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Tuesday, May 28, 2024

Telling a Similar Story

Here’s a couple more articles one on the lack of evidence for a turn around and one on China, wrapped into a single post by Michael Panzner at Financial Armageddon.

Telling a Similar Story

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Below are two seemingly unrelated articles that tell a similar story: talk that the global economy is on the upswing seems to be premature, to say the least.

In the first report (hat tip to Calculated Risk), the Vice Chairman of General Electric, a company with 14 major lines of business — appliances, aviation, consumer electronics, electrical distribution, energy, business finance, consumer finance, healthcare, lighting, commercial and industrial markets, media & entertainment, oil & gas, rail, and security — and a presence in more than 100 countries, states point-blank that they are not seeing evidence of the turnaround that policymakers (e.g., Fed Chairman Ben Bernanke), clueless Wall Street types (see: "The Wall Street Clown Show"), and TV pundits keep referring to.

The second article by well regarded analyst Andy Xie (hat tip to Naked Capitalism) is even more interesting, because it doesn’t just undermine the notion that China is on the mend — bolstering arguments I made previously in "Holes in the China Recovery Story" — and poised to kick-start a global economic recovery. It also raises questions about the recent sharp run-up in commodity prices, which many analysts say is a reflection of improving economic conditions but which seems to stem from a combination of technical buying and debt-financed speculation.

1. "GE Vice Chair Rice Sees No ‘Green Shoots’ in Orders" (Bloomberg):

General Electric Co. Vice Chairman John Rice said he isn’t seeing an increase in orders even as U.S. economic statistics suggest the world’s largest economy may soon shift to a recovery.

“I am not particularly of the green shoots group yet,” Rice said today to the Atlanta Press Club, referring to a phrase used by Federal Reserve Chairman Ben S. Bernanke that described signs of a nascent recovery. “I have not seen it in our order patterns yet. At the macro level, there may be statistics suggesting the economy is starting to turn. I am not seeing it yet.”

GE is the world’s biggest maker of jet engines, power-plant turbines, locomotives, medical imaging equipment. Rice oversees the Fairfield, Connecticut-based company’s industrial businesses.

“We see a world where good companies and good consumers can’t get all the credit we would like,” Rice said. “Companies with lots of cash on their balance sheet are worried about whether they will get what they need for working capital” and are cutting spending.

“Until that changes I don’t think you will see a significant rebound,” Rice said. “We are preparing for 12 or 18 months of tough sledding."…  more here.

2. "Fear the Dark Side of China’s Lending Surge" (Caijing.com.cn):

Banks loans designed to spark economic recovery have been channeled into asset speculation, doing more harm than good.

China’s credit boom has increased bank lending by more than 6 trillion yuan since December. Many analysts think an economic boom will follow in the second half 2009. They will be disappointed. Much of this lending has not been used to support tangible projects but, instead, has been channeled into asset markets.

Many boom forecasters think asset market speculation will lead to spending growth through the wealth effect. But creating a bubble to support an economy brings, at best, a few short-term benefits along with a lot of long-term pain. Moreover, some of this speculation is actually hurting China’s economy by driving asset prices higher.

The current surge in commodity prices, for example, is being fueled by China’s demand for speculative inventory. Damage to the domestic economy is already significant. If lending doesn’t cool soon, this speculative force will transfer even more Chinese cash overseas and trigger long-term stagflation.

Commodity prices have skyrocketed since March. The Reuters-Jefferies CRB Index has risen by about one-third. Several important commodities such as oil and copper have doubled in value from this year’s lows. As I have argued before, demand from financial buyers is driving commodity prices. The weak global economy can’t support high commodity prices. Instead, low interest rates and inflation fears are driving money into commodity buying.

Exchange-traded funds (ETFs) alone account for half of the activity on the oil futures market. ETFs allow retail investors to act like hedge funds. This product has serious implications for monetary policymaking. One consequence is that inflation fears could lead to inflation through massive deployment of money into inflation-hedging assets such as commodities.

Financial demand alone can’t support commodity prices. Financial investors can’t take physical delivery and must sell maturing futures contracts. This force can lead to a steep price curve over time…

Banks usually have to be extremely cautious about such lending, as commodity prices fluctuate far more than property prices. But Chinese banks are relatively lenient. As an industrializing economy, China’s support for industrial activities such as raw material purchases for production is understandable. However, when commodities are bought on speculation, lenders face high risks without benefiting the economy. In some cases, this practice hurts banks and the economy at the same time…

More here.

 

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