Mish's Global Economic Trend Analysis

Wave of Violent Protests, Rioting, Bombings Hits China; Expect More Riots When China's Credit Bubble Pops, Exposing Mountains of Fraud
Small Business Optimism Dips Third Month; Business Owners Cite Lack of Customers, Inflation as Problems; Keynesian Claptrap from Summers
ECB Governor Christian Noyer Warns "Default Would Mean Financing the Entire Greek Economy"; 10-Year Yields at Record High; Emergency Session Underway
Inflation Accelerates in China: CPI +5.5%, Food +11.7%, PPI +6.8%, Fixed Asset Investment +25.4%; Peak Oil Will Slow China

Wave of Violent Protests, Rioting, Bombings Hits China; Expect More Riots When China's Credit Bubble Pops, Exposing Mountains of Fraud

Posted: 14 Jun 2011 09:15 PM PDT

Protests are not uncommon in China. However, most protests have been in rural areas where farmers have had their land stolen by bureaucrats and property developers. The last few weeks have been different. Several large urban areas have seen protests against corruption.

Please consider Wave of Unrest Rocks China

A wave of violent unrest in urban areas of China over the past three weeks is testing the Communist Party's efforts to maintain control over an increasingly complex and fractious society, forcing it to repeatedly deploy its massive security forces to contain public anger over economic and political grievances.

In the latest disturbance, armed police were struggling to restore order in a manufacturing town in southern China Monday after deploying tear gas and armored vehicles against hundreds of migrant workers who overturned police cars, smashed windows and torched government buildings there the night before.

The protests, which began Friday night in Zengcheng, in the southern province of Guangdong, followed serious rioting in another city in central China last week, plus bomb attacks on government facilities in two other cities in the past three weeks, and ethnic unrest in the northern region of Inner Mongolia last month.

Antigovernment protests have become increasingly common in China in recent years, according to the government's own figures, but they have been mainly confined to rural areas, often where farmers have been thrown off their land by property developers and local officials.

The latest unrest, by contrast, involves violent protests from individuals and large crowds in China's cities, where public anger is growing over issues including corruption and police abuses.

Protests in China have been occurring at an increasing rate. This is in spite of the fact the Chinese economy has been growing at 10% a year for a decade.

What happens when China's growth slows to 4%?

Chinese Stock Market Fraud

While pondering implications of slowing growth in China, please consider The big fraud in Chinese stocks by Jim Jubak.

For years, investors in Chinese companies have used the reputations of outside auditors, institutional investors and global investment banks as a proxy for reliable financial reporting. Maybe the disclosed data wasn't always easily understood, transparent or accurate but if a Big Four international accounting firm like Deloitte Touche Tohmatsu signed off on the audit, a big institutional investor like JPMorgan Chase (JPM, news) owned a couple of million shares and an investment bank like Goldman Sachs Group (GS, news) had underwritten the company's initial public offering, the financials had to be OK, right?

Apparently not.

That's what's so depressing, disturbing and disorienting about the fraud recently uncovered at Longtop Financial Technologies (LFT). The company's books were audited by Deloitte, and Longtop still managed to lie about the $332 million in cash it claimed on its balance sheet.

This was no penny stock that duped only unsophisticated individual investors. JPMorgan Chase owned almost 2 million shares that were worth $62 million as of March 31. FMR, which owns the Fidelity mutual fund family, had $261 million invested. Maverick Capital, a hedge fund with $20 billion under management, owned $177 million of Longtop Financial Technologies shares. The lead underwriters on Longtop's 2007 IPO had been Goldman Sachs and Deutsche Bank. In 2009, Morgan Stanley was the lead manager of a sale of more shares.

Since March, more than two dozen companies based in China have disclosed auditor resignations or accounting problems, according to the U.S. Securities and Exchange Commission. The SEC has launched a task force charged with examining accounting at overseas companies listed in the United States.

In other words, Longtop Financial Technologies isn't a bad apple in a barrel of otherwise sound fruit. Instead, it's symptomatic of a big problem that has tainted an entire sector. And because China is too big an economy and too promising a stock market to simply ignore, investors need to figure out how to deal with the problem.

Longtop Financial Daily Chart

Longtop stopped trading May 18. Jubak describes the fraud in great detail in the rest of his post.

Expect Mountains of Fraud

Fraud and credit bubbles go hand-in-hand.

When things are booming, everyone is willing to look away. That's what happened with the US housing bubble as well. Greenspan then Bernanke were both in denial, as was the NAR, real estate flippers, and everyone who stood to profit from the bubble on the long side.

China is currently in the midst of an enormous property bubble and credit bubble, yet some serious cases of fraud have already popped up.

As soon as the Chinese credit bubble implodes, and it will, look for mountains of fraud in the Chinese stock market and the Chinese property market to come to light. Also expect the Chinese Copper Ponzi Financing Trade Gone Wild will implode.

As long as the stock market, the job market, and housing prices hold up, China may be able to contain social unrest. " When China's credit bubble implodes, things will likely be anything but "contained".

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

Small Business Optimism Dips Third Month; Business Owners Cite Lack of Customers, Inflation as Problems; Keynesian Claptrap from Summers

Posted: 14 Jun 2011 10:40 AM PDT

In spite of all the yapping about banks not lending to small businesses, only 8% of businesses report getting loans is a problem. In contrast 25% say getting customers is the number one problem. An increasing number of owners cite rising inflation as a problem.

Please consider Small Business Optimism Dips Lower in May

The Index of Small Business Optimism fell 0.3 points in May to 90.9. This month marks the third monthly decline in a row. The proximate cause is the fact that 1 in 4 owners still report weak sales as their top business problem. Consumer spending is weak, especially for "services," a sector dominated by small businesses. the index makes clear that optimism is moving in the wrong direction: a recession-level reading for an economy fighting its way through a recovery. Also, inflation is a growing concern now with 1 in 10 citing this as their most serious business problem meaning cost side pressures coming in the "back door," not rising food prices at home.

"Corporate profits may be at a record high, but businesses on Main Street are still scraping by," said NFIB chief economist Bill Dunkelberg. "Washington is throwing misdirected policies at the problem, offering tax breaks for hiring and equipment investment, but acting surprised when they don't bear any fruit. The failure to understand why small-business owners are not hiring or investing has resulted in a set of policies that have not been very effective, and Main Street is suffering. The icing on the cake: the growing debt, large deficits, threats of higher taxes, regulations being spewed out by state and local administrations, and the uncertainty of the new health care law—is it any wonder that optimism is down?"

Highlights From NFIB Report

Over the next three months, 13% plan to increase employment (down 3 points from April, down 5 points from March), and 8% plan to reduce their workforce (up 2 points), yielding a seasonally adjusted net negative 1% of owners planning to create new jobs.
Only 5% of the owners view the current period as a good time to expand
Fifty percent of firms reported making capital expenditures over the past six months, and the percent of owners planning capital outlays in the next 3 to 6 months fell 1 point to 20%, a recession level reading.
Sales are down; the net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months lost 4 percentage points, falling to a net negative 9%, with more firms with sales trending down than up.
92 percent reported that all their credit needs were met or that they were not interested in borrowing. Eight percent reported that not all of their credit needs were satisfied, and 49 percent said they did not want a loan. Three percent reported financing as their #1 business problem
The "feedstock" for inflation continued to grow, with the number of owners actually raising average selling prices reaching a net 15 percent, seasonally adjusted. Thirty-one (31) percent reported raising average selling prices, double the percent cutting prices which suggests that average price levels will be rising, and that is "inflation."
The Federal Reserve protests the notion that QE2 liquidity is driving commodity prices as liquidity scours the world to find a higher return than that offered by banks, but there is a strong correlation between Federal Reserve purchases and commodity prices.

Misguided Policies

Why would you want to expand or hire new employees if your problem is lack of customers?

The answer is you wouldn't and neither will small businesses. Yet Obama attacked the problem in January of 2010 with a $33 billion tax credit proposal.

The administration is floating the idea of tax credits once again on the assumption that Republicans may go for tax cuts. However, tax credits to spur hiring were bad policy in 2010 and they are still bad policy today.

Keynesian Claptrap from Obama's Former Top-Economic Advisor

More government spending and stimulus cannot possibly fix a problem that includes too much government spending and misguided stimulus efforts. Yet that is what Lawrence Summers suggests in How to avoid our own lost decade

This is no time for fatalism or for traditional political agendas. The central irony of financial crisis is that while it is caused by too much confidence, borrowing and lending, and spending, it is only resolved by increases in confidence, borrowing and lending, and spending. Unless and until this is done other policies, no matter how apparently appealing or effective in normal times, will be futile at best.

You have to be a Keynesian nutcase to believe more spending is the solution to problems caused by too much spending. Such policies have never cured one problem in history, yet proponents of such policies never learn.

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

ECB Governor Christian Noyer Warns "Default Would Mean Financing the Entire Greek Economy"; 10-Year Yields at Record High; Emergency Session Underway

Posted: 14 Jun 2011 09:24 AM PDT

ECB Governors are pouring on the sap once again today. Mario Draghi, likely the next ECB president opposes steps that aren't "purely voluntary." The irony being there is no such thing at this point of a "pure voluntary" restructuring.

Meanwhile Christian Noyer, warns that a default would mean "financing the entire Greek economy."

Emergency Session Underway as Yields Hit New Record High

Please consider Euro Finance Chiefs Race to Avert Default

Yields on 10-year Greek bonds climbed to 17.46 percent today, a record in the 17-nation euro-area's history, before an emergency session of finance ministers in Brussels.

Luxembourg's Jean-Claude Juncker, who leads the group of euro-area finance ministers, said before the meeting that "all options" will be considered regarding Greece. Austrian Finance Minister Maria Fekter told reporters that members of the group still differ on a bailout model.

ECB Governing Council member Mario Draghi reiterated that the central bank opposes any steps that aren't "purely voluntary." The "cost of a default would exceed the benefits" and a "default would not address the root causes of the crisis," Draghi told lawmakers in Brussels at his confirmation hearing for the ECB presidency.

Christian Noyer, another ECB Governing Council member, said any attempt by euro-area governments to adjust Greek debt that resulted in a default would mean financing the nation's entire economy.

"Our position is extremely simple: if there is a solution that avoids a risk of default, it seems suitable," Noyer told journalists in Paris today. "If you can't find it, it's better to avoid touching the debt. If despite everything you try to reduce the debt and you provoke a risk of default, you'll have to finance the entire Greek economy."

No other sovereign nation is graded as low as CCC by S&P, a spokesman said by e-mail. Moody Investors Service cut its rating on Greece to Caa1 on June 1, leaving only Ecuador as a worse sovereign risk.

Greek 10-Year Government Bond Yield

The market as well as the S&P have priced in a default. The only people not to recognize a default is coming are the ECB, the IMF, and Christine Lagarde, the French finance minister who is running to head up the IMF.

In spite of what the ECB and IMF says, the world will not end when Greece defaults.

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

Inflation Accelerates in China: CPI +5.5%, Food +11.7%, PPI +6.8%, Fixed Asset Investment +25.4%; Peak Oil Will Slow China

Posted: 14 Jun 2011 12:13 AM PDT

I keep repeating that those looking for "inflation" where by prices or by credit expansion, need to look at China, not the US. Please consider China's Inflation Accelerates to 5.5%

China's inflation accelerated to the fastest pace in almost three years in May and industrial production rose more than estimates, sustaining pressure for a further interest-rate increase.

The 5.5 percent annual gain in consumer prices matched the median forecast in a Bloomberg News survey of economists. Production rose 13.3 percent, exceeding a median 13.1 percent forecast. Fixed-asset investment quickened, according to statistics bureau data released in Beijing today.

Food prices rose 11.7 percent from a year earlier as pork and vegetable costs surged.

Inflation has exceeded the Chinese government's 4 percent target each month this year as companies including McDonald's Corp. boost prices. Still, the pace remains the slowest of the so-called BRIC nations, with the latest data showing annual rates of 6.6 percent for Brazil, 9.6 percent for Russia and 8.7 percent for India.

China's producer prices rose a more-than-estimated 6.8 percent in May and non-food inflation accelerated to 2.9 percent, the fastest pace in at least six years, today's data showed.

The increase in industrial output compared with April's 13.4 percent expansion from a year earlier. Retail sales, which are boosted by inflation, rose 16.9 percent after a 17.1 percent gain in April.

Fixed-asset investment excluding rural households expanded 25.8 percent in the first five months of the year, up from 25.4 percent in January-through-April.

Peak Oil Will Slow China

Fixed investment in China is soaring even though infrastructure projects make little to no economic sense. The result is exactly what one would expect: inflation.

However, what cannot go on won't.

Please consider the energy bulletin article China's Energy Future by Robert Rapier.

China uses about two barrels a year of oil per person. In the United States we use 23 barrels of oil per person per year. If China's usage grew to the U.S. equivalent, it would be 85 million barrels a day, which is about the total consumption of oil for the world.

There will be a major disaster long before China consumes anywhere close to that amount. Yet China bulls insist China will keep growing at the same rate. Peak oil says it's not remotely possible.

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

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Tuesday, June 14, 2011

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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