I went to the L.B./L.A Ports confrence back in May. The only person there that was somewhat pessimistic was the gal from Nat Retailers Assoc. Everyone else there was so gun-ho. I and the rest of the trucking co people felt everyone else was on another planet. We will see, but our business has been slowing since q3.
Is all this talk about "coupling" really fit for the finacial blogs? I thought this was supposed to be good clean family fun! If you are going to "couple" at least use protection, especially with a subprime date.
CR- Thanks for the terrific graphs! This really helps me understand what Roubini and others are talking about. I normally don't post because I have little to contribute, but it's so quiet this evening and you deserve applause from someone. I would have assumed that everyone's gone shopping, but having read the reports on the other string, I know better.
Although growth is zero, chinese exports to US are hardly showing signs of heading back to 2001 levels. Does zero growth = recession, or just .. treading water.
In order to 'recouple' one must have first 'decoupled' one must suppose but since all the evidence for the latter amounts to less than a single night-soil deposit in the globalization honey pot can we just agree the entire notion of 'decoupling' was a mound of sell-side bull manure to begin with and leave it at that?
The stuff does look better when it's graphed though.
Coming from Beijing itself, I find this really quite ominous and think it bears repeating:
The report is Beijing's first public comment on what repercussions it expects from the global credit crisis and a sign that the government does not support the view that Asian growth has "decoupled" from the US.
"If demand in the US drops further, Chinese exporters will be devastated by a rapid and continuous fall in orders," the report said.
And it seems to suggest they share Gary Shilling's concerns about runaway capital spending and possibly disasterous overcapacity.
Next time China threatens to dump dollars we should remind them:
Whew! That was close. I thought there might be some economic turbulence in our future. Not so.
Worried retailers and mall operators breathed a sigh of relief after the 2007 holiday shopping marathon off to a robust start Friday.
The economy is robust. Please take that as a cue to shop more than ever because everyone else is doing it. You should never be suspicious of an article that tells you that the "marathon" is going great even though you can still hear the echoes of the starting gun and most of the people running the marathon have yet to even get to the starting line. Marathons are so long and boring anyway. And I'm pretty sure I know how this one ends. Now, let's go get a flat screen and an Orange Julius.
NEW YORK (CNNMoney.com) -- Worried retailers and mall operators breathed a sigh of relief after the 2007 holiday shopping marathon off to a robust start Friday.
Buying accelerated later in the afternoon as individuals, later identified as Federal Reserve agents, were seen handing out large bundles of cash, seemingly at random, to stunned but elated shoppers.
Can someone comment on why China doesn't simply raise wages so that the domestic population can take over where we left off?
Maybe it's the chicken or the egg problem. Before consumption started increasing, wages might have to be rasied for a substantial period of time. So businesses might go bankrupt even more quickly by paying more but not selling more. Especially if the employees save most of the extra money, which is what people in China tend to do.
Also, I'm guessing you've never actually had a conversation with someone in upper management asking them to raise wages.
I believe Ford was actually sued once by its shareholders for raising wages.
China is raising wages. However, they've got an inflation problem. We seem to keep exporting it to them (via our weaker dollar they are linked to).
More importantly, whatever they're doing isn't working. In China consumption as a percentage of GDP is falling at a pretty striking rate (IMO). Contrast that with the US where consumption as a GDP component has been expanding for some time now.
Maybe it's the chicken or the egg problem. Before consumption started increasing, wages might have to be rasied for a substantial period of time. So businesses might go bankrupt even more quickly by paying more but not selling more. Especially if the employees save most of the extra money, which is what people in China tend to do.
How would we know if many Chinese companies weren't already bankrupt?
Other than using our gut, we didn't even know how well supposedly transparent American companies (banks, retailers) have been doing until recently.
Here's some more links. I don't mean to spam, but I'm on topic for a change and spend much of my time watching China. Let's just say "China inflation" has been a popular search term of mine.
Charming Shoppes Inc. reported dismal quarterly earnings today due to sluggish sales, and predicted steep markdowns across this holiday season in response to unsold inventory throughout the specialty retail apparel industry.
Charming Shoppes is better known by the store names: Lane Bryant, Fashion Bug and Petite Sophisticate. Guess where lots of the products are manufactured... China (and some of the other smaller asian tigers). If LB can't sell the stuff at current prices, they'll have to either mark it down or dump it to the overstock market. Next year, I bet the orders are smaller.
Buying accelerated later in the afternoon as individuals, later identified as Federal Reserve agents, were seen handing out large bundles of cash, seemingly at random, to stunned but elated shoppers.
Just my luck to be at the wrong mall. I'm sure optimistic joe was at the mall with the fed res friendlies. Meanwhile I thought I was doing well when that nice man gave me a free Orange Julius.
================================
Can someone comment on why China doesn't simply raise wages so that the domestic population can take over where we left off?
Organizer
Can you try and envisage and put down a 10 point plan and schedule that the current Chinese govt would put together to do this ?
Hey, instead of "God part the sea and he did !" shit, I'm giving you 10 steps to do it in..
Jeez.. where DOES this "...in one bound he was free" come from? Hang on, I just found the source.
The coupling/de- argument tends to mirror the inflation/deflation one. I'm not sure that's the right way of looking at it.
The world decoupled from the U.S. in the 70's -- Japan, the then-China, had a decent growth spurt if memory serves. Further, the Latin American commodity producers had their heyday; I remember going to Venezuela as a kid then, and marveling at all the Rolls Royces.
Of course the U.S. wasn't in a depression then, and it wasn't as big.
But the question remains: will we face an inflationary or deflationary time period? If growth drives the price level, then its likely headed down.
But if money drives the price level, well, I wouldn't stuff my dollars in my mattress. And that means commodities can do quite well in dollar terms, just as in the 70's.
I think deflation/inflation comes down to politics: what will voters prefer? I say inflation.
Anyone that's lived in Latin American countries knows the concept of a maxi-deval. That's when inflation drives a devaluation that far outstrips relative inflation rates, and the value of foreign assets rise, often dramatically (take the example of Argentina). If the dollar is headed for a maxi-deval, then we could get higher dollar commodity prices, and hence "decoupling" of a sort.
CRUDE OIL: Prices on the Nymex jumped to an exchange- record Friday as positive momentum in the U.S. stock market overpowered data indicating OPEC is upping its oil output. Thin trading contributed to volatility. January crude oil rose 89 cents, or 0.9%, to $98.18 a barrel.
I think that most of the profit from those imports is made by US (or at least, Western) companies. How do you decouple from yourself in the first place?
If China can in turn raise the the poor up to lower middle class by the end 2008 then they can kiss the US bye. They will have 1.5b buyers. They could be paying WS for the suckers they are in believing their on hype.
jo6pac
joe6pac,
Once you get outside the economic centers in China, most people are living in another century. Some nomadic, some stationary, most could carry their possessions on their back.
The world decoupled from the U.S. in the 70's -- Japan, the then-China, had a decent growth spurt if memory serves.
I'm not sure memory is serving in this case. Inflation became a global problem. I do tend to agree with your main point though.
Inflation Fuels Global Hunger Overall, these conditions are reminiscent of the 1970s, when a weak dollar and high oil and gold prices led to severe global inflation and hit the United States especially hard. The United States and other developed nations may not be insulated from today's inflation for long. As the cost of manufacturing goods increases and developing countries struggle to allay public anxiety over fast-rising food prices, some economists believe that inflation, particularly in China, will be exported to the rest of the world.
I'm apparently in the "some economists" camp. How much deflationary pressure we can use to offset it is open for debate (but rising unemployment in the 1970s didn't seem to help).
Is the company an apparel bellwether? I've never heard it described as such, but I imagine that Lane Bryant's niche knowhow translates to Petite Sohpisticate.
then again, I remember Fashion Bug from afterschool aftenoons at the mall. Dung Beetle was more like it.
Is the company an apparel bellwether? I've never heard it described as such, but I imagine that Lane Bryant's niche knowhow translates to Petite Sohpisticate.
LOL ! I bit my keypad and refrained from discussing that aspect ( and I have reason to gripe and revel in cheap shots, I lost money shorting Charming Shoppes last year ) but you just had let the seams burst apart didn't ya !
Apparently the US GDP growths decouples from Chinese imports. Growths has been pretty stable since 2003 while imports trend down. I guess this what we've always wanted - less imports and more exports. Clearly bullish.
No Chinese manufacturer can pull a Henry Ford on wages and stay in business. "China" is a number of discrete producing entities engaged in a dog eat dog war in a variety of industries, many of them targeting that JC Penny, Home Depot order. One factory guy at a metal bashing operation, when asked about profit, pointed to the punched scrap on the floor, saying that whatever he could get for that was his net.
While margins are thin to non-existent, at least with the export orders you can get paid by L/C in a timely fashion. In domestic business, chasing receivables is the ever present downside for the Chinese maker. And those export orders are (or were) big. We see some evidence of smaller, later or more tentative orders from major retail buying offices already.
Anyway, manufacturing wages in China have been increasing at double digit percentage rates for years in order to keep workers from migrating to sought after service sector jobs (or cleaner factory jobs). It's not unusual for up to half of a factory's workers not to show up after the Chinese NY holiday break.
But what the workers do with those wages is less likely to be i-pod or new Nike oriented than it is savings or even investment (think small shop back in the hinterland) oriented. What weighs on every worker in China is the prospect of the costs associated with starting a family, the burden of aging parents and grandparents, health care and food costs through the roof, no safety net, etc. Think the opposite of diversions at LotusLand MegaMall. In the western experience, more like Dickens or Sinclair maybe.
What worries people is that China's "bicycle economy" doesn't do slow. In the industry we supply, raw material consumption has doubled in the past six years, but margins are under pressure already, now smaller orders? Remember that while China's aggregate growth could be cut in half and still be respectable on paper, it would be a blow to not only absorbing the excess rural workforce, but also to the very highly operationally leveraged factory.
As a long time lurker, I want to add my thanks CR, Tanta and the Komment Krew-- an outstanding community of skilz!
Apparently the US GDP growths decouples from Chinese imports. Growths has been pretty stable since 2003 while imports trend down. I guess this what we've always wanted - less imports and more exports. Clearly bullish.
Perhaps you should look at what we are exporting.
It is clearly bullish that we're shipping a LOT more of our food (corn, soybeans, and wheat) AND that our exported food has suddenly become a lot more expensive? In that case, let's devalue by another 50% and supercharge those exports.
Los Angeles and Long Beach Exports Here's our fastest growing exports (in items of $500 million or more) from August to September (change from previous month, not annualized) as seen in Exhibit 7 of September's FT900: U.S. International Trade in Goods and Services report.
The current expansion is now ending, as is the bull market in equities. The facts are so clear that a blind man could see it in the dark.
mp
Maybe things are not so clear after all. It is still so clear to me the current expansion will at least continue for another year, but probably into 2010. Same for the stock market. One of us must be seeing things very wrongly indeed. I'll come back to this in 6 months from now. Only time can tell.
This is a very complicated subject and I don't expect anyone to be able to go too deep into this. But I'd point out 1 thing: The Chinese economy is not slowing, and will not slow anytime soon. That's because there are still way too many things in China that can improve, from the living standard of farmers to the use of new technology (continuously stealing from US). They might not continue to grow at 11%, but going back to 7% is not 'slowing' by any means, just not as crazy. Chinese economy was growing crazily because of too much capital inflow. With US recession, if China is not forced to inflate currency rate, they'd be ok.
since reporting on consumer traffic here is for some reason popular, lemme just report that the Fry's in Sunnyvale tonight before closing was INSANE. Parking lot was full, both banks of checkouts going.
n.b: I didn't see a single whitey there, not that there's anything wrong with that.
OJoe- "One of us must be seeing things very wrongly indeed. I'll come back to this in 6 months from now."
O-Joe, during April of this year, I predicted in these pages that Walmart would have a very tough 2007, and that has proven to be correct. Walmart is playing every card it has to keep profits up.
I was, to the best of my knowledge, one of the first to suggest here that a "sector specific" credit crunch was underway, and that it could easily spill over to the broader economy.
In June of this year, I stated here that I viewed the failure of the two Bear Sterns hedge funds as a "Kreditanstalt-type event" that would lead to a generalized breakdown of the credit markets. It did. I also stated that Bear Stearn's Everquest IPO would be "dead on arrival." It was.
In light of the Bear Stearns debacle, I stated here that the Blackstone IPO would fail. It did.
Now, past performance is no guarantee of future results, but these few examples should suggest, to a reasonable person at least, that I do know what the hell I'm talking about.
Perhaps you'd care to put your own bona fides on the table.
The facts are so clear that a blind man could see it in the dark.
mp
Well, you're predictions might have come true but obviously your ability to tell what a blind man can see just ran into a counter example. Which is not to say O-Joe is blind, but he's seeing something we're not.
"No one has made a bigger bet on the dollar that China's government to the tune of around $1.2 trillion in fairly long-term dollar-denominated debt.
What about a scenario where foreign demand for all US bonds -- not just demand for CDOs and riskier bonds -- disappears"
Chinese exporters end up with dollars in their hands when they sell US stuff. The go to the CB, and exchange them for local currency. Where does China's central bank get the currency to suck up those dollars? This is important - They print them out of thin air.
As such, to ascribe investor like motives (maximizing risk adjusted return) to a central bank is a serious mistake that is made over and over again by everyday people, and experienced analysts who should know better. They have acted nothing like, and will continue to act nothing like investors....so quit thinking of them that way.
They are not investors. They are not really concerned that much with maximizing return vs risk. It is as if they printed the dollars themselves out of thin air and then used them to buy up dollar denominated assets.
The the FCBs were going to act like investors, they would have done so long ago.
This game does not end with the FCBs yanking the rug out from under the US (which in the end would harm them as much as us) as has been predicted for 5 years now. It ends with inflation in their own currency gradually forcing their hand, or with the US reducing its export of dollars (via recession). Both these are happening now.
One more thing with regards to China. Jimmy Rogers has stated for a long time that he expects a financial (but not economic) crisis in China by 2010. The underlying strength, however, for the economy is too strong to be derailed for long by a financial crisis. Everyone will run for the exits in the short term when this collapse occurs. Buy that panic. It will be the best move of the 21st century.
Agreed on going long China after crawling from the wreckage. Shoot, there's so much I'd want to go long after this nonsense gets sorted. Enough of the financial engineering, proper equity/property valuations, divies instead of buybacks....
Jimmy Rogers has stated for a long time that he expects a financial (but not economic) crisis in China by 2010
He's going to be totally blindside by the unforseen political crisis, IMO.
Talking of political crisis, I'm certain that students of the Levantine are aware of the (sadly literally) dance of death that Lebanon once again engages in:
"
Mr Lahoud made the dramatic announcement as Lebanon was slipping into a power vacuum. Under the Constitution he had to stand down at midnight after nine years in office. But even as the deadline loomed Parliament failed to elect a successor. The parliamentary session, boycotted by most opposition MPs, lacked the required quorum.
Declaring that risks of a state of emergency prevailed over the nation, Mr Lahoud ordered all Lebanese security agencies to be at the disposal of the army until a legitimate government is formed. The Government called on the army to ignore the outgoing Presidents order, raising the risk of violent confrontation between rival factions.
...
" President Emile Lahoud calls out army and quits amid a tense stand-off - Times Online
See ya at Nymex crude at $120 - my layoff bet is at 108.
Don't where people get thir blind faith in China what with a 5000 year-old history of numerous revolts, insurrections and civil wars not to mention a century of foreign domination. 5,000 years of history and yet not one day of democracy. Where does this myth of invevitable Chinese superpower status originate?
what does democracy have to do with being a superpower?
The USSR of old was clearly a superpower, and clearly not a democracy.
Many people believe that China will be the next great superpower because they have:
-the will to be a superpower
-the economic means to be a superpower
-a plan to be a superpower.
also, don't forget that many countries eagerly look forward to Chinese superpower status to "balance" the US.
when the US and USSR were both superpowers they sort of balanced one another. this forced each to build certain coalitions with other govt's and made other countries "important"
now without the USSR/Russia as superpower, the US sits alone 'on top'. many believe it has become tyrannical... (example: GWB basically telling the UN that they are unnecessary)
Seeing an unrestrained US, many global residents wish to restore "balance". China would do a good job of this.
It is physically opposite us on the globe... it is politically opposite as well...
and the Chinese have done a pretty good job at diplomacy with many of the "3rd world" countries...
(don't think they can do it... what is their nuclear capability... and what about their Sub technology... surfacing right in the middle of our most important warships undetected?)
So this is what the market got all worked up over on Friday?
"American consumers flooded stores yesterday on the traditional first day of the holiday shopping season, but the irrational exuberance of the Black Fridays of the last five years has been replaced by pragmatic restraint."
The U.S. commercial-paper market shrank $20.9 billion in the week ended Wednesday to $1.84 trillion, according to data released Friday by the Federal Reserve.
Asset-backed commercial paper, a subset of the broader commercial-paper market where companies typically fund their short-term borrowing, declined by $17.5 billion.
The $17.5 billion erosion is the second largest in the past month in the asset-backed commercial paper market, which saw a $29.5 billion drop in the week ended Nov. 7.
Money-Fund Assets Increase
NEW YORK -- Money-market mutual-fund assets increased by $21.92 billion to $3.047 trillion in the week ended Wednesday, up from an adjusted $3.025 trillion, according to the Investment Company Institute.
As the clock struck 9 p.m., the doors flung open and hundreds of shoppers dashed inside, ransacking displays and overwhelming the staff. Fifteen minutes later, the employees began delivering the bad news: most of the best deals had sold out.
No more G.P.S., sorry, said one manager. Those laptops are gone, yelled another.
Exasperated consumers left the store in anger. They are toying with the public, said Syed Sha, 52, who drove to the store two hours before it opened to buy a Sony laptop regularly $800, on sale for $549 for his college-age son.
Someone i know, experienced the same in NJ. 100's of people waiting on the two discounted laptops. Discount was couple of hundred dollars.
"One of us must be seeing things very wrongly indeed."
From his vantage point, the only thing O-Joe can see are the walls of his descending colon.
yearning to learn made some good points at 8:31; a unipolar world is not good for anyone, including the US.
We could have used our strong hand to create stronger multilateral institutions . . . instead, we'll eventually sign on to the same, but with a weaker hand. And the Bush presidency will be "consigned to the dustbin of history" as future generations try t purge this period from our collective memory.
On the subject of decoupling, one of my favorite data points to watch is the TIC data from the US Treasury. IMHO no one has better analysis on this than Dr. Roubini's colleague Dr. Setser -
We could have used our strong hand to create stronger multilateral institutions...
No, we couldn't have.
For those who grew up during the Cold War, and didn't bother to learn any history, it seems as though a close alliance between the U.S. and Western Europe is the natural order of the world.
But that was simple necessity, as the late, unlamented Soviet Union was a common foe. Once the Soviet Union collapsed, it was inevitable that the lesser differences between Europe and America, formerly papered-over, would become of higher importance and create a more arms-length relationship.
When I say multilateral institutions, I don't mean like NATO.
Many issues today transcend national borders and need to be addressed on a worldwide basis. We should be strengthening multilateral institutions like the UN and WTO.
Instead, we shat on Kyoto and the Geneva conventions.
I expect to see more regional consolidation over the coming decades, and stronger international standards being embraced. fewer currencies and more uniform basic standards.
While I don't expect to see it in my lifetime, somewhere down the road, a few hundred years maybe, the nation-state will no longer be the primary governing body.
The article quoted several people who'd traded down in their buying: from Abercrombie and Fitch to Target, or from Macy's all the way down to Big Lots.
This is going to be the pattern. Buyers will move down the retail food chain to the next cheapest venues, buying on price alone and only as much as they have to. It'll be a race to the bottom for retailers. Some of them just won't make it.
Eventually, of course, a growing number of "middle class" people won't even be able to shop at Walmart or Big Lots. I suppose, at that point, it's off to Craigslist for them.
Woohoo, already there! I gotta stop looking at all the free stuff; I've got enough 'projects', though I did build my wife a nice greenhouse with 'free' glass.
What's with the standing in line for a laptop? Reminds me of that woman who got trampled at Wal Mart for a $30 DVD player that she could have bought at a supermarket. The laptops were cheaper in July and August pre=school anyway, or the office supply places have on sale all the time.
The 2nd graph shows that we are nearly at the same point as the 2001 recession bar...and the mid 2003 ARM rescue plea from Greenspan...and the 2005 rescue by stated income loans.
Or I could be reading too much into the China Exports to the US reflection of the US economy which is 70% consumption IIRC.
It is starting to look like all that water that was bailed out of the boat to keep it from recession was only discharged from the bilge to the command bridge ("off books") and no actual repairs were made. Or do you figure that we now have a housing stock that fairly represents this multi-trillion dollar investment...like that IT investment before it?
Like that highly touted IT vehicle, will the house be hedonically valued to keep up robust GDP appearances?
and if no one noticed, the Bush-loving Australian PM was just tossed out in a landslide . . . and will lose his own seat in parliament, something that hasn't happened since . . . 1929.
So we are now exporting raw materials and importing finished goods? In my fuzzy memory, that is what India and the American colonies did back in the 18th century.
As a mention of local shopping anecdotes, yesterday was busy at the local Home Depot.
The problem with the Chinese becoming big consumers is that they need to hook their population up with electricity first. The country is lacking a lot of infrastructure and basic elements of modern life. Combine that with the corruption at the local level, and I find it hard to believe that the Chinese consumer will be able to step up to the plate anytime in the next decade. That's not even considering the cultural aspects, of savings rates and the lack of deep seated desire to purchase a bunch of crap to make themselves feel better.
As a long time lurker, I want to add my thanks CR, Tanta and the Komment Krew-- an outstanding community of skilz!
Kou Jie
Kou Jie | Homepage | 11.23.07 - 11:31 pm | #
Kou Jie - come back often I will have questions for you.
BTW - I hear the same thing EXACTLY from companies I work with. I probably have 2-3 companies calling me a month from China asking me to help them market to US producers in an effort to get AROUND the big MNCs already in place in China - it is a near futile effort to find 'margin'. I feel their pain.
Also BTW - selling scrap as a 'profit center' for metal smashers is a long time honored tradition everywhere - including the US and Europe. That tradition goes back at least 100 years here (to Henry Ford days) - probably farther. You think they are squeezed now, wait until metal prices start to decline - the scrap they paid big money to buy as raw material selling for a fraction of what they paid per pound...
And as you pointed out wages are going up in China at an 'alarming' rate... alarming that is if you are a large MNC plopping capital in a place like Shanghai - wages there are up something like 400% since about 2002... a skilled worker in Shanghai now might cost you whopping $2000 a year in USD equivalent. That same worker would earn about $40K USD in the US and about $60K USD equivalent in Western Europe (though only $20K USD equivalent in E Europe).
Wage arbitrage isn't dead yet - go inland to Wuxi or Wuhu and you can still get that skilled worker for under $1000/yr USD equiv. (I've heard as low 25 cents an hour but that info was at least a year old now, and skill level???).
If China wants to get their wages up to coastal levels (forget western par for now) - they first need to get the infrastructure up to western expectation... so material can get in and product out. It is a nightmare to get material in & product out from the interior. Once to the ports its as slam dunk to get it here.
Upgrade infrastructure and the wages start going up across the whole country. That's where China needs to spend some of that 1-2 trillion USD war chest, not currency manipulation. Do that and they could defer/delay 're-coupling' until that dollar pot runs dry.
daveNYC- "...I find it hard to believe that the Chinese consumer will be able to step up to the plate anytime in the next decade. That's not even considering the cultural aspects..."
So daveNYC and mp let's count on Americans consumers ( already up to their necks in debt ) to continue to buy buy buy and everything will be fine with the US economy...
...Relative to their incomes, American consumers have been taking on more debt for decades, as America's increasingly sophisticated financial system allows more people more access to credit. But the pace of indebtedness has accelerated dramatically. The ratio of household debt to disposable income is now above 130%. Earlier this decade it was 100%; in the early 1990s it was 80%
km4 , "The ratio of household debt to disposable income is now above 130%. Earlier this decade it was 100%; in the early 1990s it was 80%"
You know, those statistics look frightening, but you need to consider that these blended figures don't tell even a fraction of the underlying story. There has been a shift in wealth from the bottom to the top so those that have been doing the bulk of the recent consuming have balance sheets that are in far worse shape.
We already passed the tipping point and the debt service is variable interest so even if we stop consuming the inertia is so strong won't be overcome.
Let me put it this way, if the US economy was an airplane, the pilot would be declaring an emergency because almost every instrument on the panel is flashing red.
The ratio of household debt to disposable income is now above 130%. Earlier this decade it was 100%; in the early 1990s it was 80%
If i was a central banker considering the 'plus and minus' of inflation fighting... I would note that that ratio could be altered pretty quickly with 'inflation'... nominal dollar value of incomes 'up'... 'real value' of debt down... all done with a 'little flood' of money.
Not sayin' it will happen, just sayin' look at the numbers and see if you can find another 'easy' out.
barely- "...these blended figures don't tell even a fraction of the underlying story. There has been a shift in wealth from the bottom to the top.."
Another really excellent point to add to daveNYC's and km4's. Look at the high end retailers. The American consumer is now in a race to the bottom. If it wasn't for the discounters, like Walmart and Target, and the extreme discounters, the economy would have been in the tank by now.
so one can say, not only we are at peak oil, we are also at peak debt xD
Revro | 11.24.07 - 1:41 pm | #
Peak Oil is a physical constraint - peak debt is a psychological one. Completely different.
This forum is populated by a bunch of compulsive savers who can't fathom spenders. I suggest these savers do more cultural exchanges... go to the mall this afternoon and buy something completely frivolous & unnecessary - preferably on credit - to experience how the other half lives. Talk to the people in line around you - it will be illuminating.
You'll find that credit isn't that tight yet and the mass of shoppers aren't concerned about their debt loads. When the credit card companies start cutting'em off & they can't get them replaced - then they'll worry.
I'd guess that day is a lot closer - from what I read that's the next sub-prime containment zone but it isn't here yet.
Some interesting "doomsday" reading being offered up on Drudge:
New Wave of Mortgage Failures Could Create a Nightmare Economic Scenario
"NEW YORK (AP) -- When Domenico Colombo saw that his monthly mortgage payment was about to balloon by 30 percent, he had a clear picture of how bad it could get."
Eventually, of course, a growing number of "middle class" people won't even be able to shop at Walmart or Big Lots. I suppose, at that point, it's off to Craigslist for them.
flea markets. they are the stealth emerging markets within the USA.
dryfly, If interest on debt were fixed rate I would say the decision is a simple one. Given that's not the case, it's not nearly as simple of a choice.
Given the 2 options - deflation/(hyper-)inflation, and the fact that Bernanke's predisposed, you're probably correct. Those with variable interest debt are cannon fodder.
km4, that's exactly what's happened, but it's not going to continue.
MP< I strongly disagree with the US in recession, asset prices deflating, good paying jobs decreasing I see ratio of household debt to disposable income for many Americans easily going to 150% or more !
The U.S. present is the Weimar Republic of the 20's and 30's and China present is the U.S. I'm afraid that the world as a whole is in deep S**t. People in America may want to have a good Holiday season this year - because next year may be very different. The average Anerican - and people from most other countries - are ignorant of the times. I guess that they will wake up when the whole thing blows up and they are riding their bicycles to work and packing a mayonnaise sandwiches for lunch - If they're lucky!
There are only two paths to lasting income gains. The first is through capital accumulation (savings/investment) and the second is through total factor productivity (doing more with less/technology).
Asian income gains for the last 40 years have been mostly the result of capital accumulation. Several papers estimate that TFP growth has been small to negative in much of Asia:
Without growth in TFP incomes in Asia are highly correlated to foreign capital flows. When hot money enters the regions, worker productivity goes up, increasing wages, and when how money flows out worker productivity goes down and wages decrease.
It also means that savings rates in Asia/China will stay high for the foreseable future.
Dryfly, I wonder if the Black Friday figures this year will show we have reached peak profligacy (maybe not peak debt yet..) Seems as though they might.
F. Frederson, no, I haven't seen the distributions. But knowing that the wealth has been migrating upwards as incomes of the bottom 60% have declined (outsourcing taking income) and they are suffering with variable rate debt service adjusting north, the distribution HAS to be massively skewed.
"go to the mall this afternoon and buy something completely frivolous & unnecessary - preferably on credit - to experience how the other half lives. Talk to the people in line around you - it will be illuminating."
A team of horses couldn't drag me down to do something that stupid.
If i was a central banker considering the 'plus and minus' of inflation fighting... I would note that that ratio could be altered pretty quickly with 'inflation'... nominal dollar value of incomes 'up'... 'real value' of debt down... all done with a 'little flood' of money.
Not sayin' it will happen, just sayin' look at the numbers and see if you can find another 'easy' out.
Fueled with some really good wine I drank along with a garlic and onion on eggplant hero, I'm going to actually presume to address dryfly . . .
Given our ratio of currency (printed paper and coin) to debt, it is my understanding that it is unlikely to be possible to print one's way out of this puzzle. Not only is the liquidity evaporation rate of debt instruments likely to occur at a faster rate than it might be possible even to print 1,000$ denominated paper . . . banks (and other holders of debt) may not be too pleased.
Also, events often conspire to screw the most folks, so given what most people are expecting, i.e., a dollar collapse/inflation scenario, wouldn't a deflation be just dandy?
The deflation argument that makes most sense to me is that, given our monetary system, (fractional reserve, non-gold standard) to pump our way out requires both lenders willing (and able) to lend and borrowers willing (and able) to borrow.
And (while we're on "ands"), this is all in a context of an observation that this is an environment wherein central banks are no longer our primary gatekeepers of liquidity, rather it is our (imploding, soon to be black-holing) derivatives universe that is our current liquidity driver.
All this is written with respect through a gentle barossa grenache haze.
"Where does this myth of invevitable Chinese superpower status originate?"
The fact that they were once a superpower?
They have 1.3 billion people, a politburo full of engineers (unlike the West), no religious schisms or medieval delusions, mostly monoethnic population, and the fact that they rose up from collecting nightsoil in pots to manned spaceflight very fast?
Their progress is decidedly faster than the USA from say 1830 to 1920.
Also, events often conspire to screw the most folks, so given what most people are expecting, i.e., a dollar collapse/inflation scenario, wouldn't a deflation be just dandy?
I disagree - I think events conspire to screw the fewest people but to make sure they get screwed thoroughly. That's the democratic way. To me that sounds a lot like the inflation scenario wins in the end.
There is one major caveat to my belief in inflation... and it still follows my line of thinking that screwing fewer but screwing them well... that is the the WORLD determines deflation is preferable to inflation and being that we are a minority of the world and that deflation would screw us thoroughly the NOT the mass of savers outside the US... it would follow that deflation screws less (but screws us thoroughly).
The reason the world won't go that route is they have a choice - do they protect their savings or do they protect their production capacity - via monetary & fiscal policy. With things as unbalanced as they are they can't fully protect both.
The Fed could still try to inflate us out but with the rest of the world deflating it would be a huge task. I think it would result in a resounding failure - worse than Japan, carry trade without the savings to carry.
Now, the 'savers' on this forum would certainly choose protecting 'savings' - its their mindset. But CBs are political bodies and worry more about angry unemployed mobs than angry 'Carry Moms'. It will be a tough call but I vote they will protect production & jobs & their political positions rather than protect savings.
Their progress is decidedly faster than the USA from say 1830 to 1920.
Their growth is similar to Stalinist USSR in the 1930s.
I took a 'Modern History' class in college and the prof was an ex-state dept analyst circa 1940-1950 specializing in the USSR. He was a staff munchkin and even made the trips to Yalta (FDR, Churchill, Stalin) and Potsdam (Truman, Churchill , Stalin)... wouldn't we love to have been a fly on the wall at those meetings.
Anyway he put up some numbers on estimates of growth for the second FYP in 1930s USSR and it was staggering - on a par with the highest rates of the US Robber Barron Era or guestimates of the 'First' Industrial Age (Manchester-Liverpool). My guess is China is on a par or growing even faster.
The one unifying trend in all of these 'explosions' is the degree to which labor value added gets reinvested, either directly by the 'Capitalist' capturing that value (as profit) OR by savings of laborers & capitalists combined (in the case of modern Asia).
Anyway its consumption deferred... but not forever. Even the Soviet State eventually consumed those 'capital investments'... it was the base along with the lives of say 10-20 million people... that repulsed the NAZIs.
So what will China consume, consumer goods or weapons? I think our interaction with them will play a major role on the route they choose to go. I don't think its a slam dunk they follow Stalin's path but they could.
Not only is the liquidity evaporation rate of debt instruments likely to occur at a faster rate than it might be possible even to print 1,000$ denominated paper . . . banks (and other holders of debt) may not be too pleased.
Most of the "printing" these days is done electronically. In fact, expect that physical currency would be the first thing to dissapear from common use if the US were to enter a hyper-inflationary period. Since currency pays no interest its value degrades faster than money in the banks so people shun it. And, it becomes a burden to swap out piles of paper every month or so.
It was common in Brazil during times of high inflation to see people writing checks to ice-cream vendors in the park.
The deflation argument that makes most sense to me is that, given our monetary system, to pump our way out requires both lenders willing (and able) to lend and borrowers willing (and able) to borrow.
The Federal Reserve is always a willing lender and the Government is always a willing spender. But, I believe the inflation camp under estimates the structural resistance to the kind of spending the US Government and the Federal Reserve would need to embark on to offset debt deflation.
In the Great Depression, the "New Deal" programs were unable to pump enough money into the economy to keep stabilize prices. And a multitude of ever bigger stimulus packages in Japan haven't been able to pull them out of two decades of deflation.
Its always possible for a determined Fed/Congress to create inflation in a fiat money system. If monetizing US Treasury debt and increased Congressional spending isn't enough the Federal Reserve could always start buying non-degrading assets directly (maybe land?)
But, don't expect drastic actions until deflation is firmly entrenched.
Ben Bernanke has written two books, one on the causes of the Great Depression (and his analysis of why some nations recovered from it more quickly that others), the other on inflation targeting. These represent a significant fraction of his life's work as a public intellectual.
Though he has promised to run the printing press as fast as it needs to be run to prevent deflation, he has also made very clear that he believes the optimal inflation rate is just slightly positive (1-2%), and I see no reason to believe he'll run the presses any faster than the Fed thinks they need to be run to hit that target.
The danger is that the rate the Fed thinks is right will be too high or too low, and that excessive use of leverage in the financial system will have made it so sensitive to upsets that they'll find it impossible to control.
These are all quotes (three different sources) on CDOs - found thanks to Allen C's link, repeated below. They have confused me mightily. Is a CDO an entity with assets and liabilities (I think not) or an asset sold by Citibank to investors (I think not) or an asset backed by mortgages and other debt and "sold" by Citibank to a SIV, which in turn issues short term commercial paper to raise the cash to buy the CDOs (I think so)? Can anyone confirm? Thanks! P.S. How so many of you can write long posts in this tiny box baffles me - this took forever and it is not exactly how I want it but I give up.
When Citi set up its $80 billion worth of SIVs, it thought that they would stay off its balance sheet. This summer, though, financial markets lost interest in financing CDOs so the holders of the liquidity-put CDOs began to return them to Citi -- the $25 billion of them represent more than half of Citi's $55 billion of subprime-related securities. The super-senior status -- meaning that they got first claim on cash flows -- of the put-laden CDOs did not protect their value because the ratings agencies decided to downgrade them, creating a panic to exercise the put and sell the CDOs back to Citi, thus locking
huge losses for the bank.
Liquidity puts are a big thing, and indeed it seems that they were more or less singlehandedly responsible for the downfall of Chuck Prince at Citi. Basically, Citi told the world and kidded itself that it had sold billions of dollars in CDOs to investors. In reality, however, those CDOs had "liquidity puts" attached, which essentially transformed the CDO "sales" into glorified (or debased) repos. Any time that the investor found the CDO difficult to sell and CDOs are always difficult to sell he had the option to put the CDO back to Citi at par. And that's exactly what happened; it was those return-to-sender CDOs which were written down the same weekend Prince resigned.
Several CDOs were created by Citi in 2005 that borrowed from technology used in designing SIVs- another market in which Citi was a leader. The rationale was that a CDO which could issue short-term commercial debt (alongside its traditional issuance) would have access to a broader funding market and would be able to more dynamically manage its funding portfolio. To mitigate any CP rollover risk, Citi entered into a series of agreements which forced it to buy the CDO CP if no one else would. As Mr Rubin calls them, liquidity puts.
Totally different scenario this time around. I think Eric Janszen's position is pretty dead on over at iTulip. First mild deflation (except in real estate) then will follow the strong inflationary pressure. The U.S. Government is going to have to print, print, and print some more to keep paying just the interest on the national debt. It's either that or we will have a break in the chain of payments and the Govt will go bankrupt - oh wait, we already are bankrupt and the stupid Monday Night watching Joe Six Pack U.S. consumer doesn't know it yet.
As a side note, I don't know why China is getting upset over the decline of the dollar. They sent us their cheap lead ridden crap and we sent them worthless paper in return. I think we are even!
The U.S. Government is going to have to print, print, and print some more to keep paying just the interest on the national debt.
The end of any fiat money system is always hyper-inflation following a public debt trap. The Federal Reserves (unstated) first responsibility is the solvency of the Federal Government itself. Its the reason US Government debt is "risk free".
But, US Government debt levels aren't high enough at this point to qualify as a debt trap (IMHO). Subtract from the 9T in government debt the 1.5T that it owes to itself from the social security trust fund. Subtract another ~1T in monetized government debt. Having 6.5T in debt for a 13T dollar economy is manageable at this point.
Of course, we can talk all day about unfunded future liablities, etc. But, those don't start looming on the horizon for another decade or more. And, those liabilities are demographic in nature and can't be "monetized" away.
In the Great Depression, the "New Deal" programs were unable to pump enough money into the economy to keep stabilize prices.
State gov't 'austerity' & other federal policy conspired to negate a lot of the New deal stimulus... the 'War' spending proved though that if you want to pump up a deflated economy you can but it takes fiscal largese AND monetary policy to make it happen.
And a multitude of ever bigger stimulus packages in Japan haven't been able to pull them out of two decades of deflation.
See point above - Japan had numerous policy issues holding back 're-inflation'... most notably a lack of social safety net that made saving on the part of average Japanese a necessity, not an option. If Japanese bureaucrats had put their stimulus into guaranteeing retirees pensions (as opposed to make-work projects)... it would have had FAR more effect. Japanese were and still are philosophically opposed to that so it didn't & won't happen. Note though that we aren't constrained by this philosophical detail...
But, don't expect drastic actions until deflation is firmly entrenched.
I disagree... I bet they open the flood gates WAAAAAAY before deflation is even in sight. BB's currents cuts (jumping the gun IMHO) is evidence of their bias. I can hardly wait for the calls for 'tax cuts'... we are all 'Supply Siders' now, well at least the people running for election are.
My guess is election rhetoric will be the test of this last part...
Base money growth is now about 2% year-over-year. That's in-line with productivity gains and a zero percent inflation rate.
Banks are going to be severely restricted in their ability to lend unless they can find new sources of capital (base money) to shore up their balance sheets.
To keep credit outstanding stable (M3) the banks are going to need 60B in capital to bring ABCP back onto their balance sheets. They will need another xB to bring the SIVs back onto the balance sheet. And, they will need another XB to offset direct losses.
Right now, those losses are estimated to be in the 400B range. If the Fed is trying to grow SOMA by 400B they are doing a poor job of it.
Unless I missed something, China's currency is still pegged to the dollar, and so is collapsing with the dollar. Which makes its exports ever cheaper to the rest of the world, as the dollar weakens and maintains any competition between the two countries in similar terms.
The question for China, "Do we admit currency disparities, particularly as our commodity prices are hitting the roof, or do we go down with the dollar?" A complicated question for a country holding $1.5 trillion in the American currency.
The downturn in real economic activity is only part of the picture. The real big bang for the depressionary buck is the tectonic implosion of China's prodigious domestic investment and credit bubble. Of that, the deflating of the stock market, now underway, is small potatoes relative to the scale of boom time real estate speculation.
In light of these realities and their parallels across the developing world, 'decoupling' is an even more absurd canard than containment. What'll they think of next?
dryfly: But CBs are political bodies and worry more about angry unemployed mobs than angry 'Carry Moms'.
Allowing an assertion that CBs are "political bodies" (I'd say politically aware, but with different constituents and priorities and perhaps a more bureaucratic, but no less controlling mindset) -- I question the meme that they are powerful enough to solve this dilemma even if CBs were not overshadowed by derivative markets outside their zone of influence.
Credit cycles swing like a pendulum do . . .
. . . and those in arks on desert mountain tops expecting liquidity's flood of inflated FRNs may have to wait a while longer. That shimmering on yon horizon may only be credit's temporary illusion of liquidity.
CDO's are indeed a structure with assets and liabilities. The liabilities are the CDO tranches, the assets are the collateral. It is also true that a CDO is an asset that Citi, amongst myriad others, sold to clients. Before they were sold, they were assets on Citi's balance sheets and the liabilities were represented by their fraction of Citi's liabilities. That's just standard banking. When Citi moved these structures 'off-balance sheet' by selling them to structures they controlled and had 'liquidity' commitments on, they moved these assets onto the SIV's balance sheet.
That may sound Enron-esque, but actually it isn't so crooked. Citi does not have to take these assets back on its balance sheet and indeed it is highly unlikely in the extreme that they will (they are staring down the barrel of a strained capital ratio as it is). This means that, at the moment, the big three banks that are up to their eyeballs in SIV commitments are holding a gun (with the letters MLEC on the barrel) to the head of market players, basically threatening to dump the assets wholesale into the market if it comes to that and basically cause HUGE mark to market losses across the board. CR is right to follow this issue because it's a real case study in game theory- something of a twist on the classic, 'if you owe the bank 10 dollars, you have a problem, if you owe the bank 10 million dollars, they have a problem'. Enter the intense negotiations.
Always? That's taking in a bit of territory and impossible to disprove.
It's a very long term view.
Depends on the undefinable terms 'hyper-inflation' and 'debt trap'.
I'll try...
Hyperinflation is just another word for debt default for countries with the luxury of issuing debt in their own currency. I'd suggest that when long bonds are trading on the open market for less than 50 cents on the dollar you have hyper-inflation.
A public debt trap is when the interest payment on public debt are high enough that the central bank cannot raise interest rates enough to contain inflation without a default on the public debt.
First mild deflation (except in real estate) then will follow the strong inflationary pressure.
You are exactly describing my inflation mood as seen in the upper left hand corner of my homepage. This is also consistent with the death of real yields.
"Mild deflation" isn't enough to make real yields strong. It would take severe deflation. (I'm not even remotely convinced severe deflation can happen when the currency is backed by nothing. Heck, it isn't even backed by promises any longer.)
"Strong inflationary pressure" would really stick a fork in real yields. Real yields were negative in the 1970s and in the aftermath of the dotcom bubble.
I'm very bearish on real yields long-term, which is probably no surprise, since that's exactly what a stagflationist would believe. In fact, buying TIPS (treasury inflation protected securities) is not really an inflation/deflation bet (contrary to its name). It is a declining real yield bet.
Being bearish on real yields also implies that it will be difficult to maintain our standard of living moving forward. I think that pretty much goes without saying. That's no surprise either though, since that's exactly what a bearish person would say.
Yep, bearish and stagflationist. Woohoo! sigh
Here's the scary part. I could be wrong, but I don't think I'm a pessimist.
"go to the mall this afternoon and buy something completely frivolous & unnecessary - preferably on credit - to experience how the other half lives."
Then make the credit card payment late so the interest on it goes to 30+ %. Repeat as "needed". Then make the minimum payment almost forever, because that's how long it takes to pay off anything with the minimum payment.
For a great explanation of MBS and CDOs see Tanta's The Compleat UberNerd posts regarding "MBS III" and "
Leverage, Ratings, and Forced Unwind". Each of these has a picture which, when taken together, result in a lot of clarity, not to say nausea.
It's excellent writing, though the practices described are sort of disgusting.
"Unless I missed something, China's currency is still pegged to the dollar" Demand Side you did miss something, a so-far 10% revaluation of the PROC currency against the $.
China's premier, Wen Jiabao, has joined the chorus voicing concern about the dollar's recent weakness.
No one has made a bigger bet on the dollar that China's government to the tune of around $1.2 trillion in fairly long-term dollar-denominated debt.
What about a scenario where foreign demand for all US bonds -- not just demand for CDOs and riskier bonds -- disappears !
Gee I wonder what happens then to the US economy...
I went to the L.B./L.A Ports confrence back in May. The only person there that was somewhat pessimistic was the gal from Nat Retailers Assoc. Everyone else there was so gun-ho. I and the rest of the trucking co people felt everyone else was on another planet. We will see, but our business has been slowing since q3.
Is all this talk about "coupling" really fit for the finacial blogs? I thought this was supposed to be good clean family fun! If you are going to "couple" at least use protection, especially with a subprime date.
Interesting charts. Here's one for manufacturing employment over a similar time period (note: non-zero-based).
Doh!
http://www.econbrowser.com/archives/2005/11/manemploy.gif
The current expansion is now ending, as is the bull market in equities. The facts are so clear that a blind man could see it in the dark.
CR- Thanks for the terrific graphs! This really helps me understand what Roubini and others are talking about. I normally don't post because I have little to contribute, but it's so quiet this evening and you deserve applause from someone. I would have assumed that everyone's gone shopping, but having read the reports on the other string, I know better.
Although growth is zero, chinese exports to US are hardly showing signs of heading back to 2001 levels. Does zero growth = recession, or just .. treading water.
And Jim Rogers response to Rge is?
In order to 'recouple' one must have first 'decoupled' one must suppose but since all the evidence for the latter amounts to less than a single night-soil deposit in the globalization honey pot can we just agree the entire notion of 'decoupling' was a mound of sell-side bull manure to begin with and leave it at that?
The stuff does look better when it's graphed though.
And Jim Rogers response to Rge is?
From March, 2007 -
Top investor sees U.S. property crash
| Reuters
Even in China, the world's fastest expanding economy, Rogers said stocks were overvalued and could go down 30-40 percent.
But he added: "China is one of the few countries in the world where I'm willing to sit out a 30-40 percent decline."
Coming from Beijing itself, I find this really quite ominous and think it bears repeating:
The report is Beijing's first public comment on what repercussions it expects from the global credit crisis and a sign that the government does not support the view that Asian growth has "decoupled" from the US.
"If demand in the US drops further, Chinese exporters will be devastated by a rapid and continuous fall in orders," the report said.
And it seems to suggest they share Gary Shilling's concerns about runaway capital spending and possibly disasterous overcapacity.
Next time China threatens to dump dollars we should remind them:
ALL YOUR CONSUMER ARE BELONG TO US
China fears devastation to exports
Whew! That was close. I thought there might be some economic turbulence in our future. Not so.
The economy is robust. Please take that as a cue to shop more than ever because everyone else is doing it. You should never be suspicious of an article that tells you that the "marathon" is going great even though you can still hear the echoes of the starting gun and most of the people running the marathon have yet to even get to the starting line. Marathons are so long and boring anyway. And I'm pretty sure I know how this one ends. Now, let's go get a flat screen and an Orange Julius.
Can someone comment on why China doesn't simply raise wages so that the domestic population can take over where we left off?
You forgot the most import part:
NEW YORK (CNNMoney.com) -- Worried retailers and mall operators breathed a sigh of relief after the 2007 holiday shopping marathon off to a robust start Friday.
Buying accelerated later in the afternoon as individuals, later identified as Federal Reserve agents, were seen handing out large bundles of cash, seemingly at random, to stunned but elated shoppers.
I recently posted seasonally adjusted versions of this data.
Los Angeles and Long Beach Trade
The following link shows the seasonally and inflation adjusted versions in terms of dollar amounts.
China Trade and Europe
Organizer,
China is raising wages. However, they've got an inflation problem. We seem to keep exporting it to them (via our weaker dollar they are linked to).
A Coupling Argument
Can someone comment on why China doesn't simply raise wages so that the domestic population can take over where we left off?
Maybe it's the chicken or the egg problem. Before consumption started increasing, wages might have to be rasied for a substantial period of time. So businesses might go bankrupt even more quickly by paying more but not selling more. Especially if the employees save most of the extra money, which is what people in China tend to do.
Also, I'm guessing you've never actually had a conversation with someone in upper management asking them to raise wages.
I believe Ford was actually sued once by its shareholders for raising wages.
China is raising wages. However, they've got an inflation problem. We seem to keep exporting it to them (via our weaker dollar they are linked to).
More importantly, whatever they're doing isn't working. In China consumption as a percentage of GDP is falling at a pretty striking rate (IMO). Contrast that with the US where consumption as a GDP component has been expanding for some time now.
ac,
Maybe it's the chicken or the egg problem. Before consumption started increasing, wages might have to be rasied for a substantial period of time. So businesses might go bankrupt even more quickly by paying more but not selling more. Especially if the employees save most of the extra money, which is what people in China tend to do.
How would we know if many Chinese companies weren't already bankrupt?
Other than using our gut, we didn't even know how well supposedly transparent American companies (banks, retailers) have been doing until recently.
ac,
More importantly, whatever they're doing isn't working.
Yeah, no kidding. Here's one thing in particular that isn't working: "old-fashioned price controls to fight inflation."
1970s Style Hoarding (Musical Tribute)
Here's some more links. I don't mean to spam, but I'm on topic for a change and spend much of my time watching China. Let's just say "China inflation" has been a popular search term of mine.
Alarm Bells Ring
Risk: Food for Thought (Literally)
on topic...
Charming Shoppes moves to quarterly loss
philly.com: Philadelphia local news, sports, jobs, cars, homes
Charming Shoppes Inc. reported dismal quarterly earnings today due to sluggish sales, and predicted steep markdowns across this holiday season in response to unsold inventory throughout the specialty retail apparel industry.
Charming Shoppes is better known by the store names: Lane Bryant, Fashion Bug and Petite Sophisticate. Guess where lots of the products are manufactured... China (and some of the other smaller asian tigers). If LB can't sell the stuff at current prices, they'll have to either mark it down or dump it to the overstock market. Next year, I bet the orders are smaller.
"So businesses might go bankrupt even more quickly by paying more but not selling more."
So could they pour it into infrastructure and pick up the slack that way? New Deal for China circa 2008.
Buying accelerated later in the afternoon as individuals, later identified as Federal Reserve agents, were seen handing out large bundles of cash, seemingly at random, to stunned but elated shoppers.
Just my luck to be at the wrong mall. I'm sure optimistic joe was at the mall with the fed res friendlies. Meanwhile I thought I was doing well when that nice man gave me a free Orange Julius.
================================
Can someone comment on why China doesn't simply raise wages so that the domestic population can take over where we left off?
Organizer
Can you try and envisage and put down a 10 point plan and schedule that the current Chinese govt would put together to do this ?
Hey, instead of "God part the sea and he did !" shit, I'm giving you 10 steps to do it in..
Jeez.. where DOES this "...in one bound he was free" come from? Hang on, I just found the source.
-K
The coupling/de- argument tends to mirror the inflation/deflation one. I'm not sure that's the right way of looking at it.
The world decoupled from the U.S. in the 70's -- Japan, the then-China, had a decent growth spurt if memory serves. Further, the Latin American commodity producers had their heyday; I remember going to Venezuela as a kid then, and marveling at all the Rolls Royces.
Of course the U.S. wasn't in a depression then, and it wasn't as big.
But the question remains: will we face an inflationary or deflationary time period? If growth drives the price level, then its likely headed down.
But if money drives the price level, well, I wouldn't stuff my dollars in my mattress. And that means commodities can do quite well in dollar terms, just as in the 70's.
I think deflation/inflation comes down to politics: what will voters prefer? I say inflation.
Anyone that's lived in Latin American countries knows the concept of a maxi-deval. That's when inflation drives a devaluation that far outstrips relative inflation rates, and the value of foreign assets rise, often dramatically (take the example of Argentina). If the dollar is headed for a maxi-deval, then we could get higher dollar commodity prices, and hence "decoupling" of a sort.
Oh, to add the the good news:
CRUDE OIL: Prices on the Nymex jumped to an exchange- record Friday as positive momentum in the U.S. stock market overpowered data indicating OPEC is upping its oil output. Thin trading contributed to volatility. January crude oil rose 89 cents, or 0.9%, to $98.18 a barrel.
I think that most of the profit from those imports is made by US (or at least, Western) companies. How do you decouple from yourself in the first place?
If China can in turn raise the the poor up to lower middle class by the end 2008 then they can kiss the US bye. They will have 1.5b buyers. They could be paying WS for the suckers they are in believing their on hype.
jo6pac
joe6pac,
Once you get outside the economic centers in China, most people are living in another century. Some nomadic, some stationary, most could carry their possessions on their back.
Dallas area malls report strong start to holiday shopping season:
Malls report strong start to holiday shopping season - Dallas Business Journal:
David Pearson,
The world decoupled from the U.S. in the 70's -- Japan, the then-China, had a decent growth spurt if memory serves.
I'm not sure memory is serving in this case. Inflation became a global problem. I do tend to agree with your main point though.
Inflation Fuels Global Hunger
Overall, these conditions are reminiscent of the 1970s, when a weak dollar and high oil and gold prices led to severe global inflation and hit the United States especially hard. The United States and other developed nations may not be insulated from today's inflation for long. As the cost of manufacturing goods increases and developing countries struggle to allay public anxiety over fast-rising food prices, some economists believe that inflation, particularly in China, will be exported to the rest of the world.
I'm apparently in the "some economists" camp. How much deflationary pressure we can use to offset it is open for debate (but rising unemployment in the 1970s didn't seem to help).
Europe's Quant Funds May Be Down 15%, JP Morgan Says
Europe Funds May Be Down 15% in Month, JPMorgan Says (Update1) - Bloomberg.com
IAC/InterActiveCorp. to spend $100M on new Internet business in China: WSJ
That has to be marking some kind of top, lol.
For what it is worth, I'm not notoriously bearish on companies who provide you with the company's acronym as part of their name.
JMHO/Just My Humble Opinion of course!
Sub-prime 'time bomb' is set to explode in Britain
Sub-prime ‘time bomb’ is set to explode in Britain - Times Online
David Pearson- "But the question remains: will we face an inflationary or deflationary time period?"
IMO, look at housing for the answer to that question. If people can't bid, the offer doesn't matter.
Oops, I meant to say I am notoriously bearish. Subliminal advertising must have gotten to me!
RayOnTheFarm:
Charming!
Is the company an apparel bellwether? I've never heard it described as such, but I imagine that Lane Bryant's niche knowhow translates to Petite Sohpisticate.
then again, I remember Fashion Bug from afterschool aftenoons at the mall. Dung Beetle was more like it.
=============================
Is the company an apparel bellwether? I've never heard it described as such, but I imagine that Lane Bryant's niche knowhow translates to Petite Sohpisticate.
LOL ! I bit my keypad and refrained from discussing that aspect ( and I have reason to gripe and revel in cheap shots, I lost money shorting Charming Shoppes last year ) but you just had let the seams burst apart didn't ya !
Deflation indeed.
-K
Here's a chart of five year inflation expectations since August 20, 2007 ("credit crunch" day).
5 Year Inflation Expectations Trend
If you think China is going to have a rough go of it, and you are an indexer weenie like me:
China Ultra Short ETF Launched by ProShares -- Seeking Alpha
2x leverage, short the 25 best known on the Hong Kong stock exchange. Symbol FXP.
Biggest bet of my thousandare life.
Cheers,
prat
Apparently the US GDP growths decouples from Chinese imports. Growths has been pretty stable since 2003 while imports trend down. I guess this what we've always wanted - less imports and more exports. Clearly bullish.
O-Joe
No Chinese manufacturer can pull a Henry Ford on wages and stay in business. "China" is a number of discrete producing entities engaged in a dog eat dog war in a variety of industries, many of them targeting that JC Penny, Home Depot order. One factory guy at a metal bashing operation, when asked about profit, pointed to the punched scrap on the floor, saying that whatever he could get for that was his net.
While margins are thin to non-existent, at least with the export orders you can get paid by L/C in a timely fashion. In domestic business, chasing receivables is the ever present downside for the Chinese maker. And those export orders are (or were) big. We see some evidence of smaller, later or more tentative orders from major retail buying offices already.
Anyway, manufacturing wages in China have been increasing at double digit percentage rates for years in order to keep workers from migrating to sought after service sector jobs (or cleaner factory jobs). It's not unusual for up to half of a factory's workers not to show up after the Chinese NY holiday break.
But what the workers do with those wages is less likely to be i-pod or new Nike oriented than it is savings or even investment (think small shop back in the hinterland) oriented. What weighs on every worker in China is the prospect of the costs associated with starting a family, the burden of aging parents and grandparents, health care and food costs through the roof, no safety net, etc. Think the opposite of diversions at LotusLand MegaMall. In the western experience, more like Dickens or Sinclair maybe.
What worries people is that China's "bicycle economy" doesn't do slow. In the industry we supply, raw material consumption has doubled in the past six years, but margins are under pressure already, now smaller orders? Remember that while China's aggregate growth could be cut in half and still be respectable on paper, it would be a blow to not only absorbing the excess rural workforce, but also to the very highly operationally leveraged factory.
As a long time lurker, I want to add my thanks CR, Tanta and the Komment Krew-- an outstanding community of skilz!
Kou Jie
O-Joe,
Apparently the US GDP growths decouples from Chinese imports. Growths has been pretty stable since 2003 while imports trend down. I guess this what we've always wanted - less imports and more exports. Clearly bullish.
Perhaps you should look at what we are exporting.
It is clearly bullish that we're shipping a LOT more of our food (corn, soybeans, and wheat) AND that our exported food has suddenly become a lot more expensive? In that case, let's devalue by another 50% and supercharge those exports.
Los Angeles and Long Beach Exports
Here's our fastest growing exports (in items of $500 million or more) from August to September (change from previous month, not annualized) as seen in Exhibit 7 of September's FT900: U.S. International Trade in Goods and Services report.
Cotton, raw: 59%
Chemicals-fertilizer: 25%
Corn: 23%
Artwork, antiques, stamps, etc.: 19%
Soybeans: 18%
Wheat: 15%
As for advanced technology trade, the falling dollar is not closing the gap.
Advanced Technology Trade
The current expansion is now ending, as is the bull market in equities. The facts are so clear that a blind man could see it in the dark.
mp
Maybe things are not so clear after all. It is still so clear to me the current expansion will at least continue for another year, but probably into 2010. Same for the stock market. One of us must be seeing things very wrongly indeed. I'll come back to this in 6 months from now. Only time can tell.
O-Joe
This is a very complicated subject and I don't expect anyone to be able to go too deep into this. But I'd point out 1 thing: The Chinese economy is not slowing, and will not slow anytime soon. That's because there are still way too many things in China that can improve, from the living standard of farmers to the use of new technology (continuously stealing from US). They might not continue to grow at 11%, but going back to 7% is not 'slowing' by any means, just not as crazy. Chinese economy was growing crazily because of too much capital inflow. With US recession, if China is not forced to inflate currency rate, they'd be ok.
since reporting on consumer traffic here is for some reason popular, lemme just report that the Fry's in Sunnyvale tonight before closing was INSANE. Parking lot was full, both banks of checkouts going.
n.b: I didn't see a single whitey there, not that there's anything wrong with that.
OJoe- "One of us must be seeing things very wrongly indeed. I'll come back to this in 6 months from now."
O-Joe, during April of this year, I predicted in these pages that Walmart would have a very tough 2007, and that has proven to be correct. Walmart is playing every card it has to keep profits up.
I was, to the best of my knowledge, one of the first to suggest here that a "sector specific" credit crunch was underway, and that it could easily spill over to the broader economy.
In June of this year, I stated here that I viewed the failure of the two Bear Sterns hedge funds as a "Kreditanstalt-type event" that would lead to a generalized breakdown of the credit markets. It did. I also stated that Bear Stearn's Everquest IPO would be "dead on arrival." It was.
In light of the Bear Stearns debacle, I stated here that the Blackstone IPO would fail. It did.
Now, past performance is no guarantee of future results, but these few examples should suggest, to a reasonable person at least, that I do know what the hell I'm talking about.
Perhaps you'd care to put your own bona fides on the table.
Perhaps you'd care to put your own bona fides on the table.
O-Joe has so far predicted every bad event that hasn't yet happened, and been 100% accurate.
Uhhh...which is to say that it is just about impossible to refute an optimist.
Re: Kou Jie
It will be great if you continue contributing.
-K
The facts are so clear that a blind man could see it in the dark.
mp
Well, you're predictions might have come true but obviously your ability to tell what a blind man can see just ran into a counter example. Which is not to say O-Joe is blind, but he's seeing something we're not.
"No one has made a bigger bet on the dollar that China's government to the tune of around $1.2 trillion in fairly long-term dollar-denominated debt.
What about a scenario where foreign demand for all US bonds -- not just demand for CDOs and riskier bonds -- disappears"
Chinese exporters end up with dollars in their hands when they sell US stuff. The go to the CB, and exchange them for local currency. Where does China's central bank get the currency to suck up those dollars? This is important - They print them out of thin air.
As such, to ascribe investor like motives (maximizing risk adjusted return) to a central bank is a serious mistake that is made over and over again by everyday people, and experienced analysts who should know better. They have acted nothing like, and will continue to act nothing like investors....so quit thinking of them that way.
They are not investors. They are not really concerned that much with maximizing return vs risk. It is as if they printed the dollars themselves out of thin air and then used them to buy up dollar denominated assets.
The the FCBs were going to act like investors, they would have done so long ago.
This game does not end with the FCBs yanking the rug out from under the US (which in the end would harm them as much as us) as has been predicted for 5 years now. It ends with inflation in their own currency gradually forcing their hand, or with the US reducing its export of dollars (via recession). Both these are happening now.
One more thing with regards to China. Jimmy Rogers has stated for a long time that he expects a financial (but not economic) crisis in China by 2010. The underlying strength, however, for the economy is too strong to be derailed for long by a financial crisis. Everyone will run for the exits in the short term when this collapse occurs. Buy that panic. It will be the best move of the 21st century.
Agreed on going long China after crawling from the wreckage. Shoot, there's so much I'd want to go long after this nonsense gets sorted. Enough of the financial engineering, proper equity/property valuations, divies instead of buybacks....
=======================
Jimmy Rogers has stated for a long time that he expects a financial (but not economic) crisis in China by 2010
He's going to be totally blindside by the unforseen political crisis, IMO.
Talking of political crisis, I'm certain that students of the Levantine are aware of the (sadly literally) dance of death that Lebanon once again engages in:
"
Mr Lahoud made the dramatic announcement as Lebanon was slipping into a power vacuum. Under the Constitution he had to stand down at midnight after nine years in office. But even as the deadline loomed Parliament failed to elect a successor. The parliamentary session, boycotted by most opposition MPs, lacked the required quorum.
Declaring that risks of a state of emergency prevailed over the nation, Mr Lahoud ordered all Lebanese security agencies to be at the disposal of the army until a legitimate government is formed. The Government called on the army to ignore the outgoing Presidents order, raising the risk of violent confrontation between rival factions.
...
"
President Emile Lahoud calls out army and quits amid a tense stand-off - Times Online
See ya at Nymex crude at $120 - my layoff bet is at 108.
-K
Don't where people get thir blind faith in China what with a 5000 year-old history of numerous revolts, insurrections and civil wars not to mention a century of foreign domination. 5,000 years of history and yet not one day of democracy. Where does this myth of invevitable Chinese superpower status originate?
Where does this myth of invevitable Chinese superpower status originate?
from saving? those who save have, those who dont save suffer
yyy:
what does democracy have to do with being a superpower?
The USSR of old was clearly a superpower, and clearly not a democracy.
Many people believe that China will be the next great superpower because they have:
-the will to be a superpower
-the economic means to be a superpower
-a plan to be a superpower.
also, don't forget that many countries eagerly look forward to Chinese superpower status to "balance" the US.
when the US and USSR were both superpowers they sort of balanced one another. this forced each to build certain coalitions with other govt's and made other countries "important"
now without the USSR/Russia as superpower, the US sits alone 'on top'. many believe it has become tyrannical... (example: GWB basically telling the UN that they are unnecessary)
Seeing an unrestrained US, many global residents wish to restore "balance". China would do a good job of this.
It is physically opposite us on the globe... it is politically opposite as well...
and the Chinese have done a pretty good job at diplomacy with many of the "3rd world" countries...
(don't think they can do it... what is their nuclear capability... and what about their Sub technology... surfacing right in the middle of our most important warships undetected?)
So this is what the market got all worked up over on Friday?
"American consumers flooded stores yesterday on the traditional first day of the holiday shopping season, but the irrational exuberance of the Black Fridays of the last five years has been replaced by pragmatic restraint."
Bargains Draw Crowds, but the Thrill Is Gone - NY Times
"Hey, instead of "God part the sea and he did !" shit, I'm giving you 10 steps to do it in.."
K/SK - While it's true that many questions are statements in disguise, sometimes a cigar is just a cigar as they say.
I recognize where I am on the food chain of knowlege around CR and am just trying to improve my perspective.
People should be free to ask questions without some of you guys getting a knot in your shorts over it.
OT slightly...
More evidence that "it" is back...
Euro-Zone Banks Hoard Cash, Prompting ECB to Take Steps
Euro-Zone Banks Hoard Cash, Prompting ECB to Take Steps - WSJ.com
Canada too...
Bank of Canada Fund Injections
Show the Impact of Credit Crunch
Bank of Canada Fund Injections Show the Impact of Credit Crunch - WSJ.com
Excerpts from the WSJ
Commercial Paper Shrinks
The U.S. commercial-paper market shrank $20.9 billion in the week ended Wednesday to $1.84 trillion, according to data released Friday by the Federal Reserve.
Asset-backed commercial paper, a subset of the broader commercial-paper market where companies typically fund their short-term borrowing, declined by $17.5 billion.
The $17.5 billion erosion is the second largest in the past month in the asset-backed commercial paper market, which saw a $29.5 billion drop in the week ended Nov. 7.
Money-Fund Assets Increase
NEW YORK -- Money-market mutual-fund assets increased by $21.92 billion to $3.047 trillion in the week ended Wednesday, up from an adjusted $3.025 trillion, according to the Investment Company Institute.
==========================
People should be free to ask questions without some of you guys getting a knot in your shorts over it.
Organizer
I'm sorry.
-K
From Alo's post
As the clock struck 9 p.m., the doors flung open and hundreds of shoppers dashed inside, ransacking displays and overwhelming the staff. Fifteen minutes later, the employees began delivering the bad news: most of the best deals had sold out.
No more G.P.S., sorry, said one manager. Those laptops are gone, yelled another.
Exasperated consumers left the store in anger. They are toying with the public, said Syed Sha, 52, who drove to the store two hours before it opened to buy a Sony laptop regularly $800, on sale for $549 for his college-age son.
Someone i know, experienced the same in NJ. 100's of people waiting on the two discounted laptops. Discount was couple of hundred dollars.
Apology accepted.
"One of us must be seeing things very wrongly indeed."
From his vantage point, the only thing O-Joe can see are the walls of his descending colon.
yearning to learn made some good points at 8:31; a unipolar world is not good for anyone, including the US.
We could have used our strong hand to create stronger multilateral institutions . . . instead, we'll eventually sign on to the same, but with a weaker hand. And the Bush presidency will be "consigned to the dustbin of history" as future generations try t purge this period from our collective memory.
On the subject of decoupling, one of my favorite data points to watch is the TIC data from the US Treasury. IMHO no one has better analysis on this than Dr. Roubini's colleague Dr. Setser -
Dr. Setser
There is considerable lag time on the reports unfortunately and some concerns on accounting/measurement issues by Dr. Gros.
oops, make that, "raised by Dr. Gros."
We could have used our strong hand to create stronger multilateral institutions...
No, we couldn't have.
For those who grew up during the Cold War, and didn't bother to learn any history, it seems as though a close alliance between the U.S. and Western Europe is the natural order of the world.
But that was simple necessity, as the late, unlamented Soviet Union was a common foe. Once the Soviet Union collapsed, it was inevitable that the lesser differences between Europe and America, formerly papered-over, would become of higher importance and create a more arms-length relationship.
for that matter the international in perspective non isolationist US is but a minority time period in our history.
a big one, but still a relatively recent change.
When I say multilateral institutions, I don't mean like NATO.
Many issues today transcend national borders and need to be addressed on a worldwide basis. We should be strengthening multilateral institutions like the UN and WTO.
Instead, we shat on Kyoto and the Geneva conventions.
I expect to see more regional consolidation over the coming decades, and stronger international standards being embraced. fewer currencies and more uniform basic standards.
While I don't expect to see it in my lifetime, somewhere down the road, a few hundred years maybe, the nation-state will no longer be the primary governing body.
Re: retail and Black Friday:
The article quoted several people who'd traded down in their buying: from Abercrombie and Fitch to Target, or from Macy's all the way down to Big Lots.
This is going to be the pattern. Buyers will move down the retail food chain to the next cheapest venues, buying on price alone and only as much as they have to. It'll be a race to the bottom for retailers. Some of them just won't make it.
Eventually, of course, a growing number of "middle class" people won't even be able to shop at Walmart or Big Lots. I suppose, at that point, it's off to Craigslist for them.
it's off to Craigslist for them.
Woohoo, already there! I gotta stop looking at all the free stuff; I've got enough 'projects', though I did build my wife a nice greenhouse with 'free' glass.
What's with the standing in line for a laptop? Reminds me of that woman who got trampled at Wal Mart for a $30 DVD player that she could have bought at a supermarket. The laptops were cheaper in July and August pre=school anyway, or the office supply places have on sale all the time.
The 2nd graph shows that we are nearly at the same point as the 2001 recession bar...and the mid 2003 ARM rescue plea from Greenspan...and the 2005 rescue by stated income loans.
Or I could be reading too much into the China Exports to the US reflection of the US economy which is 70% consumption IIRC.
It is starting to look like all that water that was bailed out of the boat to keep it from recession was only discharged from the bilge to the command bridge ("off books") and no actual repairs were made. Or do you figure that we now have a housing stock that fairly represents this multi-trillion dollar investment...like that IT investment before it?
Like that highly touted IT vehicle, will the house be hedonically valued to keep up robust GDP appearances?
ahem
rock blogging?
and if no one noticed, the Bush-loving Australian PM was just tossed out in a landslide . . . and will lose his own seat in parliament, something that hasn't happened since . . . 1929.
what else happened in 1929?
Cotton, raw: 59%
Chemicals-fertilizer: 25%
Corn: 23%
Artwork, antiques, stamps, etc.: 19%
Soybeans: 18%
Wheat: 15%
So we are now exporting raw materials and importing finished goods? In my fuzzy memory, that is what India and the American colonies did back in the 18th century.
As a mention of local shopping anecdotes, yesterday was busy at the local Home Depot.
otherJim- "In my fuzzy memory, that is what India and the American colonies did back in the 18th century."
Excellent point. If memory serves, the "breadbasket of the world" is now a net importer of foodstuffs.
what else happened in 1929?
The Philadelphia Athletics won the World Series?
The problem with the Chinese becoming big consumers is that they need to hook their population up with electricity first. The country is lacking a lot of infrastructure and basic elements of modern life. Combine that with the corruption at the local level, and I find it hard to believe that the Chinese consumer will be able to step up to the plate anytime in the next decade. That's not even considering the cultural aspects, of savings rates and the lack of deep seated desire to purchase a bunch of crap to make themselves feel better.
As a long time lurker, I want to add my thanks CR, Tanta and the Komment Krew-- an outstanding community of skilz!
Kou Jie
Kou Jie | Homepage | 11.23.07 - 11:31 pm | #
Kou Jie - come back often I will have questions for you.
BTW - I hear the same thing EXACTLY from companies I work with. I probably have 2-3 companies calling me a month from China asking me to help them market to US producers in an effort to get AROUND the big MNCs already in place in China - it is a near futile effort to find 'margin'. I feel their pain.
Also BTW - selling scrap as a 'profit center' for metal smashers is a long time honored tradition everywhere - including the US and Europe. That tradition goes back at least 100 years here (to Henry Ford days) - probably farther. You think they are squeezed now, wait until metal prices start to decline - the scrap they paid big money to buy as raw material selling for a fraction of what they paid per pound...
And as you pointed out wages are going up in China at an 'alarming' rate... alarming that is if you are a large MNC plopping capital in a place like Shanghai - wages there are up something like 400% since about 2002... a skilled worker in Shanghai now might cost you whopping $2000 a year in USD equivalent. That same worker would earn about $40K USD in the US and about $60K USD equivalent in Western Europe (though only $20K USD equivalent in E Europe).
Wage arbitrage isn't dead yet - go inland to Wuxi or Wuhu and you can still get that skilled worker for under $1000/yr USD equiv. (I've heard as low 25 cents an hour but that info was at least a year old now, and skill level???).
If China wants to get their wages up to coastal levels (forget western par for now) - they first need to get the infrastructure up to western expectation... so material can get in and product out. It is a nightmare to get material in & product out from the interior. Once to the ports its as slam dunk to get it here.
Upgrade infrastructure and the wages start going up across the whole country. That's where China needs to spend some of that 1-2 trillion USD war chest, not currency manipulation. Do that and they could defer/delay 're-coupling' until that dollar pot runs dry.
daveNYC- "...I find it hard to believe that the Chinese consumer will be able to step up to the plate anytime in the next decade. That's not even considering the cultural aspects..."
Yes, dammit, yes. Exactly. Well done.
So daveNYC and mp let's count on Americans consumers ( already up to their necks in debt ) to continue to buy buy buy and everything will be fine with the US economy...
...Relative to their incomes, American consumers have been taking on more debt for decades, as America's increasingly sophisticated financial system allows more people more access to credit. But the pace of indebtedness has accelerated dramatically. The ratio of household debt to disposable income is now above 130%. Earlier this decade it was 100%; in the early 1990s it was 80%
km4, that's exactly what's happened, but it's not going to continue. IMO, it's stopping now, as we speak and regardless of "Black Friday."
km4 , "The ratio of household debt to disposable income is now above 130%. Earlier this decade it was 100%; in the early 1990s it was 80%"
You know, those statistics look frightening, but you need to consider that these blended figures don't tell even a fraction of the underlying story. There has been a shift in wealth from the bottom to the top so those that have been doing the bulk of the recent consuming have balance sheets that are in far worse shape.
We already passed the tipping point and the debt service is variable interest so even if we stop consuming the inertia is so strong won't be overcome.
Let me put it this way, if the US economy was an airplane, the pilot would be declaring an emergency because almost every instrument on the panel is flashing red.
so one can say, not only we are at peak oil, we are also at peak debt xD
The ratio of household debt to disposable income is now above 130%. Earlier this decade it was 100%; in the early 1990s it was 80%
If i was a central banker considering the 'plus and minus' of inflation fighting... I would note that that ratio could be altered pretty quickly with 'inflation'... nominal dollar value of incomes 'up'... 'real value' of debt down... all done with a 'little flood' of money.
Not sayin' it will happen, just sayin' look at the numbers and see if you can find another 'easy' out.
barely- "...these blended figures don't tell even a fraction of the underlying story. There has been a shift in wealth from the bottom to the top.."
Another really excellent point to add to daveNYC's and km4's. Look at the high end retailers. The American consumer is now in a race to the bottom. If it wasn't for the discounters, like Walmart and Target, and the extreme discounters, the economy would have been in the tank by now.
so one can say, not only we are at peak oil, we are also at peak debt xD
Revro | 11.24.07 - 1:41 pm | #
Peak Oil is a physical constraint - peak debt is a psychological one. Completely different.
This forum is populated by a bunch of compulsive savers who can't fathom spenders. I suggest these savers do more cultural exchanges... go to the mall this afternoon and buy something completely frivolous & unnecessary - preferably on credit - to experience how the other half lives. Talk to the people in line around you - it will be illuminating.
You'll find that credit isn't that tight yet and the mass of shoppers aren't concerned about their debt loads. When the credit card companies start cutting'em off & they can't get them replaced - then they'll worry.
I'd guess that day is a lot closer - from what I read that's the next sub-prime containment zone but it isn't here yet.
Some interesting "doomsday" reading being offered up on Drudge:
New Wave of Mortgage Failures Could Create a Nightmare Economic Scenario
"NEW YORK (AP) -- When Domenico Colombo saw that his monthly mortgage payment was about to balloon by 30 percent, he had a clear picture of how bad it could get."
Best regards,
Eventually, of course, a growing number of "middle class" people won't even be able to shop at Walmart or Big Lots. I suppose, at that point, it's off to Craigslist for them.
flea markets. they are the stealth emerging markets within the USA.
So is now the time for my business plan for a "roll up" and IPO of a national flea market chain?
dryfly, If interest on debt were fixed rate I would say the decision is a simple one. Given that's not the case, it's not nearly as simple of a choice.
Given the 2 options - deflation/(hyper-)inflation, and the fact that Bernanke's predisposed, you're probably correct. Those with variable interest debt are cannon fodder.
MP< I strongly disagree with the US in recession, asset prices deflating, good paying jobs decreasing I see ratio of household debt to disposable income for many Americans easily going to 150% or more !
The U.S. present is the Weimar Republic of the 20's and 30's and China present is the U.S. I'm afraid that the world as a whole is in deep S**t. People in America may want to have a good Holiday season this year - because next year may be very different. The average Anerican - and people from most other countries - are ignorant of the times. I guess that they will wake up when the whole thing blows up and they are riding their bicycles to work and packing a mayonnaise sandwiches for lunch - If they're lucky!
You know, those statistics look frightening, but you need to consider that these blended figures don't tell even a fraction of the underlying story.
I agree that this is an excellent point. Has anyone seen debt ratio figures broken out for the standard quintiles?
Re: Chinese Consumption...
There are only two paths to lasting income gains. The first is through capital accumulation (savings/investment) and the second is through total factor productivity (doing more with less/technology).
Asian income gains for the last 40 years have been mostly the result of capital accumulation. Several papers estimate that TFP growth has been small to negative in much of Asia:
http://www.adb.org/Documents/EDRC/Reports/ER065.pdf
Without growth in TFP incomes in Asia are highly correlated to foreign capital flows. When hot money enters the regions, worker productivity goes up, increasing wages, and when how money flows out worker productivity goes down and wages decrease.
It also means that savings rates in Asia/China will stay high for the foreseable future.
Dryfly, I wonder if the Black Friday figures this year will show we have reached peak profligacy (maybe not peak debt yet..) Seems as though they might.
F. Frederson, no, I haven't seen the distributions. But knowing that the wealth has been migrating upwards as incomes of the bottom 60% have declined (outsourcing taking income) and they are suffering with variable rate debt service adjusting north, the distribution HAS to be massively skewed.
In case you haven't read...
Citi liquidity puts?
FT Alphaville » Blog Archive » The $25bn Citi CDO liquidity put - and who else has one
"go to the mall this afternoon and buy something completely frivolous & unnecessary - preferably on credit - to experience how the other half lives. Talk to the people in line around you - it will be illuminating."
A team of horses couldn't drag me down to do something that stupid.
If i was a central banker considering the 'plus and minus' of inflation fighting... I would note that that ratio could be altered pretty quickly with 'inflation'... nominal dollar value of incomes 'up'... 'real value' of debt down... all done with a 'little flood' of money.
Not sayin' it will happen, just sayin' look at the numbers and see if you can find another 'easy' out.
Fueled with some really good wine I drank along with a garlic and onion on eggplant hero, I'm going to actually presume to address dryfly . . .
Given our ratio of currency (printed paper and coin) to debt, it is my understanding that it is unlikely to be possible to print one's way out of this puzzle. Not only is the liquidity evaporation rate of debt instruments likely to occur at a faster rate than it might be possible even to print 1,000$ denominated paper . . . banks (and other holders of debt) may not be too pleased.
Also, events often conspire to screw the most folks, so given what most people are expecting, i.e., a dollar collapse/inflation scenario, wouldn't a deflation be just dandy?
The deflation argument that makes most sense to me is that, given our monetary system, (fractional reserve, non-gold standard) to pump our way out requires both lenders willing (and able) to lend and borrowers willing (and able) to borrow.
And (while we're on "ands"), this is all in a context of an observation that this is an environment wherein central banks are no longer our primary gatekeepers of liquidity, rather it is our (imploding, soon to be black-holing) derivatives universe that is our current liquidity driver.
All this is written with respect through a gentle barossa grenache haze.
Best regards,
"Where does this myth of invevitable Chinese superpower status originate?"
The fact that they were once a superpower?
They have 1.3 billion people, a politburo full of engineers (unlike the West), no religious schisms or medieval delusions, mostly monoethnic population, and the fact that they rose up from collecting nightsoil in pots to manned spaceflight very fast?
Their progress is decidedly faster than the USA from say 1830 to 1920.
Where else do superpowers come from?
Also, events often conspire to screw the most folks, so given what most people are expecting, i.e., a dollar collapse/inflation scenario, wouldn't a deflation be just dandy?
I disagree - I think events conspire to screw the fewest people but to make sure they get screwed thoroughly. That's the democratic way. To me that sounds a lot like the inflation scenario wins in the end.
There is one major caveat to my belief in inflation... and it still follows my line of thinking that screwing fewer but screwing them well... that is the the WORLD determines deflation is preferable to inflation and being that we are a minority of the world and that deflation would screw us thoroughly the NOT the mass of savers outside the US... it would follow that deflation screws less (but screws us thoroughly).
The reason the world won't go that route is they have a choice - do they protect their savings or do they protect their production capacity - via monetary & fiscal policy. With things as unbalanced as they are they can't fully protect both.
The Fed could still try to inflate us out but with the rest of the world deflating it would be a huge task. I think it would result in a resounding failure - worse than Japan, carry trade without the savings to carry.
Now, the 'savers' on this forum would certainly choose protecting 'savings' - its their mindset. But CBs are political bodies and worry more about angry unemployed mobs than angry 'Carry Moms'. It will be a tough call but I vote they will protect production & jobs & their political positions rather than protect savings.
Their progress is decidedly faster than the USA from say 1830 to 1920.
Their growth is similar to Stalinist USSR in the 1930s.
I took a 'Modern History' class in college and the prof was an ex-state dept analyst circa 1940-1950 specializing in the USSR. He was a staff munchkin and even made the trips to Yalta (FDR, Churchill, Stalin) and Potsdam (Truman, Churchill , Stalin)... wouldn't we love to have been a fly on the wall at those meetings.
Anyway he put up some numbers on estimates of growth for the second FYP in 1930s USSR and it was staggering - on a par with the highest rates of the US Robber Barron Era or guestimates of the 'First' Industrial Age (Manchester-Liverpool). My guess is China is on a par or growing even faster.
The one unifying trend in all of these 'explosions' is the degree to which labor value added gets reinvested, either directly by the 'Capitalist' capturing that value (as profit) OR by savings of laborers & capitalists combined (in the case of modern Asia).
Anyway its consumption deferred... but not forever. Even the Soviet State eventually consumed those 'capital investments'... it was the base along with the lives of say 10-20 million people... that repulsed the NAZIs.
So what will China consume, consumer goods or weapons? I think our interaction with them will play a major role on the route they choose to go. I don't think its a slam dunk they follow Stalin's path but they could.
Not only is the liquidity evaporation rate of debt instruments likely to occur at a faster rate than it might be possible even to print 1,000$ denominated paper . . . banks (and other holders of debt) may not be too pleased.
Most of the "printing" these days is done electronically. In fact, expect that physical currency would be the first thing to dissapear from common use if the US were to enter a hyper-inflationary period. Since currency pays no interest its value degrades faster than money in the banks so people shun it. And, it becomes a burden to swap out piles of paper every month or so.
It was common in Brazil during times of high inflation to see people writing checks to ice-cream vendors in the park.
The deflation argument that makes most sense to me is that, given our monetary system, to pump our way out requires both lenders willing (and able) to lend and borrowers willing (and able) to borrow.
The Federal Reserve is always a willing lender and the Government is always a willing spender. But, I believe the inflation camp under estimates the structural resistance to the kind of spending the US Government and the Federal Reserve would need to embark on to offset debt deflation.
In the Great Depression, the "New Deal" programs were unable to pump enough money into the economy to keep stabilize prices. And a multitude of ever bigger stimulus packages in Japan haven't been able to pull them out of two decades of deflation.
Its always possible for a determined Fed/Congress to create inflation in a fiat money system. If monetizing US Treasury debt and increased Congressional spending isn't enough the Federal Reserve could always start buying non-degrading assets directly (maybe land?)
But, don't expect drastic actions until deflation is firmly entrenched.
Ben Bernanke has written two books, one on the causes of the Great Depression (and his analysis of why some nations recovered from it more quickly that others), the other on inflation targeting. These represent a significant fraction of his life's work as a public intellectual.
Though he has promised to run the printing press as fast as it needs to be run to prevent deflation, he has also made very clear that he believes the optimal inflation rate is just slightly positive (1-2%), and I see no reason to believe he'll run the presses any faster than the Fed thinks they need to be run to hit that target.
The danger is that the rate the Fed thinks is right will be too high or too low, and that excessive use of leverage in the financial system will have made it so sensitive to upsets that they'll find it impossible to control.
These are all quotes (three different sources) on CDOs - found thanks to Allen C's link, repeated below. They have confused me mightily. Is a CDO an entity with assets and liabilities (I think not) or an asset sold by Citibank to investors (I think not) or an asset backed by mortgages and other debt and "sold" by Citibank to a SIV, which in turn issues short term commercial paper to raise the cash to buy the CDOs (I think so)? Can anyone confirm? Thanks! P.S. How so many of you can write long posts in this tiny box baffles me - this took forever and it is not exactly how I want it but I give up.
FT Alphaville » Blog Archive » The $25bn Citi CDO liquidity put - and who else has one
When Citi set up its $80 billion worth of SIVs, it thought that they would stay off its balance sheet. This summer, though, financial markets lost interest in financing CDOs so the holders of the liquidity-put CDOs began to return them to Citi -- the $25 billion of them represent more than half of Citi's $55 billion of subprime-related securities. The super-senior status -- meaning that they got first claim on cash flows -- of the put-laden CDOs did not protect their value because the ratings agencies decided to downgrade them, creating a panic to exercise the put and sell the CDOs back to Citi, thus locking
huge losses for the bank.
Liquidity puts are a big thing, and indeed it seems that they were more or less singlehandedly responsible for the downfall of Chuck Prince at Citi. Basically, Citi told the world and kidded itself that it had sold billions of dollars in CDOs to investors. In reality, however, those CDOs had "liquidity puts" attached, which essentially transformed the CDO "sales" into glorified (or debased) repos. Any time that the investor found the CDO difficult to sell and CDOs are always difficult to sell he had the option to put the CDO back to Citi at par. And that's exactly what happened; it was those return-to-sender CDOs which were written down the same weekend Prince resigned.
Several CDOs were created by Citi in 2005 that borrowed from technology used in designing SIVs- another market in which Citi was a leader. The rationale was that a CDO which could issue short-term commercial debt (alongside its traditional issuance) would have access to a broader funding market and would be able to more dynamically manage its funding portfolio. To mitigate any CP rollover risk, Citi entered into a series of agreements which forced it to buy the CDO CP if no one else would. As Mr Rubin calls them, liquidity puts.
Whoops, I guess I should have started with "OT, but..." Sorry.
Totally different scenario this time around. I think Eric Janszen's position is pretty dead on over at iTulip. First mild deflation (except in real estate) then will follow the strong inflationary pressure. The U.S. Government is going to have to print, print, and print some more to keep paying just the interest on the national debt. It's either that or we will have a break in the chain of payments and the Govt will go bankrupt - oh wait, we already are bankrupt and the stupid Monday Night watching Joe Six Pack U.S. consumer doesn't know it yet.
As a side note, I don't know why China is getting upset over the decline of the dollar. They sent us their cheap lead ridden crap and we sent them worthless paper in return. I think we are even!
KM
The U.S. Government is going to have to print, print, and print some more to keep paying just the interest on the national debt.
The end of any fiat money system is always hyper-inflation following a public debt trap. The Federal Reserves (unstated) first responsibility is the solvency of the Federal Government itself. Its the reason US Government debt is "risk free".
But, US Government debt levels aren't high enough at this point to qualify as a debt trap (IMHO). Subtract from the 9T in government debt the 1.5T that it owes to itself from the social security trust fund. Subtract another ~1T in monetized government debt. Having 6.5T in debt for a 13T dollar economy is manageable at this point.
Of course, we can talk all day about unfunded future liablities, etc. But, those don't start looming on the horizon for another decade or more. And, those liabilities are demographic in nature and can't be "monetized" away.
In the Great Depression, the "New Deal" programs were unable to pump enough money into the economy to keep stabilize prices.
State gov't 'austerity' & other federal policy conspired to negate a lot of the New deal stimulus... the 'War' spending proved though that if you want to pump up a deflated economy you can but it takes fiscal largese AND monetary policy to make it happen.
And a multitude of ever bigger stimulus packages in Japan haven't been able to pull them out of two decades of deflation.
See point above - Japan had numerous policy issues holding back 're-inflation'... most notably a lack of social safety net that made saving on the part of average Japanese a necessity, not an option. If Japanese bureaucrats had put their stimulus into guaranteeing retirees pensions (as opposed to make-work projects)... it would have had FAR more effect. Japanese were and still are philosophically opposed to that so it didn't & won't happen. Note though that we aren't constrained by this philosophical detail...
But, don't expect drastic actions until deflation is firmly entrenched.
I disagree... I bet they open the flood gates WAAAAAAY before deflation is even in sight. BB's currents cuts (jumping the gun IMHO) is evidence of their bias. I can hardly wait for the calls for 'tax cuts'... we are all 'Supply Siders' now, well at least the people running for election are.
My guess is election rhetoric will be the test of this last part...
The end of any fiat money system is always hyper-inflation following a public debt trap.
Always? That's taking in a bit of territory and impossible to disprove.
Depends on the undefinable terms 'hyper-inflation' and 'debt trap'.
I'm not saying you analysis is wrong - just sayin' its an article of faith and unprovable. But then so is the alternative hypothesis.
We'll see.
BB's currents cuts (jumping the gun IMHO) is evidence of their bias.
The financial press cheerleading aside the current cuts in interest rates have barely brought us back to neutral. Check out the SOMA growth:
http://www.nowandfutures.com/images/fed_soma.png
Base money growth is now about 2% year-over-year. That's in-line with productivity gains and a zero percent inflation rate.
Banks are going to be severely restricted in their ability to lend unless they can find new sources of capital (base money) to shore up their balance sheets.
To keep credit outstanding stable (M3) the banks are going to need 60B in capital to bring ABCP back onto their balance sheets. They will need another xB to bring the SIVs back onto the balance sheet. And, they will need another XB to offset direct losses.
Right now, those losses are estimated to be in the 400B range. If the Fed is trying to grow SOMA by 400B they are doing a poor job of it.
Unless I missed something, China's currency is still pegged to the dollar, and so is collapsing with the dollar. Which makes its exports ever cheaper to the rest of the world, as the dollar weakens and maintains any competition between the two countries in similar terms.
The question for China, "Do we admit currency disparities, particularly as our commodity prices are hitting the roof, or do we go down with the dollar?" A complicated question for a country holding $1.5 trillion in the American currency.
The downturn in real economic activity is only part of the picture. The real big bang for the depressionary buck is the tectonic implosion of China's prodigious domestic investment and credit bubble. Of that, the deflating of the stock market, now underway, is small potatoes relative to the scale of boom time real estate speculation.
In light of these realities and their parallels across the developing world, 'decoupling' is an even more absurd canard than containment. What'll they think of next?
dryfly: But CBs are political bodies and worry more about angry unemployed mobs than angry 'Carry Moms'.
Allowing an assertion that CBs are "political bodies" (I'd say politically aware, but with different constituents and priorities and perhaps a more bureaucratic, but no less controlling mindset) -- I question the meme that they are powerful enough to solve this dilemma even if CBs were not overshadowed by derivative markets outside their zone of influence.
Credit cycles swing like a pendulum do . . .
. . . and those in arks on desert mountain tops expecting liquidity's flood of inflated FRNs may have to wait a while longer. That shimmering on yon horizon may only be credit's temporary illusion of liquidity.
But who knows? This may just be another fat tale.
Best regards,
calvert,
CDO's are indeed a structure with assets and liabilities. The liabilities are the CDO tranches, the assets are the collateral. It is also true that a CDO is an asset that Citi, amongst myriad others, sold to clients. Before they were sold, they were assets on Citi's balance sheets and the liabilities were represented by their fraction of Citi's liabilities. That's just standard banking. When Citi moved these structures 'off-balance sheet' by selling them to structures they controlled and had 'liquidity' commitments on, they moved these assets onto the SIV's balance sheet.
That may sound Enron-esque, but actually it isn't so crooked. Citi does not have to take these assets back on its balance sheet and indeed it is highly unlikely in the extreme that they will (they are staring down the barrel of a strained capital ratio as it is). This means that, at the moment, the big three banks that are up to their eyeballs in SIV commitments are holding a gun (with the letters MLEC on the barrel) to the head of market players, basically threatening to dump the assets wholesale into the market if it comes to that and basically cause HUGE mark to market losses across the board. CR is right to follow this issue because it's a real case study in game theory- something of a twist on the classic, 'if you owe the bank 10 dollars, you have a problem, if you owe the bank 10 million dollars, they have a problem'. Enter the intense negotiations.
Always? That's taking in a bit of territory and impossible to disprove.
It's a very long term view.
Depends on the undefinable terms 'hyper-inflation' and 'debt trap'.
I'll try...
Hyperinflation is just another word for debt default for countries with the luxury of issuing debt in their own currency. I'd suggest that when long bonds are trading on the open market for less than 50 cents on the dollar you have hyper-inflation.
A public debt trap is when the interest payment on public debt are high enough that the central bank cannot raise interest rates enough to contain inflation without a default on the public debt.
KM,
First mild deflation (except in real estate) then will follow the strong inflationary pressure.
You are exactly describing my inflation mood as seen in the upper left hand corner of my homepage. This is also consistent with the death of real yields.
"Mild deflation" isn't enough to make real yields strong. It would take severe deflation. (I'm not even remotely convinced severe deflation can happen when the currency is backed by nothing. Heck, it isn't even backed by promises any longer.)
"Strong inflationary pressure" would really stick a fork in real yields. Real yields were negative in the 1970s and in the aftermath of the dotcom bubble.
I'm very bearish on real yields long-term, which is probably no surprise, since that's exactly what a stagflationist would believe. In fact, buying TIPS (treasury inflation protected securities) is not really an inflation/deflation bet (contrary to its name). It is a declining real yield bet.
Features and Risks of Treasury Inflation Protection Securities
Being bearish on real yields also implies that it will be difficult to maintain our standard of living moving forward. I think that pretty much goes without saying. That's no surprise either though, since that's exactly what a bearish person would say.
Yep, bearish and stagflationist. Woohoo! sigh
Here's the scary part. I could be wrong, but I don't think I'm a pessimist.
"go to the mall this afternoon and buy something completely frivolous & unnecessary - preferably on credit - to experience how the other half lives."
Then make the credit card payment late so the interest on it goes to 30+ %. Repeat as "needed". Then make the minimum payment almost forever, because that's how long it takes to pay off anything with the minimum payment.
Calvert,
For a great explanation of MBS and CDOs see Tanta's The Compleat UberNerd posts
regarding "MBS III" and "
Leverage, Ratings, and Forced Unwind". Each of these has a picture which, when taken together, result in a lot of clarity, not to say nausea.
It's excellent writing, though the practices described are sort of disgusting.
"Unless I missed something, China's currency is still pegged to the dollar" Demand Side you did miss something, a so-far 10% revaluation of the PROC currency against the $.
Bobn, Thanks for the reminder, yes I will go back to the text and study it some more.
Obviously I didn't really get it all the first time.