China floating is more about the Euro than bowing down to US pressure

From the WSJ:

A Chinese central bank adviser gave an upbeat assessment on the euro's long-term outlook and said global financial markets may have overreacted to the European sovereign-debt crisis.

Li Daokui, an academic adviser to the People's Bank of China, also told a financial forum on Friday that a major appreciation of the yuan is "impossible" because China's international payments are relatively balanced.

He repeated the official stance that the yuan float will be in two directions.

His views may not necessarily reflect the central bank's thinking, though he is at a position that his view can be heard by decision makers.

The comments came after the yuan rose to a modern-era high against the U.S. dollar on the eve of the Toronto summit of the Group of 20 industrialized and developing nations. Many analysts said the yuan would return to gradual gains in the week ahead, as Beijing won't be willing to see sharp rises in the yuan hurting local exporters.

A week ago, China removed its peg to the U.S. dollar, in place for nearly two years, returning the currency to a managed-float system that references the yuan to a basket of currencies that includes the euro. China's officials have said the move will help ease the pressure on the yuan to appreciate against the euro amid the euro-zone debt crisis.

China does what it wants for their own sake and doesn't really care about international pressure. They see the potential for the Euro weakening against the US dollar to threaten their exports. If they remained pegged to the US dollar, they lack tools to combat the Euro decline!

China moved to a float why? in order to have the flexibility to manage their currency against the Euro, NOT because the US wants to brand them a currency manipulator. Perhaps the Euro might rise in this case. I believe currency traders have caught on this idea. Euro shorts better be careful!

China's peg was released on the weekend, Wednesday Euro rallies while stock markets fall.

This is shaping out to be a battle royale! China and US versus the EU. Is China taking on more than it can chew in managing its currency against both US and Europe?

Quantitative easing, everyone is doing it!

I'm not bullish on US stocks for a major reason, I think growth will slow. The only avenue of growth for companies is through exporting (i.e. Weak dollar) which is what James Altucher of Formula Capital is arguing for a bull market. I agree with him in a perfect world where the world's interest is the US' interest...... however,

James Altucher of Formula Capital is a moron. I watched some of his videos on CNBC. His whole bullishness is predicated on what is going to drive stock market profits is the low dollar. He fails to consider one huge monkey in the room, China. China is NOT going to sit by idly while US and Europe trash their own currency. China will devalue their yuan and join in the race to the bottom.

So, until China decides to devalue the yuan, the markets will do alright. But, once the devaluation happens, the stock markets sell off. The US dollar will appreciate, and guess what, the profits of US companies will go with it. That is why I'm not bullish on US stocks. In this case, there is nothing the FED can do. They can ease even more, but I think they won't once China shows the US they have the gonads to wreck their own currency and go toe to toe with US in the trashing of their own currency.

In simple terms, the Yuan will not go up against the US dollar, stock investors will see this (they don't now) and slash their growth estimates for stocks, thus sending markets back down into correction or a bear market.

Honestly, I don't even think central governments care about gold. So what if it goes to ten or twenty thousand an ounce? Honestly, they will care more about what is happening with their economic well being and whether people are working than what happens if some shiny metal is worth ten or twenty thousand bucks an ounce.

Why housing defaults matter

The US has a problem in over-leverage. The banks are leveraged on a capital ratio of 1:12.5, in other words, they keep some 8% in reserves. If a bank has 10% reserves, housing defaults that would decrease their reserves by 3% would put the bank in seizure territory. If the company is public, the stocks will go to zero when seized.

Looking at the following graph, we can see how quickly the default rate has jumped 2% in over a year. Say, 2% defaults result in decrease of reserves by .75% on average, then it only takes 6% of homes defaulting to get the 3% decrease in reserves. We have some major problems.

Housing default (source: calculated risk)

Bank problem list is at 767, up from 653 in March. This problem list has NEVER decreased. More banks seem to be eligible every time I see the FDIC's press release. They are slow-walking the bank seizure process.

If by now the banks can't get their housing delinquencies under control, this year, another wave of foreclosures is going to happen due to the second wave of housing interest rate resets. I doubt anyone believes with another wave of resets happening that the default rate will get lower.


As you can see, the loans which will experience payshocks start increasing around now, through June and July, then pretty much into next year and into 2012. Option Arms default rates are just as bad as subprime.

Banks will write these assets off..and when they do, rest assured their reserves will decrease, and stock prices will go down. Either that or we will have another 5 trillion of QE by the Fed.

To buy or not to buy, Malaysian stocks

The market is around 1250 right now. I'm not a buyer at this time. Lets see where the next month goes. My feeling is three part-

ONE. Liquidity is still there, so eventually prices will run up in the longer run. Bailouts will keep coming, the second wave of housing problems are starting to hit (hence second round of Quantitative easing), the Euro is facing just the beginning of their member states' problems, and the US will likely need to bailout their states that overspent.

TWO. We will have had only the first negative month. Perhaps it will subside to the upside the next month, but maybe not if momentum players have anything to say about it.

THREE. Equities may not go up forever. They are capped by economic growth, dividends payouts, and input costs. The things that can go up, however are bond yields as investor concerns over the "stealth default" through inflation, and commodities as more money chases fewer goods.

75000 S&P futures seller found

Looks like they found the culprit. If you can't find it here, try zerohedge. A trader selling 75000 E mini futures. 75000 *50 *1150 = $ 4,312,500,000. It appears they found some counter party to then take the other side and sell short sell 4.3 billion dollars of S&P stock. That may be enough to do it.

It's a bit ridiculous. Anyways, you heard it here first how leverage can absolutely wreck the market. The truth is, if someone wants to sell the futures, how can it be manipulation? There's no limit on how many futures one can sell in one go, although the authorities maybe should put limits. Remember though, that if there is a huge unwinding of leverage from liquidity being drained, there's not much one can do.

Dow Crash of 10%

While it is interesting how the media try to spin 10% drop in the DOW on Friday as an error or mistake, the truth is that it doesn't take much for the market to do that. The 1987 crash didn't really have many events causing the 20% drop.

The latest reason seems to be a huge amount of options were bought causing a major bank to sell a lot of stock when they wrote the option. This is one of the more likely reasons.

Another possible reason is the selling of futures which equates to the counter party hedging their futures position with stock. The counter party needs only put up some margin, while the seller buys the stock to hedge. A 20% margin would equate to 5 times the margin amount of selling power. This is another way to create some massive selling power.

I mentioned earlier that the buying of futures could cause a massive rally. I also mentioned what could happen if the futures weren't rolled over, massive selling power. Options buying and selling have the same dynamic. Writers buy or sell the underlying position to hedge against the buyers.

I would think the real reason behind the crash would probably be a dynamic of either futures or options. All this talk about high frequency trading, mistaken orders, failed circuit breakers probably are not the root cause despite what is mentioned in the media.

If the US is stock buying futures, what does that mean?

This is to follow up on the previous post that the US government may have been buying futures to artificially increase the stock market. In the following, I give a hypothetical scenario if the government had bought futures, and when the positions expired, what would happen.

Suppose the US government may have put bought index futures at some date a couple of years away. Given a margin requirement of say...10%, 100 billion worth of futures over 6 months would translate into some $1 trillion of buying power.

When people buy these futures, the sellers will have to buy the index to hedge their positions. They would buy 1 trillion dollars worth of stock so they might deliver these to the government some years away.

So, what happens when the government closes out their positions by offsetting at some earlier date. Well, the opposite happens, there will be no buying power and a lot of shorts. In fact, all the institutions which took the other side of the trade don't have to hold their stocks any more and will more likely sell the positions. As we approach the futures date, we will get a lot of selling, to the tune of a trillion dollars of selling power in the stock market.

When closing out futures contract, the government could theoretically take delivery, but that would translate them into putting up even more money for the basket of stocks they take delivery for. This won't happen. I don't know how the treasury could justify a hundreds of additional billions to congress just to purchase stock.

The last option is that they could roll over the futures position to an even further date. The government would close out, the counter parties sells one trillion worth of stocks, and reopen, the counter parties buy another one trillion worth of stocks. Nothing much except a flat and choppy market would ensue in this case.

Either the treasury/fed could perpetuate the positions or close them out.

Possible manipulation on the stock market by US government?

Usually I tend not to write about this kind of speculative thing, but I find this rally fishy and evidence presented by zerohedge, although circumstantial, shows most of the rally since September 2009 has taken place in the after hours. The data might be coincidence, but yes, the US government boosting stock prices through buying futures would be a perversion of government intervention in free markets and this is showing the world that the stock market can be gamed through the futures market.

The world has believed that investing is something that is based on the performance of companies and economies. If they have to account for whether or not the government will buy or sell futures to game the market, then basically they will have wrecked decades of faith and trust by the public in markets. More people will know that the market is really a gamble and investing will have become a thing of the past. Why would people invest in the market if they know that it can be manipulated?

Of course, this after hours manipulation might just be nothing but an anomally but hopefully this thing gets sorted out or people will just lose faith.

Who's going to buy the US government debt?

One of the biggest questions that deflationists have to answer versus the inflationists is:

who will buy all the debt issued by the government to keep interest rates down?

Inflaionists say that no one will buy this government debt and thus rates will go up and we will have inflation.

Deflationists have had trouble giving a credible sounding answer to this one. But it is important to address as low government rates are a basic tenant of the deflationist camp. I've had difficulty coming up with a reasonable answer to this myself and I'm skeptical of all ideas on deflation as well as inflation. I'm concluding that the debt issued by the government will be financed by savers.

The next question is when will this happen as it hasn't happened yet? Well, we have to consider China and foreign buyers of US debt. From Barrons:

the real question isn't whether the U.S. will pay back what it's borrowed from abroad. In essence, can foreign purchases of Treasuries keep up with the widening deficit? That's the question posed by Greg Blaha and Ryan K. Malo of Bianco Research in a note to clients.

Back in September 2007, foreign purchases of Treasuries equaled 270% of new issuance, they note, as they sucked up the available supply of U.S. government securities in sight. That was before the budget deficit exploded last year owing to the economic collapse and the cost of the federal bailouts. By September 2009, foreign investors were taking down only 16% of Treasury issuance.

Obviously, foreign purchase of debt is way down and will not be enough. Next, we consider the consumers/savers. The main reason why they have not been putting their money in treasuries is that some of them have been compelled to spend on cars and houses. They've been liquidating what little they have saved. Q3 GDP showed consumers saved 3.3% of personal income as opposed to 4.9% of income in Q2. [1] (Personal savings as a percent of income on line 34)

Anyhow, now we look at the other buyer, the Federal reserve.

The 10 year treasury rates have been going higher as the fed slows their treasury purchases. The Fed ended their treasury purchase in August. The fed's balance sheet also reflects this action. An inflationist would say once the Fed stop purchases, the rates will go up and inflation will soar. This has been happening as of late, probably why gold is up and proving inflationists right so far. But this is only somewhat true for a short period while the consumer transitions to saving again. This is an inflation "head fake."

Fed Balance Sheet (notice the treasury purchase portion of assets has flattened)

Coincidentally, gold has gone a lot higher during this void where the fed ended their buying and the thrifty part of the consumer is spending. Make no mistake, though that consumers will soon return to their saving ways. Of course not all savers turned to consumers at the government's incentive. They are probably the ones to thank for keeping the rates as low as they have been. I imagine after all these stimulus measures have taken effect, the consumer will revert back to saving and de-leveraging and buying treasuries. When the consumer/saver returns to increasing their savings rate, the treasuries will once again increase increase in value.

While I'm not too sure when this will happen, I can't imagine it will take too long, maybe a couple of months. When we see people stop buying into stimulus programs, saving more in the BEA personal income and outlays reports, and the prices of treasuries start to firm up is when we will have the treasury asset class strengthen again for quite a while unless of course the government manages to whip out another carrot. Even then the US government has only so many bullets before people start to lose patience.

Taiwan-Malaysia trade suffers, asian economies won't recover without US

From the Business Times:

TRADE between Taiwan and Malaysia is expected to be at US$10 billion (US$1 = RM3.50) this year, a decrease from the US$12.3 billion posted in 2008.

According to the Taipei Economic and Culture Office in Malaysia, this is due to the global financial crisis.

"The decrease is not much as the Taiwanese government has been trying to help local manufacturers continue exporting while providing opportunities to promote their products," director of the economic division, Lin Min-Li said yesterday.

In 2008, Taiwan's imports from Malaysia were at US$6.8 billion while exports stood at US$5.5 billion.


Besides that, Lin said the Taiwanese government was also helping and encouraging investors to look at five important markets in South East Asia - the Philippines, Indonesia, Malaysia, Thailand and Vietnam.

"Among the five countries, Malaysia is the most successful for investment. We prefer Malaysia due to the stable political climate, as well as good manufactured products.

"There is still room for Taiwanese investors to come to Malaysia," he added.

According to Lin, Taiwan ranked number three in terms of foreign direct investment in Malaysia for the first five months of this year.

We see a 20% drop in trade between Malaysia and Taiwan. When you look at Malaysia's largest trading partners, Singapore, US, Japan, China, and Thailand, each one of them have based their policies on growth through exports, with the exception of US. Even worse, each one of these countries' largest trading partner is the US. Like I said before, this is exactly the reason US needs to recover first for Malaysia to recover. It takes more than talk to say the world economy has diversified itself away from the US, especially Asia.

US Unemployment, Autos, will a car rebate program work for Malaysia?

With the latest employment report from the US showing some positives, I'd just like to point out that the unemployment numbers have been showing job losses but the unemployment rate has decreased from 9.5% to 9.4%. This number can vary month to month but over a period of a few months, will straighten itself out. I don't think people should be jumping for joy just yet.

Some people have been criticizing auto sales in the cash for clunkers program to be just a subsidy for a short time. This is true for the specific industry, next year, the car sales will certainly fall without the cash for clunkers program. But people have been failing to realize how much economic windfall comes from a single car sale. Getting car sales up could be one of the most cost effective ways to help bring the global economy and American economy on track.

A single car involves thousands of parts from all over the globe. The heavier, more expensive parts will likely be made in the United States. I can think of no single purchase which has positive effect on so many industries than autos. Houses by comparison, involve mainly building materials and have a larger price tag, but the sheer number of components pales to a single car.

This brings me to my next point. It is likely a general rebate program such as the one the US uses in it's "cash for clunkers" program will not work in Malaysia. Why? Malaysia doesn't have a huge auto industry and mainly imports most of its auto component needs. The market is too small. Such a program won't do much to help the Malaysian economy. Also, large components can be made by nearby countries and shipped at a relatively low cost, thus increasing the economic leakage of such a program to other countries.

Of course, they could give an even bigger rebate to the Malaysian car manufacturers. That would work much better. It is important though, that the more expensive components are manufactured in Malaysia. Given the high tax rate of autos here, and that a lot of used cars are still worth quite a lot of money, much higher than RM5000 the government is refunding, it is just too small for people to seriously consider taking up the offer. They should probably up the rebate to 20% of the cost of a new car.

Cash for old cars, similar to Malaysia's, wildly popular in US

From the Star Online:

WASHINGTON: The White House said Thursday it was reviewing what has turned out to be a wildly popular "cash for clunkers" program amid concerns the US$1 billion budget for rebates for new auto purchases may have been exhausted in only a week.

Transportation Department officials called lawmakers' offices earlier Thursday to alert them of plans to suspend the program as early as Friday.

But a White House official said later the program had not been suspended and officials there were assessing their options.

"We are working tonight to assess the situation facing what is obviously an incredibly popular program," White House press secretary Robert Gibbs said of the Car Allowance Rebate System.

"Auto dealers and consumers should have confidence that all valid CARS transactions that have taken place to date will be honored."

Gibbs said the administration was "evaluating all options" to keep the program funded.

A Transportation Department official said the department was working with Congress and the White House to keep the program going.

The administration officials spoke on condition of anonymity because they were not authorized to speak publicly about the discussions.

The CARS program offers owners of old cars and trucks $3,500 or $4,500 toward a new, more fuel-efficient vehicle.

Congress last month approved the program to boost auto sales and remove some inefficient cars and trucks from the roads.

The program kicked off last Friday and was heavily publicized by car companies and auto dealers

Through late Wednesday, 22,782 vehicles had been purchased through the program and nearly $96 million had been spent.

But dealers raised concerns about large backlogs in the processing of the deals in the government system, prompting the suspension.

A survey of 2,000 dealers by the National Automobile Dealers Association found about 25,000 deals had not yet been approved by NHTSA, or nearly 13 trades per store.

It raised concerns that with about 23,000 dealers taking part in the program, auto dealers may already have surpassed the 250,000 vehicle sales funded by the US$1 billion program.

"There's a significant backlog of 'cash for clunkers' deals that make us question how much funding is still available in the program," said Bailey Wood, a spokesman for the dealers association.

The clunkers program was set up to boost U.S. auto sales and help struggling automakers through the worst sales slump in more than a quarter-century.

Sales for the first half of the year were down 35 percent from the same period in 2008, and analysts are predicting only a modest recovery during the second half of the year.

So far this year, sales are running under an annual rate of 10 million light vehicles, but as recently as 2007, automakers sold more than 16 million cars and light trucks in the United States.

General Motors Co. spokesman Greg Martin said Thursday the automaker hopes "there's a will and way to keep the CARS program going a little bit longer." - AP

At an average of $4000 per rebate for a new car, the US government has just goosed auto sales by some 250,000 units in just a week. Just to keep things in perspective, 10 million sales is equivalent to 192,000 units per week on average. This will push up the annual run rate to over 10 million most likely.

Auto sales are a major component for world trade as the US generally imports most of its components for cars. China may sell a lot of cars, but most of the components are made in China. Getting the sales up is a necessary positive to get the world economy back on track.

California Credit Rating Cut Close to Junk After IOUs

From Bloomberg:

California’s credit rating was cut for the second time in as many weeks by Fitch Ratings after a stalemate over how to close a $26 billion budget deficit forced the most-populous U.S. state to pay some bills with IOUs.

Fitch lowered its rating of California’s general obligation bonds by two steps to BBB from A-, placing the debt two ranks above so-called high-yield, high-risk junk ratings, and said the state may be cut further. The credit-rating company last lowered its assessment of California on June 25.

California, the largest issuer of municipal bonds, last week began issuing IOUs for the second time since the Great Depression as Governor Arnold Schwarzenegger and lawmakers remained deadlocked over the budget cuts needed to make up for revenue lost because of the recession. California Controller John Chiang said the step was needed to conserve cash.

“The downgrade to ‘BBB’ is based on the state’s continued inability to achieve timely agreement on budgetary and cash flow solutions to its severe fiscal crisis,” Fitch said in a statement.

The Fitch action affects $79 billion of debt -- $69.3 billion of general obligation bonds, rated BBB, and $9.7 billion of appropriations credits, rated BBB-.

Schwarzenegger, a Republican, and Democratic leaders of the Legislature remained divided over how to fix the budget after a meeting in the governor’s office late yesterday. Assembly Speaker Karen Bass, a Los Angeles Democrat, said she was “discouraged” and criticized Schwarzenegger for seeking to link government reforms to a budget deal.

The article is mainly self explanatory, but for a state government to endure downgrades to a level of BBB speaks exactly how bad things are at the moment. States almost never get that kind of treatment. The US government treasuries seems to be the only place now where money is safe at the moment. This could change of course.

US Job Report suggests that Green shoots are mostly Yellow weeds

Some excerpts from RGE Monitor:

The June employment report suggests that the alleged ‘green shoots’ are mostly yellow weeds that may eventually turn into brown manure. The employment report shows that conditions in the labor market continue to be extremely weak, with job losses in June of over 460,000. With the current rate of job losses, it is very clear that the unemployment rate could reach 10 percent by later this summer, around August or September, and will be closer to 10.5 percent if not 11 percent by year-end. I expect the unemployment rate is going to peak at around 11 percent at some point in 2010, well above historical standards for even severe recessions.

The other element of the report that must be considered is that, for the summer, the Bureau of Labor Statistics (BLS) is still adding between 150,000 and 200,000 jobs based on the birth/death model. We know the distortions of the birth/death model – that in a recession jobs created within firms are much smaller than those created by firms that are dying. So that’s distorting downward the number of job losses. Based on the initial claims for unemployment benefits, it’s more likely that the job losses are closer to 600,000 per month rather than the figures officially reported.

The other important aspect of the labor market is that if the unemployment rate is going to peak around 11 percent next year, the expected losses for banks on their loans and securities are going to be much higher than the ones estimated in the recent stress tests. You plug an unemployment rate of 11 percent in any model of loan losses and recovery rates and you get very ugly losses for subprime, near-prime, prime, home equity loan lines, credit cards, auto loans, student loans, leverage loans, and commercial loans – much bigger numbers than what the stress tests projected.

There are also signs that there may be forces leading to a double-dip recession, sometime toward the second half of next year or towards 2011. If oil prices rise too much, too fast, too soon, that’s going to have a negative effect on trade and real disposable income in oil-importing countries (US, Europe, Japan, China, etc.). Also concerns about unsustainable budget deficits are high and are going to remain high, with growth anemic and unemployment rising. These deficits are already pushing long-term interest rates higher as investors worry about medium- to long-term stability. If these budget deficits are going to continue to be monetized, eventually, toward the end of next year, you are going to have a sharp increase in expected inflation - after three years of deflationary pressures - that’s going to push interest rates even higher.

For the time being, of course, there are massive deflationary pressures in the economy: the slack in the goods markets, with demand falling relative to supply-and-excess capacity. The rising slack in labor markets, which are controlling wages and labor costs and pushing them down, implies that deflationary pressures are going to be dominant this year and next year.

But eventually, large budget deficits and their monetization are going to lead – towards the end of next year and in 2011 – to an increase in expected inflation that may lead to a further increase in ten-year treasuries and other long-term government bond yields, and thus mortgage and private-market rates. Together with higher oil prices driven up in part by this wall of liquidity rather than fundamentals alone, this could be a double whammy that could push the economy into a double-dip or W-shaped recession by late 2010 or 2011. So the outlook for the US and global economy remains extremely weak ahead. The recent rally in global equities, commodities and credit may soon fizzle out as an onslaught of worse- than-expected macro, earnings and financial news take a toll on this rally, which has gotten way ahead of improvement in actual macro data.

I pulled some interesting sections from RGE Monitor's article by Nouriel Roubini regarding the current US job numbers.

Last month's job losses were quite decent at 360k compared to the trend of 500k job losses a month. But this blip might be explained by the distortions caused by the birth/death model that the BLS is recently employing. Adjust 360k by 150-200k jobs a month, we are back at 500k job losses a month, about where the trend currently is.

Higher unemployment has a huge effect on the stress tests., so bank losses will get larger. Analysts using the stress test results for their earnings projection will need to adjust for higher unemployment.

Deflationary pressures will be around for this year and next, adding on to the idea that the recent commodity rally looks like a head fake.

And this "W" shaped recovery a lot of economists are talking about seems more like a recovery with ups and downs instead of a double bottom. The recovery will be weak, recessions will now be weak, basically, a stagnant economy. Inflation might rise further into the future.

Fed keeping treasury purchases unchanged

From Bloomberg:

The Federal Reserve refrained from increasing its $1.75 trillion bond-purchase program, said the pace of economic contraction is slowing and predicted inflation will remain “subdued for some time.”

Chairman Ben S. Bernanke is watching to see how quickly the economy can recover from the deepest recession in five decades: Orders for durable goods unexpectedly rose in May, a government report showed today, while unemployment continues to climb. The Fed also wants to quell concerns that the $1 trillion expansion in its balance sheet will fuel inflation, pushing bond yields higher and crippling any rebound in the economy.

Today’s decision was unanimous. The Fed’s $300 billion Treasuries-purchase plan is scheduled to end in mid-September, according to the FOMC statement at the conclusion of the March 17-18 meeting, when it was announced. The Fed also committed to buy up to $1.45 trillion of housing debt this year. At its current rate, the Fed will reach the $300 billion of Treasuries by late August.

Total assets on the central bank’s balance sheet grew $1.17 trillion over the past year to $2.07 trillion as the Fed loaned to banks, commercial paper issuers, and purchased bonds outright to support the flow of credit to consumers and businesses.

The Fed will surely keep interest rates low, that's a bygone conclusion. I think the most important part of this meeting is the purchases of securities and whether it will go up or not. The Fed at this point seems to believe that we are in a recovery and are finally backing up their words with their actions by not lending anymore monetary help with additional purchases.

This statement of confidence is a bit speculative at this point in time. They should expand the purchases but not necessarily spend all of it. Make the purchases at their discretion. Unemployment needs to go down a lot more. I think they are now suddenly caught up with the current market hype of "green shoots."

Even though there are economic indicators showing that the economy is improving, I'm highly skeptical because the unemployment rate is still going up and an incredible rate. We are getting less job losses but higher unemployment. It's tough to predict when unemployment will turn because of changes in the mix of people looking for work.

Economic indicators are great, but unemployment is the bottom line. I won't be entirely convinced until it starts to turn. When people keep seeing 10% unemployment, I think they will think twice about spending. Lets see if the Fed is right or wrong in calling the bottom.

Can't have your cake and eat it too in export dependent economies

"Live by the sword, die by the sword" prevails as a prominent theme throughout the recent financial crisises. China has its part to blame in fattening the US economy by providing cheap exports and fueling their consumption binge.

No one should really depend on China to bring their economies back from the brink. China's prosperity depends in large part on the US prosperity. Their whole financial system is basically built on exporting everything they possibly can to the US. So whoever would depend on China utlimately also depend on the US. I can think of several southeast asian countries that fit the mould.

The countries which piggy back on others through exports enjoyed some fantastic propserity will also share some fantastic pains during this global recession. Those countries will never be decoupled from global growth as long as exports make up a large portion of their gdp.

Prime Mortgages downgraded

From Marketwatch:

S&P said it lowered ratings on 102 classes from 33 U.S. prime jumbo residential mortgage-backed securities that were issued from 1998 to 2004. The rating agency also affirmed ratings on 669 classes from 32 of the downgraded deals, as well as 34 other deals.

"The downgrades reflect our opinion that projected credit support for the affected classes is insufficient to maintain the previous ratings, given our current projected losses," S&P said in a statement.

Oops, looks like subprime isn't the only problem, the whole housing market is!

10% unemployment expected in a few months

From the AP:

The White House says double-digit unemployment is coming sooner than previously acknowledged.

White House spokesman Robert Gibbs says the president expects the nation will reach 10 percent unemployment within the next few months.

In an interview with Bloomberg last week, President Barack Obama said he expected the nation to reach 10 percent unemployment sometime this year.

The current unemployment rate reached a 25-year high of 9.4 percent in May.

President Obama is at least starting to realistically assess what happens when the unemployment reaches at least 10 percent. So, with this expectation, the next obvious question to his advisors will probably be how will things look with 10 percent+ unemployment. It's a step in the right direction at least. Stress tests will need to be re-done as well.

Templeton Investment's view on possible hyperinflation

Excerpt from Barrons:

Some economists fear excessive stimulus will lead to hyperinflation in coming years. Does this worry you?

Although the size of the stimulus programs and injections of liquidity around the world are cause for concern, and commodity prices have moved sharply higher. Excess capacity still exists in many industries. This, combined with high unemployment rates, should act to contain inflation for the foreseeable future.

I'm going to agree with this, and to add to this we are still going to see a decrease in prices for the housing portion of inflation. This will suppress the cost of living. But low inflation or deflation doesn't mean that commodity prices will be low as well. Their prices can act on their own individual demand and supply situations.

Capacity is a tricky thing as well. Certain industries that haven't really gone through a big growth cycle might not have excess capacity. Any industry related to housing probably has lots of excess capacity. Perhaps tech might not have so much excess capacity as their boom years happened in pre-2000 and they probably have worked a lot of it off.

So, this is my point, when looking at inflation from this kind of a "surgical" perspective, due to all this liquidity sloshing around, we will see certain industries and commodities outperform relative to others.

This outperformance will not necessarily be due to growth of the industry or demand for the commodity, but relative lack of capacity to produce more combined with the excess liquidity being channeled there.

Checking out US CPI data

First, I'd like to note that energy and transport prices have more or less settled. But transport can be viewed as a derivative of energy prices since the main cost in transport is energy. So basically, energy prices have seemed to stop dropping. It's a good thing, so we will have inflation in the future right? I mean, it looks like all commodity related prices have hit bottom. It's seems so to me.

Wrong! Look at housing! that hasn't dropped at all! It's dropped the least of all the categories for the last 3 months. Last I checked, prices of houses in the US have dropped some 50%. The prices Americans spend on housing/rent will surely follow once people realize that there are other places out there that rent a lot cheaper than their current mortgages and rentals. Housing seems to be like a semi truck, slow to move but once moving, it will be very hard to stop.