World markets fall 1.5% on Wednesday -weak U.S. consumer report

by albertacowpoke | October 28, 2009 at 03:26 am

255 views | 46 Recommendations | 26 comments

As evidence mounts, that the U.S. consumers will not return to their spendthrift ways, Asian markets overnight fell by 1.5%.

The U.S. Dollar lost ground against the Japanese Yen and Oil dropped below $80. The U.S. consumer is struggling, the Unemployment rate is edging close to double digits and in some states has already moved past 10%.

This does not instill confidence in the consumer. PIM of Spain has written several excellent articles on the state of the present economy. His predictions seem to be confirmed by these recent events of ups an downs of the markets.

Just last week there was overjoy that DOW had reached the 10,000 mark. Will there be continuing slippery slope of markets? It seems even Administration officials continue to contradict each other on the state of the economy.

Trading on Wall Street should prove to be interesting today.

Global stock markets dropped Wednesday as more signs American consumers were struggling undermined hopes for a stronger turnaround in the world's largest economy.

Major Asian markets fell by about 1.5 per cent or more, with European shares shedding about one per cent in early trade. Oil prices dropped below $79 a barrel, while the dollar weakened against the yen.

The losses followed another choppy session on Wall Street, where an unexpected drop in consumer confidence gave investors few reasons to venture further into a market that's run massively higher in the last eight months.

The news was the latest evidence that U.S. shoppers, their budgets tightened by the economic crisis and rising unemployment, aren't likely to return to their spendthrift ways anytime soon. It was all the more unsettling in Asia, coming ahead of the vital Christmas holiday season, when major export companies rely heavily on Americans to increase their spending on electronics, toys and other goods.

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Roy C

at 11:08 on October 28th, 2009

The Asian capitalists can't pimp us out anymore. The deeds been done and the Fat Lady has sung, and she wants to get off the stage now and take down the scenery. :)

All that stuff that they have there, all those factories- I hope that it is all paid for. Why? Because, if they have not paid for those factories, if they got highly leveraged money, then as we buy less, the value of the factory, the company that owns it, is less.

And, if the value of the assets of the company, factory, "good will", as it is called and all, goes below the value of the loan, then the company and its factories will be "under water", just like so many once over-valued homes in the US.

Then, if there are any real problems beyond just a lessening of profits to insufficient profits, or actual losses, then foreclosure, bankruptcy, insolvency, will take down those banks that made the loans with the factory.

The chaos that will be China at that point will promote huge civil unrest. The Chinese gov't had been sitting atop a revolution since Tiananmen Square.

Then World Depression 2.0 really begins.

albertacowpoke

at 11:05 on October 28th, 2009

Thanks for you comments Roy.

Iffy (not verified)

at 11:12 on October 28th, 2009

You miss a point: while it is true China's current economic model involves selling lots of crap to the western world, you can be damn sure they can turn their economy to other markets. It is a communist state: if they want 10 percent growth, then they get it. If they want everyone to have a swimming pool and a Hello Kitty Brand House, then everyone gets one. They create the demand because nobody has a say on the matter. We need to learn from that.

albertacowpoke

at 11:14 on October 28th, 2009

Good points Iffy, certainly something to consider.

nanute

at 11:24 on October 28th, 2009

And here's the kicker: they'll do it with our money.

rng

at 11:22 on October 28th, 2009

Demand has reduced, rightfully. It has not ended. Cheaper energy means cheaper production costs. For a more strategic view:

Tune in to cable TV, talk radio, or the blogosphere and you will soon be hit over the head with the message that free trade is destroying America. According to the economic populists on the left and right, the wages, jobs, and futures of Main Street Americans are being sacrificed daily to the gods of globalization.

On trade, as on so much else, the populists have it wrong again. Free trade and globalization are great blessings to American families. Trade is delivering lower prices and more variety to consumers, especially the poor, while creating better paying jobs for the middle class. Beyond US shores, the spread of economic openness is building a more peaceful, democratic and humane world for our children....

During difficult economic times, import competition allows American families to keep their heads above water by delivering lower prices on staples such as food, clothing, and shoes. The prices we pay for goods exposed to global trade tend to rise more slowly than inflation or even fall.

http://www.yaleglobal.yale.edu/content/free-trade-has-enriched-world-more-diverse-goods

nanute

at 11:42 on October 28th, 2009

mg, while I agree with your basic assumptions, most Americans, particularly those that are currently experiencing serious economic difficulty, fail to see the benefits you express.

The biggest problem right now for America is the continued weakening of the currency. Naysayers, will try and tell you it is because we are creating too much debt. In the short term this argument is not plausible. Once our economy starts to recover, and consumers start spending again, if ever, is when the inflationary and devaluation aspects of the currency will be relevant.

China is the wild card right now. I would argue that one of the major factors, not the only factor, why our currency is experiencing devaluation is because of China's monetary policy. I wrote about this the other day, and didn't get any reaction at all. I'll re-state the argument again: China is manipulating their currency which is having the effect of lowering the value, while in reality economic conditions in real terms show that the currency should be increasing in value. China wants to maintain their edge in the export markets, and a devalued currency enhances that desire. If China's currency was truly pegged to the dollar and allowed to truly float in the currency markets it would rise in value.

Under the current situation, the US is in no position to put pressure on China to change it's monetary policy. Or are we? If the US dollar continues to decline, China's value of US dollar denominated asset will decline.The problem for China is that if their currency goes up in value, the only way they can offset the increase is by buying more dollars to strengthen the dollar. Perhaps China is betting that maintaining a strong export balance of trade will offset the loss. Time will tell who is right.

This issue is not the only one affecting our current situation, but in my view it is one of the major factors.

rng

at 12:06 on October 28th, 2009

Americans fail to see ...

In all honesty they are spoon fed nonsense by populist who don't have a grasp on domestic issues that have complexity, let alone global economics. It is also part of the entitlement and instant gratification mindset many Americans have. Americans are poorly served by the media, and as a resultant easy prey for populists selling rankings and hyperbole.

The biggest problem right now for America is the continued weakening of the currency

I don't agree. This strong dollar argument is a nationalism and pride issue. A weaker currency certainly impacts status as a reserve currency but it also produces positives. It makes imports more expensive and exports more competitive. We have to understand we are part of a global market and cannot stand in isolation...that is a 1950's unreality in today's world. Anybody who thinks that broad monetarism and protectionism is a way out needs to go back to school and understand inter-connectivity impacts (see Tom Barnett for strategy or Krugman for economics of the issue). China has its own set of issues and is absolutely keeping its currency low - see above on import-export impact for its rationale.

nanute

at 12:13 on October 28th, 2009

you misunderstood my point on the weak dollar. We are in agreement. The weak dollar fallacy is the argument that inflation bugs keep selling Right now a weak dollar would allow more imports at cheaper prices. (With the exception of oil). Take a closer look at my argument. Maybe I misstated my position. I'll look again.

rng

at 12:23 on October 28th, 2009

Perhaps I am not understanding. You are saying that a weak dollar would allow more imports at cheaper price...but actually a weak dollar makes imports more expensive. We can buy less of foreign goods if our dollar declines. It does however make our exports cheaper as they are purchased in a foreign currency (even if nominally converted at the end).

Also I agree that while debt is an issue, liquidity and propping up domestic demand is more important just now until we cycle and consumer demand starts to edge back up

nanute

at 12:46 on October 28th, 2009

you are right I misstated my position. We are not in a position to be buying anything for consumption right now. We need to be saving. I know we need to be putting people back to work and get the economy going again. The weak dollar limits our imports as you correctly state. I'm saying we need the dollar to remain cheaper to offset our trade imbalance. Demand for our exports will theoretically increase demand and re-employment. Notice I said theoretically.

albertacowpoke

at 11:41 on October 28th, 2009

rng, that would certainly be my take on Free Trade. I have had this discussion previously with others. When Canada and the United States were negotiating the Free Trade, which Bill Clinton eventually signed, there was a heated debate in Canada, were those against it were telling those for it that they were selling their souls to the U.S. Free Trade has opened many doors on either side of the U.S./Canada border.

Whenever protectionism becomes popular it is used as a tool by politicians to discredit it. Reality shows a different picture. Some manufacturing jobs just could not be sustained in North America and will never come back.

rng

at 12:05 on October 28th, 2009

Agreed. Pushing protectionism is like promising a ride back in a time machine to an idealized childhood. It will sell votes but it is not real. Not now and certainly not in the future.

rng

at 12:06 on October 28th, 2009

correcting sequencing of replies

Hugh Askew

at 15:17 on October 28th, 2009

If, when, the economy - worst case, mind - crashes far enough, wages will fall to the point where we will again be competitive. Not a pretty thought, but plausible enough for me to toss it out there.

nanute

at 15:21 on October 28th, 2009

Let's just hope that if that happens a dollar an hour will buy a weeks worth of groceries.

rng

at 15:55 on October 28th, 2009

When you have average daily wage levels of $1.65 in Cambodia for example, it would be an extreme fall to get there. Could be a great fiction novel though...or a comedy skit or a tragedy more likely

Hugh Askew

at 16:59 on October 28th, 2009

Not hard to project the current situation to time when things were so bad that a third or more of the population was out of work.

What happens if Israel or the US bombs Iran's nuke facilities? Iran responds by sinking a tanker or two in the Persian Gulf. Gas prices rise overnight to 10.00-20.00 a gallon. The economic ramifications would be beyond ginormous.

Or, a year from now, the US, already burdened under tremendous debt, adds another trillion of so to the current load. Then, has to confront a Chinese move on Taiwan. China would simply have to prolong the conflict until such time as the US could no longer borrow money to finance military operations. Where would we turn for aid?

Neither is far fetched, neither is beyond the realm of possibility.

Think Ima Bad Jammie hasn't played it out in his mind? Doubt that Chinese planners haven't considered the consequences of American borrowing?

Will they happen? Don't know. Doesn't even matter that i think they are possible. It will only matter if one or the other does happen.

If not for American largess, Britain would not have been able to continue their war against Germany in 1941. Review the effects of the Shah being disposed, and the hostage situation in 1979, to see a minor version of what happens if Iran gets nasty.

Roy C

at 17:05 on October 28th, 2009

Mr. Hugh, excellent explanation.

albertacowpoke

at 17:08 on October 28th, 2009

Yes none of it can be ruled out, especially the Iran scenario. The Strait of Hormuz is a fragile passage for oil. There is a reason there are still U.S. troops in Iraq.

Somebody should have also noticed recently all the international trade agreements that have been concluded between Russia and China and China and Russia with India.

Do you think there is some positioning going on to influence world events?

rng

at 17:27 on October 28th, 2009

And Russia, China, Germany et al with Iran. Or the joint exercises with Turkmenistan. Who else could support the US, Europe, Saudi Arabia....will they? I agree the US needs to realize that it is not Atlas and especially not anymore. It cannot carry the world on its back. We tread on dangerous ground if we beard Iran. We need to smack Israel up the back of the head IMHO and if they as so much put a plane over Iran cut their millions of dollars a day aid we give them. If our leaders are really stupid enough to push that scenario then we are back building bunkers. I recognize the scenario you propose, it has been described a few thimes in defense strategy briefings. I don't believe it will happen with a measured hand at the wheel\, if Cheney had still been in control, more likely but the hawks have had their wings clipped.

albertacowpoke

at 17:47 on October 28th, 2009

I agree this scenario is a nightmare. These are troubling times and the positioning continues as we speak. It may only play out in the economc sphere, at least I hope it does. Help us, if it actualizes itself as a major conflict.

Hugh Askew

at 11:06 on October 29th, 2009

Cowboy, China has made oil deals all over the globe in the last few years. Enough to ensure a supply of oil to China regardless of what happens in the Straits. They have been using American dollars, that may well be worthless, if the scenario plays out.

Very prescient in my humble opinion. Explains the Chinese stance on Iran. Why lobby for your rivals interests? Any further mess there will only entangle the US further, and cost us an incredible amount in money and prestige.

Besides, it lets China appear to be neutral and non-meddling.

albertacowpoke

at 11:18 on October 29th, 2009

You're right about deals all over the globe. They have even bought interests in the Alberta Oil Sands. All that requires is pipelines to the West Coast, which are being built as we speak. The oil will flow through an upgrader in Fort Saskatchewan, about 25 miles from here and then transported from there to the West Coast.

Jnkns

at 11:47 on October 29th, 2009

a weak dollar would never be good by any means, I mean it could lower the unemployment rate but inflation will be higher. overspending culture must be reduced so people stop getting loans of overprinted bucks.

http://www.tradeviewforex.com/cfdblog/post/2009/10/27/us-dollar-may-continue-advancing-against-euro-canadian-currency-dropped-tradeview-pro-trading-platform.aspx