in the second quarter of 2009. Yet, the underlying numbers to suggest a recovery are still sorely missing. Deflation now seem to have taken hold, unemployment is rising fast and although the recent manufacturing PMI provided us with an upbeat signal, the underlying trend still is still that of a very tepid recover, if at all, or just a plain slump.
(quote Bloomberg)
Japanese businesses cut spending for a ninth quarter as the global recession squeezed profits, underscoring the challenge for the incoming government to sustain a recovery from the country’s worst postwar slump. Capital spending excluding software fell 22.2 percent in the three months ended June 30 from a year earlier, after dropping a record 25.4 percent in the previous quarter, the Finance Ministry said today in Tokyo. Profits slid 53 percent.
Sales fell 17 percent, the second-biggest drop on record, indicating global demand hasn’t recovered enough to encourage companies to buy more plant and equipment. Sanyo Electric Co. and Seven & I Holdings Co. are among businesses scaling back. “Companies have too many resources, and until that situation changes, they won’t have to invest in more equipment and they won’t need to hire more people,” said Seiji Shiraishi, chief economist at HSBC Securities Japan Ltd. in Tokyo.
(click on graphs for better viewing)
On a y-o-y and q-o-q basis, the sales of Japanese companies fell 17% and 4.5% respectively. Especially, manufacturing in general and machinery and equipment producers saw a rapid decline in sales. Investment in plants and equipment fell back sharply on an annual as well as a quarterly basis at 21.7% and a full 39.1% respectively. The pronounced fall in Q2 investment owes itself to an abnormally large outlay in Q1 2009 which has consequently been paired in the period just ended. As can be seen in the graphs to the right, the manufacturing sector has been hit much harder than the non-manufacturing sector which is not difficult to understand if you think about the fact that it is this sector of the Japanese economy which is most exposed to the external environment. This is to say, that the manufacturing sector’s top line is very sensitive to external conditions on the margin. Between Q4-08 and Q2-09 the cumulative drop in Japanese manufacturers sales was a whopping 35% almost double that of the non-manufacturing sector’s corresponding toll of a drop of 18%.
With respect to investment in plants and equipment (corporate capex) the picture is, interestingly, the reverse with the investment by the non-manufacturing sector falling much more sharply during the present turmoil. On a four quarter moving average basis, the change in investment in plants and equipment for of the non-manufacturing sector has been falling ever since the first quarter of 2006 with a cumulative drop of 37%. The corresponding number for the manufacturing sector shows that the investment of plants and equipments have been falling since the third quarter of 2007 with a cumulative drop of 19%.
Finally, in the context of operating profits (that is, profits derived soled from the company’s primary operations), the non manufacturing sector is still well in the black whereas the manufacturing sector has moved from a figure much below average in Q4-2008 to outright red figures in Q1-09 and Q2-09. Between Q1 2000 and Q3 2009 the average quarterly profit (nominal) for Japanese manufacturers was a little over 4 billion Yen.
In Q4 2008, the consolidated profit read 761 million yen and in Q1-09 and Q2-09 the numbers had turned into an outright decline with negative profit of 3.5 billion and 645 million respectively. Conversely, the non-manufacturing sector was, albeit still below average, performing much more strongly with solid black numbers throughout the crisis.
No Recovery Here
While there certainly may be places the newly elected party to rule Japan can look for green shoots and evidence of an impending recovery in Japan, corporate capex and profit numbers are not one them. Neither are, of course, the labour market, the deflation debacle, as well as the household sector which leaves us with the obvious question of where then? Second quarter clocked in better than most had expected and ironically, despite the analysis fielded above, upbeat signals from industrial production and the manufacturing sector in general are cited as the main reason. I will let my readers judge for themselves by perusing the graphs above and then also note the following crucial point made by Soc Gen’s Gleen B. Maquire in one of their recent economic outlook reports (my emphasis);
The bulk of the contribution to growth came from net exports. Exports increased by 6.3% qoq while imports declined by 5.1% qoq. Overall, net exports contributed 1.6ppt to Q2 growth. The recovery in the Japanese economy is starting to look eerily similar to the 2001-03 recovery when Japan emerged ahead of Europe and the US. This is largely a China dynamic with Japan’s exports to China (and indirectly to the rest of Asia) recovering in step with China’s stimulus measures coming on line.
(…)
Industrial production is responding to robust demand from China for capital equipment and
industrial goods as well as tentative signs of a recovery in the durable goods cycle within Asia and globally.
So, this appears to be an export story in which case positive news from Japan should not surprise us at all. Macquire goes on to argue that since Q2 did not see a bounce back in inventories from the sharp de-stocking of Q4-08 and Q1-09 this, expected, bounce in inventories. I remain skeptical of this claim since I don’t necessarily believe that the new level of growth will necessarily support any rapid re-stocking of inventories, but time will of course tell very soon.
Finally and specifically in relation to the analysis above, it is also interesting to ponder the discrepancy between the manufacturing and non-manufacturing sector in relation to the idea of Japan being dependent on exports to grow. Clearly, the manufacturing sector’s higher sensivity with respect to the financial crisis and its top line makes sense since external conditions deteriorated very rapidly. Conversely, the domestic economy of Japan was not struck by a major, and relatively large, credit crunch. Hence, we see the top line of non-manufacturers relying more on domestic demand decline less. On the other hand, in relation to corporate capex the manufactures’ slump in investment is very exclusively tied to the financial crisis while that of the non-manufacturers seem much more broad based. Once again can we rationalize this through the idea that the manufacturers remain tied to external conditions while that of the non-manufacturers is increasingly tied to the domestic market.
So, does this last niggle make sense? I am not sure, but it would be an interesting thing to check.
By Thomas Knapp, on October 8th, 2009
To quote Nancy Reagan, “just say no”.
Specifically, just say no to this:
[U]nder my plan, individuals will be required to carry basic health insurance — just as most states require you to carry auto insurance. Likewise — likewise, businesses will be required to either offer their workers health care, or chip in to help cover the cost of their workers. There will be a hardship waiver for those individuals who still can’t afford coverage, and 95 percent of all small businesses, because of their size and narrow profit margin, would be exempt from these requirements. But we can’t have large businesses and individuals who can afford coverage game the system by avoiding responsibility to themselves or their employees. Improving our health care system only works if everybody does their part.
To forestall immediate descent into partisan Obama bashing, a brief digression: Obama cribbed the “individual mandate” described above from “conservative” Republican Mitt Romney, who signed it into law as governor of Massachusetts and then bragged about / defended it (rather than vetoing it as he did eight other provisions of the law, including an “employer mandate” similar to the one described above) in 2006. So please … don’t try to turn this into a “left/right” thing.
The insurance companies are drooling over this, of course, and their water carriers in Congress from both major parties will support it (while quietly gutting the “unicorns and ice cream for everyone” restrictions on pre-existing condition refusal, payment caps, etc.) if they can get away with supporting it.
So, the first thing to do is let your congresscritter know that (s)he can’t get away with supporting it.
The second thing? Obey little, resist much.
It just so happens that I am, at this particular moment, insured. And while I’m glad, at this particular moment, to be insured (I have dental coverage, and that coverage is saving me about $1200 on the mass extraction/denture procedure I’m getting ready for — for those who have been following the saga, I got the molds made last week and should get the teeth yanked some time in the two to four weeks), I’ve lived a good part of my life without insurance.
If the proposal described in President Obama’s speech is passed and signed into law, I’ll be returning to uninsured status ASAP — and giving anyone who comes calling to collect a fine a close-up look at my middle finger when I hold out my hands for them to put the cuffs on.
Anyone who’s in a position to do likewise, should.
By Eldon Mast, on October 8th, 2009
While skeptics remain, Q3 earnings season kicked off on Wednesday with almost all those announcing earnings surprising to the upside.
Alcoa, the firm which much earlier in the year pegged the global turnaround, swung to a profit in Q3. “We do clearly see growth, substantial growth … in China,” Alcoa CEO Klaus Kleinfeld told reporters. “The second half of the year is clearly better than the first half in many industries and many regions.” You may remember Kleinfeld’s “giant sucking sound” of demand predictions.
Google also reasserted our sentiment of several months now, “We are clearly seeing aspects of recovery, and what is notable is that we’re seeing aspects of recovery not just in the United States but in Europe… We never stopped hiring, but we told our team internally and we’ve said to many other people that we are increase our hiring rate and our investment rate in anticipation of a recovery.”
Our favorite perma-doomsters like Nouriel Roubini continue to beat the drum of “double dip recession”, but the Q3 earnings results will paint a much different picture.
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