Global decoupling? Then answer this conundrum

[c1ue]

Re: Global decoupling? Then answer this conundrum

GRG,

The $50B number represents what additional consumer spending from the populations of the Middle Eastern countries might be able to add. I further noted Russia and said that there might be $60B/year extra spending possible - again in a best of all worlds scenario, with $100B or perhaps even $150B in China/India best case.

This yields a counterbalance of $260B from the Middle East, Russia, and China/India as a best case scenario - still far far short of $450B.

As for the Middle East in particular, given the Middle East's population (Saudi Arabia, Oman, UAE, Iran, Iraq, Yemen, and Jordan) collectively makes $540.8B per year, I think a $50B incremental increase in spending is a very generous allocation.

As for governments, you may think $50B is nothing for the governments of these countries, but $50B/year in perpetuity is a lot of spending when it represents 9% of the per capita income of the entire region - meaning every living soul there.

Contrast this with the roughly $13T that the citizens of the US make every year. We're living the legacy of the $418B federal deficit in 2004 and $318B federal deficit in 2003; these numbers represented only slightly over 3% and 2% respectively of the US economy in those years.

For the Middle Eastern governments to spend $50B/year extra would mean 9% additional spending vs. the total economy; this has to hurt someone, somewhere, somehow - although it equally will benefit someone, somewhere, and somehow.

As for surpluses - as someone who works in the oil business, I'm sure you are aware of the incremental effects of prices over cost levels.

Should oil/metal commodity prices decline as a function of decreased US spending, this would disproportionately reduce Russia's (and any other commodity dependent economy's) income.

Thus the surpluses could disappear very quickly - as the Clinton budget 'surpluses' disappeared.

Finally as for SWF's - sure, they can throw some money around.

But the scale of money we're talking about means the SWF's must continue to gain cash - which in turn which assumes prices will not fall and/or demand will not reduce - or the SWF's will begin spending capital.

You may not agree that the $450B US spending shortfall could happen; you may believe that the rest of the world has the money to throw around; but I think you would agree that the degree of spending required to make up a $450B per year US spending shortfall would be unprecedented in history for the rest of the world - as a percentage of the income being made.

[c1ue]

Re: Global decoupling? Then answer this conundrum

Russia's trade surplus in 2006 alone was $139 Billion

GRG,

I also caution you to not conclude trade surpluses equal money available for a government to spend.

From: http://en.g8russia.ru/g8/members/russia/

In 2004, the budget surplus was 686.5 billion rubles, or 4.1% of GDP, budget revenues were 3,422.26 billion rubles, and budget spending was 2,735.745 billion rubles.
The federal budget for 2005 was approved on the basis of a projected GDP of 18,720 billion rubles and inflation of 7.5% - 8.5%. Planned budget revenues are 3,326 billion rubles (17.8% of GDP), planned spending is 3,047 billion rubles (16.3% of GDP), and the planned budget surplus is 278.1 billion rubles (1.5% of GDP).

In other words, and assuming an exchange rate of 28 rubles/dollar, the entire Russian federal budget was only $97B in 2004 and $103B in 2005.

Sure, there was a surplus, but I don't see where even an extra $50B could be easily extracted and spent.

In contrast, the US federal budget was $2.3T in 2004, and $2.4T in 2005.

http://en.wikipedia.org/wiki/United_...federal_budget

Again, the scale of spending in the United States at the federal and consumer level - even with the dollar falling - is gargantuan in comparison with the rest of the world.

[zmas28]

Re: Global decoupling? Then answer this conundrum

http://www.nytimes.com/2007/12/16/opinion/16roach.html



From Stephen S. Roach

What is the right number to look at in the context of global (de)/coupling from a gross liquidity perspective? If one were to use the trade deficit as a proxy for the (net) contribution of the American consumer to global liquidity, this would yield a number closer to about 600-700 billion. Rising oil prices are causing higher import spends.
(The 9.5 trillion is likely the 72% of GDP but wouldn't most of that spend be domestic and not trade related?)
If we saw this number reduce by 5% that would compute to about $30-35 billion, a significant but much smaller number.

[c1ue]

Re: Global decoupling? Then answer this conundrum

What is the right number to look at in the context of global (de)/coupling from a gross liquidity perspective? If one were to use the trade deficit as a proxy for the (net) contribution of the American consumer to global liquidity, this would yield a number closer to about 600-700 billion. Rising oil prices are causing higher import spends.

Interestingly enough, the BEA.gov data for Petroleum products shows $302B in petroleum imports in 2006, with $260B in 2007 ex. November and December.

Comparable time periods between 2006 and 2007 = $256.7B vs. $260.5B - not a huge difference given overall trade deficit was $830B in 2006.

However, the $528B deficit excluding petroleum is not a single or even thousands of transactions; the $9.5T number Roach speaks of is the cascade of spending --> earning --> spending from the 'base' of the economy ultimately to the deficit.

If I use the physics analogies:

total energy in system = kinetic energy = 1/2 mass*(velocity squared) = $9.5T consumer spending

movement of money = momentum = mass * velocity = forward impetus - friction = imports - exports = (2006 numbers) $1.02T - $1.85T = $830B deficit

Then mass would be the actual 'basic units' of money changing hands.

Playing with these 2 equations algebraically yields v = 22.9, then m = $36B

Purely fictional nonsense, but applying the same methodology to China:

China GDP in 2006: $10.17T
China consumer spending in 2006: 36.4% of GDP = $3.7T
China trade surplus in 2006: $177B

https://www.cia.gov/library/publications/the-world-factbook/print/ch.html
http://www.iht.com/articles/2007/09/...iness/yuan.php

v = 41.8, m = $4.23B

The numbers themselves are almost certainly bogus, but this gives you an idea of the relative scales: net cash in/outflow in the US is something like 9x equivalent to China while the 'energy' of each dollar for said in/outflow is almost double in China vs. the US.

This despite GDPs that are similar ($10.17T vs. $13.3T)

So what I'm saying in different words is that there ain't no frickin' way China can make up for US spending!

[zmas28]

Re: Global decoupling? Then answer this conundrum

In regards to my point on the effect of increasing oil prices on imports, I was referring to more recent data. From a recent Financial Times article:
"US import prices and trade deficit climb
By Daniel Pimlott in New York
Friday Jan 11 2008 13:25

Import prices rose at their fastest pace in at least 25 years in 2007, underlining the threat of stagflation as the US enters a period of slower economic growth, according to figures from the Commerce Department.

The data come as other figures showed the US trade deficit widening in November, suggesting even weaker growth in the final quarter of the year.

Import prices rose 10.9 per cent last year, the fastest yearly increase since records began in 1982. The price of petroleum imports rose by 50 per cent over the year. Excluding energy, import prices rose by 3 per cent.
......
......

The higher import prices data came after the US trade deficit widened in November to its highest level in 14 months as oil prices soared.

Total exports in November rose at a slower pace than imports, leaving the deficit up by $63.1bn, much larger than the $60bn that economists had expected.

A 17.2 per cent jump in crude oil imports drove total imports 3 per cent higher. Excluding volatile oil and aircraft trade, exports dipped 0.1 per cent, the second monthly decline in a row."
Link: http://us.ft.com/ftgateway/superpage...1401725&page=1

As to whether increased demand from China and elsewhere will be "enough", I would think the answer depends on "enough for what?" and how deep the US recession gets. The market seems to be pricing in a recession (movement from equities S&P 500 to bonds over the last 6 months), but thinks China and India will be relatively unscathed. Both Shanghai (20%) and Mubai Sensex (10%) took a hit a few months back, but are now on an upward trend, diverging from the US market. You can clearly see the divergent trend on any chart from November or so. Will this trend continue depends on how bad the news gets in the US in coming months. Personally, I think there might be a hit down the road.

How much is global growth going to slow depends on how bad things get here and also any knock on effects of the credit squeeze. With the credit problems seemingly spreading to the credit card sector (not yet to auto loans according to GM), this could spell big problems. On the other hand, it looks like the Fed is on a rate-cutting campaign and there are emerging signs of a degree of consensus around financial stimulus via tax cuts.
I'm not sure where all the injected liquidity by the Fed will go. Will it stay at home in the US which is the epicenter of the problems or will some of it find its way into higher growth markets? This would be a departure from the past. I don't know, but time will tell.

I doubt we would have a global synchronized recession unless things went extremely nasty here, and I think the effects would not fall evenly across all economies. Thats my current thinking, which is definitely open to change as events unfold. I definitely think that risks are to the downside, am taking a more cautious stance.

[Jim Nickerson]

Decoupling a sucker play from the start.

Decoupling Was a Sucker Play From the Start: Michael R. Sesit

Commentary by Michael R. Sesit

http://www.bloomberg.com/apps/news?p...wYA&refer=home

"The falls in stock markets all over the world this year seem to have been triggered by the realization that U.S. weakness is likely to persist and that everybody will be affected in one way or another,'' says Gabriel Stein, a senior economist at Lombard Street Research Ltd. in London.

50 Percent Probability

Myth No. 1: Although the U.S. economy will slow, it will avoid a recession.

Maybe so, but a recession over the next 12 months is now a 50 percent probability, according to a Bloomberg survey of economists, up from 40 percent in January. The U.S. is confronted with its worst housing crisis in a quarter century; gross- domestic-product growth slowed to an annualized 0.6 percent in the fourth quarter last year, down from 4.9 percent in the third; and January payrolls tumbled by 17,000, the first decline since August 2003. A key gauge of non-manufacturing fell to its lowest reading in more than six years.

Myth No. 2: The rest of the world can escape the clutches of a U.S. slowdown.

Not according to history. The U.S. has had five recessions since 1970. Each time, other economies' GDP growth also declined. The U.S. economy fell an average of 3.8 percent during the recessions of 1974-75, 1980, 1982, 1991 and 2001, with other industrial countries slowing an average of 2 percent, Latin America falling 1.7 percent and emerging Asia declining 1.3 percent, according to the International Monetary Fund.

'Hermit Economies'

"Despite all the chatter about one region or another being immune from problems in the U.S., the reality is that in a globalized economy characterized by rising cross-border flows of goods, services and capital, only hermit economies like North Korea are truly de-linked from planet Earth,'' says Joseph Quinlan, New York-based chief market strategist at Bank of America Capital Management. "Every one, more or less, sinks or swims in the global village.''

Myth No. 3: Rising demand in the developing world will compensate for the expected drop in U.S. consumer spending. Emerging-market countries are consuming more, yet growth in many of them is still mostly driven by exports, not domestic demand. Moreover, 2.55 billion people -- almost half the population of the developing world -- lived on less than $2 a day in 2004, the latest year of available data, according to the World Bank and Bank of America.

U.S. Beats BRICs

U.S. consumers spent $9.27 trillion in 2006, or 3.5 times the aggregate $2.62 trillion personal-consumption expenditure of the so-called BRIC countries: Brazil, Russia, India and China.

Myth No. 4: Growing intra-Asian trade -- especially that between China and other countries in the region -- will make up for lost exports caused by a steep U.S. slowdown.

No doubt, intra-regional trade is growing rapidly, but much of it reflects shipments of intermediate goods. Still, 61 percent of emerging Asia's exports are ultimately consumed in the U.S., European Union and Japan, according to the Asian Development Bank, while Asian developing countries account for just 21 percent of final demand.

"The U.S. is still more important to each Asian country's total output than demand from other ex-Japan Asian economies combined,'' the bank said in a recent report.

European Exports

Myth No. 5: Europe is becoming less dependent on the U.S.
True, America accounts for only 12 percent of EU exports to countries outside the 25-nation bloc, down from 18 percent in 2000. But exports aren't the whole story. Sales by U.S. affiliates of German companies totaled $352 billion in 2005, the last year of available data -- four times the $86 billion of German exports to America. Meanwhile, Dutch U.S. affiliate sales were 16 times exports, U.K.-affiliate sales 7.6 times British exports and French-affiliate sales 5.9 times.

"If the U.S. economy heads south, so too will the earnings of many European firms,'' Quinlan says.

What's more, Wall Street's pull on the world's financial markets is unrivaled.

"U.S. equity returns remain the single biggest driver of global equity returns,'' says David Woo, London-based head of global currency strategy at Barclays Capital. "A sizable U.S. equity correction, by precipitating a global equity correction, will likely lead to a synchronized global economic slowdown.''

It seems to me this article should put the issue to rest, if it is still an issue, and assuming Sesit is writing close to the truth.

[GRG55]

Re: Decoupling a sucker play from the start.

Decoupling Was a Sucker Play From the Start: Michael R. Sesit

Commentary by Michael R. Sesit

http://www.bloomberg.com/apps/news?p...wYA&refer=home



It seems to me this article should put the issue to rest, if it is still an issue, and assuming Sesit is writing close to the truth.

No disagreement with the logic, but what if the US recession (2008 version) is just not all that bad?

If you don't work on Wall St (or in Detroit) it may not be more than a slow-down for a couple of quarters. Money being sprinkled around, Ben itching to cut rates again, doesn't look like a formula for a complete collapse of that all important US consumer.

Not yet.

[touchring]

Re: Decoupling a sucker play from the start.

No disagreement with the logic, but what if the US recession (2008 version) is just not all that bad?

If you don't work on Wall St (or in Detroit) it may not be more than a slow-down for a couple of quarters. Money being sprinkled around, Ben itching to cut rates again, doesn't look like a formula for a complete collapse of that all important US consumer.

Not yet.

Yes, the emerging economies and wallstreet will want the US to continue taking crack(debt), lend money, pump money (SWF) or whatever to ensure the house of cards doesn't fall so soon - the time for the US to fall is not here yet, still takes another 10-15 years for China and India to develop their economies so they could stand on their own. In the meantime, they will continue feeding crack to America.

[Southernguy]

Re: Global decoupling? Then answer this conundrum

Investment in China is about 40% of GDP. Of course, not all of it is in industrial capacity. Probably most is in infrastructure. Anyhow, I´m sure a lot of IC is created every year. Japan and most of Europe are also showing signs of slowdown. USA gets 21% of China exports. But Europe´s share is larger than that.
What if exports slow significantly? Is it too absurd to imagine a glut of production emerging? An overproduction crisis?
And consequently less money left to buy US bonds?
Just asking
DELSUR

[Jim Nickerson]

Re: Global decoupling? Then answer this conundrum

Investment in China is about 40% of GDP. Of course, not all of it is in industrial capacity. Probably most is in infrastructure. Anyhow, I´m sure a lot of IC is created every year. Japan and most of Europe are also showing signs of slowdown. USA gets 21% of China exports. But Europe´s share is larger than that.
What if exports slow significantly? Is it too absurd to imagine a glut of production emerging? An overproduction crisis?
And consequently less money left to buy US bonds?
Just asking
DELSUR

What is "DELSUR"?

[touchring]

Re: Global decoupling? Then answer this conundrum

Investment in China is about 40% of GDP. Of course, not all of it is in industrial capacity. Probably most is in infrastructure. Anyhow, I´m sure a lot of IC is created every year. Japan and most of Europe are also showing signs of slowdown. USA gets 21% of China exports. But Europe´s share is larger than that.
What if exports slow significantly? Is it too absurd to imagine a glut of production emerging? An overproduction crisis?
And consequently less money left to buy US bonds?
Just asking
DELSUR

From the latest January figures. Both US and Europe will have to slow down a hell lot more to have any impact on China factory exports! Definitely a hell lot more than what the credit crunch caused!! :eek:

China January Trade Surplus Up 22.7 Pct

By JOE McDONALD – 1 day ago


BEIJING (AP) — China's trade surplus grew by 22.7 percent in January over the same month last year as foreign demand for exports stayed strong despite worries about slowing global growth, according to data reported Friday.
The latest figures appeared likely to fuel demands by China's trading partners for action on trade barriers and currency controls. Some American lawmakers are calling for punitive tariffs on Chinese goods if Beijing fails to act quickly.
January's trade gap totaled $19.5 billion, the government's Xinhua News Agency said, citing data from the Chinese customs agency.
Exports in January rose 26.7 percent to $109.7 billion, while imports grew by 27.6 percent to $90.2 billion, according to Xinhua.

http://ap.google.com/article/ALeqM5g...CsS8QD8UQNJJ00

[zmas28]

Re: Global decoupling? Then answer this conundrum

However, from the same link:
"But compared to previous months, the surplus shrank. It was the first time since April that China reported a monthly trade gap below $20 billion. In December, it totaled $22.7 billion, and in October it reached an monthly record of $27 billion."
Also interesting:"Friday's trade data suggested that China could expect strong growth this year despite a possible slowdown in the United States, a key export market.

The managing director of the International Monetary Fund said Friday that China might be affected by a U.S. slowdown but its economy still should expand by about 10 percent this year. That would be down from 11.4 percent growth in 2007."
The 10 percent growth figure is higher than some other estimates.

[c1ue]

Re: Global decoupling? Then answer this conundrum

"But compared to previous months, the surplus shrank. It was the first time since April that China reported a monthly trade gap below $20 billion. In December, it totaled $22.7 billion, and in October it reached an monthly record of $27 billion."

Ah, but note the denominator: the dollar.

Also keep in mind that the spending slowdown did not begin until November/December; it takes time for this to impact statistics.

[touchring]

Re: Global decoupling? Then answer this conundrum

The slowdown in nov/dec is not enough to offset the forward momentum in other markets.

The credit crunch will have to get a lot worst - maybe when credit card companies start withdrawing cards by the millions, then it will have some effect.

Ah, but note the denominator: the dollar.

Also keep in mind that the spending slowdown did not begin until November/December; it takes time for this to impact statistics.

[GRG55]

Re: Decoupling a sucker play from the start.

Yes, the emerging economies and wallstreet will want the US to continue taking crack(debt), lend money, pump money (SWF) or whatever to ensure the house of cards doesn't fall so soon - the time for the US to fall is not here yet, still takes another 10-15 years for China and India to develop their economies so they could stand on their own. In the meantime, they will continue feeding crack to America.

Come now. You don't really believe this "US consumer addict as victim, with no free will" stuff, do you

From the latest January figures. Both US and Europe will have to slow down a hell lot more to have any impact on China factory exports! Definitely a hell lot more than what the credit crunch caused!! :eek: