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PeakTrader:

Another E.U. recession and a hard landing in China will have negative effects on the U.S. economy:

Is a Chinese economic slump on the horizon?
January 8, 2012

First, Europe’s slump has weakened China’s trade; Europe buys about a fifth of its exports. Second, housing is showing signs of a bubble and is deflating. Finally, China’s government will have a harder time deploying a stimulus than during the 2008-09 financial crisis. Government debt rose from 26 percent of gross domestic product in 2007 to 43 percent of GDP in 2010.

"...a drop in growth to 5 percent or less...for China’s modernizing economy and huge labor force, a 5 percent growth rate would raise unemployment and social discontent. The adverse GDP swing would roughly equal the U.S. decline in the 2007-09 recession.

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Consumer Spending Growth In China Fades; Spending a Mere 34% of GDP; Can China Fail Like Japan?
June 17, 2011

Government data this week showed retail sales growth slowed to 16.9 percent in May, less than the average of the past five years and a figure that’s inflated by soaring prices for food. By contrast, spending on fixed assets such as factories and property climbed 26 percent, excluding rural households, in the first five months, the fastest pace in almost a year.

Investment has indeed grown far faster than GDP. From 2000 to 2010, growth of gross fixed investment averaged 13.3 per cent, while growth of private consumption averaged 7.8 per cent. Over the same period the share of private consumption in GDP collapsed from 46 per cent to a mere 34 per cent, while the share of fixed investment rose from 34 per cent to 46 per cent.

If this pattern of growth is to reverse, as the government wishes, the growth of investment must fall well below that of GDP. This is what happened in Japan in the 1990s, with dire results. The question is when.

Fixed investment in China is going to collapse at some point. When it does, it will take China's massive property bubble with it. Losses at Chinese banks will be staggering.

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“Tax less, spend less” policy could help China
Jan 9, 2012

Beijing’s fiscal revenue growth has outpaced that of the economy in the past decade and now amounts to 25 percent of GDP, up from 15 percent 10 years ago.

Despite fast rises in salaries, disposable income as a percentage of GDP has been falling steadily.

Lowering taxes for the poor and consumers will make China’s people feel richer, and spend more.

More consumption is necessary to offset sluggish investment and exports in 2012.

Beijing lifted the threshold for paying income tax in June, but could offer bigger concessions to tax-payers.

Personal income tax revenue has risen about 30 percent in 2011, three times as fast as income growth.

High consumption taxes, especially on imported goods, deter spending at home and send shoppers abroad.

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Cutting 1 trillion yuan in China taxes
Jan. 5, 2012

"China’s economy is slowing down.

The export sector, about two-fifths of the economy in value added, may be shrinking.

The property sector, about one-tenth of the economy, may be shrinking too.

The auto and infrastructure sectors, about another two-fifths of the economy together, may have slowed to a single-digit growth rate from about 20%.

The retail sector may still maintain a growth rate in the mid-teens.

The economy as a whole could slow by half from the previous two years.

Electricity consumption, for example, may slow to a 7% growth rate, from 13%.

China can’t afford a lost decade. The country’s population will begin to decline in 2020. It would be extremely difficult to accumulate wealth with a declining, old and aging population.

The growth over the past three years has been funded by taxing efficient activities to fund inefficient ones.

Inflation is one manifestation of the rising inefficiency. It may make the economy bigger in the short term but would lead to crisis in the future.

China’s economy has probably gone backward in the past three years despite the growth.

The government sector has gotten very easy money from collecting taxes and fees and borrowing cheap money from banks. The easy money has caused the massive expansion of the government sector.

China needs to immediately cut taxes by one trillion yuan ($158.5 billion) to support economic growth and boost efficiency."

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PeakTrader said...

Buddy, so, China has been exchanging valuable goods for worth less paper to maintain employment.

What's your point?

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It was inevitable China's export growth to the U.S. would slow:

China Exports to the U.S. (selected years)

1985 $3.8 billion
1990 $15.2 billion
1995 $45.5 billion
2000 $100.0 billion
2005 $243.5 billion
2010 $364.9 billion

U.S. Exports to China

1985 $3.9 billion
1990 $4.8 billion
1995 $11.8 billion
2000 $16.2 billion
2005 $41.2 billion
2010 $91.9 billion

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VangelV says: "the Chinese have traded depreciating consumer goods for productive capacity and infrastructure."

I think, Brian S. Wesbury wrote the following:

"At the end of 2010, foreign investors owned $22.9 trillion worth of US assets. At the same time, Americans owned $20.3 billion of foreign assets.

The Commerce Department reports that Americans have earned $727 billion in income on foreign assets over the past year, a rate of return of roughly 3.6%.

Meanwhile, over the same period, foreigners have earned a much smaller $510 billion in income from their US assets, a rate of return of only 2.2%.

The difference is $217 billion.

Or, another way to think about it is that Americans often buy productive assets abroad – think building a factory in India or China – while foreigners often buy US Treasury securities, which only offer a paltry return.

My comment: Bargains induced U.S. demand for those "depreciating consumer goods."

And what happened to the term you used often before: "Malinvestment," like building empty skyscrapers, offices, and even cities?

The Chinese work hard. They created "productive capacity and infrastructure," but also created a massive amount of waste.

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Buddy, China has to absorb foreign currencies (to keep them stronger) to promote exports and maintain employment. (in reply to Buddy's statement "China's foreign currency reserves also increased 11% in 2011 to $3.2 trillion USD").

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PeakTrader said...

Oil producers seem to know oil prices will continue to rise, and they're correct.

If the U.S. and global economy had a strong recovery, oil would be soaring towards $200 a barrel.

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kmg said...

"If the U.S. and global economy had a strong recovery, oil would be soaring towards $200 a barrel."

You are not a very good trader, are you?

Even $120 will not happen other than brief episodes of just a few days in length.

Oil well *never* stay above $120 for more than 60 days at a time. Never.

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PeakTrader said...

kmg says: "You are not a very good trader, are you?"

You may want to see my comments on oil in the 10-1-11 CARPE DIEM post "How N. Dakota Became Saudi Arabia: Interview with Harold Hamm, Discoverer of Bakken Oil."

You'll discover I was bullish on oil and cited "Oil ETF - USL (currently a little over $35 a share)," which happened to be a multi-year bottom within a day or two (it closed at $45 today).

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PeakTrader said...

kmg says: "Oil will *never* stay above $120 for more than 60 days at a time. Never."

I bet a lot of people felt the same way once about $1,500 gold.

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PeakTrader said...

I think, if the U.S. had a strong recovery in 2009-10, somewhat similar to 1982-83, oil would rise towards $200, which would slow the recovery.

It's estimated a $100 increase in oil prices (to $200) will reduce U.S. real GDP growth 2%.

Also, I suspect, rising oil prices would hit the E.U. and China much harder.

If we got the initial strong real growth through 2010, soaring oil prices would reduce growth.

However, the output gap would be smaller and unemployment lower. Perhaps, oil would remain above $100.

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