May 2009 Non-Manufacturing ISM - Details Suggest Weakness

The Institute for Supply Management Report On Business® shows the May 2009 Non-Manufacturing ISM is Still Contracting, but at a lesser rate. As is often the case, details and the headline numbers suggest different things.

The NMI (Non-Manufacturing Index) registered 44 percent in May, 0.3 percentage point higher than the 43.7 percent registered in April, indicating contraction in the non-manufacturing sector for the eighth consecutive month, but at a slightly slower rate.



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ISM's Non-Manufacturing Business Activity Index in May registered 42.4 percent, a decrease of 2.8 percentage points when compared to the 45.2 percent registered in April. Six industries reported increased business activity, and 10 industries reported decreased activity for the month of May. Two industries reported no change from April. Comments from respondents include: "Many initiatives and plans on hold"; and "Delay in start date of new client projects."

The six industries reporting growth in May based on the NMI composite index — listed in order — are: Real Estate, Rental & Leasing; Arts, Entertainment & Recreation; Utilities; Retail Trade; Construction; and Accommodation & Food Services. The 11 industries reporting contraction in May — listed in order — are: Other Services; Mining; Educational Services; Management of Companies & Support Services; Wholesale Trade; Finance & Insurance; Public Administration; Agriculture, Forestry, Fishing & Hunting; Transportation & Warehousing; Health Care & Social Assistance; and Information.

Employment

Employment activity in the non-manufacturing sector contracted in May for the 16th time in the last 17 months. ISM's Non-Manufacturing Employment Index for May registered 39 percent. This reflects an increase of 2 percentage points when compared to the 37 percent registered in April. Three industries reported increased employment, 12 industries reported decreased employment, and three industries reported unchanged employment compared to April. Comments from respondents include: "Layoffs and non-replacement of attrition continue to lower overall employee populations"; "Hired some line workers for small increase in business"; and "Properties beginning to add back staff to take care of increased demand."

The industries reporting an increase in employment in May are: Arts, Entertainment & Recreation; Real Estate, Rental & Leasing; and Mining. The industries reporting a reduction in employment in May — listed in order — are: Educational Services; Public Administration; Other Services; Information; Transportation & Warehousing; Management of Companies & Support Services; Wholesale Trade; Construction; Finance & Insurance; Accommodation & Food Services; Health Care & Social Assistance; and Retail Trade.

There is much more in the report so inquiring minds may wish to take a look.

Data Weaker Than Headline Number

Orders, employment, backlog of orders, imports, and exports suggest the report is much worse than the headline sentiment of "contracting at a lesser rate".

New Orders is arguably the most important measure of activity and orders are contracting faster than last month. The Backlog of Orders index is also contracting at a faster pace.

Employment is contracting at a lesser pace. However, employment is sitting at 39, the weakest component, and a long way from neutral. Inventories are contracting at a lesser pace. Prices are falling at a lesser rate, but the US$ has also been getting crushed.

Collectively, the data suggests an inventory replenishment phase as opposed to "green shoots" that will amount in sustainable trends. The report may not have been a disaster, but the details show it was not very good.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Case-Shiller and CAR Housing Declines Since Peak - May Report

The following charts were produced by my friend "TC" who has been monitoring Case-Shiller and California Association of Realtors housing data. Although individual cities topped at varying times, the top-10 and top-20 city composites peaked in a June-July 2006 timeframe.

Case-Shiller data lags by two months and is from March. CAR data lags by one month and is from April. The charts all show home price declines from respective peaks.

Case-Shiller Declines Since Peak Current Data



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Case-Shiller Declines Since Peak Futures Data



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CAR Median Home Prices, Declines From Peak



"TC" writes:

Case-Shiller – March 2009

Home prices continued decline despite an $8000 federal tax credit nationally. Median national prices have now fallen 32% peak-to-trough over the past 3 years or $80,000.

In the 20 cities that Case-Shiller tracks prices have fallen from 11% (Dallas) to 53% (Phoenix). Price declines are highest in CA, NV, AZ, FL and Detroit. In all of the cities prices have now declined back to early 2000 prices and thinly traded futures data points to a bottom occurring in about 15 months.

It is important for readers to know that Case-Shiller uses a Repeated Sales Methodology (RSM) which provides the most accurate housing data available. Additionally, there are two newer columns titled "Price Level" which show both the last time prices were at the current level and what price level prices are projected to decline to based upon the CME Futures market.

CAR – April 2009

Home prices in California mostly stagnated month-over-month resulting in a disappointment for a state now offering $18,000 in tax rebates to purchase a home (7% - 8% the median home value). Median state prices have been more than cut in half and cities have declines varying from 40% to 73% peak-to-trough.

This results in the median Californian having lost nearly $350,000 in just 2 years! In higher rent areas the price drops are even more staggering with Santa Barbara South Coast leading the way with a price drop of nearly $850,000 in only a 1 ½ years!

This data does not use the Repeated Sales Methodology (as Case-Shiller does) and consequently can be biased based upon the sales pool. Additionally, the DQ News data includes the sale of new homes and resales; whereas the CAR data only includes resales.

Thanks "TC"

Unemployment is soaring in 2009 and so will foreclosures, credit card writeoffs, and bankruptcies. That will add to the inventory problems and further price declines. For additional analysis please see Mortgage Meltdown, More Pain To Come.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Schwarzenegger declares 'day of reckoning'; Wells Fargo CEO says California in 'financial ruin'

California is in dire straits. Hoping to find opportunity amidst the angst, Schwarzenegger declares 'day of reckoning'.

Declaring that "California's day of reckoning is here," Gov. Arnold Schwarzenegger said today the state should turn its dire budget straits into an opportunity to make government more efficient.

Speaking to a relatively unusual joint session of the Legislature and other constitutional officers, Schwarzenegger acknowledged the billions of dollars in spending cuts he has proposed to close a $24.3 billion hole in the budget will be devastating to millions of Californians.

"People come up to me all the time, pleading 'governor, please don't cut my program,'" he said. "They tell me how the cuts will affect them and their loved ones. I see the pain in their eyes and hear the fear in their voice. It's an awful feeling. But we have no choice.

"Our wallet is empty. Our bank is closed. Our credit is dried up."

The short-term problem faced by lawmakers is closing the budget gap in time for state officials to go the private investment markets and borrow billions of dollars to get the state through the first months of the fiscal year that starts July 1.

State Controller John Chiang has warned that without such loans, the state's coffers will run dry by the end of July. Chiang said last week that as a practical matter, the budget must be patched up by mid-June in order to give officials time to borrow the money.

To do that, Schwarzenegger has proposed a plan that relies partially on accounting maneuvers and borrowing funds from coming fiscal years, but mainly on deep cuts in nearly every program funded by state government.

Those range from cutting spending on K-12 schools, community colleges, the University of California; releasing some non-violent prisoners a year early; closing 80 percent of the state's parks, and wiping out or paring back on health and social service programs for California's neediest residents.

I see very little new in what Schwarzenegger is saying. I would like to see a list of items, what each is going to save and whether or not the total comes up to $24 billion. Short term borrowing or accounting shenanigans are not going to do it. My fear is Obama throws taxpayer money at the problem like he is everything else.

Unions, local governments split on bankruptcy bill

Meanwhile, a battle is brewing in the California state legislature with Unions, local governments split on bankruptcy bill.

What started as a municipal bankruptcy in the city of Vallejo has morphed into an all-out fight between California's local governments and unions over the sanctity of labor contracts vs. the autonomy of cities and counties.

Next battle zone: the floor of the state Assembly, where legislation requiring local governments to get state approval to file for bankruptcy protection is headed for a vote later this week.

The bill by Assemblyman Tony Mendoza, D-Artesia, is sponsored by the California Professional Firefighters and supported by nearly three dozen labor organizations in the state and AARP – groups worried about labor contracts or pensions potentially being affected by bankruptcy filings.

The legislation, AB 155, would require local governments to get approval from the California Debt and Investment Advisory Commission before filing. If it passes in the Assembly, it goes to the Senate.

The law is intended to help protect the state's credit rating on Wall Street, said Richard Garcia, Mendoza's spokesman.

My Comment: The law is intended to get Mendoza re-elected by sponsoring legislation favorable to the unions, and extremely unfavorable to taxpayers who have to foot the bill for ridiculous pension promises.

"Every city is in trouble," said Marc A. Levinson, the lead insolvency lawyer on the Orrick Herrington & Sutcliffe team handling Vallejo's bankruptcy filing.

"Nobody wants to go through bankruptcy. I counseled Vallejo to stay out of bankruptcy. But if you can't pay your bills, what do you do?"

Strongly opposing the bill are the League of California Cities and the California State Association of Counties.

If you live in California it would behoove you to write your state representatives and tell them to vote down this monstrosity and that you are sick to death of your taxes funding ridiculous pensions for state employees.

Hopefully Schwarzenegger will have the common sense to veto this ridiculous bill if it passes.

Wells Fargo CEO says California in 'financial ruin'

The Sacramento Business Journal is reporting Wells Fargo CEO says California in 'financial ruin'

“The state of California is in financial ruin,” Stumpf told those attending a statewide microfinance lenders’ conference at Stanford University. “The budget deficit in California is staggering.”

Stumpf said the recession is taking a toll on some of the loans made to creditworthy borrowers who lost their jobs and fell behind on payments.

“Today we’re charging off loans to people we should have made loans to,” said Stumpf, reiterating that the bank avoided many of the exotic mortgages offered by rivals.

Stumpf’s comments were not intended as guidance on how the San Francisco bank is faring in the second quarter, a bank spokesman said.

Regardless of what Stumpf intended to imply, his statements are a reflection on Wells Fargo.

But the idea that the bank avoided many of the exotic mortgages offered by rivals is extremely disingenuous. Wells Fargo (by acquisition of Wachovia) is veritable hotbed of foreclosures to come via its Pay Option ARM and Alt-A portfolios.

Let's revisit Mortgage Meltdown, More Pain To Come.

Here's the good news:
The Wave of Resets from Subprime Loans Is Mostly Behind Us.

Alt-A Mortgage Resets



Here's the bad news:
There Are $2.4 Trillion of Alt-A Mortgages and Their Resets Are Mostly Ahead of Us.

Option Arm Oiginations



About $750 Billion of Option ARMs Were Written, Nearly All at the Peak of the Bubble.

Option ARMs by State


California accounts for 58% of all Option ARMs. Think Wells Fargo, a big option ARM player is going to come out of this glowing? Warren Buffett does. I don't. Place your bets.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Speculative Bets Against The Dollar Highest Since July 15 2008

Anti-dollar sentiment is again running rampant. Please consider Bets against dollar highest since start of economic crisis.

Speculative bets against the dollar have risen to their highest level since the onset of the financial crisis.

Positioning data from the Chicago Mercantile Exchange, often used as a proxy for hedge fund activity, showed that in the week ending May 19, bets against the dollar – short positions – versus the euro exceeded bets on dollar strength by 12,250 contracts.

This net short position was the highest level since the week of July 15, when the dollar hit a record low of $1.6038 against the euro.

Ashraf Laidi at CMC Markets said considering that long positions in the euro and yen against the dollar were still about 11 times lower than their record highs, speculators had plenty of upside against the dollar in terms of quantity as well as price.

Dollar Bears with an Ugly American Accent

Professor James Kostohryz offered his thoughts on the dollar on Monday. It’s well worth another look. Emphasis mine.

Dollar Bears with an Ugly American Accent

One of the things that have always puzzled me is how it is that perma-bears that are forever predicting the demise of the US Dollar never speak about any other problem other than the ones in the US. It s as if the US were the only country that had any problems.

Truth be told, my long experience with these folks has been that the vast majority of them simply don t know much of anything about foreign countries and even less about foreign currencies and interest rates.

The fact is that economic fundamentals in the US, and the fundamentals of the US financial system in particular, are much better on average than in the vast majority of other industrialized countries. Inexplicably, although the value of the dollar is measured against other currencies, the bears never even seem to fathom this.

Next time you run across one of these Dollar Cassandras, please ask them to tell you the names of the currencies that the Dollar going to decline against, and to please speak to you in detail about the relative fundamentals of these nations. Ask them about sovereign debt ratios. Ask them about external debt ratios. Ask them about bank capitalization ratios. My experience has been that when you pose this question to the perma-bears, it usually elicits a long pause and empty stare.

For example, none of the Dollar bears that were getting all lathered up last week about how rising Treasury yields were signaling the Demise of America appeared to have any clue that rates were rising all over the world.

Indeed, yields on many equivalent European bonds, including the Bunds, rose by even greater amounts.

Another example is that the perma-bears that are forever talking about Dollar Debasement, seem to think that monetary stimulus only happens in the USA. They seem blissfully unaware of central bank stimulus measures in other nations that have been just as expansionary or even more so than the policies of the US Fed.

Folks who emit opinions on the US Dollar need to spend as much, or even more, time analyzing and explicating economic and financial conditions outside of the US as they do handwringing about the demise of the USA.

The US dollar retested a bottom in July 2008. Anti-dollar sentiment was rampant. Here is the chart.



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Carry Trade Is Back

One thing is certain. The carry trade is back (borrowing money in one currency to invest in another currency with higher interest rates, or in foreign stocks or commodities). It remains to be seen how carried away speculators get with these positions but I can guarantee they will have to be unwound at some point.

In the meantime, I caution everyone not to make bets on the basis of Commitment Of Traders reports on sentiment. The COT reports are not a timing device.

Moreover, please note that I am not a huge dollar bull. I was at the lows, and to be honest, quite some time before that. However, since the top (when dollar bulls came out of the woodwork), I called for a trading range. Now we are well within that trading range and there is plenty of room for the dollar to go either way.

Fundamentally it's hard to like the dollar here. However, it's not easy to like the Euro here either. And the fundamentals of the British Pound are even worse than the dollar in my estimation.

As noted in US Manufacturing Contracts 16th Consecutive Month; China Expands 3rd Month China passed a $586 billion stimulus package. For the size of China's economy, $586 billion is quite massive. That stimulus went directly into production, and if the global economy does not pick up to support Chinese exports, China may easily overheat.

Those who think the RMB (Yuan) is going to replace the US dollar as the next world's reserve currency are in complete fantasyland. I doubt there even is a next reserve currency.

Hell's Bells, the RMB does not even float yet.

Of course fiat currencies do not really float anyway. They simply sink at varying rates, slowly going worthless over time.

Eventually, every fiat currency in existence is headed for zero. Gold is not headed to zero.

Short-term, I do not know where the dollar goes, nor does anyone else. What I do know is anti-dollar sentiment is quite extreme and that signals caution on anti-dollar bets.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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GM's Inglorious Conclusion

At long last GM has gone bankrupt and was booted from the DOW along with Citigroup. The world did not end as former CEO Wagoner suggested would happen. Indeed the markets seemed to be cheering the news. Let's take a look at some headlines.

GM Files Bankruptcy to Spin Off More Competitive Firm

General Motors Corp., the largest manufacturer to go bankrupt, filed for court protection with a government-financed plan intended to create a viable company that can compete in world markets.

The U.S. government will extend $50 billion of loans to the 100-year-old automaker and plans to convert that into a 60 percent stake in the reorganized company, according to a filing in U.S. Bankruptcy Court in New York. GM today missed a deadline to show that it could reorganize outside of court and reported debt of $172.8 billion, more than twice its assets.

“Any suggestion that an American corporate icon like GM could file for bankruptcy would have been laughable a few years ago,” said Lynn Hiestand, a lawyer specializing in restructuring with Skadden, Arps, Slate, Meagher & Flom LLP.

U.S. Gets Majority Stake in New GM

The United States will invest another $30 billion during and after the GM bankruptcy process, bringing the U.S. commitment to $50 billion. Following that infusion, "the U.S. Treasury does not believe or anticipate that any additional assistance to GM will be required," a senior administration official said Sunday night, calling the restructuring a "permanent" solution.

Under the proposed restructuring, about 60 percent of the new GM would be owned by the United States, about 12 percent by the governments of Canada and Ontario, a union health trust would own 17.5 percent, and the company's current bondholders would get 10 percent.

"The proposal seems to favor the rights and claims of the UAW, a political ally of the current administration and a powerful lobbying force in Washington, over the rights and claims of the company's diverse group of bondholders," according to a letter from 20 House members, led by Rep. Jeb Hensarling (R-Tex.), to Treasury Secretary Timothy F. Geithner. "Contractual rights of investors are being trampled by the government under the rationale of 'extraordinary circumstances.' "

A critical legal issue is whether the bondholders might be able to get more for their debt if the company were simply liquidated, the proceeds distributed among those with claims.

The first critical issue is fairness. And by that measure bondholders were robbed. The next critical issue is the taxpayer investment of $50 billion into GM that will never be repaid.

GM to Announce Tentative Hummer Sale

GM has been studying strategic alternatives for the brand for a year, and has settled on a buyer that could take over the brand by the end of the third quarter, these people said. GM will continue producing Hummer H2 and H3 trucks and SUVs at plants in Louisiana and Indiana for the buyer.

GM is withholding the name of the buyer until a later date, and will only say on Tuesday that this investor is committed to continuing to develop the Hummer portfolio and build alternative-fuel models for the brand at some point. The purchase price will also be withheld.

If GM had not found a buyer by early June, Hummer would likely have been killed in bankruptcy court, one person involved in the deal. GM found an investor for its Opel brand over the weekend -- Magna International Inc. -- and is seeking buyers for Saturn and Saab.

Anyone dumb enough to buy the Hummer deserves to follow GM into bankruptcy.

Filings Reveal Depth of Problems

General Motors Corp.'s $82.2 billion in assets and $172 billion in liabilities spell out the extent of its problems and sheer breadth of the 101-year-old giant's bankruptcy.

In a torrent of filings at the U.S. Bankruptcy Court in Manhattan, GM's mind-numbing scale is evident: It has 463 subsidiaries and has built 450 million cars and trucks over the years. It employs 235,000 people world-wide. This includes 91,000 in the U.S., which it pays $476 million each month, and 493,000 retirees with various benefits. It spends $50 billion a year buying parts and services from 11,500 vendors in North America.

A liquidation analysis by the turnaround and advisory firm AlixPartners LLP, which is also providing a chief restructuring officer to GM, estimated that GM would have paid back its banks 23 cents to 77 cents on the dollar on the $6 billion it owed them.

The Treasury, on the hook for $20 billion, would have gotten back 12 cents to 24 cents. Bondholders, the UAW's health-care trust and other unsecured creditors would have received nothing.

A Saga of Decline and Denial

The above is a long, interesting read with enough details to suggest Wagoner was incompetent.

For the New GM, A Final Challenge to Please Drivers

America will soon have a new auto maker, "The New GM" -- or as some will call it, "Government Motors." Politicians, financiers and lawyers created it. American consumers will decide whether it succeeds.

The New GM will be a shadow of what the once-mighty old General Motors Corp. used to be. But it will be a really big shadow -- with more brands, more models, more dealers and possibly more market share than any other player in the U.S. industry. It will have a diverse ownership: the U.S. Treasury, the governments of Canada and the province of Ontario, a collection of bond investors and the United Auto Workers.

Mr. Henderson vowed that the New GM, freed of many of the health-care and debt-service obligations that sucked up its capital, will now "increase our investment in new technology" and no longer waste effort on cars that aren't "best in class."

GM has said this before. Now it will have to deliver.

Pray tell, why should GM have to deliver now? Obama has already thrown $50 billion at GM, what's another $50 billion more to win union votes?

Obama: Nationalization of GM to be short-term

In a defining moment for American capitalism, President Barack Obama ushered General Motors Corp. into bankruptcy protection Monday and put the government behind the wheel of the company that once symbolized the nation's economic muscle.

The fallen giant, the largest U.S. industrial company ever to enter bankruptcy, is shedding some 21,000 jobs and 2,600 dealers. Sparing few communities, the retrenchment amounts to one-third of its U.S. work force and 40 percent of its dealerships.

"We are acting as reluctant shareholders because that is the only way to help GM succeed," Obama said of the temporary nationalization of the 100-year-old company.

"What I have no interest in doing is running GM," Obama said. His only goal, he said, was to get GM back on its feet and then "to get out quickly."

Take a look at the lead sentence of this article. The writer of this story clearly does not know the difference between capitalism and toenail fungus.

The Ad Campaign for a ‘New’ G.M.

Can General Motors make up for decades of mistakes and misfires in a minute?

That is the ambitious goal of a 60-second commercial to begin running on television on Wednesday. The spot is already available on a Web site (gmreinvention.com) and on YouTube.

The commercial was created by Deutsch, an advertising agency owned by the Interpublic Group of Companies that handles assignments for G.M. like producing campaigns for the (soon to be divested) Saturn division.

GM Reinvention



Does anyone find that music extremely scratchy and irritating? That sound is god awful to me. Speaking of which I find those on-star ads extremely irritating as well. I will immediately turn the station when I hear one. So does my wife who even drives a GM.

Booted From The DOW

At long last GM is booted from the DOW.

GM, Citigroup Replaced in Dow by Cisco, Travelers

By replacing GM with Cisco, Dow Jones & Co. has removed automakers from the best-known benchmark for U.S. stocks, saying in an e-mailed statement that computers are as central to the economy as cars were in the previous century.

Cisco, the world’s largest maker of computer-networking equipment, joins Microsoft Corp., International Business Machines Corp., Intel Corp. and Hewlett-Packard Co. in the Dow, boosting its technology weighting from about 17 percent.

Travelers, the second-biggest U.S. commercial insurer, joins JPMorgan Chase & Co., American Express Co. and Bank of America Corp. among financial companies in the Dow. Its higher price than Citigroup’s will boost the benchmark’s financial weighting to about 10 percent from about 7 percent. Financials make up about 14 percent of the S&P 500, a broader benchmark.

The choice of New York-based Travelers restored an insurer to the Dow average, which had lacked one since the removal of AIG.

No One Could Have Predicted This

Let's return one more time to the opening snip:

“Any suggestion that an American corporate icon like GM could file for bankruptcy would have been laughable a few years ago,” said Lynn Hiestand, a lawyer specializing in restructuring with Skadden, Arps, Slate, Meagher & Flom LLP.

Really?

Flashback Wednesday, November 16, 2005

Inquiring minds are reading Can GM Be Saved?

...the real debate is not whether GM will go bankrupt, but whether said bankruptcy occurs sooner rather than later.

The real question then should be how to handle the upcoming bankruptcy in the most equitable manner possible rather than wasting money trying to prevent it.

...

GM is currently on collision course with bankruptcy anyway so it may as well happen in a manner that protects the most people. The 5 step program above would protect both GM pensioners and US taxpayers. No doubt union members will object to step number 4, but a reduction in the power of the UAW would appear to be a foregone conclusion anyway.

...

Finally, the union may as well lock in a good deal for its pensioners right now as opposed to a poor one later that might also affect taxpayers to the tune of $30-100 billion or so.

...

the Mish plan to save GM in a "fair and equitable manner" was a purely theoretical exercise that favored pensioners while ignoring huge implications to GM stockholders and bondholders. In that regard it can not be viewed as a serious proposal.

...

Here is the bottom line: No matter what CEO Wagner believes about bankruptcy, it seems likely the market or the PBGC or perhaps even a new law protecting pension benefits over bondholders will force him to change his mind. If history is any guide, not only will GM go bankrupt, but pensioners will get the shaft and taxpayers will end up footing some of the bill.

How did I do?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Former Chinese Central Bank Advisor Questions Geithner's Math, Calls Federal Reserve Assets "Rubbish"

A former Chinese central bank adviser says Global Crisis ‘Inevitable’ Unless U.S. Starts Saving.

Another global financial crisis triggered by a loss of confidence in the dollar may be inevitable unless the U.S. saves more, said Yu Yongding, a former Chinese central bank adviser.

It’s “very natural” for the world to be concerned about the U.S. government’s spending and planned record fiscal deficit, Yu said in e-mailed comments yesterday relating to a visit to Beijing by U.S. Treasury Secretary Timothy Geithner.

The Obama administration aims to reduce the fiscal deficit to “roughly” 3 percent of gross domestic product from a projected 12.9 percent this year, Geithner reaffirmed today. The treasury secretary added that China’s investments in U.S. financial assets are very safe, and that the Obama administration is committed to a strong dollar.

It may be helpful if “Geithner can show us some arithmetic,” said Yu. “We need to know how the U.S. government can achieve this objective.”

The deficit is projected to reach $1.75 trillion in the year ending Sept. 30 from last year’s $455 billion shortfall, according to the Congressional Budget Office.

The U.S. needs a higher savings rate and a smaller deficit on the current account, which is the broadest measure of trade, or “another financial crisis triggered by a dollar crisis could be inevitable,” the Chinese academic said.

Referring to the Federal Reserve “as the world’s biggest junk investor,” and to Chairman Ben S. Bernanke as “helicopter Ben,” Yu said the Fed has dropped “tons of money from the sky since the subprime crisis.”

“The balance sheet of the Federal Reserve not only has expanded like mad but is also ridden with ‘rubbish’ assets,” he said

Yu Yongding is not the only one questioning Geithner's math. How about it Tim, can we see your scribbles?

In related news Geithner tells China its dollar assets are safe. The crowd laughed...

U.S. Treasury Secretary Timothy Geithner on Monday reassured the Chinese government that its huge holdings of dollar assets are safe and reaffirmed his faith in a strong U.S. currency.

China is the biggest foreign owner of U.S. Treasury bonds. U.S. data shows that it held $768 billion in Treasuries as of March, but some analysts believe China's total U.S. dollar-denominated investments could be twice as high.

"Chinese assets are very safe," Geithner said in response to a question after a speech at Peking University, where he studied Chinese as a student in the 1980s.

His answer drew loud laughter from his student audience, reflecting scepticism in China about the wisdom of a developing country accumulating a vast stockpile of foreign reserves instead of spending the money to raise living standards at home.

In his speech, Geithner renewed pledges that the Obama administration would cut its huge fiscal deficits and promised "very disciplined" future spending, possibly including reintroduction of pay-as-you-go budget rules instead of nonstop borrowing.

"We have the deepest and most liquid markets for risk-free assets in the world. We're committed to bring our fiscal deficits down over time to a sustainable level.

"We believe in a strong dollar ... and we're going to make sure that we repair and reform the financial system so that we sustain confidence," he said.

But Geithner said there could be no return to business as usual either for the United States or China: both must change their growth strategies as U.S. consumers pay down debt after years of living beyond their means.

So far Geithner is repeating the strong dollar policy of Snow and Paulson: Yapping about it while the administration does everything to destroy it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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US Manufacturing Contracts 16th Consecutive Month; China Expands 3rd Month

The Institute for Supply Management May 2009 Manufacturing ISM Report On Business® shows manufacturing in the US contracted for the 16th consecutive month, but at a lower rate.

Economic activity in the manufacturing sector failed to grow in May for the 16th consecutive month, while the overall economy grew for the first time following seven months of decline, say the nation's supply executives in the latest Manufacturing ISM Report On Business®.

"While employment and inventories continue to decline at a rapid rate and the sector continued to contract during the month, there are signs of improvement. May is the first month of growth in the New Orders Index since November 2007, with nine of 18 industries reporting growth. New orders are considered a leading indicator, and the index has risen rapidly after bottoming at 23.1 percent in December 2008. Also, the Customers' Inventories Index remained below 50 percent for the second consecutive month, offering encouragement that supply chains are starting to free themselves of excess inventories as nine industries report their customers' inventories as 'too low'. The prices that manufacturers pay for raw materials and services continued to decline, but at a slower rate than in April."



PERFORMANCE BY INDUSTRY

Five of the 18 manufacturing industries reported growth in May. These industries — listed in order — are: Nonmetallic Mineral Products; Plastics & Rubber Products; Machinery; Food, Beverage & Tobacco Products; and Printing & Related Support Activities. The industries reporting contraction in May — listed in order — are: Textile Mills; Furniture & Related Products; Electrical Equipment, Appliances & Components; Fabricated Metal Products; Primary Metals; Transportation Equipment; Computer & Electronic Products; Wood Products; Apparel, Leather & Allied Products; Miscellaneous Manufacturing; Chemical Products; Petroleum & Coal Products; and Paper Products.

Chinese Manufacturing Expands Third Month

Bloomberg is reporting Chinese Manufacturing Grows, Adding to Recovery Signs.

China’s manufacturing expanded for a third month, driving stocks to the biggest gain since March and adding to evidence that the economy is recovering.

The official Purchasing Manager’s Index was at a seasonally adjusted 53.1 in May after registering 53.5 in April, the Federation of Logistics and Purchasing said today in Beijing in an e-mailed statement. A reading above 50 indicates an expansion.

A surge in lending and investment and rising retail sales have spurred confidence that Premier Wen Jiabao’s 4 trillion yuan ($586 billion) stimulus package is reviving growth in the world’s third-biggest economy. U.S. Treasury Secretary Timothy Geithner said today that the global recession may be easing, helped partly by China’s “very forceful” measures.

“The Chinese economy is well on track for recovery and economic growth is picking up steam,” said Lu Ting, an economist at Merrill Lynch & Co. in Hong Kong.

China’s economic growth may accelerate to 6.8 percent this quarter from 6.1 percent in the first three months, according to a Bloomberg News survey of economists.

Bear in mind that China needs growth faster than 7% to prevent a mass exodus of Chinese workers back to the farms. For details please see Yellow Brick Road Economic Theory.

Also note that $586 billion of Chinese stimulus went directly into production. US stimulus went to bail out banks and to keep zombie corporations alive. If you throw enough money around, some people will eventually spend it, but attitudes have otherwise generally changed. As soon as the stimulus stops so will the spending (if not before).

Investment demand for housing is picking up in the US as noted in Buying Frenzy In Phoenix. However, that demand is widely scattered and unsustainable with unemployment soaring.

If there is pent up demand for anything it is pent up demand to foreclose. Various foreclosure moratoriums will be ending and a flood of new housing supply will come in the wake. Investment demand for housing will soon be swamped by new supply.

With this amount of structural weakness, it remains to be seen how much more stimulus can be forced down the global economy's throat before it overheats. That, not green shoots is the real message behind rising treasury yields.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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