Economy Slowing, Government Clueless, Americans Discouraged

Finance at First Light
Good morning! Here’s what you need to know:
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OVERVIEW

  1. China’s Property Bubble Might Deflate Slowly | If so, those betting on an imminent crash will be disappointed.
  2. Tax Uncertainty Keeps Hiring On Hold | Do you know what your tax rate will be on January 1st? Neither does anybody else.
  3. The Economy Is Slowing Without Stimulus | The ever-chipper John Hussman has the data to prove it.
  4. Japan Still Sinking | Other than a persistent slowdown in exports, this export economy is doing fine.
  5. Americans Are Discouraged | It’s hard to depress Americans, but this government is doing it and it’s killing the economy.

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BRIEFING

1. China’s Property Bubble Might Deflate Slowly

We heard comments from Jim Chanos last week suggesting that China’s runaway property bubble is reaching the bursting point. That’s not the first time Chanos has said so, either. He’s been talking about it all year.

Andy Xie, however, disagrees. He wrote at Bloomberg yesterday that, while he acknowledges that the “market has now peaked,” it will just “trend down gradually for the rest of the year.” He points out, “Property bubbles can deflate over many years. Japan’s expanded for two years after the Nikkei-225 Stock Average crashed in the 1990s. Instead of bursting, it fell about 8 percent every year for two decades. Taiwan’s paralleled Japan’s and declined gradually until the China hype revived the market.”

His prediction: “It will trend down gradually for the rest of the year. When expectations of a yuan revaluation reverse and capital outflows ensue, probably in 2012, the market will deflate faster…for five years. The average prices in larger cities are likely to decline by half or more. Land values will fall by much more. In the biggest and craziest bubble in Zhejiang Province, they may drop 80 percent or more.”

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2. Tax Uncertainty Keeps Hiring On Hold

Richard Rahn wrote in the Washington Times: “There is not one American individual or business owner who operates in the United States who knows what tax rate he will face as of Jan. 1. Worse yet, the question will not be answered until probably less than 30 days from the end of this year. How can any business plan employment and capital spending levels under such needless uncertainty? Most will just postpone hiring and expansion decisions until after the beginning of the year, if they can. Members of Congress tell us they are concerned about unemployment, but their very actions — or inactions — are causing more unemployment.”

The editors of Investor’s Business Daily have the answer: extend the Bush tax cuts. They wrote yesterday that “failure to extend the cuts will badly damage our struggling economy.” They pull from an “urgent letter to President Obama from 313 leading economists” this stark warning: “The promise of a tax increase in January 2011 would create significant economic distortions as individuals and businesses conserve capital or stave off hiring.”

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3. The Economy Is Slowing Without Stimulus

After presenting several charts showing a deterioration of monthly US GDP momentum, John Hussman wrote in his weekly note yesterday: “If we had good reason to expect positive economic tailwinds, we would be less concerned about the present deterioration. Unfortunately, my impression is that the bulk of the growth that we did observe coming off of the June 2009 economic low was driven by a burst of stimulus spending coupled with a variety of programs to pull economic activity forward. My concern is that these synthetic factors are now trailing off, with little intrinsic economic activity to carry a recovery forward. Suffice it to say that we’re not yet out of the woods.”

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4. Japan Still Sinking

When your economy is built on exports, a slowdown in exports is a rough thing. Just ask Japan. It’s so worried about any further damage to its economy that it tacitly ceded the Senkaku islands to China last Friday to avoid an undue slowdown in bilateral trade.

Japan’s recession never ends. The nation’s growth fell to 0.4% in the April-June quarter. The yen is up 9% against the dollar this year. According to Reuters Tokyo correspondent Kaori Kaneko: “Exports in August rose 15.8 percent from a year earlier, below expectations for a 19.0 percent gain, Ministry of Finance data showed on Monday. Growth was much weaker than the 2010 peak rate of 45.3 percent in February. US exports increased 8.8 percent from a year earlier, much weaker than a 25.9 percent rise the previous month, hit by a slowdown in shipments of cars. Annual exports growth to Asia, which accounts for more than half of Japan’s total exports, slowed to 18.6 percent from 23.8 percent in July’s data. Exports to China rose 18.5 percent, below 22.7 percent in July.”

The Bank of Japan will probably loosen its already loose monetary policy next week. Things are about to get real interesting in a country where bonds pay a paltry 1%, so nobody wants them as they enter retirement and the government can’t afford to raise rates at all. Even at the current 0.5% yield on a 10-year Japanese government bond, debt service already eats up 59% of Japan’s tax revenues. The country will default. Were Joe Biden given the job of describing the impact of a Japanese default on world markets, he’d get little disagreement in calling it a “big f***ing deal.”

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5. Americans Are Discouraged

Cullen Roche wrote this morning at Pragmatic Capitalism:

Over the last few years I have argued that much of what the government planned to do would have destructive psychological ramifications. Unfortunately, this appears to have come true as no one truly trusts the stock market these days. Small business sentiment shows a total lack of faith in the government. Consumer confidence remains abysmal. This is all very disconcerting because a deflationary environment has a way of snowballing and becoming self destructive. It can eat at a society from within as they become discouraged. …

The government is trying to talk us out of becoming discouraged. They have rescued the financial system with record bailouts, trillions in stimulus and hope-filled messages. This continues to this day. We are told that the Federal Reserve will bolster markets with quantitative easing and supportive monetary policy. We are told that the government will stimulate Main Street and small business. We are told that they will give us tax credits for buying new cars or new homes. We are told that saving the banks will save us all. But when one looks under the hood at all of these policies you realize that none of them have been beneficial to Main Street. Almost without exception they have been short-term attempts to bolster a banking system that has failed us.

Quantitative easing is just the latest gimmick to bolster bank balance sheets and generate hope of a real recovery. Real recovery will come when Main Street is cured of its debt disease. Until then, discouragement will continue to eat at the core of this system as the government continues down its misguided path. I used to think that Americans were too hopeful and prideful to be discouraged for any extended period, but this government appears to be doing a pretty good job of scaring us with their rhetoric while also implementing policy that proves them entirely ignorant in regards to all things economics. Until something actually changes in Congress it’s likely that the threat of deflation and discouragement will remain. And with it will be depressed economic growth.

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2 Comments

  1. Jim T
    Posted September 29, 2010 at 4:04 am | Permalink

    The Washington Times is a conservative outlet, of course they propose tax cuts for the rich.

    What we really need is a cut for the middle class. Republican stall tactics in the Senate won’t allow it any time soon.

    Hooray for the little guys.

    • Posted September 29, 2010 at 11:52 am | Permalink

      Both sides are complicit in the mess, as usual, angling for their careers instead of serving their voters. Dems postponed the debate until the November lame-duck session, making their chance of letting the ban on taxes for the rich expire while extending the tax for the middle class almost nil.

      The best case for letting the cuts expire was probably made by Daniel Gross at Slate, per last Wednesday’s briefing.

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