Global Deflation: Unavoidable

FN: Nobody seems to care, but it really is all about deflation. Deflation first, inflation later. That is how this mess will play out. There is no other way, despite Ben "Helicopter" Bernanke's best efforts to inspire inflation and skip the whole deflation part. The Master Plan really is to inflate, but the math simply doesn't add up.

What kind of "urgent action" can be taken to "reduce high levels of excess capacity"? No amount of additional debt will put that idle capacity to work. Other than taking dynamite to idle factories, the only other "effective" measure would be to start a war. Wars have the added benefit of putting the unemployed to work even as infrastructure is blown up.

World Bank warns of deflation spiral: "The World Bank has given warning that global economy will fall into a "deflationary spiral" unless urgent action is taken to reduce high levels of excess capacity in industry.

Justin Lin, the bank’s chief economist, said factories running idle around world threaten to trap economies in a vicious cycle, risking further spasms of financial stress, requiring yet more rescue packages.

"Significant excess capacity has been built up and unless this issue is addressed, we will face a deflationary spiral and the crisis will become protracted," he told an audience in Cape Town.

Mr Lin said capacity use had fallen to 72pc in Germany, 69pc in the US, 65pc in Japan, and as low as 50pc in some developing countries, mostly touching lows not seen in modern times.

The traditional cure for countries caught in slumps is to claw their way back to health through devaluation, but this cannot be done today because the crisis is global. "No country can count on currency depreciation and exports as a way out of recession. Unless we deal with excess capacity, it will wreak havoc on all countries. There is urgent need for global, co-ordinated fiscal stimulus," he said.

Investments should be focused on infrastructure in poor countries that are bearing the brunt of the crisis. The downturn is already likely to trap over 50m more people in extreme poverty this year.

Mr Lin said some $30 trillion has been wiped off global stock markets and a further $4 trillion off US house prices, creating powerful deflationary headwinds. While emergency measures have eased the financial crisis, they have not stopped it turning into a deeper "real economy" crisis entailing mass lay-offs.

The comments came as the Bank of Japan agreed to extend its quantitative easing (QE) policies – mostly the purchase of corporate debt – and warned that business investment is "declining sharply". Headline inflation has dropped to minus 1.1pc.

Michael Taylor at Lombard Street Research said Japan has been too timid, repeating the error of its Lost Decade when it failed to carry out QE on a sufficient scale.

"Japan is already back in deflation, and it is here to stay. This year the economy will shrink by around 7pc, dramatically increasing the output gap and intensifying deflationary pressures. Cash earnings are down 3pc in the last year,"

The Bank of Japan downgraded its growth forecast, predicting that the economy will contract 3.4pc in the fiscal year to next March. This follows a catastrophic fall in output at a 14.2pc an annual rate in the first quarter, the worst ever recorded.

While industrial output has bounced over the summer, there are concerns that it may have been flattered by an "inventory rebound" as companies rebuild stocks.

Eurostat confirmed on Wednesday that the eurozone has slipped into deflation. Prices fell 0.1pc in June."

Related Articles:
Swiss slide into deflation signals the next chapter of this global crisis
Deflation returns as Japan's jobless rate hits four-year high
Bank of Japan governor says US must tackle household debt
CCM becomes Spain's first bank rescue as property bust worsens
Germany considers direct lending

Monster Accumulation Day

FN: A really monstrous "Major Accumulation Day" occurred yesterday. Everything that could move up, did move up. Volume was decent as well. This puts the markets right at resistance around 6000 and the declining 200 day EMA (green line) for the NYSE Composite (NYA), but the same goes for the S&P 500 (SPX). Equities are now extremely stretched after this huge three day sprint.

It looks like CIT will be left to die now. Bailout talks collapsed yesterday... again. This should put equities under pressure a bit. The failure of CIT is important because CIT did receive TARP money. The US taxpayer is likely to lose the entire TARP amount in a bankruptcy. The whole TARP plan was presented with the promise that the US taxpayer would not lose any money. Slowly reality will sink in and this could spike US Treasury yields.

CIT Fails to Win U.S. Bailout as Bankruptcy Looms (Update2): " CIT Group Inc., the 101-year-old commercial lender running short of cash, said the U.S. government would not rescue the company, fueling speculation that it may be forced to file for bankruptcy.

Talks with regulators have broken off and “there is no appreciable likelihood of additional government support being provided over the near term,” the New York-based firm said yesterday in a statement. CIT, once the biggest independent commercial lender, may seek court protection if no U.S. aid emerges, Standard & Poor’s said this week. The company said it is “evaluating alternatives.”

CIT Chief Executive Officer Jeffrey Peek failed to convince regulators that fallout from a collapse would threaten the rest of the financial system. Officials at the Treasury, Federal Reserve and Federal Deposit Insurance Corp. have resisted putting more taxpayer funds at risk, on top of the $2.33 billion granted to CIT in December, to keep the lender afloat.

“Maybe they can put together a last-minute deal and try to sell themselves,” said Adam Steer, an analyst with CreditSights Inc. “The most viable alternative once the government decides to not step in is a trip into bankruptcy.”

CIT is seeking $2 billion in rescue funds from owners of its debt and has given them 24 hours to put up the money, the Wall Street Journal reported today, citing unidentified people familiar with the matter. CIT told investors that without the cash, it will probably file for bankruptcy, the Journal said."

Treasury Bets U.S. Financial System Can Weather CIT Collapse: "The U.S. spurning of CIT Group Inc.’s aid request suggests officials are betting they’ve fixed the financial system enough to withstand the bankruptcy of a mid-sized lender.

“I hate to say this, but it was probably expendable,” said Dennis Santiago, chief executive officer of Institutional Risk Analytics, a Torrance, California, research firm that studies systemic risk. “It may have just missed the boat” on federal rescues, Santiago said.

Yesterday’s decision to forego a lifeline for CIT came 10 months after Lehman Brothers Holdings Inc. filed for bankruptcy. Lehman’s collapse ushered in the depths of the credit crisis to date, and resulted in the establishment of a $700 billion bailout fund; officials yesterday indicated programs created with that money would help fill any lending gap left by CIT.

Treasury Secretary Timothy Geithner, en route to Paris as CIT acknowledged policy makers had turned it down, is also wagering the administration will weather any political fallout. Unlike Bear Stearns Cos. or American International Group Inc., which got extraordinary aid last year, New York-based CIT specializes in loans to smaller firms, counting 1 million enterprises, including 300,000 retailers, among its customers.

A Treasury official said the department anticipates losing the $2.3 billion of taxpayer funds that it had already injected into the company from the Troubled Asset Relief Program should it file for bankruptcy."

Intel Beats, Global Confidence Drops

FN: Equities are feeling a little frisky from the Intel (INTC) earnings beat last night. A couple of other names beat yesterday as well. The whole thing is a giant gong show really. When the world unraveled these companies stopped giving guidance and analysts guessed really really low. This was done precisely to guarantee a beat or make an official miss impossible.

As one of the traders I talk to put it, "Unless Intel is going to hire 6 million Americans, it doesn't do shit."

Its all about the jobs. No jobs means no purchasing power. In the meantime, it appears to be "bounce time". The 912 area is the first area of resistance. The next big area is 930, the previous swing high. The ultimate line in the sand for the Bears is 950.

Global Confidence Drops as Unemployment Surge Counters Stimulus: "Confidence in the world economy dropped for the first time in four months in July as government stimulus efforts showed little sign of reducing unemployment, a Bloomberg survey of users on six continents showed.

The Bloomberg Professional Global Confidence Index declined to 39.13 in July from 43.57 in June. A reading below 50 means pessimists outnumber optimists. A measure of U.S. participants’ confidence in the world’s largest economy fell to 29.5 from 36.7, the survey showed.

The MSCI World Index is down close to 2 percent since the U.S. Labor Department on July 2 reported higher-than-expected job losses and an unemployment rate approaching 10 percent. Treasury Secretary Timothy Geithner said yesterday the world will probably suffer “more than the usual” setbacks in exiting the worst slowdown since the Great Depression.

“No one can wave a magic wand,” said David Semmens, an economist at Standard Chartered Bank in New York and a regular survey participant. “We aren’t pulling out of the recession in the same way as in past recessions. The economic outlook isn’t improving as strongly as people would have hoped.”"

Major Accumulation Day

Banks Bounce

FN: Meredith Whitney upgraded Goldman Sachs yesterday and was less bearish on banks in general. The Banking Index (BKX) broke the declining trend from the May high of $43.80 and is now above the 20, and 50 day EMAs (blue, red lines). Any bounce needs to halt below the declining 200 day EMA (green line) to maintain a longer term bearish posture.

The Regional Banking Index (KRX), is clearly weaker than the BKX. Price is still below all three moving averages, the 20, 50 and 200 day EMAs (blue, red and green, lines). The regional banks are the ones that got deep into commercial real estate loans. They're also the ones that got bailed out the least and are expected to be the "next shoe to drop".

The talk from Meredith Whitney was the catalyst for an oversold bounce.

CIT Going the Way of Lehman

FN: It looks like the powers that be are going to "Lehman" CIT. All requests for assistance were rebuffed by the FDIC. This would be quite the serious failure that would unleash a cascading round of small and medium sized business failures.

CIT Group Says Its Failure Risks Demise of Customers (Update2): "CIT Group Inc., the century-old lender that hasn’t been able to persuade the government to back its debt sales, says its demise would put 760 manufacturing clients at risk of failure and “precipitate a crisis” for as many as 300,000 retailers.

A collapse would ripple across the “small and medium-sized businesses who rely on CIT to operate -- to pay their vendors, ship goods to their customers and make their payroll,” the New York-based lender said in internal documents obtained by Bloomberg News that make the case for its importance to the U.S. economy. CIT spokesman Curt Ritter declined to comment on the documents.

CIT executives spoke with regulators during the past two days, according to a person familiar with the talks, after its bonds and shares tumbled on concern that the Federal Deposit Insurance Corp. won’t allow the lender into its bond-guarantee program created last year to unfreeze debt markets. CIT may default as soon as April, when a $2.1 billion credit line matures, according to Fitch Ratings.

“A CIT default would create liquidity issues for the corporate sector,” Ed Grebeck, chief executive officer of debt consulting firm Tempus Advisors in Stamford, Connecticut. “If CIT isn’t doing trade finance and lending, its customers will look to other banks for replacement and from what I’ve seen, they aren’t willing to step up.”

Baltic Dry, Chinese Hoarding, Commodities and the Fake Recovery

FN: The Baltic Dry (BDI) bounced of the December 08 low of 663.0 and powered into the 38.2% Fibonacci Retracement level. This put the price above the 20, 50 and 200 day EMAs. With the Chinese commodity hoarding almost complete, commodities have started to roll over and head back into the abyss. Shipping rates must almost certainly break down. The BDI is currently sitting on the rising trendline. Watch for a break.

As China Hoards, Concern Grows About Recovery: "For weeks, the ships have been lining up 10 deep at China's booming Qingdao Port, waiting to unload their cargo into storage facilities that cannot keep pace with the thousands of tons of raw materials coming in.

With imports of iron ore, crude oil and other raw materials spiking – and reports of 90 ships at a time waiting their turn to unload – China's continuing growth, fuelled in part by aggressive government spending, has been keeping world commodity prices afloat.

As the global economy continues to falter and Chinese exports plummet, there is growing concern that the stockpiling may soon come to a halt, leading to further, painful drops in commodity prices.

“The level of [iron ore] importing doesn't match the level of steel production so far this year, so there's a considerable amount of stockpiling going on,” said Tim Huxley, chief executive of Hong Kong-based Wah Kwong Maritime Transport Holdings, who along with many others in the shipping industry is grateful for what he called “a shot in the arm” but skeptical that the stockpiling can continue – especially since many of those container ships are sent away empty, without export orders to fill them.

At the same time, China is also stockpiling raw materials used in industrial production rather than exporting them, according to complaints lodged with the World Trade Organization by the U.S. and the European Union on Tuesday. They allege that China is using illegal duties and fees to crimp exports, giving its manufacturers an unfair advantage.

Both the stockpiling of imported commodities and the hoarding that is alleged in the WTO complaint could be inflating global prices for resources.

The risk is that if China's appetite for metals and oil begins to fade as restocking concludes and the rest of the world's demand for goods produced by the Asian economic superpower remains weak, any recovery in commodities could be at risk, undermining the broader recovery. Canada's commodity producers could be in for another bout of serious pain."

A Complete Fleecing of the Sheeple

FN: This has to be the most complete fleecing of the Sheeple ever. The truely amazing thing is that the Sheeple don't seem to know yet they've been absolutely pillaged.

Wake up already!