Smart Economy

When will the recession end? Part 38 More bad news for global banks-growing debt losses, writedowns

U.S., European bank writedowns, credit losses

Dec 3 (Reuters) - Top U.S. and European banks have lost more than $1 trillion from toxic assets and bad loans since the start of 2007, and losses were expected to top $2.8 trillion from 2007-10 with roughly two thirds from loans and the remainder on securities, according to International Monetary Fund forecasts. U.S. banks were expected to take a $1 trillion hit andEuropean bank losses will reach $1.6 trillion, the IMF said atthe end of September. It said U.S. banks were about 60 percentthrough their losses, but Britishand eurozone banks were only40 percent through their writedowns.

 Below is a list of estimated losses (in billions of dollars at current exchange rates). The only Canadian Bank, CIBC is highlighted in red 

http://www.reuters.com/article/idUSGEE5B22GO20091203

BANK 2007 2008   2009 YTD    TOTAL

Citigroup (C.N) 29.1 63.4 21.8 $124.0

Wachovia Corp* 4.0 73.4 $77.4

Bank of America 12.1 29.2 27.0   $68.3

Merrill Lynch** 25.1 38.6 $63.7

HSBC (HSBA.L) 19.3 30.3 13.9   $63.5

Lloyds (LLOY.L)&6.8 28.9 22.3   $58.0

UBS (UBSN.VX) 50.6   1.7   $52.3

Royal Bk Scotland 7.0 23.5 19.6   $50.1

Fannie Mae (FNM.N)4.7 26.9 15.4   $47.0

Freddie Mac (FRE.N)5.2 24.4 12.8   $42.4

Washington Mutual 5.1 36.7 $41.8

Barclays (BARC.L) 7.0 16.5 10.3   $33.8

JPMorgan Chase 4.5 10.2 16.8   $31.5

Lehman Brothers****12.5 14.0 $26.5

Santander (SAN.MC)4.8   8.3 10.6   $23.7

Commerzbank/Dresdner (CBKG.DE) 3.9 13.3   4.5   $22.3

Morgan Stanley (MS.N) 10.3 10.1   1.7   $22.1

Wells Fargo (WFC.N)     3.5   8.7   8.2   $20.4

Deutsche Bank (DBKGn.DE)    4.0 11.2   3.1   $18.3

Credit Suisse (CSGN.VX)     3.5 11.9   1.9   $17.3

IKB &&     $14.7

National City*****     $14.0

BNP Paribas+ (BNPP.PA) 2.4   8.0   3.4   $13.8

BBVA (BBVA.MC) 2.7   4.2   5.5   $12.4

UniCredit (CRDI.MI)     3.5   5.1   2.4   $11.0

Societe Gen+ (SOGN.PA) 1.3   3.7   5.8   $10.8

C.Agricole+ (CAGR.PA)   2.7   4.4   3.1   $10.2

ING (ING.AS) 7.1   2.4    $9.5

Bayern LB   1.1   8.0     $9.1

Intesa Sanpaolo (ISP.MI)    1.6   4.5   2.6    $8.7

Goldman Sachs (GS.N)    1.7   4.9   1.9    $8.5

Natixis+ (CNAT.PA) 2.0   2.5   3.1    $7.6

Canadian Imp Bk Commerce    $6.5

Erste Bank (ERST.VI)    0.8   2.5   1.3    $4.6

Standard Chartered (STAN.L)    0.8   1.8   1.1    $3.7

Bear Stearns****** 3.0   0.6 $3.6

Fortis $3.1

WestLB $3.0

Rabobank    0.8   1.7     $2.5

===============================================================

  Total $1,071.7

 (Sources: Reuters/annual reports/company filings)Estimates based on writedowns and losses 

from subprime securities, mortgages, CDOs, 

derivatives and SIVs, and losses on bad loans, 

or non-performing loans. The definition of a 

bad loanis complex and can vary between countries 

and often includes a provision for future loan losses.

Commercial-property debt a slowly building crisis for banks

Banks and other lenders who made the commercial real estate loans that today 

can't be refinanced didn't see the property crisis before it arrived. Many wonder whether 
the enormity of the problem is fully appreciated. "Real estate debt for banks is 
the pig in the python, and the question is when it will be digested," well-known 
European property investor Patrick Vaughan said. "It has looked like it would 
kill the python." Financial Times (tiered subscription model) (12/7)

Dubai World problems ripple through U.K. property market
Dubai World has yet to announce any asset sales as it wrestles with financial 
problems, but when it does, many of its London properties are expected to be on 
the list. Dubai World has $328 billion of property debt outstanding in the U.K., 
and many fear the sudden influx of property into the market could be a strain. 
Telegraph (London) (12/6) 

Overleveraged offices threaten Canada's biggest developer
When Blackstone Group and Canada's Brookfield Properties bought 84 million square feet of some of the best office space in the world in 2006, it looked like a pretty good deal. But now analysts say the transaction was overleveraged. And the owners face $1.6 billion of debt on the deal maturing in 2011. According to one analysis, U.S. commercial property prices will fall 40% to 50% from their 2007 high before they start rising again. Financial Post (Canada) (12/7)

Walter Derzko

When will the recession end ? Part 37 Is a Double Dip Recession a Possibility for Mid-America Region

Sometimes it's better to take a regional snapshot of business conditions then to look at an entire country as a whole. The US agricultural middle  heartland was one of the most resilient regions throughout the recession so far, but now it's showing signs of growing weakness, (just like we saw in the 1930's depression).

[...It's possible that different regions of the USA could experience an L-shaped or roller coaster shaped or W shaped economy.....Walter Derzko   ]

The November Business Conditions Index for the Mid-America region, a leading economic indicator from a survey of supply managers in a nine-state area, slumped to its lowest level since May of this year.

States included in the survey are Arkansas, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, Oklahoma and South Dakota.

[UPDATE--This was confrimed nation-wide by the sliggish, flat or mixed Beige book results for Nov that were released Dec 2, 2009 in the Beige Book at the Federal Reserve ; and look to the Dec 8th survey of USA CEO from the Business Roundtable on layoff intentions and capital spending for the next 6 months in the USA--N.B. so far Canada does not supply similar surveys of CEO intentions--Walter Derzko. ]

The index stood at 47.5, which was down from October’s 51.8 and September’s much healthier 56.2. An index of 50.0 is considered growth neutral.

November survey results at a glance:
• Business conditions index drops to its lowest level since May.
• Inflation gauge indicates increasing price pressures in the pipeline.
• Only 12 percent of firms reported an increase in employment, while 19.5 percent indicated their firms reduced jobs.
• Over 41 percent of supply managers expect layoffs in the months ahead, and only 48 percent anticipate a pay increase in 2010.
• Minnesota and Oklahoma were the only states with an increase in leading indicator.

“This month’s plunge below growth neutral raises the possibility of a double-dip recession for the region. The significant decline in farm income for 2009 continues to weigh on firms with strong ties to agriculture. For example, agriculture-equipment manufacturers have been hard hit by farmers’ reluctance to purchase new equipment. This downturn has been particularly significant for rural areas of the region,” Creighton University Economics Professor Ernie Goss said today.

After rising to growth neutral for October, the employment index sank to 46.1. “Over the past year, the region’s employment level is down by 400,000, or roughly 3 percent of its jobs. Based on recent survey results, I expect the region to continue to lose jobs with unemployment rates rising slightly. This month, supply managers were asked about possible layoffs at their companies; over 41 percent anticipate that layoffs lie ahead. As a result of the weak labor market, only 48 percent of the supply managers expect to receive pay increases in 2010,” said Goss, director of Creighton’s Economic Forecasting Group and the Jack A. MacAllister Chair in Regional Economics.

Rebounding prices have accompanied job losses for the region. The prices-paid index, which tracks the cost of raw materials and supplies, moved above growth neutral for a sixth straight month to 68.0, down slightly from 68.9 in October. “The weak U.S. dollar is pushing up commodity prices across the board. Our wholesale inflation gauge is pointing to elevated inflation at the consumer level as early as the middle of 2010 in my judgment,” said Goss.

At the Fed’s November meeting, its rate setting board announced that it expects the nation’s inflation rate, excluding food and energy, to decline over the course of the next two years. “Supply managers in our survey think that this outlook is too optimistic. I agree with the supply managers and expect inflationary pressures to rise above the Fed’s acceptable range of 1.75 percent to 2.0 percent by the middle of 2010,” said Goss.

Looking ahead six months, economic optimism, captured by the November confidence index, dipped to a still strong 61.1 from 65.4 in October. “Improvements in the housing market, along with very low interest rates, have lifted the economic outlook of supply managers in the Mid-America region,” said Goss.

Consistent with a weak economy, trade numbers were once again anemic. New export orders inched higher to 50.0 from 49.3 in October, while imports sank to 47.8 from October’s 50.7. “The weaker U.S. dollar that is making imported goods more expensive is contributing to the decline in goods purchased from abroad and rising inflation pressures,” said Goss.

Supply managers in the nine-state region continue to reduce inventories. The November inventory index slipped to 43.6 from October’s 44.4. “This is the 14th straight month that the inventory index has been below growth neutral. Even as business confidence has grown, we have yet to record any restocking of inventories for raw materials and supplies. Any significant re-stocking will be a very positive factor for the regional economy,” said Goss.

Other components of the November Business Conditions Index were new orders at 47.3 down from 53.6 in October; production or sales at 46.7, down from 53.5; and delivery lead time at 53.9, down from 57.9.

The Creighton Economic Forecasting Group has conducted the monthly survey of supply managers in nine states since 1994 to produce leading economic indicators of the Mid-America economy.

When will the recession end ? Part 36 Will Russia collapse next after Dubai due to excessive debt-its Achilles heel

Two decades ago Russia defaulted on its debt-would we soon see a repeat? That leaves an interesting question-if both economic super powers-The USA and Russia collapse, would the world be a better place and who would come in to fill the vacume?

 

The NYT in a recent story titled Wake of Dubai, Trying to Predict the Next Blowup said:

"Corporate borrowing surged over the last five years [...]  $200 billion of corporate debt is coming due this year or next  year. [...] companies in Russiaand the United Arab  Emirates account for about half of that borrowing. “This is where the Achilles heel is,”

Companies in several countries face immediate tests. Companies in China  will have to borrow $8.8 billion in 2010; companies in Mexico $11 billion. [...] According to an analysis by JP Morgan Chase, Russian companies borrowed  $220 billion from banks or by selling bonds from 2006 to 2008. That is  the equivalent of 13 percent of Russia’s gross domestic product. In the  Emirates, that figure was $135.6 billion, or 53 percent of G.D.P.; in  Turkey, it was $72 billion, or 10 percent of G.D.P.; and in Kazakhstan,  it was $44 billion, or 44 percent of G.D.P."

Sergij Brin the co-founder of Google writes a story called Russia -Nigeria in the snow in the Russian version of Esquire & offers an eye-opening  comparison table between the sad business  case of Russia and Nigeria. (hat tip to Olena Hantsyak-Kaskiv ). It's translated automatically by Google from the Russian version- Россия — это Нигерия в снегу at  http://www.esquire.ru/articles/30/5minutes/

Brief comparative table

RUSSIA		NIGERIA
Population
142 021 thousand man		140 003 thousand man
Gini coefficient * (according to the CIA)
40.5		43.7
Corruption (according to the company on the Transparency International 2007)
143rd place in the world		147 th place in the world
Environmental pollution as a result of gas flaring (according to World Bank in 2007)
1 st place in the world		2 nd place in the world
Main suppliers of liquefied natural gas by 2030 (according to Gazprom)
1 st place in the world		2 nd place in the world
Rate of increase gold reserves (according to Bloomberg in 2006)
73,5% (1 st place in the world)		73,4% (2 nd place in the world)
Life expectancy men
58		52 года
The number of citizens, confident of the superiority of democracy (according to sociological organization World Values Survey for 2006)
47,8%		44,2%
The level of protection of property rights (according to the International Association of Property Rights Alliance in 2007)
63rd place out of 70		64-th place out of 70
Position in rating the most dangerous places for recreation (according to market research firm Economist Intelligence Unit in 2007)
4 th place out of 10		5 th place out of 10
Number of people who are sure that stability  is more important than freedom of speech (according to the company GlobeScan Incorporated in 2007)
47%		43%
Place in the ranking of media freedom (according to Reporters without Borders "in 2007)
144 th out of 169		131 th out of 169
Mortality (according to the CIA in 2007)
16.04 per 1000		16.68 per 1000
The level of migration (according to the CIA in 2007)
0,28 per 1000		0.26 per 1000
Unemployment (according to the CIA in 2007)
6,6%		5,8%
Place in a rating of "Ease of Doing Business" (according to World Bank estimate for 2008)
106 th out of 178		108 th out of 178
The level of economic freedom (according to The Wall Street Journal  and The Heritage Foundation in 2007)
120 th out of 161		131 th out of 161
Place in the World ranking of peace (Global Peace Index; according to market research firm Economist Intelligence Unit in 2007)
118 th out of 121		117 th out of 121

Walter Derzko

When will the recession end? Part 35 Drivers of new growth?

Last night I attended a talk in Toronto by Jeff Rubin, former CIBC World Markets economist turned author. Rubin was confidently predicting triple digit oil prices again in 6-12 months, but failed to explain his rational and logic behind the jump.

I just don't see it--he says he bases his forecasts on 3d world growth-Brazil, India andn China.

But I just can't see Indian or Chinese middle class consumers making up for lost USA GDP growth by buying their own kitchy consumer products that used to fill Walmart stores in rurual America....they are far more sophisticated shoppers and frankly wouldn't buy their own junk.

Rubin's 6-12 month prediction for triple digit oil is even less probable considering that we have anywhere from 12 to 18 debt bubbles that have yet to burst floating around the globe, not just in the USA but in emerging economies. His logic was that soaring triple digit oil prices drove us into recession, so even if oil prices did spike again, then why would  it not  send us into a double dip recession again?

The ugly inconvenient truth that politicians don't want to talk about is that we have too much excess capacity in too many conventional business sectors-such as banks, services, commercial or residential real estate in North America or in several manufacturing sectors in Asia--which could take a decade to "deleverage" if not more. That loss has yet to be replaced by equivalent job growth in nanotech, biotech, cleantech, alt energytech and smarttech-and it's unlikley that they would be hiring the same people that have been recently layed off, who don't have the requisite PhD and related job experience.

The only wild card that could drive oil prices to triple digits in six months is if all 165 countries unilaterally impose a "carbon tax" but I just don't see that happening at or after Copenhagen...unless Rubin knows something that he's not publicly disclosing..Could all politicians be secretly ganging up on all its citizens with a global carbon surcharge? It makes more sense to do it with water vs carbon, since those shortages are more imminant. However if polticians are clever, they would legislate that the water intake values be downstream of the water/pollution outake valves in a stream--get it? Self regulation.

The two cartoons on the left from  this week's New Yorker magazine express the situation perfectly-without any further comments.

Walter Derzko

When will the recession end? Part 34 More negative USA signposts

The US economy has appeared to stall in comparision to the historic trendline.

Chicago Fed National Activity Index

From the Chicago Fed: Index shows economic activity leveled off in October

The index’s three-month moving average, CFNAI-MA3, decreased to –0.91 in October from –0.67 in September, declining for the first time in 2009. October’s CFNAI-MA3 suggests that growth in national economic activity remained below its historical trend.

Click on table for larger image in new window.

This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967. According to the Chicago Fed the index should move "significantly into positive territory a few months after the official NBER date of the trough" - and that hasn't happened yet.

BANK RISKS
On the Canadian side of the boarder, the Globe and Mail reports that the TD Bank has far more exposure to commercial US loans, many of which could default in 2010

"Toronto-Dominion Bank's exposure to the troubled U.S. commercial real estate market is significantly higher than many of its investors believe, a new report suggests.[....]  TD's filings with U.S. regulators suggest it has about $19.5-billion (U.S.) in exposure, versus the roughly $12-billion that the bank disclosed in a recent presentation to shareholders, says Hamilton Capital, a new Toronto-based boutique asset manager specializing in financial services."

CDS in TROUBLE

Nov. 27 (Bloomberg) -- Wall Street’s system for determining payments on derivatives linked to the debt of defaulted companies is showing cracks less than a year after securities firms changed practices to avoid “Draconian” regulation.

IS US DEPOSIT INSURANCE BANKRUPT?

FDIC Bankrupt? Uh huh.

From CNBC's "Breaking News" banner: FDIC to Ask Banks to Pre-Pay Premiums to Inject Cash Into Deposit Insurance Fund (story developing)

 

Walter Derzko

When will the recession end? Part 33 Société Générale warns clients of Global Economic Collapse scenario

Politicians of all stripes, central bankers and economists employed by stock brokerage firms are all cheering us up-claiming (more like wishing)  that things are getting better on the economic front, yet behind the scenes out of public view, bankers and hedge fund managers are in fact,getting more concerned. ( ..shades of warnings that we saw in 2006 on the Smart Economy blog about the pending US housing collapse and the imploding financial banking system.)

 

The latest to go public with warnings to its customers is the French bank Société Générale who has advised wealthy clients to be ready for a possible "global economic collapse" over the next two years, according to The Telegraph in the UK. They should know since they have been around the recession/depression block several times since their startup in 1863.  In a 68-page report titled "Worst-Case Debt Scenario," SocGen explains that the rescue packages over the past year have merely transferred private liabilities onto government shoulders, creating a fresh set of problems. Debt levels, public or private, are too high as a share of GDP. The deleveraging process will take years to undo the debt problem.

 

SocGen says that under the worst bear-case scenario, the dollar would continue to decline and global equities would retest the March lows.  Property prices would slide again and oil prices would fall back to $50 in 2010. Public debt would explode within two years, with worldwide state debt reaching $45 trillion. Further, the aging population will make it harder to erode debt through growth. As for the U.S., it could take nine years to reduce debt/income ratios to the safe levels of the 1980s.

Full story  here

 

Have you adjusted your business strategy playbook for this contingency? Where you shocked by the financial crisis and did you miss the opportunity windows the first time around in 2007-2008? Do you know how to mitigate the looming threats and seize these new once-in-a-lifetime opportunities again?

 

What could trigger this collapse? It could be a number of things such as a combination of various debt bubbles (18 at last count ) which we have discussed in length before in this blog. One growing possibility  is a country defaulting on its soveriegn debt. This is not unusual and not really out of the ordinary. We  see one or two countries declaring bankrupcy every decade, --remember Russia, or Argentina in the 1908's etc? Well the global banking system can handle a rescue of one or two countries at a time. But, what if this time around we had a cascading failure of a dozen or so failed states like dominoes all collapsing at once? The global economic and financial system is not set up to handle this disaster wild card.

 

Who could that be on that failed states list?

 

The  Top 10 Safest Sovereign Debt List (based on Credit Default Swaps thiis week ) includes Australia,  New Zealand, Belgium, Norway, France, Germany,  the Netherlands, Finland, the U.S., Denmark 

 

Countries with the highest perceived default risk include Argentina, Venezuela, Latvia, Iceland, Lithuania, Kazakhstan, Lebanon, Ukraine and Russia,   See Bloomberg...

 

Wild Card-Dubai (UPDATE Bloomberg Nov 26, 2009) or another oil/gas petro states (such as Russia) may default due to falling commodity prices and growing debt.

 

From Oct 2008.....The creditworthiness of at least 20 countries around the world has more than halved in the last six months as the global credit crisis has deepened. There are growing fears that  other countries such as Pakistan, Iceland, three Baltic states -Estonia, Lithuania, and Latvia, Hungary, Bulgaria, Romania, Serbia, Sweden, Ukraine, Russia, Greece, Italy, (and others in the Eurozone), Turkey, Kazakhstan, Vietnam, South Korea, Venezuela, Mexico, Bolivia and Argentina could all slide into a downward spiral towards bankruptcy..

 

...as Harvard historian Niall Ferguson warns today in a story in the Globe and Mail (There will be Blood Part 2) .."we are now in uncharted waters."

 

Walter Derzko 

When will the recession end? Part 31 US housing still in trouble

Housing Prices May Fall Further

A number of factors suggest housing prices could drop another 10%.

read the full story:

http://www.forbes.com/2009/10/26/housing-prices-case-shiller-business-oxford.html?partner=alerts

..and dropping more then 10%...Detroit Attempts to Auction 9,000 Properties for as Little as $500; 80% Had No Bids  (it begs the question-how much is a house worth that no one wants to buy?)

Detroit house auction flops for urban wasteland

After five hours of calling out a drumbeat of "no bid" for properties listed in an auction book as thick as a city phone directory, the energy of the county auctioneer began to flag.

"OK," he said. "We only have 300 more pages to go."

Full story here http://www.reuters.com/article/gc03/idUSTRE59O17F20091026

Walter Derzko

The real reason for the war in Afghanistan ? Control of rare strategic metals in Afghanistan

Ever wonder why Soviets sent troops and tanks into Afghanistan in the 1970’s into what many returning troops have called a country with God-forsaken mountains and passages. Why are American,  Canadian, British,  and other NATO  troops  stationed there today?

The Taliban, terrorists, drugs, poppies, proximity to nukes in Pakastan, protecting future regional oil pipelines, etc you say…of course...that’s all true now-the official line.

But Afghanistan has something far more precious that the rest of the world wants and  needs-four unexplored rare metals- lithium, caesium, tantalum and niobium.

Another important group in the periodic table  are the so called "rare earth" metals-part of a total class of 17 industrially valuable  "lanthanide" elements near the end of the periodic table, with less then pronounceable names.  Rare-earth  metals are the key ingredients in 21st Century high tech and green technology: Without them, we wouldn’t have smartphones, digital cameras, laptop screens, hybrid car batteries or precision weapons. In the 1930 we had alcohol prohibition. Imagine the teenager boycots around the world with a ban or restriction on strategic metals used in cell phones or cameras?

So brush up on your high school chemistry and the periodic table.

So what metals are on this strategic list?

In a 1981 article in Science, the Journal of the American Association of Science, the following metals were all identified as strategic, but not all as critical metals:

1. Cobalt
2. Chromium
3. Manganese
4. Platinum, not PGMs
5. Titanium

This year’s list, (selected by Ivan Herring at the National Academies for its Critical Minerals for Industrial Use study group)  the following were added:

1. Rhodium
2. Molybdenum
3. Platinum and other PGM's- Palladium etc
4. Lithium
5. Rare Earth Metals -  we use that phrase to denote the 17  "lanthanide" elements running from Lanthanum (La) through to  Ytterbium (Yb) and Lutetium (Lu)

While not high on the currrent priority list for countries fighting in Afganistan, these rare strategic  metals may jump up the list fairly quickly.  I can imagine back room deals being made with Afgan war lords  for mineral exploration rights and wealth sharing agreements even before predicted shortages come to pass.

Some researchers are predicting that we only have 5-10 years of supply left of the currently known and easy-to-get rare earth metals. That's a very short period of time from a strategic planning point of view, some new mines can take a decade to get off the ground-or should I say get "into the ground".( like the new  mine in northern Canada which isn't expected to go into production until 2012 but now might be fast-tracked.)

 

To make matters more uncertain, the USA and the rest of the world buys 90-95% of their  rare earth metals from China, who just threatened a potential export ban or severe restrictions....and all high technology manufacturers around the globe are in a panic.

 

Afganistan, the USA and Canada could become new sources if China bans exports of rare earth metal and rare metals by 2015.

 

According to the NYT:

"A copy of the draft rules,  said China would further reduce its combined annual export quotas for all rare-earth elements to 35,000 tons a year, from 53,000 tons last year and almost 66,000 tons as recently as 2005." The draft policy also clearly stated that exports of dysprosium and terbium were to be prohibited along with exports of three other rare-earth elements: thulium, lutetium and yttrium. By cutting exports, as well as putting a total tax of 42 percent on exports of dysprosium, terbium and some of the other rare-earth elements, Beijing officials have successfully required manufacturers of advanced magnets, motors and other technologies to move their factories to China, where the minerals are readily available."

 

While researching shortage opportunties for my new book on Opportunties, I ran across a  report on Minerals in Afghanistan posted on the British Geologic Survey  

 

It outlines the following:

"In Afghanistan rare metals (lithium, caesium, tantalum and niobium) occur in three main deposit types: pegmatites, mineralised springs and playa-lake sediments"

 

"Globally, rare metals are produced from deposits in these three settings, chiefly in Chile, Argentina, the USA and Turkey. ..[also China & in the future-Canada--Walter Derzko]

Lithium has many uses, for example in batteries, in the glass and ceramics industry, and in high performance alloys for aircraft. Most tantalum is used to produce capacitors that are used in laptop computers, mobile phones and digital cameras. Niobium is primarily used in specialist steels although it also shares some uses with tantalum since it has almost identical chemical properties.

Conclusions and potential

Afghanistan has considerable resources of rare metals in pegmatites, mineralised springs and lake-sediment salts. No systematic modern exploration has been carried out since the withdrawal of Soviet forces and many of the known localities warrant further investigation and exploration based on modern mineral deposit models and techniques."

 

 

Walter Derzko

When will the recession end ? Part 30 The China Factor; the Chinese economy has no legs?

The countries of the western developed world have defacto nominated China, with it's population of over a billion people to lead the world out of this economic and financial crisis.  The Chinese consumer, who has long been known more for their propensity to save money for retirement and not as a "spend thrift consumer", is supposed to replace the American shopper, who is still currently mired in debt, and dealing with continued troubles in residential mortgage defaults and home foreclosures.

What if this assumption is false?

What will the possibility of a collapse of the Chinese economy at some point in the future do to confidence in still fragile financial markets, not to mention your source of supply for many products and manufacturing inputs we count on today?  Many now concede, that the collapse of a single firm-Lehman Brothers in the USA, precipitated the financial mess that the world is now in.

What if a country goes bankrupt? 

Many analysts have not publicly explored this issue but it's not too early for entrepreneurs to start thinking about the resulting consequences, both threats and opportunities that might ensue from this wild card scenario.

It can't happen, you say.  Preposterous !  China is too big to fail, economists will tell you.  They have too much money-they hold 2 trillion dollars in US Treasury bills.

That's in fact why it can happen.

Did you ever stop to wonder?  In the 1930's, why was the Great Depression so much more severe in America then in other country?  Economists who study this in detail with provide many reasons, but a key one is the reliance on exports for continued growth.  In the 1930's America was quickly growing to become the new kid on the block, the new "exporter" to the world, replacing the then-prevalent superpowers, the UK and other countries in Europe.  Today, China has taken over that role, and just like the US, eight decades ago, it has much more to loose then the rest of the world.  As consumers put the breaks on purchasing in a recession, China must close factories and eliminate jobs.

I've always been somewhat suspicious of official Chinese economic data.  For instance, official GDP figures keep rising but paradoxically, industrial electricity usage is flat or dropping.  Just as Russia has admitted to fudging economic data, in the days of the former Soviet Union, I often ask myself - what's to stop the Chinese Communist government from doing the same thing -putting out a false economic image of growth in front of the whole world.  Proof of this deception has been hard to come by until this article, that appeared in the journal Foreign Policy entitled: How China Cooks its Books.[7]

It's an open secret that China has doctored its economic and financial statistics since the time of Mao.  But could it all go south now?  warns the author.

The government estimates that roughly 20 million migrant factory workers have lost their jobs since the downturn started.  But, with "resignations" which are not included in official figures, the number is likely closer to 40 million or 50 million, according to Yiping Huang, the chief Asia economist for Citigroup.  Workers are often given a choice to be fired with lower benefits or resign with higher benefits, distorting official figures.

Every year, just like the old Soviet Union Five Year plan "China announces its annual objective of GDP growth rate.  In Chinese culture, the government has to reach the objective; otherwise, they will 'lose face,'" illustrates the author "For instance, the government announced that it wanted to ensure a GDP growth rate of 8 percent in 2009, and it has become the priority for government officials to meet that objective."

Local, municipal and provincial governmental officials are often the ones who actually fiddle with and cook the books and not the senior bureaucrats.  They have a vested self-interest to manipulate raw economic statistics.  When they reach or exceed the central government's economic goals, they get rewarded with better jobs or more money.  "The higher their GDP figures, the higher the chance will be for local officials to get promoted,"

"China similarly distorts everything from its GDP to retail sales figures to production activity.  This sort of number-padding isn't just unethical, it's also dangerous: The push to develop rosy economic data could actually lead China's economy over the cliff."  cautions the author.

The author provides further proof:

"The government insists that even though China's all-important export sector has been devastated -- contracting about 25 percent in the past year -- a massive uptick in domestic consumption has kept factories producing and growth churning along.  A close examination of retail sales and GDP growth, however, tells a different story.  China's domestic retail sales have risen about 15 percent year on year, but that does not really translate into Chinese consumers purchasing 15 percent more televisions and T-shirts.  The country tabulates sales when a factory ships units to a retailer, meaning China includes unused or warehoused inventory in its consumption data.  There is ample evidence that state-owned enterprises buy goods from one another, simply shifting products back and forth, and that those transactions count as retail sales in national statistics."

Last October, Vice Premier Li Keqiang said in a speech after inspecting China's Statistics Bureau, "China's foundation for statistics is still very weak, and the quality of statistics is to be further improved" -- a brutally harsh admission coming from a top state official.  [7]

When the world finally sees that the Chinese emperor has no clothes, or the Chinese economy has no legs, what do you think will happen?

Will there be opportunities, as well as threats, should this collapse happen?

Of course.  -a political wild card opportunity

Source: [7] Foreign Policy; How China Cooks Its Books

Excerpt from Opportunity;  45 Scenarios to Drive Your Business in Challenging Times by Walter Derzko, published by J. Wiley and Sons ISBN13: 978-0-470-73761-3 ISBN10: 0-470-73761-1 Consumer Release Date: December 29, 2009

When will the recession end? Part 29 Who is more job resilient in a recession? Startups or Large incumbant Corporations?

Who creates more jobs in a downturn? New Start-ups, estisting SME's  or established incumbent corporations?The following chart from a recent Kauffman Foundation study found that over the past several decades that job creation, even in a recession by start-ups has been fairly consistent in the USA , ranging between 250,000 and 375,000 net new jobs created per year (new jobs created minus jobs losses), while total job creation has see-sawed between large positive and negative flucutions for the economy as a whole. ie existing small business (<50 employees) let go 138,000 in the USA in July 2009, according to payroll processor ADP.

When household name corporations lay off anywhere from hundreds to tens of thousands of empoyees it make the front page headlines, but we never hear about the new startups that may pick up from a few to a dozen new staff members faithfully every year, until they grow into a Fortune 500 or 1000 company. They are off most people's radar screens. Many are not considered sexy enough or newsworthy to be covered by business journalists and the mainstream press.

If tradition holds true in the USA, we are likely to see between 400,000 to 700,000 new start-ups created both this year and last. Many of course will fail after one to two years, some will just limp along in survival mode, teetering on the brink, but many will thrive and grow, with a few showing up on the Fortune 500 or Inc 500 in a few years (2020 or 2030). Some may spawn new innovations and scientific discoveries across all sectors, from software / IT to packaging to food processing, just like we saw in the 1930's.

Similarly in Canada, we saw a blip of 30,000 net new jobs through self-employment created in March 2009.

Source: The Chart is from the study--The Economic Future Just Happened, June 2009; pg 12, The Kauffman Foundation