Sunday, May 29, 2016

CHINA SLOWDOWN TO COMPOUND AND CONSUMPTION WILL SLOW DOWN

Chinese economy has taken a major step in consolidation of its industries across the all segments. This is very positive step for the global economy as china’s excess capacity was dumping goods across the globe. Many reports and filings have been done on the table of WTO by many countries against china for its dumping of goods. China even leads major slow down of production due to its cheap import of goods. Finally china took the decision of consolidation. But this consolidation will lead to significant slowdown in the Chinese macro economy which will be reflected not only on Chinese economy but also on the global economy in the coming days. China will face and will make the world also face some very tough days as consumption and gross fixed assets formation and demand comes down. If another recession comes china will not find avenues for growth as there is hardly any space to deploy stimulus or QE. Its time for relook on the business strategy in China and the type of investments and returns one should expect from the same. Further the shadow banking might get exposed which will create a down fall for the global economy. In between their are many economists who will argue that China has enough treasuries to withstand slowdown. Well in that case get ready for redemption and markets will fall like pack of cards.

One of the biggest blows will go to consumption sector which have been the key for the companies who opened their shops in china as well for the country itself too. As consolidation of industries happens employees and labours will get unemployed. This is the key place where consumption will decline and when around 3 million or more than that numbers of employees will be unemployed then this will spook significant drop in consumption. Many US subsidiaries are there in china who will find drop in sales and revenues in the coming quarters. Further people will be more inclined for savings rather than for investments or consumption as job market uncertainties will rule them.  Many economist will argue that they will change their job lines but its not so easy as their an involvement of an significant level of skill for change over. Secondly when the Chinese economy is struggling with stock market collapse and slow down I find these unemployed people will add more fear among the society and will give a strong lesson to the others which will compound the slowdown of the consumption pattern.
The government has announced that it will come up with packages to support the slowdown but the fact is that will not spook consumption within the economy as people will be uncertain about new job opportunities and how long the current crisis of consolidation will rule.  Chinese economy will face more hardships in the coming days as its massive pool of labour is going to rest.  Now with consolidation of industries new manufacturing and ancillary machines, spare parts, and new investments into fixed assets will decline. As new fixed assets formation declines there will be a significant slowdown in those industries which will affect on wages growth in the near time.  This will further accelerate the consumption slow down and will widen the income inequalities. People will be more inclined to save rather than going for investments. It’s a wild fire which is silently going to catch the global economy. Debt levels has also piled off in the corporate china which will take a toll on the economy once the slow down grows.  China’s total debt rose to a record 237 per cent of gross domestic product in the first quarter. Real estate investment accounted for more than 14% of GDP in 2015, and this slowing growth has put downward pressure on the entire economy. Beijing has turned to massive lending to boost economic growth, bringing total net debt to Rmb163tn ($25tn) at the end of March, including both domestic and foreign borrowing.  Now those who are betting that china have enough surplus of foreign treasuries to support its fall then be prepared to witness massive sell of the markets once that situations come alive.
Its being found that over the last 2 decades china has created a mess of over capacity it’s now getting ready for paying the price. I find that income inequalities will widen up in china from this consolidation phase and this will kill the growth of the china as its being expected in 2016 and 2017.  We will witness slowdown in the Chinese economy and this will spook overseas investments by china rather focusing on domestic investments in china. Obviously when consolidation is the key buzzing word investments within the economy will decline and will look for opportunity in the other countries. I feel pity for the Chinese people as they have been guided wrongly by creating excess capacity in all industries which is not required over the next decade as the world is also busy in creating excess capacity.

Sunday, May 15, 2016

US IS HEADING FOR RECESSION NUMBERS SPEAKS DIFFERENT STORY

The US economy is not completely out of the ICU and its seems that very soon another recession will follow as the level of taking steroids of survival have exceeded. The point of discussion is that US economy has never learnt to get growth without borrowing. We ignored the alerts before also and now we are repeating the same. 2006 US Housing market was booming and during the same time signs of mortgage bubble was evident but media and diplomats ignored and we all paid the price in 2008.  History is repeating and this time also we are deaf. Employment growth has happened but how its quite difficult to figure out. One way is to find out the pattern of the data related to food stamps and other Medicaid facilities. Media sources are back again to create immense growth optimism but I beg to differ with the same as I can find recession is in the wings and that’s too post election of US.  Crude and Commodity have killed major industries and the ancillary industries too. Reserve capital is getting depleted and the country is getting in high levels of insolvency.  The U.S. essentially owes its lenders a staggering $13.9 trillion, or “$42,998.12 for every man, woman, and child.

 The debt levels are not coming down and corporate profits have taken a toll followed with share holders buy back strategy of share price hike has also come down. The press and financial projections have been quite strong fake as the real numbers post something very awkward for these projectors.  Reuters’ headline proclaimed that , “U.S. retail sales rise strongly, boost economic outlook”: where as the  Retail sales of $450.89 billion in April were down 2% from $460.1 billion in March.  It has become a fold paradise where everyone is looking for growth of the macro drivers but they are forgetting that these tricks have been played a decade earlier also.

 Predication and analysis of the economic growth are more important rather than just finding green shoots of growth. For example it’s a decade now that US housing market was in the Golden era of growth and during the same time every economist informed that US housing mortgage bubble will burst which was ignored by the politicians and by the world economy. We never dreamt of Lehman brothers getting sold. We witnessed that too. Now for example since July 2010 motor vehicle sales reported in the monthly retail sales data have risen at a $354 billion annualized rate. Now this is growth shoot for the economy but quickly looking into auto loans outstanding which have increased from $699 billion to $1.052 trillion.

The debt levels of the US economy in all segments are just simply growing. Recession will come back again as these mortgages will come for haunting for repayments and that’s where the income levels are low. From Credit cards, to mortgage loans, student loans all of them have only surged. The below chart depicts the story of the debt.



 Wage growth have been slower and job creation will take a halt as most of the share holders wealth creation have been buy back of shares which has stopped now. Just over 2 million supervised manufacturing workers, or about a third of the total, need food stamps, Medicaid, tax credits for the poor or other forms of publicly subsided assistance. Over here also government has tried to deploy the tax payers money. From 2009 to 2013, federal and state governments subsidized the low manufacturing wages paid by the private sector to the tune of $10.2 million per year. Here's a list of the top 10 states based on the share of their manufacturing employees that need food stamps because their wages don't fully cover the cost of household nutrition. Food stamps and Medicaid/CHIP dependence are particularly important to track because they are direct subsidies for immediate living and healthcare needs for adults and children while the refundable tax credit is disbursed annually, based on money taken from paychecks throughout the year. 

In between if you measure the average of retirement we find a country like India situation where people beyond 70. In US workers aged 50 and older are planning to retire a little later in life, at a median age of 67, according to the survey of the Transamerica Center for Retirement Studies' survey. Age of working has extended since shift in Social Security benefits to a later retirement age, and with the demise of traditional pensions (meaning the average American has to do more personal saving for retirement, something we as a country are well behind in), it makes sense that people would be waiting longer to retire. This is the key reason why the macro growth numbers should not be taken positively and cross verification and trend analysis with logics needs to be implemented. One this is clear that US did not learn to spend without borrowing. Consumption will pick up & citizens are clear that bailout will soon follow to save them.

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