Economic Rebalancing

The global economy is horribly out of balance, with the United States going deeper into debt each year as a result of a huge trade gap. This blog describes the process of global economic rebalancing. If you have any comments or questions about the posts here, please don't hesitate to use the comments section.

Monday, May 21, 2007

These Stories Tell the Sad Story of the US Economy

The US economy is dying a slow painful death. The body is suffering as many consumers are buried under a mountain of debt, foreclosure rates are soaring and the housing market is awash with vacant homes that can't sell.

Life support for this terminal case comes in the form of foreign purchases of US assets, the Yen Carry Trade and credit creation to increase leverage and risk in the business sector. The infusion of cash drives up profitability of US businesses, provides jobs and creates an illusion of financial health that can only be considered temporary.

Debt burdens are already at levels where they can only be serviced by the addition of more debt. Without foreign investment and rapid money supply growth the profitability of most American businesses would tumble. Without private equity capital, hedge fund borrowing and increasing corporate leverage the stock market would tumble. A look at the contributions of each of the leading economic indicators, gives a good "indication" of where the US economy is being led:

Negative or Flat Economic Statistics:
Average Workweek = -.06%
Initial Claims = -.12%
Vendor Performance = -.07%
Capital Goods Orders = -.08%
Building Permits = -.25%
Interest Rate Spread = -.06%
Consumer Expectations = -.08%
Consumer Goods Orders = 0%
Subtotal: -0.72%

Positive Stimulants:
Money Supply, M2 = +.12%
S&P 500 Stocks = +.15%
Subtotal: +.27%

Total Leading Economic Indicators: -0.45%

M2 and the stock market are being manipulated upward with easy credit and the huge flows of borrowed and foreign money into equities, which in turn is providing a great deal of short term economic stimulus. If not for this, all the other indicators would be down worse and the total measure of leading economic indicators would be pointing toward a very sharp recession.

Wall Street understands the sad state of affairs very well, but rather than seeking constructive reform of the financial system a feeding frenzy has erupted among the sharks circling the carcass. New money is being created to fund private equity deals at an accelerating rate and US assets are being sold off as quickly as Wall Street's dealmakers can find willing sellers. It's as if there is a mad rush going on to extract the most fees possible before the day comes when there's nothing left to plunder. The following articles give a snapshot view of how the flood of foreign and new money are propping up stocks and the economy for the time being:

1. Saudi Firm Buys GE Plastics for $9 Billion.
"General Electric Co. said Monday it will sell its GE Plastics division to petrochemicals manufacturer Saudi Basic Industries Corp. for about $11.6 billion.
GE said it would use the proceeds primarily to increase its planned 2007 stock buyback program. It now expects to buy back $7 billion to $8 billion in stock, up from the previous plan of $6 billion. The deal is expected to create a net gain, after taxes, of $1.5 billion for the conglomerate."


With hundreds of billions of US dollars to invest, oil producing nations are gobbling up bonds and equities on a massive scale. Meanwhile GE seeks to prop up their stock price and increase leverage through greater share repurchases. Credit problems at GE Capital may be beginning to put some pressure on GE's liquidity. Much of the money they receive from the Saudi's will probably get loaned out to other businesses through GE Capital. The Saudi's are letting us sell off our hard assets in order to fund excessive consumption of oil.

2. Countrywide Financial Raises $4 Billion.
"Countrywide Financial will use a portion of the net proceeds from this offering to fund repurchases of up to 23 million shares of its common stock simultaneously with this offering and expects to use the remainder for general corporate purposes."
It came from new convertible debt in a private placement and Countrywide will use around a billion of that to buy back stock. With defaults leading to a liquidity crisis for many lenders countrywide is trying to buffer their cash position with low interest debt at the expense of future share price appreciation.

3. China Takes a $3 Billion Stake in Blackstone.
"The agreement gives China's government a stake in the private equity boom sweeping the globe and hands a key alliance to Blackstone at a time foreign investors struggle to gain support from the Chinese government for takeovers of domestic assets."

Like the Saudi's, China is rolling in trade gap dollars and getting tired of piling them into US treasuries and agency debt. They're looking for investments that won't lose as much ground to inflation as faith in the dollar begins to unwind.


Every day seems to bring more stories like the ones above - money being created to fund share repurchases, US assets being sold to fund the trade gap. When the game comes to an end it sure won't be pretty.

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