Posted: 27 Apr 2011 01:00 PM PDT

In the wake of the tsunami and earthquakes, Japan's Retail Sales Slump Most in 13 Years

Japan's retail sales tumbled the most in 13 years last month as the nation's record earthquake shut stores and discouraged households from spending money.

Sales slumped 8.5 percent in March from a year earlier, the biggest decline since March 1998, according to a statement by trade ministry in Tokyo today.

Toyota Motor Corp. led a record drop in auto sales in March and domestic output plunged 63 percent after disruptions in its supply chains and factory closures. Production will return to normal by December, the automaker said.

Prime Minister Naoto Kan unveiled a 4-trillion yen ($49 billion) extra budget last week to rebuild the northeast area that was devastated by the earthquake and tsunami. The spending aims to provide more than 100,000 temporary homes and clean up debris from the disaster.

The magnitude-9 quake and ensuing tsunami crippled the Fukushima Dai-Ichi nuclear plant operated by Tokyo Electric Power Co., causing radiation leaks and power shortages in eastern Japan. The disaster left more than 26,000 people dead or missing, according to the National Police Agency.

S&P Cuts Japan Debt Outlook to "Negative"

Japan's debt-to-GDP is the highest in the G7 by far. It is about to get worse with government spending poised to soar in cleanup efforts. Please consider Japan Debt Outlook Cut to 'Negative' by S&P on Reconstruction

Japan's sovereign-rating outlook was cut to "negative" by Standard & Poor's as the nation's reconstruction needs following last month's earthquake will likely add to what's already the world's biggest debt load.

The outlook on Japan's local-currency debt rating, at AA-, the fourth-highest grade, was lowered from "stable," S&P said in a statement today. The company had reduced the rating by one step in January in the first cut since 2002. Moody's Investors Service said last month the disaster may bring forward the "tipping point" for the country's bond market.

Today's decision adds to pressure on Prime Minister Naoto Kan, who has yet to detail how the rebuilding will be paid for and how he plans to rein in longer-term fiscal deficits. As public spending increases, revenue will likely decline because of the economic hit from the disaster, with a report today showing retail sales tumbled the most in 13 years last month.

Moody's today reported no change to its negative outlook for Japan's Aa2 grade rating, the third highest, after a reduction from "stable" in February because of political gridlock. Japan's public debt will probably increase 5.8 percent to 997.7 trillion yen ($12.2 trillion) in the year started April 1, from a projected 943.1 trillion yen last year, the Finance Ministry said in January.

The Organization for Economic Cooperation and Development last week urged Kan's government to at least double a sales tax to 10 percent and to implement increases as soon as possible. The nation's total public debt will reach 204 percent of gross domestic product this year, according to the OECD, the highest level among nations tracked by the group.

Message from Mike in Tokyo Rogers

My friend "Mike in Tokyo Rogers" writes ...

Hello Mish

My friends and I have been running relief trips to the hardest hit areas of the tsunami. The real disaster is 30,000 dead or still missing.

We need all the help we can get and was hoping you could put up a link up to our "Black Water" video to help us get the message out.

The guys who made the video are professionals so this is BBC quality work.

Ishinomaki - Black Water

If the embedded YouTube video above does not play, please click on Ishinomaki - Black Water

Those who wish to donate to the crisis can do so via the Japanese Red Cross.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Taking Silver Profits - Swapping Silver for Gold

Posted: 27 Apr 2011 08:55 AM PDT

I have held physical silver and gold investments continuously for 5 years, and on and off before that. Today I cashed out of silver, trading it for an equal dollar value of gold.

For the sake of full disclosure, my physical precious metals holdings are now entirely at GoldMoney and I have an affiliate relationship with them.

As a result of that relationship, I will likely be back in silver soon, but in small amounts, and hopefully at decreasing prices. If silver crashes, I will consider switching a considerable percentage of my gold for an equal dollar value of silver.

This is not a top call. I have no idea how high silver will go. No one else does either. I came close to cashing out near $30 but figured I would ride out a correction to low to mid $20's. That correction never came.

However, one thing I have learned is parabolic moves seldom end well. Please consider the following charts.

Silver Monthly Chart

click on chart for sharper image

Gold Monthly Chart

click on chart for sharper image

Disorderly Silver Advance

The advance in gold has been steady and orderly. In contrast, the advance in silver has been anything but orderly.

Parabolic spikes in anything typically retrace a significant part of the move, sometimes all of it.

Note the spike in silver from $4 to $8.50 retraced all the way back to $5.45 and the spike from $5.45 to $21.40 retraced all the way back to $8.40.

Parabolic Spikes Unstable

Given the unstable nature of parabolic and hyperbolic spikes, I believe the price of silver is highly likely to revisit the low $20's at some point. Thus, I see no point in chasing silver higher here. Moreover, except for pure speculation, I see little reason to even hold silver in this spike.

Both gold and silver seem susceptible to a pullback, but especially silver because of the unstable nature of its advance. For now, I will take my chances with gold.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Bogus Threats to US Reserve Currency Status: No Country Really Wants It!

Posted: 27 Apr 2011 03:35 AM PDT

In spite of all the hype regarding the Yuan as a reserve currency I have stated many times recently that discussion of the Yuan as a reserve currency is nothing but ridiculous hype.

My reasons are:

The Yuan does not float, and there is no indication China is prepared to allow the Yuan to float any time soon
China is a command economy
In China, property rights and civil rights are questionable
Chinese banks are insolvent because of malinvestments in infrastructure and an enormous property bubble

Michael Pettis at China Financial Markets has a similar list of reasons, phrased slightly differently. However, Pettis does add one key item I overlooked: "Very deep and open domestic bond markets"

From a recent email post Pettis writes ....

Is it time for the US to disengage the world from the dollar?

Last week on Thursday, the Financial Times published an OpEd piece America Must Give Up The Dollar I wrote arguing that Washington should take the lead in getting the world to abandon the dollar as the dominant reserve currency.　

My basic argument was that every twenty to thirty years – whenever, it seems, that the American current account deficits surge – we hear dire warnings in the US and abroad about the end of the dollar's dominance as the world's reserve currency.　 Needless to say in the last few years these warnings have intensified to an almost feverish pitch.　

But I think these predictions about the end of dollar dominance are likely to be as wrong now as they have been in the past.　 Reserve currency status is a global public good that comes with a cost, and people often forget that the cost is much higher than most countries are willing to accept.

Just as importantly as a public good, dominant reserve currency status requires a number of characteristics.　At a minimum these include

Ample liquidity
Central bank credibility
Flexible domestic financial markets
Minimal government or political intervention
Very deep and open domestic bond markets　

With the exception perhaps of the euro, which may or may not emerge in the next decade on a more rational basis than it currently exists (albeit with more than one defection), no other currency has the necessary characteristics that will allow it plausibly to serve the needs of the global economy.

And no other country, not even Europe, will be willing to pay the cost.　 This is the important point.　 If there is any chance that the dollar's status declines in the future, it will require that Washington itself take the lead in forcing the world gradually to disengage from the dollar.　

Ironically, this is exactly what Washington should be doing.　 Conspiracy theory notwithstanding, claims that the reserve status of the dollar unfairly benefits the US are no longer true if they ever were.　 On the contrary, the global use of the dollar has become bad for the US economy, and because of the global imbalances it permits, bad for the world.

This cost comes as a choice between rising unemployment and rising debt.　 The mechanism is fairly straightforward.　 Countries that seek to supercharge domestic growth by acquiring a larger share of global demand can do so by gaming the global system and actively stockpiling foreign currency, mainly in the form of, but not limited to, central bank reserves.　　 This allows them forcibly to accumulate domestic savings while relying on foreign demand to compensate for their own limited domestic demand.

In practice, dollar liquidity, limited Washington intervention, and the size and flexibility of US financial markets ensure that these countries always stockpile dollars.　 There is no real alternative to the dollar, and most other governments would anyway actively discourage massive purchases of their own currencies because of the adverse trade impacts.　 Why?　 Because if foreigners accumulate euros or yen at anywhere near the rate they accumulate dollars, they would force Europe and Japan into massive current account deficits, and neither Europe nor Japan has any interest in seeing this happen.

Foreign acquisition of dollars, in other words, automatically forces the US into running a corresponding current account deficit as foreign policies that constrain consumption in the accumulating country require higher consumption abroad.　　 Active trade intervention in countries that engineer large trade surpluses have to be accommodated by rising trade deficits elsewhere, and because reserves are accumulated in dollars, this "elsewhere" is the US.

Without government intervention, there is no reason for domestic investment to rise in response to policies abroad.　 On the contrary, I would argue that with the diversion of domestic demand, private investment might even decline.　

So in order to limit the employment impact, capital flows into the US have to finance additional US consumption.　 Americans, then, are forced to choose between higher unemployment and higher debt, and in the past the Federal Reserve has chosen to encourage higher debt.　

If cheaper consumption is such a gift, it is hard to explain why attempts by the US to return the gift to countries whose consumption costs are artificially high – demanding for example that these countries revalue their currencies and so reduce costs for their own consumers – are always so indignantly rejected.　 No one, it seems, is eager to lower their consumption costs at the expense of employment growth, and yet reserve status may very well require this trade-off.

The massive imbalances that this system has permitted are destabilizing for the world because they permit large and unstable debt buildups both in countries that over-produce, like China and Japan, and those that over-consume, like the US.　 If the world were forced to give up the dollar, there is no doubt that there would be an initial cost for the global economy – it would reduce global trade somewhat and it would probably spell the end of the Asian growth model.　 But giving up the dollar would also lower long-term economic costs for the US and reduce dangerous global imbalances.

For this reason the US should take the lead in shifting the world to multi-currency reserves in which the dollar is simply first among equals.　 The cost of maintaining sole reserve currency status has simply become too high in the past three decades and is leading inexorably to rising American debt and worrying global imbalances.

No One Really Wants Reserve Currency Status

I am quite sure that Pettis has this correct. After all, if reserve currency status was such a gift, why doesn't China take the steps that would make it possible. Why doesn't Europe?

The fact is, for all their bitching, nearly every country on the planet does not want to relinquish their "export growth model". Every week there is some trumped-up report by someone about how China is trading more in the Yuan with Russia and Southeast Asia countries. In the grand scheme of things such trade in Yuan nearly meaningless, not representative of a significant adjustment.

Mathematically, the fact remains, the US runs a huge trade deficit, and countries accumulate US assets, most frequently US Treasuries.

The Fed is fighting back by attempting to force the US dollar lower. Mathematically every currency cannot be weak relative to each other. Central bank actions to achieve the impossible are behind the rise in commodities, especially silver and gold.

Unstable Mess

The irony in this mess is those cheering the demise of the US and the US dollar look at baby-step moves countries like China make in that direction as if that would hurt the US.

The reality is the US would be better off (and so would the world), were the US to lose reserve currency status. Nonetheless, don't expect it any time soon. China is not ready and Europe is in the midst of a sovereign debt crisis that will not go away for years.

Meanwhile the global imbalances between the US and the rest of the world grow. The imbalances within Europe grow with the ECB's One Size Fits Germany policy as well as Trichet's insistence there will not be a writedown in sovereign bonds of Greece, Portugal, and Ireland. Finally, China is overheating, trapped in an unsustainable export-and-build-infrastructure model that is clearly on its last legs.

How and when this mess resolves is anyone's guess, but it likely will not be pretty. Meanwhile, global complacency in equity markets is at record highs.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Wednesday, April 27, 2011

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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