When will the recession end? Part 42 More lies, revisions, paradoxes, deceptions, omissions.

Over a  year ago, I warned our regular Smart Economy blog readers to be on the lookout for well hidden, camouflaged government lies, revisions, over hype, paradoxes, deceptions and omissions that would create a false image of economic prosperity, where none exists and an illusion of "we're back to normal times."

Read the rest of the post below

Walter Derzko, Smart Economy, Toronto

Author of the soon-to-be published book- Opportunity 45 Scenarios to Drive Your Business in Challenging Times,

published by J. Wiley and Sons

ISBN13: 978-0-470-73761-3

ISBN10: 0-470-73761-1

 

Contact us to book your Opportunity Clinic workshop or for a keynote speaker for your next event

The Chinese Paradox

Take China-the fastest growing economy in the world...well maybe? I've always had my serious suspicions about the accuracy of Chinese GDP growth numbers.

100 years ago during the Great Depression, America was hit the hardest economically, because they were the "prime exporter to the world" and in the dirty 1930's when everybody stopped buying US exports, America suffered the most. (Just think...why didn't other countries in the 1930's suffer their own local  Great Depressions? (--well with the exception of the 1933 man-made, forced  Soviet famine in Ukraine, caused by the Soviet Union (read Russia).

China has taken over as the new  "exporter to the world" ( think Japan, America and Walmart) so China should now  be in a recession too and not just America. It just doesn't make any economic sense, unless the Communist government is orchestrating the biggest economic deception and ponzi scheme in the world.

Most savvy entrepreneurs and business people now recognise that all the billion dollar bailouts in China and the USA has only delayed the next great depression, but it didn't eliminate the looming threat of it altogether. All the trillions of dollars of private, business and national sovereign debt accumulated around the globe has to be deleveraged first, one way or another, before things get back to normal. 

[see How China Cooks Its Books  BY JORDAN CALIN  in the widely respected Foreign Policy Journal from 2009 http://www.foreignpolicy.com/articles/2009/09/03/how_china_cooks_its_books ; It's an open secret that China has doctored its economic and financial statistics since the time of Mao and there is nothing to indicate that anything has changed.  But could it all go south now?  --Walter Derzko]

Last June, as  the economy and exports in China were supposedly booming, industrial electricity consumption was dropping, indicating that industry was closing,defaulting and not growing as fast in any case. Since then, the communist Chinese government mysteriously stopped releasing public numbers on electrical demand and usage. I wonder why?

UPDATE: One reader responds with an on-the-ground view:

"...[...]..."in prefecture-level cities --- provincial capitals --- there is huge amounts of construction and consolidation. Huge apartment complexes are being built and older Cold War-era Communist-style housing blocs (nicknamed Khrushchevka's by the Russians--Walter Derzko) are being torn down. The adjustment in figures could also be a realization of energy efficiency as older buildings are torn down and new ones built." ..[..]...Maybe industrial electricity usage has dropped because Chinese companies are becoming more energy conscious and conservative. Lots of people I've met, befriended or interacted with have demonstrated a basic awareness of environmental understanding.

At the same time, most people don't have a deep understanding of anything other than the history of the country and society. Only financial professionals understand finance. Likewise, only teachers understand teaching. Society is very compartmentalized. It makes everything efficient, in a unique way, because not as many people engage in finger pointing criticism." 

We read reports that the  growth of new car sales in China has been growing exponentially but we don't see a corresponding increase in gasoline consumption. Has China figured out how to drive on air or water, or are Chinese officials just storing their new cars in the garage?

And what about all those exports? Where are they going when the cumulative imports of their top trading  partner nations are either flat or still decreasing? Global trade is not just at a comparative standstill, but has nose dived again from a local peak in Nov 2009. The Baltic Dry Index (BDI) is at record lows for the last two years, dipping from 4661 in Nov 2009 & dropping to 2864  on the last business day of Jan 2010.

Surely, the Chinese are more quality conscious and wouldn't be stupid enough and stoop low enough to actually buy and use their own junk and kitchy production at home?

UPDATE: Monday morning Feb 1, 2010, I received an email ( bold and underlining is mine for emphasis) from a regular Smart Economy blog follower --an expat living in China who writes a differing opinion:

Walter ...[..]...This is a fallacy that many economists and critics fall into. What they and you have failed to realize is that the Chinese consumer market is the largest in the world. And it is under-provided. Chinese consumers have historically not been prominent players in the global economy because of their relatively lack of wealth. This wealth is mainly accumulated in Beijing's foreign exchange reserves and sovereign wealth funds, not to mention the coffers of China's political elite.

However, this is changing rapidly. The financial crisis in the US is quickly shifting markets in China, and this effect is playing out now and will continue over the next two or three years. The average Chinese salary is rising, so Chinese consumers are awakening.

Additionally, the government's stimulus intended to get capital into the hands of consumers for consumption. I believe that it was distributed unlike the American stimulus -- which went directly into banks. The Chinese stimulus went into infrastructure projects. The trickle down to the consumer will be much quicker than in the United States. Chinese banks are also more willing to lend credit.

Finally, Chinese merchandise, while traditionally considered "junk", is no longer junk. Check the labels of everything that you own.

Industry leaders all outsource production to China, because that is where labor is most abundant and cheapest. Not to mention the political climate is stable, if not questionable to Western standards.You'll be surprised that most of what you own and consider "valuable" is made in China."

..[...]...I live in China, at the moment, in [ommitted to protect the identity of the email sender].

Here is relatively backwater, but it developing at an amazing pace.

There is construction everywhere, transportation networks are upgrading, business are closing and opening almost monthly. Renovation is rampant. It's all very exciting. This is truly a land of entrepreneurial opportunity, if you can clear your initiative through the authorities. Usually this means merely having the money and the resources required to succeed. Not a bad stipulation.

..or is it an inflating construction bubble, as some Chinese economists at the WEF at Davos are speculating ?--Walter Derzko

PBOC Adviser: Asset Bubbles Are Real Worry For China's Economy
Wall Street Journal
BEIJING (Dow Jones)--Asset  bubbles are "the real worry" for China's economy and the government should properly manage them, a key adviser to China's central ...

 Satyajit  Das, a risk analyst, writing about the current situation in China in a story called Riding the Dragon Part 3 observes:

"The Chinese economic model may be unsustainable. It relies on global trade and investment (much of it export related), which together contribute a high proportion of China's GDP. This trade entails importing foreign components that are then reassembled and then exported. Domestic consumption has been kept low. (this conflicts with the above observation--Walter Derzko) Treasure has been built up in the form of domestic savings and trade surpluses.

Recently, China announced that its $2 trillion treasure would be used to make foreign acquisitions to secure exclusive access to raw material. The problem is that China's treasure is already invested in assets of dubious value and limited liquidity to finance global consumption.

Chinese Premier Wen Jiabao warned that the Chinese growth was becoming increasingly "unstable, unbalanced, uncoordinated and ultimately unsustainable". That was two years ago! Currently, China may be aggravating the problems by massive liquidity-driven stimulus to perpetuate a failed strategy.

Speaking at the meeting of the World Economic Forum in Dalian on 10 September 2009, the Chinese Premier Wen Jiabao repeated his message from two years ago without signalling any change in direction: "China's economic rebound is unstable, unbalanced and not yet solid. We cannot and will not change the direction of our policies when the conditions aren't appropriate." 

So as you can see we clearly have two polar opinions about China. So is this an Equivicality Opportunity? (from the Opportunity Clinic--Walter Derzko)

Deflation vs Inflation?

Commodity prices on a number of industrial feed-stocks and inputs has jumped over 100% in 2009, but producers prices have been relatively flat, since the consumer is tapped out and in debt over their heads. One grocery store chain in eastern Canada has even announced that they will stop charging 5 cents for each plastic grocery bag and absorb the cost since the consumer is overstretched.

Many newspapers trumpeted the story last week about Ford, who announced that it has hired 1,500 new workers for a second shift in Chicago, but most neglected to mention that the starting salary for a new worker was only $14 per hour, half of what older unionized workers got when they first started. These newer union workers will never see the same salary caps in old age or pensions that current longtime auto workers now enjoy....a sign of the continued pauperisation of America.  I see more deflation on the way, and not inflation, which is what the government is truly wishing & hopng for ( to inflate their way out of this debt crisis.)

+5.7 GDP growth in the USA -Real growth or Voodoo economics?

And what about the stellar 5.7% 4Q US GDP number?  While government official and bankers where popping champagne corks, regular investors were selling (read dumping)  shares on Wall Street on Friday.  Google's two founder unloaded (dumped) $10 Billion dollars of their own google shares in the last quarter, taking profits off the table.  Even though they still own $29B in current valued shares, it's not a great vote of confidence for sustained growth in the US economy.

So is the +5.7% GDP increase a sign of real economic growth in the US economy or just a statistical quirk?

The latter, it appears.

It's a statistical aberration if you look at the numbers that make up the GDP.

2 /3  or 60% of the +5.7 GDP growth was due to a process called inventory adjustment-a one time boost to the economic bottom line.

Here's the logic.

As sales on everything nosedived during the 2008-2009 recession, due to excess capacity and falling demand, companies were left with backlogs of excess unsold inventory of all sorts. Instead of making new goods, they first reduced and sold the backlogged inventory. Only then do they begin to restock. This restocking in the 4Q 2009 added the 3.4% to the +5.7% of GDP growth.  Note that this is product going on the back room shelf again, back into inventory and not actually out the door, being sold to the consumer.  Funny how that works-when you add goods to inventory thenthat counts at a positive to GDP, when you actually sell soemthing out the back door it's a negative impact to GDP.

Personal consumption which accounts for 70% of US GDP actually slowed in growth from 2.8% in the 3Q when we had "cash for clunkers' program to 2% annualized growth in the 4Q in the run up to Christmas. Since these are the first estimates of GDP they will likely get revised (probably downward by 30% ) just as we saw in the final 3Q GDP numbers. If you take out inventory adjustments, then  real economic growth for Q4 was only 2.3%. Subtract  30% from that estimate and you get an anemic +1.6% for Q4 GDP growth and that's with $787B in stimulus TARP bailouts. The US needs a minimum of 3% growth just to absorb the new 18-25  year olds who want to enter the workforce, forgetting the 7.2 million people who lost their jobs in the recession.

Another major paradox--If the recession is really over, then why has the NBER been silent on the topic and not officially declared the recession (actually a depression) over?

A more balanced, real-time, comprehensive and realistic economic growth indicator that I like better then GDP is called the Chicago Fed National Activity Index (CFNAI) 3 month moving average, which never gets quoted in the mainstream business media. Most entrepreneurs and managers in my class and workshops have never heard of it. It sharply contradicts the official GDP increase, showing  a slowing and flat. stagnant economy for Oct, Nov and Dec 2009 in the USA.

While Obama was cheer-leading the nation in renewed hope, jobs and prosperity in his State of the Union Address (the deception)-the annual WEF gathering of global CEO's, insiders,  politicians, top bankers and economists at Davos (i.e from the World Bank, IMF, Bank of International Settlements, numerous national Central Banks) were all unanimously (both privately and publicly) warning of a possible double dip recession, or W-shaped recovery (the reality).This falls in line with the over 100 assets, debt and hype bubbles that I've cataloged on the Smart Economy blog last week. It was interesting to compare my list of 100 bubblesto the WEF Davos session on the Next Crisis, which  was broadcast publicly.

But the WEF Davos  session I really wanted to see and hear the most was on Bubbles, which, as expected, was held behind closed doors and  out of public view...sadly no webinar was available.

Trouble with Bubbles

Date: 27. 01.2010 Time: 10:45-12:00

The US dollar is the major funding currency of carry trades as investors borrow at exceptionally low interest rates in search of higher returns around the world.

How can potential asset bubbles be spotted and addressed before they emerge?

[...odd..I had absolutely no trouble at all spotting and cataloging over 100 asset, debt and hype  bubbles in 2009 and into 2010 ..I wonder why mainstream economists are having so much trouble? --Walter Derzko]

At the end of  the Next Crisis Davos workshop (which appears to be a given, a-taken-for-granted assumption by most Davos attendees), participants were offered only 3 choices on what would precipitate the next financial crisis   1) excessive sovereign debt, 2) over-regulation of financial services or 3) or global trade protectionism.

As the Washington Post reports:

"Harvard economist Kenneth Rogoff kicked off the Wednesday discussion with a simple, depressing argument: The banking collapse is morphing into a long-term crisis of government debt.  Instead of financial panic, we now face an "illusion of normalcy," with governments stepping in to guarantee everything.  They've succeeded in fending off another Great Depression -- great!  -- but at the cost of skyrocketing debt." ..[..]...And if history is any guide, he said, financial crises are often followed precisely by a wave of sovereign debt crises a few years later.  "In countries like the United States and Britain, I'm not talking about default, but we certainly may have to see very painful political crises," Rogoff predicted, "belt tightening, higher taxes, slower growth." Rogoff, a former chief economist at the International Monetary Fund, believes we're fooling ourselves if we think otherwise: "We may tell ourselves we're better, we've figured things out .  .  .  We're different.  I submit to you: We're not."

Lord Peter Levene, chairman of Lloyd's of London, was up next, arguing that the prospect of overregulation poses the biggest threat.  "I'm from the government -- I'm here to help," he said mockingly.  "You guys in the industry don't know what to do, so we're going to fix it for you."

He was followed by Jacob Frenkel, a former governor of the Bank of Israel, who maintained that the threat of trade protectionism looms large.

The panelist I like the most and who seemed to be the most candid was Chinese central banker Zhu Min who warned the audience  of new Asian crisis.

Who won the debate?

Washing Post summarizes"

"Yet, even in this World Economic Forum crowd, full of fund managers and chief executives, conventional pro-market arguments didn't seem to resonate.  In an anonymous, electronic vote by the members of the packed auditorium, 50.7 percent agreed that government debt poses the biggest threat, 37.3 percent worried most about protectionism and only 12 percent feared over regulation the most."

Government Market Manipulation & Back room politics

It doesn't hardly surprise me that Bloomberg reports that:

"Russia urged China to dump its Fannie Mae and Freddie Mac bonds in 2008 in a bid to force a bailout of the largest U.S. mortgage-finance companies, former Treasury Secretary Henry Paulson said. Paulson learned of the “disruptive scheme” while attending the Beijing Summer Olympics, according to his new memoir, “On The Brink.” The Russians made a “top-level approach” to the Chinese “that together they might sell big chunks of their GSE holdings to force the U.S. to use its emergency authorities to prop up these companies,” Paulson said, referring to the acronym for government sponsored entities.  The Chinese declined, he said."

"Russia sold all of its Fannie and Freddie debt in 2008, after holding $65.6 billion of the notes at the start of that year, according to central bank data."

Don't be surprised !!

I'm sure the US government and other governments have secretly  orchestrated market swings that go in their favor with the Trillions of dollars it holds in your and my tax monies. The estimated cumulatively accounts for the US government  likely totals over  $110 trillion dollars or $12 trillion for the State of California alone.  These secret, off-the-public-balance-sheet,  rainy day investment (CAFR) accounts,  reported in Comprehensive Annual Financial  Reports (CAFR) or Annual Financial Reports are traded by Goldman Sachs and other investment banks. (see Walter Burien's eyeopening video "The only game in Town on http://www.cafr1.com )

And here is my favorite head scratcher:

The tiny African country Ghana has revised its GDP, not by a tiny fraction but up by 50% - Go figure !!! and now projects a 22 % growth in GDP in 2011. ..[next African Growth Bubble?--Walter Derzko]

Ghana’s GDP May Be Revised Up by 50%, Standard Bank Says

By Emily Bowers

Jan. 28 (Bloomberg) -- Ghana may revise up the size of its economy by 50 percent, after underestimating growth for years, Standard Bank Plc said today.

“The implications are clearly huge,” Stephen Bailey- Smith, head of Africa research, said in an e-mailed report.  “Many of the risk measures that we calculate will have a significantly lower denominator,” including fiscal and current account deficits.

While reducing the relative size of the budget deficit, the revision may also cut the impact of oil production, which will begin later this year and was expected to push economic growth to 22 percent in 2011, Bailey-Smith said.  The revision would give a greater weighting to more dynamic sectors of the economy, he said.

“It is our understanding that the Ghanaian authorities (confirmed by the IMF) believe that they have been underestimating GDP and thus GDP growth for many years,” Bailey-Smith said.

No-one was immediately available at the Finance Ministry to comment.

The Bank of Ghana will probably cut its prime lending rate, currently at 18 percent, by 2 percentage points next month, Standard Bank forecast.  The domestic currency, the cedi, will strengthen to 1.35 to the dollar by the end of this year, Bailey-Smith said.  The currency was trading at 1.4305 as of 11:09 a.m. local time.

I wonder where all the hot "carry trade money" that sloshes around the globe is heading to next, after $ $608.5 million dollars just exited from the Russian equity market in the past 12 weeks-another equity bubble that was overinflated and ready to burst.

Have you seen more government lies, revisions, paradoxes, deceptions and  omissions?

Email me and I'll post them.

Walter Derzko, Smart Economy, Toronto

 

Author of the soon-to-be published book- Opportunity 45 Scenarios to Drive Your Business in Challenging Times,

published by J. Wiley and Sons

ISBN13: 978-0-470-73761-3

ISBN10: 0-470-73761-1

 

Contact us to book your Opportunity Clinic workshop or for a keynote speaker for your next event