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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Chispas who wrote (5697)	5/6/2004 9:16:37 AM
From: mishedlo	Respond to of 116555

Sugar Daddies in Asia A. Gary Shilling, 05.10.04, 12:00 AM ET forbes.com The strong growth in March payroll employment gave succor to the bond bears. They've been telling you that the next big move in interest rates is up, ending the rally in Treasurys that began last August. They foresee substantial business spending on inventories, equipment and software, which is supposed to propel the economy to full employment and inflation before long. So the Federal Reserve, they say, will jack up rates in anticipation, maybe before the November election. These baleful forecasters also think that foreign central banks will stop their huge buying of Treasurys. That would then push up U.S. rates ruinously. I disagree. The March job gains were generated in government, hospitality, retail, construction and health care. These sectors don't reflect the majority of American businesses, the ones that must restrain labor costs since they lack pricing power in a global world of surpluses. As the extra income from tax cuts and mortgage refinancing cash-outs fades, continuing layoffs will curtail consumer spending in this year's second half. Sluggish sales will retard business spending and keep the Fed at bay while reviving the specter of deflation. I also expect foreigners to keep recycling dollars into Treasurys. They receive dollars equal to our current account deficit, $510 billion in 2003's fourth quarter at an annual rate, and must invest them in dollar assets of some sort. Right now foreign central banks are doing much of the job of soaking up these dollars, investing them in safe and liquid Treasury bills. That keeps yields down at the short end of the yield curve. The downward tug indirectly pushes down yields at the longer end of the spectrum, the 10- to 30-year Treasurys. This process will continue. In the 12 months through January, foreigners were net buyers of $318 billion in Treasurys, with Asians accounting for $209 billion (fellow columnist Jim Grant on page 188 uses a different measurement for the massive U.S. debt in foreign hands). Foreigners owned $1.6 trillion in Treasurys as of January, or 37% of the total. Meanwhile, U.S. private investors have dropped their holdings to 46% as they bail out of bond funds and Treasurys. (The remaining 17% is held by U.S. governmental bodies.) Our current account deficit goes hand in hand with the federal deficit. The unwritten rule in Washington is that if you have a fiscal deficit, you should run a trade deficit of like amount. Then foreigners will finance the federal red ink as they recycle the current account deficit dollars. The recent jump in foreign official Treasury holdings (see chart) also reflects the dollars the central banks buy to support the buck. Japan doesn't want a strong currency to impede its exports, and it keeps the yen value down by printing yen at a furious rate and using this currency to buy dollars--192 billion of them last year and 140 billion this year so far. The acquired dollars are then turned into Treasury paper. China, with a dollar-pegged yuan, has to recycle all the U.S. currency generated by its trade surplus with America, plus the greenbacks brought in for direct investment there. So if foreigners, especially governments, stop buying Treasurys, there could be trouble in our bond market, and if they unload what they now have, big trouble. But these actions are unlikely. Don't believe rumors that Japan will no longer support the dollar because it can afford to downplay exports. Four previous Japanese recoveries in the last decade quickly faltered. And consumer spending there remains weak while deflation encourages the ever-pessimistic Japanese to wait for lower prices before buying. Besides, the century-old Japanese export-or-die mentality is sacrosanct. The central bank will keep propping up the buck to make exported cars and TV sets cheap to American consumers. Similarly, China can't abandon its dollar buying. It needs a strong dollar--a weak yuan, that is--to keep its exports competitive and to keep its underemployed population busy. The day may come when the Chinese government stops being the lender of last resort to America, but if it does stop, there are a billion or so Chinese citizens ready to take up the cause. Given the legal right to do so, they would yank deposits out of the Chinese banking system and invest in U.S. securities. The legendary stability of Treasurys and the ubiquity of the dollar make Treasurys very appealing to central banks overseas. The Euroland economies are a mess. Dollar alternatives to Treasurys, such as American stocks and real estate, are out for central banks. As for gold, they are in the process of selling, not buying, it. Treasurys' special allure remains intact, and I see the next big move in interest rates as down.

To: Chispas who wrote (5697)	5/6/2004 9:19:34 AM
From: mishedlo	Respond to of 116555

Auto Sales Vehicles sold at a 16.4 million unit pace in April, which was lower than the 17 million rate analysts expected and the 16.7 million units last month. GM’s sales increased by 0.2%, all of which came from increased truck sales that were aided by its Truckfest promotion. During Truckfest GM offered $1,000 in incentives along with zero-percent financing. These offers increased the incentives GM offered on trucks by 1.2% from March and likely crimped Ford’s sales, which were down 4.1%, as well. Incentives remain the bane of automakers. Every opportunity they take to try and wean consumers off incentives, consumers react by slowing purchases. GM only managed to increase sales by increasing incentives. Ford attempted to pare back incentives and it lost sales. Ford has already increased its incentives on its SUVs and minivan by offering a $1,000 rebate on zero-percent financing for 60-months. It appears that all the rhetoric about sacrificing market share to restore profitability was only rhetoric. The domestic automakers have such large fixed costs that they are almost better off building as many cars as possible and selling them for close to cost than slowing down the manufacturing line which would spread the fixed cost over fewer cars. While the domestic automakers reported lackluster sales, several foreign manufacturers reported strong sales. Porsche sales were up 13% on the strength of its SUV, Nissan increased sales by 14.0% and BMW reported its strongest month ever, eclipsing last April’s sales by 11%. The foreign automakers have continued to win market share. April marked the fourth consecutive month where the big three were less than 60% of the market. This is the longest stretch ever where the domestics held less than 60% of the market. Additionally, most of GM’s sales were driven by fleet sales, which rose 30%. Retail sales fell 8%. The slower sales pushed inventory levels up to 85 days, about 18% higher than last month. Fleet sales are also helping Ford. Fleet sales rose 9% while retail sales fell 9%. Ford’s inventories also increased substantially, up to 87 day. This is about 20% higher than average inventory levels. With inventories high at most automakers, the next couple months might be a good time to “hold hands and buy a SUV,” to borrow a line from our hometown central banker, Bob McTeer. prudentbear.com