Mish's Global Economic Trend Analysis

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• Pentagon Loses Control of Laser Guided Bombs to China; Shades of "Avatar", Rare Earth Metals a Potential "Unobtanium"; The "Bright Side"
• Cheap, (I Mean Really Cheap) Stores
• Open Dissent at the Fed: Charles Plosser (Philly Fed) Opposes QE2; Thomas Hoenig (Kansas City) attends Tea Party
• Why the Statistical "Recovery" Feels Bad

Pentagon Loses Control of Laser Guided Bombs to China; Shades of "Avatar", Rare Earth Metals a Potential "Unobtanium"; The "Bright Side" Posted: 29 Sep 2010 06:37 PM PDT Last Sunday in Prepare for Currency/Trade Wars; How Might China Respond to US Tariffs? I mentioned the possibility China might shut off exports of rare earth metals used in making glass for solar panels, motors that help propel hybrid cars like the Toyota Prius, and laser guided bombs. Indeed, it was the shutoff of rare earth metals to Japan that caused Japan to "cry uncle" and release a Chinese boat captain detained by the Japanese in disputed waters. For details, please see Rare Earth Diplomacy: Japan Holds Chinese Boat Captain;China Blocks Rare Earth Exports to Japan;China Holds 4 Japanese on Spy Charges;Captain Set Free Rare Earth Metals a Potential "Unobtanium" In light of the above, it should be no surprise to see Bloomberg report about the sudden growing concern Pentagon Losing Control of Bombs to China's Monopoly "It's a seller's market now," says Bai Baosheng, 43, puffing a cigarette in his office in Baotou, China, where his company sells bags of powder containing a metallic element known as neodymium, vital in tiny magnets that direct the fins of bombs dropped by U.S. Air Force jets in Afghanistan. The U.S. handed its main economic rival power to dictate access to these building blocks of modern weapons by ceding control of prices and supply, according to dozens of interviews with industry executives, congressional leaders and policy experts. China in July reduced rare-earth export quotas for the rest of the year by 72 percent, sending prices up more than sixfold for some elements. Military officials are only now conducting an inventory of where and how U.S. suppliers use the obscure but essential substances -- including those that silence the whoosh of Boeing Co. helicopter blades, direct Raytheon Co. missiles and target guns in General Dynamics Corp. tanks. "The Pentagon has been incredibly negligent," said Peter Leitner, who was a senior strategic trade adviser at the Defense Department from 1986 to 2007. "There are plenty of early warning signs that China will use its leverage over these materials as a weapon." While two rare-earth projects are scheduled to ramp up production by the end of 2012 -- one owned by Molycorp Inc. in California and another by Lynas Corp. in Australia -- the GAO says it may take 15 years to rebuild a U.S. manufacturing supply chain. China makes virtually all the metals refined from rare earths, the agency says. The elements are also needed for hybrid-electric cars and wind turbines, one reason supply may fall short of demand in 2014 even with the new mines, according to Kingsnorth of Imcoa. Just how far U.S. manufacturing has waned is apparent at a factory in Valparaiso, Indiana, where dogs skitter across a bare concrete shop floor, their nails clicking. This brick plant on Elm Street once made 80 percent of the rare-earth magnets in laser-guided U.S. smart bombs, according to U.S. Senator Evan Bayh, a Democrat from Indiana. In 2003, the plant's owner shifted work to China, costing 230 jobs. Now the plant houses Coco's Canine Cabana, a doggy day care the current tenants started to supplement sagging income from their machine shop. It's taking as long as 10 weeks to get neodymium magnets, double the previous wait time, said Joe Schrantz, group supply chain manager at Moog Inc. in East Aurora, New York. For Western companies, China's policies are creating the real "unobtanium," the fictional mineral fought over in James Cameron's 2009 film "Avatar." Rising neodymium prices are forcing up the price of magnets, which typically cost between $2 and $30 apiece. That's having a "significant" effect on profit, and suppliers say costs will keep going up, Schrantz said. The company is considering buying blocks of raw material and storing it. "If everybody does that, then it's going to get really crazy," he said. There is much more in the article. Please give it a look. The Bright Side Although "unobtanium" is a cause of concern for warmongers everywhere, being the ever-optimist that I am, I prefer to look at the bright side. Prices are soaring. Isn't that what Bernanke wants? Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Cheap, (I Mean Really Cheap) Stores Posted: 29 Sep 2010 02:05 PM PDT Reader Jed writes .... Hello Mish, Here is a humorous image of a sign I took yesterday at the Southdale Mall in Edina. Jed Thanks Jed but that store has a long, long way to compete with stores in Japan that sell things for 10 Yen (about 12 cents by current calculation). Here is a Forex Currency Conversion Link. ¥10 Shops in Japan Mike in Tokyo Rogers reports ¥10 Yen Shops in Japan! Proof of Deflation! The Asia Times Online shows what 20 years of Japan's economic policies have brought us: Severe deflation. We have ¥10 yen shops selling daily items and doing brisk business in Japan. The ¥10 yen shops sell loss leader items to attract the customers but the other items sell for about ¥88 each, so they even beat out the ¥100 yen shops. The store that accomplishes all of this is called the Recycle Garden. Deflation Dilemma The article Mike Rogers referred to is Ten-yen stores capture deflation dilemma With many worrying that the United States economy headed towards a painful Japanese-style deflation, the concept of "Japanization" is increasingly being bandied around the world. But what is "Japanization"? One answer is found in Kawasaki City, about 20 kilometers southwest of downtown Tokyo. There, a 10 yen-shop called Recycle Garden (equivalent to a 10 cent store in the US) is attracting large numbers of customers by word of mouth. The outlet is one of nine Recycle Garden branches operated in the Kanto region centered on Tokyo and including Yokohama, Kawasaki and Atsugi. At Recycle Garden, 10 yen buys the customer everyday items such as chopsticks, kitchen goods, nail-scissors, hand sanitizers, or air fresheners. A colored plastic hair clasp is also 10 yen. In the Kawasaki shop alone, the product lineup consists of about 1,000 items at 10 yen, with the number of goods totaling around 30,000. It's all there. Surprisingly, most of those products are made in Japan, not in China, Vietnam or Cambodia, from where usually cheaper and lower-quality goods flow into Japan. "Everything is incredibly cheap," said Kyoko Yamada, 52, a careworker, who lives in Tsurumi Ward adjoining Kawasaki, who on a recent visit to Recycle Garden bought 10 items such bath agents. How is such unprecedented price-slashing possible? The mechanism is this: amid an increasingly fierce pricing war among neighborhood retail shops such as 100-yen convenience stores, Recycle Garden makes bulk purchases of those goods from bankrupt shops and firms as from deceased manufacturing and wholesale merchants. In most cases, on hearing the news about a bankruptcy, Recycle Garden workers dash to the failed firms with large dump trucks, and buy up and take away immediately to their chain store a vast amount of goods. "We are cutting prices to the bone," said Tadafumi Fukuda, 41, manager at Recycle Garden's Kawasaki outlet. "Since we also sell other items at 88 yen and above, 10-yen goods serve as a crowd puller." The number of customers visiting the shop has increased 20% from a year ago, when the shop started to sell 10-yen goods, he said. Can this happen in the US? I think it can, no matter what Bernanke thinks. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Open Dissent at the Fed: Charles Plosser (Philly Fed) Opposes QE2; Thomas Hoenig (Kansas City) attends Tea Party Posted: 29 Sep 2010 11:58 AM PDT An open battle exists at the Fed concerning Bernanke's second round of Quantitative Easing (QE2). Hoenig Attends Tea Party Bloomberg reports Fed Dissenter Hoenig Wages Lonely Campaign Against Easy Credit Thomas M. Hoenig, dressed in a gray suit, white shirt with French cuffs, and baby-blue tie, faces an edgy crowd of 150 people in a hotel meeting room in suburban Lenexa, Kan. A large "Kansas City Tea Party" banner covers a table at the door. Attendees wear anti-tax stickers on their lapels. This is not an after-dinner speech for which most central bankers would volunteer. Hoenig smiles at his audience and begins: "This is a support-the-Fed rally, right?" Dead silence. Then the room erupts in laughter. Disarmed, the Tea Partiers listen politely as Hoenig defends the Federal Reserve as an indispensible institution, even if at the moment, he says, it happens to be heading in the wrong direction. And, by the way, if it were up to him (though it's not, really) he would break up the biggest Wall Street banks. This is Tom Hoenig's moment, and it's a strange one. In Washington, he is the burr in Fed Chairman Bernanke's saddle: the rogue heartland banker who keeps dissenting alone -- for the sixth straight time on Sept. 21 -- to protest the Fed's rock- bottom interest-rate policy. Hoenig warns that the Bernanke majority is setting the country up for an as-yet-unknown asset bubble: the next dot-com or subprime craze. He can't tell yet where the boom-and-bust will materialize, but he can feel it coming, like a Missouri wheat farmer senses in his bones the storm that's just over the horizon. In abundant speeches and articles, Hoenig has condemned the political influence of the financial elite. "We've had a Treasury Secretary from Goldman Sachs under a Democratic President and a Treasury Secretary from Goldman Sachs under a Republican President. The outcomes were not good," Hoenig says while being driven to a luncheon talk at an affordable housing conference in Topeka, Kan. Hoenig harbors powerful misgivings over not dissenting more often and more forcefully during the Greenspan years. "He regrets going along with the votes when Alan Greenspan was chairman to get rates so low and keeping them so low so long," says his friend Fisher. There is much more in the article including a discussion of the open debate between Krugman and Hoenig. Philadelphia Fed president Charles Plosser joins Hoenig Please consider Economic Outlook Charles I. Plosser's speech to The Greater Vineland Chamber of Commerce September 29, 2010. My basic message is this: I believe we are in the midst of an economic recovery – a modest one, but a recovery nonetheless. Over the last few months, we have experienced something like the summer doldrums. The tail winds that helped propel the economy earlier in the year have waned. Yet such a slowdown is not unusual in the early phases of recovery, and we should not overreact to data that can be volatile and may be revised over time. My assessment of the recent data leads me to expect that the recovery will continue at a moderate pace over the next several quarters. Inflation and Monetary Policy On the inflation front, recent data indicate some deceleration, which has led some observers to voice concerns about sustained deflation – that is, a prolonged decline in the level of prices. In my view, inflation will remain subdued in the near term, but I do not see a significant risk of sustained deflation. I anticipate that inflation expectations will remain relatively stable and core inflation will run in the 1 to 1-1/2 percent range this year and accelerate toward 2 percent in 2011. Inflation in this range is not a problem – indeed, low inflation is desirable. Most people forget, or are too young to know, that from 1953 to 1965, the average inflation rate measured by the consumer price index (CPI) was just 1.3 percent. For the last 15 years, Switzerland's average inflation rate has been less than 1 percent. In neither of these episodes did low inflation lead to economic stagnation or fears of deflation. Were deflationary expectations to materialize – and let me repeat, I do not see much risk of this – I would support appropriate steps to raise expectations of inflation, including, perhaps, aggressive asset purchases coupled with clear communication that our goal is to combat deflationary expectations. But for such a strategy to be successful, the public must believe that the Fed can and will act to combat those expectations. The Fed must be credible. Protecting that credibility is why, based on my current outlook, I do not support further asset purchases of any size at this time. As I said earlier, asset purchases in our current economic environment can do little if anything to speed up the return to full employment. But if the public believes that they can and is disappointed, it may have less confidence that the Fed will act to raise inflationary expectations if needed. Because I see little gain at this point, and some costs, I would prefer not to engage in further asset purchases at this time. There is much to blast Plosser for. For starters, Quantitative Easing does not work as noted in Sure Thing?! Moreover, inflation targeting is pure idiocy. For some explanations as to why please see Fallacy of Inflation Targeting. For further discussion, please see Does Inflation Targeting Make Any Sense? Finally, it is perfectly clear that Plosser does not even know what inflation is. Yet, even if one did think inflation was about prices, the idea that the Fed can control prices in a global economy is sheer lunacy. Nonetheless, it is interesting to see multiple dissents regarding Fed policy. Hopefully that dissent continues to mount. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Why the Statistical "Recovery" Feels Bad Posted: 29 Sep 2010 02:26 AM PDT Inquiring minds might be interested in charts of GDP minus the effect of increased government spending. The charts are from reader Tim Wallace who writes ... Dear Mish - Take a look at the following spreadsheets of GDP from 2001 to 2010, in chained 2005 dollars to account for [price] inflation. U.S. GDP and Net GDP (subtracting government spending) click on chart for sharper image The above chart clearly demonstrates that there really is no recovery, just increased federal spending and debt. Here are the GDP numbers chained to 2005 dollars (Millions): Year GDP Gov't Spending Net GDP 2001 11,371.3 2,056.4 9,314.9 2002 11,538.8 2,188.6 9,350.2 2003 11,738.7 2,303.3 9,435.4 2004 12,213.8 2,377.7 9,836.1 2005 12,587.5 2,486.0 10,101.5 2006 12,962.5 2,578.5 10,384.0 2007 13,194.1 2,570.1 10,624.0 2008 13,359.0 2,753.3 10,605.7 2009 12,810.0 3,210.8 9,599.2 2010 13,191.5 3,470.0 9,721.5 Note that the chained GDP number less the federal spending nets out to a number less than the GDP of 2004. So basically, our economy is back where it was seven years ago. Private Sector GDP click on chart for sharper image Private sector GDP continues to shrink as the above chart and following table shows. Year Private GDP% 2001 81.9% 2002 81.0% 2003 80.4% 2004 80.5% 2005 80.3% 2006 80.1% 2007 80.5% 2008 79.4% 2009 74.9% 2010 73.7% Moreover, over 40% of government spending is deficit spending. That increase in deficit spending accounts for the alleged rebound in GDP. Clearly that deficit spending is unsustainable. How much of that increased government spending made it into your pocket or benefited you in any way? While your are pondering that, remember that all government spending adds to GDP whether or not anything is actually produced. The "Feels Bad" Recovery These charts help explain Good News: The Great Recession is Over; Bad News: It Doesn't Feel Like It. So far, we do not even have an admission by the President, by Congress, or by most economists as to what the problems are. Instead everyone wants to "stimulate" something, typically by throwing money at problems. This is why the problems are unlikely to be fixed, and this is why we are likely to remain in a stagnant economy that produces few jobs for the remainder of the decade. While the recession is over, it certainly does not feel like it. Moreover, because we fail to address the structural issues, the odds of slipping back into another recession are exceptionally high. Keynesian and Monetarist Stimulus Both Failures Neither Keynesian stimulus (deficit spending) nor monetary stimulus (Quantitative Easing) have done anything to speed up the recovery. In regards to the latter, the QE Engine Revs, but the Car Goes Nowhere. Just as happened in Japan, all we have to show for our stimulus is bigger and bigger deficits with a corresponding increase in the percentage of revenues needed to finance that debt. All this talk of a "recovery" is nonsensical. Careful analysis shows the alleged recovery is nothing more than an illusion caused by unsustainable deficit spending. Meanwhile, the real economy is mired at the 2004 level. Simply put, the recovery "feels bad" because there is no recovery in the first place, only a statistical illusion of one. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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