Global Economic Slowdown May Worsen Significantly

Slowing growth as well as deficit and debt problems in the Eurozone, U.S., China and the emerging nations increases the odds of a deflationary global recession and a renewed down leg in the ongoing secular bear market.

The U.S economy has been slowing in the last two or three months. Either downside surprises or actual declines have been reported in key economic indicators relating to consumer spending, new orders, production and employment. A number of major companies have either revised down their second quarter earnings estimates or reduced their guidance for the second half. As a result, second quarter earnings estimates for the S&P 500 have been declining and full-year estimates probably will drop as well. When we further consider the dysfunction in Congress, the "fiscal cliff", the prospective end of operation twist, the elections and the prospect of renewed fighting over the debt ceiling, the threats to an already fragile recovery are high.

The Chinese economy is slowing, perhaps by more than the official numbers show. The NY Times has reported that many local and provincial officials have been falsifying numbers to hide the true extent of the problems. China’s economic model is heavily dependent on capital investments and exports, while internal consumer spending remains a relatively small part of GDP. Although Chinese officials recognize the need to increase consumer spending as a percentage of GDP, that is a long-term solution. In the meantime, exports to Europe, China’s top customer, are falling now and cannot be offset, except by ordering the building of more plants that will produce goods for which there is no current market. All in all, it seems that it will be difficult to avoid a hard landing.

The slowdown in Europe, the U.S. and China is also impacting the economies of the emerging nations, which are heavily dependent on exports. Declining growth is also driving down commodity prices. Despite all of the talk of decoupling, it seems apparent that the economies of all nations are linked and that there is little prospect of an oasis of prosperity in an increasingly dependent world. _Global Slowdown Will Accelerate

US Q2 Earnings Outlook Down

It is interesting to note that Friday’s EURUSD rally (1.8 percent) was the largest since exactly October 27. For reference, that previous rally was sparked by the Greek debt deal which arguably extinguished an immediate crisis fire; and yet the market still pulled an immediate about-face and tumbled 1500 pips in less than three months. That doesn’t mean that the euro is destined for the same fate this go around, but the fundamental comparisons between the current situation and October are remarkable. And, if anything, they are worse now. _Professionals are Skeptical of Euro Bandaid Bailouts

The so-called SOEs boast close family and financial ties to China's ruling party clique. Power and wealth have become one in the same—a kleptocracy of insiders skimming off part of the prodigious money flows sluicing through the Chinese economy through relatives strategically placed in state companies, consulting firms, and various financial institutions. Unless this blatant favoritism is curbed by the incoming administration of Xi Jinping, says Overholt, China faces the prospect of long-term stagnation—a prospect potentially far worse than that of Japan some 20 years ago. _China Corruption Casts Shadow on Future Prospects

The world is going through a number of simultaneous crises, just as the US has chosen to abdicate its global leadership role under President Obama.

It is unlikely that the US will be in a good position to help stabilise the global situation, at least in the near future. US President Obama's war against the private sector economy of his own country guarantees that the US economic juggernaut will take time to rebuild, before it can take on many challenges outside its own immediate realms of influence.

Much Ado About Chinese Stealth Fighters

Like most information coming out of China these days, information about China's military capability must be taken with a grain of salt. This is particularly true about the recent hype over China's "new stealth fighters."

In December 2010 the Chinese People’s Liberation Army Air Force shocked observers when it allowed civilian photographers to snap and publish photos of China’s very first, and previously unseen, stealth fighter prototype undergoing ground testing in Chengdu in central China.

The J-20 “Mighty Dragon” took off for its apparent first test flight on Jan. 11, inaugurating what some have described as a new era of aerial warfare, in which advanced Chinese aircraft might challenge the decades-long dominance of the U.S. military with its stealth fighters and bombers. “China’s new Chengdu J-20 stealth fighter was an important milestone in China’s Long March toward parity in military technology with Russia and the West,” wrote Carlo Kopp, an analyst with Air Power Australia, an independent think tank.

Not only did China possess the J-20, its aviation companies were also said to be hard at work on several other radar-evading fighters similar in philosophy to the American F-117, F-22 and F-35 fighters and B-2 bomber. Among these rumored warplanes was the J-16, reportedly in development in Shenyang in northeastern China.

The J-16 was, if anything, scarier to the American defense establishment than the J-20, for it was more practical. The Mighty Dragon was clearly an experimental aircraft incorporating design elements typically not seen on Chinese warplanes, including internal weapons bays. Moreover, the twin-engine J-20 apparently lacked purpose-built engines and could be seen flying with Russian-made AL-31F engines likely poorly-suited for the airframe.

A year after its debut the first J-20 had completed only 60 confirmed testing flights of the thousands required by a new warplane design. A second copy of the Mighty Dragon appeared in the spring of 2012 but by summer still hadn’t flown.

...The J-16′s first public appearance occurred in Shenyang in April, when the PLAAF flew at least one of the new fighters before a press audience. Hong Kong’s Kanwa magazine described the J-16 as a direct copy of the Su-30, a version of the T-10 dating from the late 1990s. The J-16 in fact does not feature any of the rumored stealth enhancements, such as can be found on the T-50. Apparently, the only difference between the Chinese J-16 and the Russian Su-30 it’s copied from is that the J-16 can carry Chinese-made weapons. Both the J-16 and the Su-30 use the standard, Russian-made AL-31 engine.

In that sense, the “new” Chinese fighter isn’t new at all. Instead of representing an immediate step towards a stealthy fighter force rivaling America’s, Beijing’s new warplane holds the line at late ’90s-early 2000s technology. Unless China is developing any other new warplanes — and that’s certainly possible — a true generational leap in front-line fighter technology will have to wait for the J-20 to achieve operational readiness. That could take a decade, by which time the U.S. military will likely have brought potentially hundreds of new F-35 stealth fighters into service.

As the J-16 was making its first public appearance, Beijing was also negotiating with Russia to purchase copies of the Su-35, the newest T-10 model. The proposed purchase only underscores China’s apparent inability to produce its own combat-capable versions of even moderately stealthy warplanes anytime soon. Perhaps Beijing is learning the lesson that the U.S. government learned during the 15-year, $70-billion development of the F-22: that inventing stealth fighters is hard. _Source

We know that many Chinese buildings, tunnels, bridges, towers, and other construction has a tendency to collapse years ahead of their time -- if not prior to completion.

China's legendary difficulties with construction and civil engineering has been linked to rampant corruption in China's construction industries and governmental oversight departments. But who is to say that there are not similar problems with Chinese manufacture of military aircraft components? There must be some reason why the Chinese have so much trouble building their own engines and other components of modern military craft.

Westerners -- particularly Americans -- need to be careful not to allow their Pentagon and military contractors to exaggerate China's military capability in the leadup to another legendary arms race. It is unlikely that the US government -- already spending over $1 trillion a year more than it can raise -- can survive another full scale arms race such as the one it barely survived against the Soviets.

China Slowdown Coverup Fools Analysts

Many veteran China watchers appear to have been fooled by faked statistics coming from Chinese government sources. It appears that the economic slowdown in China may be deeper and more extensive than previously suspected -- rivaling the slowdown of late 2008 - early 2009.

Record-setting mountains of excess coal have accumulated at the country’s biggest storage areas because power plants are burning less coal in the face of tumbling electricity demand. But local and provincial government officials have forced plant managers not to report to Beijing the full extent of the slowdown, power sector executives said.

Electricity production and consumption have been considered a telltale sign of a wide variety of economic activity. They are widely viewed by foreign investors and even some Chinese officials as the gold standard for measuring what is really happening in the country’s economy, because the gathering and reporting of data in China is not considered as reliable as it is in many countries.

Indeed, officials in some cities and provinces are also overstating economic output, corporate revenue, corporate profits and tax receipts, the corporate executives and economists said. The officials do so by urging businesses to keep separate sets of books, showing improving business results and tax payments that do not exist.

The executives and economists roughly estimated that the effect of the inaccurate statistics was to falsely inflate a variety of economic indicators by 1 or 2 percentage points. That may be enough to make very bad economic news look merely bad. The executives and economists requested anonymity for fear of jeopardizing their relationship with the Chinese authorities, on whom they depend for data and business deals. _NYT

As mountains of coal, copper, and other commodities continue to pile up at Chinese depots, China analysts are beginning to wonder if they can trust any numbers whatsoever that hove their origin within the Chinese government or state owned entities.

Serious economic decline linked to a banking crisis has affected several countries in Europe, and lower oil prices are beginning to take their toll on Russia. If China is forced to reduce its massive commodities stockpiling and the massive infrastructure overbuild, exporting nations such as Brazil and Australia may begin to feel the pain.

Al Fin economic analysts have been warning readers of this possibility for well over a year now, but as of yet global commodities prices have not yet dropped back to 2007 levels.

The Chinese government has very good reasons to not show any public sign of economic weakness at this time. But if it is forced to back off from its ambitious building stimulus scheme, the global repercussions in commodities markets may make 2008 / 2009 look like boom time.

Debate Over China's Economic Slowdown

Michael Pettis discusses the economic debate over China's slowdown, and the question of whether China's CCP government can pull the economy out of its decline. Pettis discusses some of the main problems with China's current policies of malinvestment and misallocation of resources.

Patrick Chovanec provides a wealth of links to articles on China's economic situation. This "links feature" from Patrick is turning into quite a treat. Using this information, a person can browse the data points and draw his own conclusions.

Coal stockpiles rise as economy dips

Watching the growing stockpiles of essential commodities is one way of monitoring economic progress. Another important checklist to update is overcapacity in manufacturing and real estate.

If Pettis is right, and China is being forced into another round of stimulatory infrastructure overbuild, we will need to be able to monitor the extent of this overcapacity.

China can easily prop up its near term GDP numbers at the cost of future stability. In the process, it can lend false hope to its commodities suppliers such as Brazil, Australia, and several S.E.A regional countries.

In the end, China will have to reform its corrupt and dysfunctional system of state owned banks and enterprises and crony government, or it will resort to escalating nationalistic xenophobia and war, or China will schism into antagonistic fragments.

The crisis point will likely occur sometime in the 2020s, within years of a similar crisis point in neighboring Russia.

More on China's Troubled Transition

It seems as if China has failed to learn the lessons of its mistakes and excesses, and is embarking upon a journey of increasing corruption and oppression. By rejecting much-needed economic reforms, China appears to be closing the door on what could have been a wonderful era of abundance and opportunity for the Chinese people.

... [In the 1990s] Deng Xiaoping reignited economic reforms by taking on the Communist Party’s powerful left wing.... Mr. Deng brought in reformers like the now-retired President Jiang Zemin and Prime Minister Zhu Rongji to scale back state control, moves that eventually paid off with China joining the World Trade Organization in 2002.

But when they retired, replaced by Mr. Hu and Prime Minister Wen Jiabao, the atmosphere changed. Economic modernization was seen as causing social unrest, which rose steadily during the 2000s. In response, the country put in place a “stability maintenance” apparatus to tamp down criticism.

....Publicly controlled enterprises have become increasingly lucrative, generating wealth and privileges for hundreds of thousands of Communist Party members and their families. And in a clear sign of its position, the government has moved to limit public debate on economic policy, shutting out voices for change. While political reform has always been a taboo topic in China, in economics, from the late 1970s to the early 2000s, almost anything went, with powerful voices backing strong measures that challenged the status quo. But now, despite the rise of social media, fewer prominent voices within China are able to make the case for a systemic overhaul that would prepare the nation for long-term prosperity on sturdier foundations.

“It’s not a good time to speak out for reforms, but it’s a good time to speak out against them,” said Li Shuguang, a professor at the China University of Politics and Law. “The government doesn’t encourage debate.”

Few people illustrate this conundrum better than Zhang Weiying, a 53-year-old Peking University professor who is probably the closest China has to an economic dissident.

A cause célèbre in Chinese economics circles, Mr. Zhang was fired a year and a half ago from his post as dean of the university’s Guanghua School of Management. Since then, he has been on an extended sabbatical, traveling widely and giving speeches on the country’s brewing economic troubles, among them slowing domestic growth and a collapse of financing for private enterprise _NYT

Much more at the link.

A Broad Look at China's Economic Problems

Stealth Problem Alert from Patrick Chovanec: A potential mess in the making.

More potential problems for China's government and economy

Interesting overview of China's situation from Vitaliy Katsenelson in Scribd slideshow format

Each of these links contains a slightly different assessment of China's problems, with some important factual information which you might not run into otherwise.

China: Bubbles on Top of Bubbles

...even though the Chinese government has been, for years, telling everyone that they are serious in trying to curb home prices, it is now becoming clear that because rising home prices and inflation are what make Chinese ruling class gain personal profit, they are now giving up on real estate market curbs already. In fact, not only have they been fine-tuning real estate policies mainly at the local governments level, they have started cutting lending rates, as we have all known. Between attempting to maintain high growth and letting the economy to adjust, the government speaks the latter and does the former.

As a result of all these subtle changes in languages and actual policies, it seems that the real estate market is heating up again in various cities. Now we are seeing queues in property sales office again in Beijing, Shenzhen and other places as people seem to believe that as the tightening is over, real estate prices will rise again according to Sina. As we said yesterday, that this is rather pathetic as the government seems to be hoping that speculators will come in again to save the economy. _Also Sprach Analyst

What these bubbles on bubbles are covering up is the fact that the Chinese government has no idea what it is doing, as far as China's economy is concerned.

Even worse, the Chinese CCP government may not want to know what is truly going on under all the layers of bubbles they have helped generate through their multiple levels of essentially unworkable and incompatible economic policies.

Chinese state owned enterprises (SOEs) -- including large banks -- are turning out to be the Chinese equivalent of Enron, Bernie Madoff, and Jon Corzine combined. This does not bode well for the time when bills must finally be paid.

[Chinese] Money supply rose markedly in May and recent years' credit growth has surpassed even that of the U.S. in the period leading to the Lehman collapse. Unfortunately, instead of being put to good use, much of that money has ended up in the hands of wasteful state-owned enterprises, or SOEs...

...The SOEs are like the profligate Real Housewives of Beijing. They get tons of money to splurge on fancy, wasteful items, get wined and dined by the country's most powerful figures, yet contribute relatively little to the economy. In many cases, they're profitable solely because they're the only players allowed in strategically important industries...

...Of course, the nation's four largest banks -- themselves majority state-owned -- have a tremendous bias in lending to SOEs. And the government's vested interest in protecting the status quo has led to major restrictions on multinational banks looking to expand within China. ...

...As a result of their intimate connections with China's authorities, SOEs enjoy a number of remarkable advantages that private firms would kill for. They get huge government subsidies in the form of significantly lower tax rates, have access to much cheaper basic inputs like water, land, and energy, and enjoy barriers to entry in key industries.

But despite their edge, SOEs are much less efficient than their private counterparts, and have become increasingly inefficient over the past decade. In fact, many are loss-makers and there's mounting evidence they've misallocated capital on a tremendous scale. But thanks to the "wonders" of state capitalism, they keep getting funded -- accounting for more than 75% of all bank loans -- and continue to expand. _Daily Finance

Those who are interested in the ultimate future of modern China should read the full piece in Daily Finance.

This type of corruption in high places is not likely to turn out well. And yet, an international poll by Pew Research reveals that most westerners see China as the world's dominant economic player.

Welcome to the global Idiocracy.

Demographic Collapse in Russia Threatens Pensions

The collapse in the birth rate after the breakup of the Soviet Union two decades ago will cause Russia's labor force to shrink 11 million by 2030, while the number of pensioners will grow by 9 million. _MoscowTimes

Perhaps the silver lining of Russia's pension problem is that Russian men do not often live long enough to enjoy their pensions. High death rates from heart disease, alcoholism, suicide, tuberculosis, crime, accidents, and smoking related diseases allow only a few old Russian men to live long enough to complain about their pensions.

One solution involves increasing the time Russians would have to work to receive a full pension. The Social Development Ministry proposes boosting this period to 40-45 years, up from just five years at present.

In one of his first decrees as the new president, Putin has called for a mechanism that rewards pensioners who work beyond the official retirement age.

"It is a hidden hike in the pension age, but they don't want to do this openly," said Julia Tsepliaeva, chief economist at BNP Paribas in Moscow.

To save money, the plan would also have to penalize Russians who still retire at 55 or 60. It's far from clear that Putin has the political stomach for such an unpopular step.

. "Unfortunately, people don't realize that they are paying for pensions themselves," said Gurvich. "They have paternalistic thinking and think that the government pays. So they don't like the idea of working longer." _MoscowTimes

Somehow I doubt that Putin -- or any Russian politician or official -- can get away with raising work requirements for a pension from just 5 years all the way up to 40-45 years.

With the average life expectancy for Russian men barely at or above 60 years, most men will not be healthy enough to work that long, and many will not survive that long -- work or no work.

As the numbers of ethnic Russians inside the country continues to shrink -- and the numbers of non-Russians inside Russia continues to grow -- there will be the further problem of conflict between the non-Russian workers who may not wish to pay high taxes to support ethnic Russian pensioners.

Of course, that conflict can arise in any country where demographic replacement -- due to differential birthrates and immigration -- is taking place.

Obama Misspoke: It's the Public Sector That's Doing Fine

President Obama recently claimed in the middle of a big press conference, that "the private sector is doing fine." Oddly, Democratic Senate Majority leader Harry Reid said exactly the same thing six months ago, when pressing to hire more unionised government workers. But really, just how would those two big-government diehards know whether the private sector was doing well? They are so deep up the government colon they wouldn't know a healthy private sector from an outer space alien invasion.

Obama and [Senate Majority Leader Harry] Reid have it precisely backward: It’s the public sector that’s doing fine. According to the Bureau of Labor Statistics, the unemployment rate for government workers last month was just 4.2 percent (up slightly from 3.9 percent a year ago). Compare that to private-sector industries such as construction (14.2 percent unemployment), leisure and hospitality services (9.7 percent), agriculture (9.5 percent), professional and business services (8.5 percent) and wholesale and retail trade (8.1 percent). As Andrew Biggs of the American Enterprise Institute points out, the public-sector unemployment rate “is the lowest of any industry or class of worker, even including the growing energy industry.” If the rest of Americans enjoyed the same unemployment rate as government workers, Obama would be cruising to reelection.

Meanwhile, the private sector continues to struggle under the weight of Obamacare, the spiraling national debt, the $46 billion in annual costs of the new regulations imposed by Obama, and the looming threat of “taxmageddon” — when, come January 2013, the private economy will get hit with hundreds of billions in higher taxes.

The result? In the first quarter of this year, private-sector GDP grew by a meager 2.6 percent. That is certainly better than the pathetic 1.2 percent growth rate last year, but compared to previous recoveries, it is anemic. When Ronald Reagan ran for reelection in 1984, private-sector GDP grew by 6.5 percent — 2 1 / 2 times the current rate. That’s why Reagan was able to declare “It’s Morning in America again” while Obama can’t.

Obama and Reid may think 2.6 percent private-sector GDP growth is “just fine,” but the 23 million Americans who are unemployed, underemployed or have quit looking for work don’t share their complacency. Unless Obama wants to put them all in government jobs (which he might), the only way to help these Americans find work is to reduce barriers for job creators in the private sector. The election will likely hinge on who Americans better trust to do that.

That is why Obama’s gaffe is so damaging to his prospects for reelection. It feeds a growing public perception — which is being actively cultivated by the Romney campaign — that when it comes to the economy, Obama is out of his depth and hostile to private business. _WaPo Opinion

This mentality of government uber alles -- an amorphous and swelling general dependency upon government for more and more essentials while at the same time as government budgets are being destroyed by out of control government union pensions, pay, benefits, and double dipping -- is killing state and local governments. Of course, if these regional governments could print money -- as Obama's and Reid's central government can -- they might be able to hold out against the taxpayer revolt a little bit longer.

The following video provides a counter-point to this ruinous mentality of government dependency and unlimited government growth. Meet Emily O'Neill, of the Center for Freedom and Prosperity (h/t Daniel Mitchell)



Some people believe it will take something on the order of a "civil war" to clean out the nests of vermin, vipers, and vultures out of all the regional governments.

At that point, it will be time to look to the central government. But before the central government can be reformed, Obama and his band of corrupt and merry radicals simply have to go.

Why so Vicious? Did She Do It for Trayvon?

No one knows why the 18 yo woman in the photograph stabbed a 27 year old pizza delivery woman multiple times in the head, chest and torso. The delivery woman was making a delivery at a home when she was accosted by the woman -- Cadedra Lynn Cook -- and a teenage male accomplice on the doorstep.

Police are looking for a motive for the murder, since the amount of money taken from the victim would not normally be considered worth committing a capital offense.

Police said a pizza order was placed by telephone at Domino’s shortly before 9 pm on Thursday and Ms Hutcheson was the delivery person sent.

Ms Hutcheson was found bleeding in the doorway of the house at around 9.15pm by police officers conducting a traffic stop nearby who rushed to the scene when they heard her screams.

She was pronounced dead at Polk Medical Center.

Police said both attackers fled on foot after the stabbing, and after a search overnight involving many different police teams, officers apprehended the teenagers at around noon yesterday in a nearby field. _DailyMail

The victim -- a single mother of a 4 yo child -- had taken the pizza delivery job to help support her young child.

As noted, police are baffled as to why the perpetrators committed such a vicious crime under the apparent circumstances. But attacks on pizza delivery persons are not unheard of. Generally the motive is robbery, but in a national atmosphere of racial tension brought on by the Trayvon Martin murder trial, the motive of race must be considered in an interracial crime of this type.

The reasons for apparently random violent crimes cannot always be determined. In the US, resentment of blacks against whites and members of other races has grown over the past several decades, due at least in part to dysfunctional public policies dealing with race.

News coverage of the Trayvon Martin shooting plays into this general resentment, occasionally leading susceptible people into violent acts -- or making it easy to justify these acts in hindsight.

Blacks commit a disproportionate amount of violent crime in almost every multicultural community where the proportion of black residents passes a certain threshold.

Rather than papering over these crimes and this clear tendency to violence, societal institutions such as academia, the media, government, etc. should seek to identify the roots of this violence, so as to find a solution. The perpetuation of such violence through national denial leads to a very unstable situation.

Photo Credit

Democratic Party Suffers Injury to A Majour Support

The US Democratic Party is largely supported by Government Employee Unions, Trial Lawyers, Big Faux Environmentalist lobbies -- and to a lesser degree by large Wall Street firms, academics, celebrities, and media conglomerates.

Government Employee Unions suffered a grievous injury last week, when voters in Wisconsin and California elected to make it more difficult for the unions to hold taxpayers hostage at the point of a gun.

The voters of Wisconsin know that the Democrat Party is for the most part owned and operated by corrupt public-employee unions that want to suck every last dollar out of their pockets to fund bankrupt pensions and health care plans for themselves and their members.

The voters of Wisconsin have realized that these unions and the politicians who support them are literally stealing from them and endangering the economic future of their children. ...Americans are now choosing self-responsibility and fiscal sanity over the suicidal power grabs of the public-employee unions and their political protectors. Not only will these corrupt public-employee unions continue to take a pounding across the country but come November, Obama will too. _IBD

Voters in San Diego and San Jose sent a similar message to their state and municipal government employee unions.

US states, counties, and municipalities are beginning to suffer, as their budgets are being squeezed by extortionate union contracts. Libraries must be closed, while at the same time important city, county and state workers must be laid off or cannot be hired.

US President Obama has supported the quasi-criminal government unions in their fight against the taxpayers. As taxpayers wake up to what is being done to them by government unions, it is likely that they will eventually wake up to Obama's participation in their economic rape. Whether such an awakening will occur before the election in November depends to a large degree upon the lengths to which the US media will go to protect their favoured politician in the White House.

Global Economy at the Crossroads

China may be on the brink of instability and large scale capital flight

If this dire prediction should come to pass, the repercussions across global markets -- both emerging and developed -- would be severe.

The global drop in oil prices is having a depressing effect on Russian markets and the ruble

Putin's inability to sell high priced Russian natural gas to China is likely to further hurt the wounded bear

Things are bad all over, with people beginning to remark on an exodus of cash from China

A growing problem of capital flight from Russia etc.

Even Europe is beginning to feel the sting of capital flight -- and not just Greece and Spain

Unless the US can get rid of Obama and his ruinous administration of economic saboteurs, and unless the UK and Australia can get rid of their energy starvationist politicians and bureaucrats, even the Anglosphere may be in for some very hard times.

Mainland Europe needs to reverse its demographic decline and enact some crucial pro-energy policies, before it suffers a terminal green dieoff.

It is possible for entire societies to commit suicide. Try not to let it happen to yours.