There is no US consumer recovery...implications for China

Last week's Flow of Funds report from the US Federal Reserve showed that US total credit expansion, or the relative lack of it, continued to disappear down the plughole despite the government's mighty efforts to put the country back on the path to prosperity (see chart below).

The current recovery, based in very large part to manufacturers starting to ramp up their inventories, simply cannot be sustained while credit is disappearing at this debilitating rate.
















The recently released Q4 Flow of Funds data allowed economists to get a full view of the 2009 data. It was ugly. Most shockingly, the household sector shrank its borrowing for the seventh quarter in a row.

Combined with continued rapid balance sheet shrinkage in both the corporate and financial sectors, total domestic debt contracted for the fourth quarter in a row. The government's creation of credit, or stimulus, as big as it has been is barely propping up the whole economy overall.

Now, we might be getting used to such news, but it is always worth remembering that, prior to the global meltdown, even one quarter of total domestic debt shrinkage was enough to stir the government into rapid response mode with quick relief measures.

The omens are not good for China's exporters. 15 months after the height of the financial crisis, the trend is now clear. US consumers who make up 70% of US GDP are just not in the mood to spend. No wonder the Chinese premier is reluctant to let the value of the yuan appreciate significantly. This will put pressure on the exporters to raise their prices to the buyers and could be the final straw that leads to bankruptcy and spills more unemployed factory workers onto the city streets.

With demand conditions probably permanently stuck in a rut, who dares to prick any of the current China bubbles ranging from property to stockmarkets?

Dr Sam Vaknin, narcissism, Obama and the fate of the world economy

Who is Sam Vaknin? He hails from Israel and is a world authority on the study of narcissism. He has dedicated twelve years to the study of personality disorders in general and the Narcissistic Personality Disorder (NPD) in particular. He has authored nine books on this topic including the Barnes & Noble best-seller "Malignant Self-Love: Narcissism Revisited" and has numerous awards under his belt. Although a prominent psychologist, he is adamant he is not a certified mental health professional.

He has studied Adolph Hitler, Mao Zedong, Joseph Stalin, Kim Jong-il, David Koresh and Charles Manson. He has added Barack Obama to this list.

" I must confess I was impressed by Sen Barack Obama from the first time I saw him. At first I was excited to see a black candidate. He looked youthful, spoke well, appeared to be confident – a wholesome presidential package. I was put off soon not just because of his shallowness but also because there was an air of haughtiness in his demeanor that was unsettling. His posture and his body language were louder than his empty words. Obama’s speeches are unlike any political speech we have heard in American history. Never a politician in this land had such quasi “religious” impact on so many people. The fact that Obama is a total incognito with zero accomplishment makes this inexplicable infatuation alarming. Obama is not an ordinary man. He is not a genius. In fact he is quite ignorant on most important subjects. Barack Obama is a narcissist...
...All these men had a tremendous influence over their fanciers. They created a personality cult around themselves and with their blazing speeches elevated their admirers, filled their hearts with enthusiasm and instilled in their minds a new zest for life. They gave them hope. They promised them the moon, but alas, invariably they brought them to their doom. Charmed by the charisma of the pathological narcissist, people cheerfully do his bidding and delight to be at his service. He creates a cult of personality – focused on one thing alone and that is power..."

On Obama's autobiography...
" Obama’s election as the first black president of the Harvard Law Review led to a contract and advance to write a book about race relations. The University of Chicago Law School provided him a lot longer than expected and at the end it evolved into, guess what? His own autobiography! Instead of writing a scholarly paper focusing on race relations, for which he had been paid, Obama could not resist writing about his most sublime self. He entitled the book Dreams from My Father. Not surprisingly, Adolph Hitler also wrote his own autobiography when he was still nobody. So did Stalin. For a pathological narcissist no subject is as important as his own self. Why would he waste his precious time and genius writing about insignificant things when he can write about such an august being as himself? Narcissists are often callous and even ruthless as the norm, they lack conscience. This is evident from Obama’s lack of interest in his own brother who lives on only one dollar per month. A man who lives in luxury, who takes a private jet to vacation in Hawaii, and who has raised nearly half a billion dollars for his campaign (something unprecedented in history) has no interest in the plight of his own brother. Why? Because, his brother cannot be used to increase his power. A narcissist cares for no one but himself. […] What can be more dangerous than having a man bereft of conscience, a serial liar, holding an office of great power?

Many politicians are narcissists. They pose the usual threats to others. […] They are simply self serving and selfish and are prone to passing ill-advised laws.
Obama evidences symptoms of pathological narcissism, which is different from the run-of-the-mill narcissism of a Richard Nixon or a Bill Clinton for example. History shows plenty of evidence that pathological narcissists can be dangerous. "

Is Dr Vaknin being alarmist? Let us look at a sample of recent events that lend to or detract from his prognosis. Obama flew to Copenhagen on Airforce One to pitch for Chicago as a serious 2016 Olympic venue contender (and subsequently failed); summonsed General McChrystal, the top US commander in charge of Afghanistan away from a London meeting to an update on the tarmac before leaving Copenhagen; was awarded the 2009 Nobel Peace Prize (from 205 nominees) a week later on 9 October which he accepted humbly.

A fragile world economy which is tentatively stepping back from the abyss must learn to build trust in the policies from the "man of the moment" who must surely be a strong contender for Time's Person of the Year. Continue to watch Obamanomics with signature healthcare reforms legislation currently being debated in Congress; cap & trade plus new VAT (value added tax) proposals are now on the table as revenue raising measures. These are potentially added costs for the US consumer...and Asia export trade risks. Meanwhile world financial markets continue to cheerlead "green- shoots" countenancing no U-turns.

http://samvak.tripod.com/cv.html
http://samvak.tripod.com/obama.html

A "leading" indicator for the US consumer: The tipping point between intensive care and money heaven

While scanning the investment horizon with the aftershocks from ground-zero (ie US of A) still reverberating for savvy investors, I came across something that really made my jaw drop, compelling me to do some quick calculations.

In 2001 and 2003, the old prez Bush made some big tax cuts in personal income tax. They expire towards the end of 2010 and will change back to the old rates. Big deal I thought, it's just catch-up time ... until I dug deeper. The taxpayer's pocket is going to get bashed on this one.
- The 10% bracket will increase to 15%
- The 25% bracket will increase to 28% (between $33,950 and $82,250 per year)
- The 28% bracket will increase to 31%
- The 33% bracket will increase to 36%
-The 35% bracket will increase to 39.6%
They seem smallish amounts until I figured you're looking at hikes of +9% to 50% (that's probably the local hairdresser in the bottom bracket!). But get this...Larry Summers, Obama's National Economic Adviser has gone on record in 2009 as saying these will not be renewed/extended. So that's the first calc. With all that govn't debt, they need the revenues.

In the last few years, Asia's emergence has revolved around the US consumer...not the mainland factoryworker or the rich monied wife who flies down from Shanghai to shop at Pacific Place while hubby pays HK$70,000+ per sqft for the Masterpiece in Tsimshatsui to get rid of his loose change. The last two (a small and visible minority) are just the multiplier effect at work aided by the factory worker (a visible but uninfluential economic majority). But over the water, "Joe the plumber" who was personified in the presidential election campaign as the common man on the street is a very visible and powerful cog of the economic majority who determines Asia's export fate, representing 70% of US GDP.

My second calc is to quantify the probable loss in Asia exports due to the loss in spending power as a result of these tax rises. My assumptions:
- US population 307m
- US unemployment in 2010 @ 10% (now at 9.7%, although John Williams of Shadowstats puts it in the mid-teens)
- No. taxpayers = 307m x 70% (30% are non-working under 18s and retirees) x 90% (less unemployed) = 193m
- Say the average taxpayer's annual salary is U$40k (ie HK$26k/mth) across the whole workforce and allow 15% for deductions (taxes & social security etc - very conservative %) and the tax rate goes up by +3% as above

Each taxpayer has to pay additional taxes of US$40k x 85% x 3% = US$1,020 per year. With 193m taxpayers = US$197bn increase in tax revenues / loss in consumer spending power.

Remember this is consumer goods (PCs, cameras and phones, stationery, clothes, home decorations etc) of incremental discretionary spending they will have to elimiminate. Most of this stuff is imported. They'll still have to maintain paying their rents/mortgages, eating and value shopping on day-to-day necessities while cutting back the imported nice to haves/luxuries. If not already, they're cutting back on services too (gym passes, Fifi's doggy manicure sessions).

This is where I use back of envelope maths for the third calc.....if 75% of the imported consumer stuff is from Asia (can only generalise here what truly good popular stuff South America, Europe and Africa ship across besides meat products, confectionery and precious stones), then Asia will lose US$148bn exports. Of this, say 50% is from China @ US$74bn (high volume and low margin consumer electronics and cheap household stuff you see in CitiSuper/FrancFranc/discount stores) with Korea, Taiwan and Japan making up the other 50% with their predominant lower volume but higher margin electronics gear and autos.

US$74bn China loss works out at a reduction in their trade surplus of US$6.2bn / month. If you look at the big picture below, US$6.2bn is a devastating hit in any month! My calc can still be 20% wrong and not affect the picture. The trend is already down drastically; it may bottom out and level off for a while in 2010...before it gets whacked again later. PRC Government steps in again with more stimulus?
















This is a freight train which is out of sight but you can hear the rumbling in the distance. Oncethe lights start flashing, bells ringing and the gates come down at the crossing, it is too late to get across the profitable investing road. You're stuck in your positions! Whatever Obama's tax pledges, Joe the plumber is about to be well and truly drained (excuse the pun). You have plenty of time to position your portfolios to counter the 3% tax butterfly flapping its wings in Washington today before it causes an earthquake at the Chen's factory in Dongguan and Hutchison House (HK's status as a premier transhipment port is at stake here because of economic cycle and structural (Shenzhen port cheaper) shifts.

Keep a careful eye out on this US tax issue which the local HK media don't have on their radar today.