Mish's Global Economic Trend Analysis

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• China Buys U.S. Businesses at Record Pace; What are the Implications? Will Alarm Bells Ring?
• US Factory Orders "Unexpectedly" Decline; US Car Sales "Unexpectedly" Decline; Expect the Unexpected
• Draghi Hints at Bond Buying But Rules Out Banking License and Warns Governments Must Use EFSF/ESM, ECB Cannot Replace Governments; 10-Year Yield Back Over 7%

China Buys U.S. Businesses at Record Pace; What are the Implications? Will Alarm Bells Ring? Posted: 02 Aug 2012 10:42 PM PDT CNN Money reports Chinese buying of U.S. business at record pace Chinese direct investment in the United States could hit a record high in 2012, according to a new research report released Wednesday. Total Chinese foreign direct investment in the U.S. is on pace to reach at least $8 billion this year, according to the report from research firm Rhodium Group. That would top the previous record of $5.7 billion reached in 2010, said Thilo Hanemann, research director with Rhodium Group, which tracks all acquisitions and investments in manufacturing facilities, warehouses, labs and offices by foreign companies in the United States valued at $1 million or higher. In manufacturing, the biggest investments are being made by Chinese firms with products that have been slapped with hefty anti-dumping tariffs, Hanemann said. Opening up a plant in the United States allows Chinese firms such as Golden Dragon Precise Copper Tube Group, Inc. -- which broke ground this year on a $100 million plant in Thomasville, Ala. -- to avoid these tariffs. What are the Implications? China buying US businesses is a necessary part of correcting global imbalances. As a direct function of trade math, China's reserves must eventually return to the US. The only way that will not happen is if the US defaults on foreign-held treasuries. However, don't be deceived by the words "record pace". To put the $8 billion of direct investment in perspective, China has close to $1.75 trillion in US dollar reserves and $3.2 trillion worth of total reserves. Will Alarm Bells Ring? Some might be alarmed by China buying US businesses. Actually this is a good thing, and the faster things speed up, the better off the US and China will both be. Direct investment will provide much-needed jobs in the US and it will alleviate China's dependence on an unsustainable model of fixed investment. Unfortunately, "record pace" is nowhere close enough to matter, but all trends start somewhere. The key point is that mathematically, dollars must return home, and the sooner it happens the better off the global economy will be. Don't expect alarmists in Congress and union sympathizers to see it that way. 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.

US Factory Orders "Unexpectedly" Decline; US Car Sales "Unexpectedly" Decline; Expect the Unexpected Posted: 02 Aug 2012 11:57 AM PDT The words for the day once again are "unexpectedly declined". I have a couple of examples. The New York Times reports U.S. Factory Orders Fall Unexpectedly New orders for factory goods unexpectedly fell in the United States in June, a fresh sign that the slowdown in the country's manufacturing sector will probably stretch into the second half of the year. The Commerce Department said on Thursday that new orders for manufactured goods dropped 0.5 percent during the month. Economists in a Reuters poll had forecast a rise of 0.5 percent. American factories appear to be one of the sectors most vulnerable to Europe's festering debt crisis. The trend in American manufacturing has appeared softer and has added to concerns the economic recovery is losing steam. The decline in new orders in June will probably mean softer output down the road, which could weigh on economic growth. Car Sales "Somewhat Softer Than Expected" Yesterday, Yahoo!Finance reported U.S. auto sales remain soft in July Major automakers reported U.S. auto sales for July that were somewhat softer than expected as high U.S. unemployment and weak consumer confidence kept would-be buyers on the sidelines. July auto sales showed the continuation of what has been a slowdown in growth since the late spring. Sales early this year shot past even the most bullish forecasts, but starting in May, the rate of improvement started to weaken. "If we were talking in February this year and you asked me what we're going to have July, I'd say at least 14 and a half," said TrueCar.com analyst Jesse Toprak. "But we're going to barely get to 14." GM, the largest U.S. automaker, reported on Wednesday a 6 percent drop in July U.S. sales, while Ford posted a 4 percent drop. The smallest U.S. automaker, Chrysler Group LLC, posted a 13 percent increase. GM and Ford both pinned their declines on lower sales to fleet customers like rental car companies. GM's fleet sales fell 41 percent, in line with the company's forecast last month. But their overall results were still lower than some estimates. Analysts had expected better financing deals, pent-up demand and increased construction spending to offset the sluggish U.S. economy. Toyota sales were up 26 percent to 164,898 in July. A year ago, Toyota was still grappling with major vehicle shortages stemming from the March earthquake in Japan. In a release, Toyota said customers were taking advantage of long-term, low-interest financing at low lease rates. Expect the Unexpected Why economists could not see this coming is a mystery. Manufacturing new orders have collapsed virtually everywhere, including the US. GDP, a lagging indicator, is 1.5% annualized, well below the stall speed of 2%. Based on new orders and anecdotal evidence from the world's largest auto parts manufacturer, I confidently predicted on July 9, Global Collapse In Auto Sales Coming Up. On July 2, I noted US Manufacturing ISM Contracts for First Time in Three Years; New Orders and Prices Plunge; Perfect Miss: 0 of 70 Economists Polled By Bloomberg Expected Contraction Yesterday I noted Dismal Manufacturing Numbers Worldwide; US ISM in Contraction Second Month. Yet economists were surprised by today's "unexpected decline" in US Factory Orders and yesterday's decline in auto sales. The surprise ought to have been that car sales and factory orders held up as well as they did. Growing Evidence of Recession With each economic report, it becomes more clear the US is already in recession, yet economists cannot see that yet either. If the jobs report is miserable tomorrow, and I expect it to be, then expect economists to be surprised by that too. For Friday's job forecast ADP predicts +163,000 jobs but I'll Take the Under (Way Under). The economic consensus for Friday is about +100,000 jobs and I will take the under on that as well. Zero to 50,000 would not surprise me in the least. 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.

Draghi Hints at Bond Buying But Rules Out Banking License and Warns Governments Must Use EFSF/ESM, ECB Cannot Replace Governments; 10-Year Yield Back Over 7% Posted: 02 Aug 2012 08:20 AM PDT Today the ECB left interest rates unchanged and hinted at future bond purchases but also warned "Governments must stand ready to activate the EFSF/ESM". The Financial Times has details in Draghi prepares for fresh bond buying Draghi admitted to Bundesbank reservations about bond-buying and made clear that governments would first have to apply to the eurozone's rescue funds – the European Financial Stability Facility and the European Stability Mechanism – and accept "strict and effective conditionality". "First of all governments need to go to the EFSF; the ECB cannot replace governments." Mr Draghi also said the ECB "may consider" further non-standard measures but declined to elaborate. Mr Dragi indicated there would be no immediate intervention. "In the coming weeks we will design the appropriate modalities for such policy measures," he said." He said that all members of the ECB's governing council had endorsed the framework of measures "with one exception." "It's clear and it's known that Mr Weidmann and the Bundesbank have their reservations about the programme of buying bonds," he added. He also ruled out giving the eurozone's rescue funds a banking licence, a move that could vastly increase their firepower but which is firmly opposed by the Germany and other core eurozone members. "The current design of the ESM does not allow it to be recognised as a suitable counterparty. Text of Draghi's Press Conference I cannot find some of the direct quotes the Financial Times mentions, but the gist of the Financial Times' translation seems accurate. Here are some snips from ECB President Draghi Statement to Press Conference Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged, following the decrease of 25 basis points in July. As we said a month ago, inflation should decline further in the course of 2012 and be below 2% again in 2013. Exceptionally high risk premia are observed in government bond prices in several countries and financial fragmentation hinders the effective working of monetary policy. Risk premia that are related to fears of the reversibility of the euro are unacceptable, and they need to be addressed in a fundamental manner. The euro is irreversible. In order to create the fundamental conditions for such risk premia to disappear, policy-makers in the euro area need to push ahead with fiscal consolidation, structural reform and European institution-building with great determination. As implementation takes time and financial markets often only adjust once success becomes clearly visible, governments must stand ready to activate the EFSF/ESM in the bond market when exceptional financial market circumstances and risks to financial stability exist – with strict and effective conditionality in line with the established guidelines. The adherence of governments to their commitments and the fulfilment by the EFSF/ESM of their role are necessary conditions. The Governing Council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective. In this context, the concerns of private investors about seniority will be addressed. Furthermore, the Governing Council may consider undertaking further non-standard monetary policy measures according to what is required to repair monetary policy transmission. Over the coming weeks, we will design the appropriate modalities for such policy measures. Yields Soar Draghi's statements sent the Spain 10-year bond yield soaring back above 7%, currently 7.13, up 40 basis points. Yield on Italy's 10-year government bond is up 30 basis points to 6.23%. Clearly the market was expecting far more after Draghi's statements last week that the ECB would do "whatever it takes". 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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