Juggling Dynamite

Today HSBC’s Chinese preliminary purchasing managers’ index slipped to 50.4 in November from 50.9 in October. The reading just above 50 implies a weak expansion among manufacturers, and is a sign that growth in the third quarter is fading. The much anticipated rebound in exports remains elusive: new export orders slumped to 49.4 from 51.3. Things the US economy is demanding like energy equipment are largely being made at home, with clothing now coming more from Mexico and cheaper labor parts of Asia beyond China. See: Waking up from the Chinese Dream

Despite intense marketing initiatives and central bank injections to the financial system, consumer spending in the developed world continues to be subdued. See: Target’s profit plunges on weak consumer spending. Here is a direct video link.

Cash-strapped, North American families are focusing their spending more on necessities and automobiles (responding to the 0 down, 0 interest for 8 years financing campaigns, as auto dealers scurry feverishly to bring forward even more demand from the future and capitalize on it today). Cars that are not made in China. Nor is the world grabbing up much of what is made in Canada either for that matter: today the Loonie is plunging again as the Bank of Canada reiterated that “significant slack” remains in the economy and growth is being held back by sluggish business investment and exports.

Spending less and waiting for lower prices is the right thing for consumers to do. But it’s not good for the still bloated retail sector that has yet to downsize significantly from the gargantuan proportions it achieved during the now deflating consumer credit bubble. For more on how significant consumer spending is to the economic cycle see Joseph Ellis’ excellent book “Ahead of the Curve”.  Here is a direct video link to a Bloomberg report.

Global banks are still sitting on mountains of bad debts that will never be repaid. The extend and pretend phase permitted by central bank liquidity bought some time but has done nothing to clean out and reset the system. Meanwhile the regular folks who foolishly took advice from the reckless loan sellers continue to pay the price, literally stuck in limbo like this debtors village in Hungary. Here is a direct video link.

Back in the mid-2000’s I remember some financial “experts” talking about the “brilliant strategy” of borrowing in other currencies in order to get lower mortgage rates than were available in one’s home currency. Lower rates allowed people who could not afford a house to buy one! It also allowed those who could only afford a small house to buy a more expensive one…great idea for those who were selling the products…made for a much larger pool of buyers. Predictably catastrophic idea for those did the borrowing and buying though. As the loan based currencies strengthened, the borrowers were thrown into default. Meanwhile the bankers who collected the commissions and bonuses upfront made off like bandits. Literally.

Which brings us to the problem with high risk, self-destructive financial advice, products and strategies, they often look great at the outset. They may even appear to be working for a while, maybe even a few years. While they appear to work, people want to believe and ignore probable outcomes allowing the architects and sales force to look brilliant and extract huge financial rewards up front. Then when high risk concepts and assets blow up, tragedy hits the people who bought. And the public purse is tapped for funds to help clean up the mess. It would be great if we could nip this vicious circle in the bud one of these times. But that requires people to stay sober, manage risks and take protective steps for themselves before the losses hit.

Danielle was a guest today on The Financial Survival Network with Kerry Lutz talking about recent trends in the world economy and markets. You can listen to an audio clip of the segment here.