Emerging Markets Deteriorate, No Cure for Global Economy

In spite of all the denials, the US, Europe, and Australia are in recession. Brazil and Canada just entered the recession zone as well.

This economic turn of events has PIMCO CEO Bill gross admitting a mistake. Let's take a look starting with Brazil.

62 of 62 Analysts Miss Call on Brazil Interest rates

Given that central banks most often telegraph their moves, the one place analysts are typically correct is on interest rate policy. That wasn't the case this time as Brazil Cuts Key Interest Rate to 12% as Recession Risks Outweigh Inflation

Brazil’s central bank unexpectedly cut interest rates as the risk of recession in Europe and the U.S. shifted policy makers’ focus away from the fastest inflation in six years.

The bank’s board, led by President Alexandre Tombini, voted 5-2 to cut the benchmark rate a half point to 12.0 percent after raising rates at each of the previous five meetings. All 62 analysts surveyed by Bloomberg had forecast rates would be left on hold.

“Re-evaluating the international scenario, the Committee considers there was a substantial deterioration, reflected in generalized reduction of great magnitude in the growth projections for the major economic blocs,” policy makers said in their statement posted on the central bank’s website.

Stunning Reversal

That is a stunning reversal and I would not have gotten it correct either. Normally there is some sort or warning or at least a pause.

BRIC Growth Engine Dies

Bloomberg reports BRICs No Cure for Global Economy This Time

Stocks of international companies that depend most on emerging markets for sales show developing nations won’t be strong enough to buoy the global economy.

Goldman Sachs Group Inc.’s gauge of U.S. companies with the most developing-nation revenue fell 15 percent since April, the biggest drop since the bull market began in 2009. Avon Products Inc. (AVP), which gets at least 74 percent of operating profit from emerging markets, sank 15 percent in New York last month. Siemens AG (SIE), which doubled sales from the nations in five years, lost 21 percent in Frankfurt, the most since October 2008.

“The policy driven boom of the past couple of years will not be repeated any time soon,” said Stephen King, chief economist at HSBC Holdings Plc in London and author of “Losing Control: The Emerging Threats to Western Prosperity.” It’s “difficult to see how emerging nations can ride to the rescue once more,” he said.

Citigroup, the third-largest U.S. lender by assets, gets more than half its earnings from emerging markets, CEO Vikram Pandit said in March. While second-quarter revenue from the consumer bank’s Latin American and Asian units rose 13 percent to $4.46 billion, profit fell 14 percent. Shares of the New York-based bank retreated 19 percent last month, more than the 11 percent drop in the S&P 500 Financials Index.

Whirlpool, based in Benton Harbor, Michigan, relied on developing nations for at least 32 percent of its second-quarter revenue, according to data compiled by Bloomberg. The world’s largest appliance maker reported a 92 percent plunge in operating profit in Asia, more than the 62 percent decline in North America, the data show. Whirlpool’s shares fell 8.7 percent in August, extending this year’s retreat to 29 percent.

China Suffers Sharp Drop in Export Orders

Reuters reports Asia's factories quieter as exports slip

The Purchasing Managers Indexes showed manufacturing contracted in South Korea and Taiwan as new export orders fell sharply. China's official PMI increased slightly, the first rise since March, but it also reflected the effects of slowing demand in the United States and Europe.

China's overall PMI rose to 50.9 in August from 50.7 in July, according to government data, a touch weaker than economists polled by Reuters had predicted. The new export orders index dropped to 48.3 from July's 50.4.

Beijing pinned the blame for the sharp fall in export orders at least partly on the debt crises in advanced economies. The National Bureau of Statistics said the export sector was "facing challenges."

Taiwan's PMI dropped to 45.2 in August, the lowest reading since January 2009, which was in the middle of the global financial crisis that crushed world trade. A reading below 50 indicates contraction.

China is battling inflation at a three-year high, and Premier Wen Jiabao said on Thursday that Beijing would try to engineer a bigger drop in consumer prices in the second half of the year. Chinese officials have said repeatedly that fighting inflation is the top priority despite sluggish growth abroad.

Thursday's data showed input prices rose in China last month, suggesting price pressures remain acute.

Brazil unexpectedly lowered interest rates on Wednesday because of concern about a global economic slowdown.

China isn't the only Asian economy struggling to contain inflation. In South Korea, the consumer price index hit a three-year high, up 5.3 percent in August from a year earlier, marking the eighth consecutive month that inflation has exceeded the Bank of Korea's target.

Thailand's CPI was also higher than expected.

This puts Asia's central bankers in a bind. Hot inflation points to more interest rate hikes, but the darkening global outlook argues for a policy pause.

Asia Stagflation

Stagflation is one of those muddled terms that people debate over. The definition I prefer is inflation and recession at the same time. Using that definition, Brazil and parts of Asia are in stagflation now.

Recall that Keynesian theory stated recession and inflation at the same time were impossible. The 1970's proved that theory to be rubbish.

Keynesianism should have died in the 70's, totally discredited, but somehow it survived in academia where its nonsensical ideas still haunt us to this day.

Canadian Economy Contracts

The Globe and Mail reports Canadian Economy contracts for first time since recession

Canada now has its own two-speed recovery, with the domestic economy holding firm even as exports falter amid a slumping global rebound.

The economy shrank at an annualized rate of 0.4 per cent in the second quarter, the first contraction since the Great Recession, and a sharp reversal from the 3.6-per-cent growth rate of the first quarter, Statistics Canada figures showed. It’s a sign that Canada, envied by many countries as a bastion of stability since the financial crisis, is not immune to global economic malaise.

In fact, among the Group of Seven club of rich economies, only Japan had a worse second quarter.

Sales abroad staged their steepest drop in two years, with exports plummeting more than 8 per cent on an annual basis. The high-flying Canadian dollar made it harder for businesses to sell their goods to weakening markets in the United States and Europe. Also, Japan’s natural disasters created havoc in the automobile industry, while wildfires in northern Alberta and maintenance shutdowns in the oil industry curtailed energy production.

But there’s a bright side to Canada’s performance. Company purchases of machinery and equipment in Canada soared at a 31-per-cent annualized pace in the second quarter, the biggest surge since 1996.

That shows businesses remain upbeat about their prospects, but also illustrates the gulf in confidence between Canadian executives and their U.S. competitors, analysts said.

No Bright Side to Canada's Performance

There is no bright side to Canada's performance. The confidence is misplaced. The global economy is in complete shambles. The US, Eurozone, UK, Australia, Brazil, and parts of Asia are in recession.

Moreover, austerity measures are about to smack Europe, the Australia housing bust is in full swing, and Brazil just joined the recession party. To top it off, China and India are fighting huge inflation problems.

If Canada is ramping up productive capacity now, it is a huge mistake, not a bright spot. Moreover, Canada's enormous property bubble will collapse and perhaps a global slowdown is just the right catalyst this go around.

PIMCO Admits Mistake

Reuters reports PIMCO says betting against U.S. debt was a mistake

Bill Gross, the manager of the world's largest bond fund, feels like "crying in his beer" for having bet so heavily against U.S. government-related debt earlier this year, the Financial Times reported on Monday.

Showing a more bearish view on the U.S. economy, Gross said PIMCO had initially dumped all of its U.S. debt holdings in March as he expected economic growth to be higher, resulting in inflation down the road.

That decision greatly undermined the performance of PIMCO's Total Return Fund. As Treasuries prices rallied, the fund lost 0.97 percent in the past four weeks, while the benchmark Barclay's U.S. Aggregated Bond Index rose 0.23 percent in the same period, according to Lipper data.

So far this year, the fund has returned 3.29 percent, less than the 4.55 percent recorded by the Barclay's benchmark index.

"When you're underperforming the index, you go home at night and cry in your beer," the Financial Times, in its online edition, quoted Gross as saying. "It's not fun, but who said this business should be fun. We're too well paid to hang our heads and say boo hoo."

Gross, who oversees $1.2 trillion at PIMCO, said it was "pretty obvious" he wishes he had more Treasuries in his portfolio right now.

"I get that it was my/our mistake in thinking that the U.S. economy can chug along at 2 per cent real growth rates. It doesn't look like it can."

Six Reasons to Fade Bill Gross

Flashback March 10, 2011: Pimco Dumps All Remaining Treasuries in Total Return Fund; Six Reasons to Fade Bill Gross

Six Reasons to Fade Pimco

I view this setup as favorable for US Government bonds. For starters there is no Pimco selling pressure, only potential buying pressure when Gross changes his mind.

Second, everyone seems to think the end of QE II will be the death of treasuries. While that could be the case, sentiment is so one-sided that I rather doubt it, especially is the global recovery stalls.

Third, the US dollar is towards the bottom of a broad range and any bounce could easily wipe out gains in higher yielding emerging-market debt.

Fourth, the global macro picture is weakening considerably with overheating in China, state government austerity measures in the US, and a renewed sovereign debt crisis in Europe on top of a supply shock in oil. Emerging markets are unlikely the place to be in such a setup.

Fifth, chasing yield means chasing risk, and that is on top of currency risk. Chasing risk is highly likely to fail again at some point, the only question is when.

Sixth, several interest rate hikes are priced in by the ECB this year. Will all those hikes come? I rather doubt it, and if the ECB doesn't hike, look for the US dollar to rally, perhaps significantly.

The US dollar has not significantly rallied yet, but otherwise I am pleased with what I said back in March.

Pettis 12 Predictions

I have to say that Michael Pettis' Long-Term Outlook for China, Europe, and the World; 12 Global Predictions is looking fabulous now, and possibly way ahead of schedule, even in China.

If so, the much beloved BRICs and commodities in general (with the possible exception of gold), will not be the place to be.

Source: Global Economic Analysis