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Friday, February 6, 2009

economic crisis in 2009. "how deep it is"

LETS START WITH ASIA

Asia Economic Crisis: Spotlight on Japan, China, Korea, Vietnam. Decoupling, an idea that never made any sense, is talking another beating. Bad news is coming from multiple places in Asia, with Japan and China leading the way. Let's take a look starting with Japan's Recession Deepens as Factory Output Plummets .

--> Japan's recession deepened in November as companies cut production at the fastest pace in 55 years and rising unemployment prompted households to pare spending.

Factory output plunged 8.1 percent from October, the Trade Ministry said today in Tokyo, more than the 6.8 percent estimated by economists. The jobless rate climbed to 3.9 percent from 3.7 percent. Household spending slid 0.5 percent, a ninth drop.

Simultaneous recessions in the U.S. and Europe have weakened demand for Japan's exports, prompting companies from Toyota Motor Corp. to Sony Corp. to idle plants and fire workers. The Bank of Japan has little room to spur the economy after cutting interest rates close to zero last week, and Prime Minister Taro Aso has yet to implement two stimulus packages.

“Data clearly indicate the problem for Japan is deflation, not inflation,” said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo.
Bank of Japan Considers Extraordinary Steps

With export demand plunging and the Yen soaring, the BOJ May Consider ‘Extraordinary Steps,' Kamezaki Says
“The Bank of Japan is committed to doing its utmost to contribute to stabilizing financial markets,” Kamezaki, 65, [policy board member] said today at a business meeting in Takamatsu, western Japan. “Extraordinary times demand extraordinary steps.”

Central bank officials are examining the feasibility of buying a wider range of securities, including corporate bonds and stocks, and the policy board will make a decision based on their findings, Kamezaki said at today's press conference.
Japan PM announces record budget

The Prime minister of Japan, Taro Aso announces record budget .
Taro Aso, Japan's prime minister, tried to put a rocket under the stricken economy on Wednesday, announcing the country's biggest ever annual budget, as fear mounts that Japan faces a long recession.

The budget for the fiscal year starting next April, along with two other extra budgets for the current year, will finance Aso's Y12,000bn in fiscal stimulus programmes, which amounts to more than 2 per cent of Japan's gross domestic product.

Ministers said the stimulus was as large as or even larger than steps adopted in other major economies. But it also meant Japan's primary budget deficit will nearly triple, making Tokyo's target of a surplus in two years almost impossible.

”Japan cannot avoid the tsunami of the world recession, but it can try to find a way out,” Mr Aso told a news conference, in which he illustrated the government's stimulus plans with a diagram of a three-stage rocket.

”The world economy is in a once-in-a-hundred-years recession. We need extraordinary measures to deal with an extraordinary situation,” he said.
Japan's Extraordinary Measures Have Blown Up Already.

Extraordinary measures are a way of life for Japan. From currency intervention to building bridges to nowhere, Japan has taken extraordinary measures for decades. In that timeframe, Japan went from being the largest creditor nation to a nation deep in debt.

As of November 17th 2008, BusinessMirror notes " Japan's public debt that exceeds 180 percent of the GDP, limiting the government's ability to stimulate growth ".

It takes pretty extraordinary measures to achieve public debt of 180% of GDP, and although that feat did not produce anything worthwhile, Aso wants to try it again. Keynesian clowns should take note, but they don't.

China Needs More Policies to Spur Consumption

Peoples Bank of China's Zhou Says China Needs Policies to Spur Consumption .
China needs to devise more policies to boost consumption among the nation's 1.3 billion people to counter the impact of falling exports on economic growth, central bank Governor Zhou Xiaochuan said.

“Although the government has pledged to boost consumption to sustain growth, we still face difficulties in identifying which areas and which measures we should take to spur spending,” Zhou told a conference in Beijing today. Economic policies have failed to rebalance growth away from trade and investment, with the share of consumption in gross domestic product falling to less than 50 percent from 60 percent a decade ago, he said.

Premier Wen Jiabao may unveil a second stimulus package as early as next month aimed at spurring consumer spending as the economy is set for its slowest growth in two decades. The government has already increased subsidies for farmers to buy household electronics, cut taxes on property and is preparing policies to revive slumping car sales in the world's second- biggest auto market.

China's household consumption rate “is among the lowest in Asia as households still hold large precautionary saving balances,” said Ben Simpfendorfer, a Hong Kong-based economist with Royal Bank of Scotland. He estimates household consumption growth slowed to 5 percent in 2008 after rising at double that pace the previous year.

The U.S. economy faces the opposite problem, Zhou said today, with consumption too high and the savings rate too low. The policies now being pursued by the Bush administration to revive growth by boosting consumption aren't the solution to the country's long-term structural economic problem, he said.

Consumer spending represents more than two-thirds of the U.S. economy while household consumption's share of China's gross domestic product slumped to slightly more than 35 percent last year from 45 percent a decade ago, according to Chinese government data.

“This shows there is huge potential to boost consumer credit and encourage people to buy homes and cars,” Yi said.
No Savings Glut

Statements from Yi, Zhou, and Ben Simpfendorfer promote the silly idea there is some sort of savings glut in China. There isn't. Please see Global Savings Glut Exposed and Bernanke Blames Saving Glut For Housing Bubble for counter arguments.

“ This shows there is huge potential to boost consumer credit and encourage people to buy homes and cars,” Yi said . Does anyone learn? Credit bubbles caused the great depression, and the great recession that we are in. One might think that someone in authority would learn something from this. But they never do. China wants to follow the US to ruin.

Besides from a simple Austrian economic standpoint it it not possible to have too much savings. It is possible however to have too much debt and that is where the US is right now.

China Currency Reserves Drop For First Time In 5 Years

Market New is reporting China Currency Reserves Post First Fall Since 2003
China's foreign-exchange reserves dropped for the first time in five years as a result of the global financial crisis, Market News International reported, citing Cai Qiusheng, head of the investment management bureau under the State Administration of Foreign Exchange.

The current figure must be lower than the peak of about $1.9 trillion, Cai told a trade forum in Beijing over the weekend, the English-language wire service said. He didn't specify which period he was referring to or give a figure.

China's foreign exchange reserves $1.9 trillion at the end of September, according to Bloomberg date.
Please see Strange Case of Falling International Reserves Explored for more on reserves.

Korean Economy Faces Contraction

South Korea president Lee Lee Myung Bak Warns Korean Economy May Shrink in First Half
South Korea's economy may shrink in the first and second quarters of next year, affected by a global economic slowdown, President Lee Myung Bak said today.

“The world economy is difficult and South Korea is heavily dependent on the external side,” Lee said at a meeting at the presidential house in Seoul today, according to his office Web site. “Even though we may post positive annual growth, we're in danger of negative growth in the first and second quarters.”

“Negative growth is unavoidable,” said Chun Chong Woo, senior economist at SC First Bank Korea Ltd. “We're bound to be affected by the global slump, and the government will have to think of more aggressive policies to help spur the economy.”

The Bank of Korea has cut its key rate by 2.25 percentage points since October, the most aggressive easing since it first set a benchmark in 1999. The bank most recently cut the benchmark rate by 1 percentage point to a record low 3 percent on Dec. 11.

South Korea is also pumping funds into banks, cutting taxes and boosting public spending to limit the fallout from the global credit crisis, which sent the Korean won down more than 28 percent and the stock index tumbling 41 percent this year.

“We see the first and second quarters to be the bottom,” Lee said. “There's hardly any country posting economic growth from the fourth quarter to the first quarter. “There is an end to this agony,” he said. “It won't last 10 or 20 years.”

An End To Agony, When?

Where do people get the idea this is all going to be over in a couple quarters? Somehow Bak makes the magic leap of faith the recession will be over soon just because it will not last 10 years. I suggest it lasts another year or longer. Even when the recover comes it will be anemic as the US consumer is tapped out and will be devastated by the stock market and housing carnage. Frugality will be the new reality for quite some time.

Vietnam's Weak Dong Policy

Struggling to boost exports, Vietnam Devalues The Dong .
Vietnam's central bank devalued the dong by 3 percent to help exporters after the Southeast Asian economy expanded at the slowest pace in nine years and the trade deficit widened.

“The devaluation is necessary as the government is trying to increase exports,” said Do Ngoc Quynh, chairman of the Vietnam Bond Forum in Hanoi and head of currency and debt trading at Bank for Investment & Development of Vietnam, the nation's second-biggest lender by assets. “Other currencies in the region have considerably declined against the dollar, but the dong hasn't dropped that much.”

“The Vietnamese dong is facing downward pressure due to the current-account deficit,” said Yuichi Izumi, an economist at Nomura Securities Co. in Tokyo. “The State Bank wants to guide the dong lower to support the export sector.”

Slower gains in consumer prices may have also provided more room for the central bank to weaken the dong. Inflation cooled for a fourth month in December to the slowest pace in nine months, with consumer prices rising 19.9 percent from a year earlier, the government said today. The rate touched 28.3 percent in August, the highest since at least 1992.

Fiscal insanity is everywhere you look. Inflation is running at 19% yet Vietnam wants a weaker dong. And with serious downward pressure, it's wrong to be long the dong.

The recession that started in January 2008 looks to be four phased. The first phase, The housing collapse, actually started in August 2007. The financial meltdown hit in September 2008, and likely will continue through to March 2009 or so. The business firestorm is really just getting underway now, and will be the dominant theme for the next 8-12 months whlie the final phase, currency collapse, will (if it occurs at all) likely not happen for another 12-18 months.
The business collapse itself is taking place in a number of different verticals, which differentiates it from a traditional oversupply recession. In an oversupply recession, the market produces too much of a good or service for the available demand, which usually means that either companies have to cut back on producing goods (and consequently reduce their own profitability) or they fail and fall out of the market. In time, demand rises to meet supply, and the industry in question recovers.
The housing collapse was a classic oversupply recession - too many houses on the market at too high a price, and eventually demand couldn't meet supply. Had the housing market not been fueled by low interest rates when they weren't needed, had the financial industry not done a dice-o-matic on the resulting mortgages, and so on, chances are pretty good that we would be about 2/3 of the way through this by now, IT, except for the specific housing IT vertical, would be relatively unscathed.
The problem now is that risk became baked into the very core of the global financial system like a series of fault lines, and the collapse of the mortgage business was like a deeply buried mortar going off in that mess. This in turn exposed the very ugly truth about finance - that prices are psychological, and when no one knows the value of things, the ability to plan for the future ends.
This fear has manifested in the credit crunch, when banks are terrified of lending money out because they know that the assets that the carry are far below what they should carry in order to stay solvent - and that if they loan out money, they won't have it when the next wave of credit defaults occur (either credit cards or commercial real estate, take your pick - they'll hit about the same time). There's currently an effort to reliquidate the banks by most of the world's governments, though with at best limited success (more on that in future articles).
The business collapse is occurring because of two factors. First companies that had depended upon having readily available lines of credit are finding these lines being cut or dramatically reduced, which makes them much more vulnerable to the variability of incoming contracts ... at a time when everyone else is facing the same problem.
The second is that this has put significant downward pressure on household incomes, as these same lines of credit (in the form of second mortgage refinancing, credit cards and so forth) are now becoming scarce at the consumer level (along with financial investments having plummetted in the last few months). This has resulted in a consumer strike, as people save rather than spend.
For those businesses with a direct consumer face (or those that IT companies who supply services to these businesses) this translates into reduced revenues and shrinking demand, which in turn has a direct impact upon both those people that produce retail hardware and has an indirect effect upon IT companies that produce software to support these retailers. It also means that companies that had projects in the work for FY 2009 are scaling these back or putting them on indefinite hold until they get a clearer read of the economic situation.
One of the problems with recessions is that while there is an underlying economic aspect to most of them (many people just don't have the money in the first place), there is also a psychological aspect. People stop spending (and start saving), in anticipation of two things - first, that when they need the money, they may not have it, and second, that when the economy is receding, the overall price of both goods and services drop. It makes little sense to take on new purchases (whether new projects or new goods) when demand is dropping and the possibility is fairly strong that they can get those things for cheaper in a year or two.
At an individual level, this is a rational response. The problem comes when everyone does it. At that point, demand dries up, companies go out of business, reducing the overall stock of those same goods and services. This happens with all goods. The problem that we face right now is that the goods that are at the root of the problem - houses - tend to have a comparatively long shelf life compared to Tickle-me Elmo dolls or iPods. They can't be inventoried or written off, which means that it will take considerably longer for demand to meet supply, and as capital investments destroying houses and restoring the property to a usable state can be painful at best.
Unfortunately, this means that the psychological aspects of businesses far removed from housing will be very much held hostage to the housing cycle. Eventually (for a number of reasons) housing prices will stabilize at a new level of equilibrium (which, if reversion to the mean is any indication, should be about 15% below where most prices are now), though it is also likely that any markets will overshoot this level to about 25% or so below current levels before eventually returning to this mean. While estimates vary as to how long it will take, most economists feel that it will be at least another nine to eighteen months, putting the "bottom" of the recession at or around late 2009 or early 2010.
Yet even that won't necessarily be the end of the troubles. A deep financial depression is a lot like a deep cyclonic depression (a.k.a, a hurricane). In a hurricane, a great deal of damage is done by the winds, as windows break, cars go flying and in some cases houses go sliding into the depths or get turned into kindling. Yet the real damage comes from factors such as storm surges, where large amounts of water start moving quickly in areas not designed for water. Hurricanes knock out power, making recovery efforts difficult, and paradoxically, raises the possibility that fires will start that can't be reached or put out, causing even more damage.
The same thing is happening now - we are within the eye of the financial hurricane, a kind of false calm where the winds and pressures are at an unstable equilibrium, but this only has the effect of relaxing things that had bent in response to the hurricane force winds. Unfortunately, once we enter the eyewall on the other side the forces are just as strong, but going in the other direction (one of the reason hurricanes are so destructive).
When this plays out, many retail companies (and not a few medium to large sized malls) will be out of business, their buildings sitting vacant and often poorly maintained. There will be a significant exurban flight as people are forced to sell their properties (typically at a loss) because of unmaintainable mortgages and either rent closer in to population cores or move to higher density housing (this trend will be exacerbated by the number of baby boomers who are reaching retirement age and are staring at fixed incomes with oversized mortgages and reduced bank accounts), a trend which will result in many "bedroom communities" becoming squalid slums or just abandoned altogether.
Suppliers to these retailers are already starting to disappear as retailers cut back on their inventories, and in areas such as automotive manufacturing the tremors as these highly centralized, monolithic conglomerates continue to shutter plants are causing the extensive supply chains to fragment as companies that weren't sufficiently diversified lose their primary customers and go out of business.
As this happens, it also makes it harder for these same companies to continue to pay their leases, which are typically financed at a much higher rate than consumer mortgages are as most are fifteen year rather than thirty year paper. This will be the next major pressure that a lot of companies, even those outside of the retail sector, will be facing, and software companies in particular are vulnerable to this particular threat, especially as VC financing continues to decline. Expect by the end of 2009 that office buildings will be even more vacant than they were in 2003 at the bottom of the tech recession.
Venture capital, by the way, is also drying up for much the same reason as credit in general - VCs are investors, and they do not in general want to take a loss on a company, even one with a brilliant idea, if they are concerned that economic pressures will never let it get off the ground. Moreover, those same investors already have extant commitments that they are in many cases having to serve as the primary bank for, and this in turn is reducing their willingness to take on new businesses (and will for some time).
A further process that will accelerate is the disaggregation of conglomerates, as companies shed or spin-off divisions that are not profit centers. It's likely that this will hit the big services companies such as IBM, Fujitsu, Siemens and so forth disproportionately, though it might also affect companies such as Microsoft or Oracle. Many of the newly created spin-offs may not make it once cut off from the sheltering effect of the mothership, but others (most notably those that were already successful companies in their own rights) may very well come out stronger in the process.
The next year will be a poor one for mergers, unless they happen to be pure stock exchange mergers (where the two companies agree to on a common stock conversion rate with little actual money changing hands). Acquisition mergers typically require not only cash on hand, but also require access to bonds or other equities that can be used to leverage this cash on hand. With so much uncertainty right now in terms of equity prices, however, raising such funds becomes difficult, even as it seems like we are awash in a sea of junk bonds.
Toward the end of 2009, expect this trend to reverse. Companies with strong cash positions going into this storm will have a much clearer understanding of the shape of the market by the end of the year, and will be able to buy technically sound but financially distressed software companies at bargain rates. If you're vested in a startup, now is probably a good time to discuss acquisition strategies, though probably not at the premium values that many startups tend to value themselves, with an eye towards that sweet spot in the Q4 2009.
There's currently a running debate among economists about what happens when the recession ends. Some, primarily Keynesians, feel that economic stimulus is a necessity to get us out of the current liquidity trap, and that for the most part the debt that most countries are taking on now will restore us back to a period of economic stability with perhaps at worst only modest inflation (in the 3-4% rate) for a few years thereafter.
Others, especially those of the Austrian school of economics, expect that all of the money being created in order to finance the stimulus will, once the credit crunch eases, result in significant inflation, possibly above 10% per annum, leading to a similar situation (stagflation) that caused the 70s to be so hard (well, that and disco).
My money is on the Austrians, as they were surprisingly accurate in their predictions of the present economic crisis, and as a central part of the problem facing the economy right now is that real interest rates (those charged by banks to their primary customers) continues to remain far higher than the nominal 0.25% percent rate that the current Fed has set the prime lending rate.
In short, even after the storm abates, money may continue to be in short supply for many months (or even years) to come. Expect that government stimulus packages and government works programs may in fact have to substitute for the private economy for some time (more on that in the next section).

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