MoneyNews
Thursday, July 14, 2005

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1. Wilkinson's Analysis: Possible Global Recession Looming?

The first half of this year was marked by fears of a global economic slowdown.

2005 started with a clear message from the Chinese authorities that they needed to stem the blistering pace of economic growth in their country.

Now that we are into the second half of the year, we are beginning to get a clearer picture of the impact of those measures and how manufacturers are dealing with them.

The continued strong data coming out of China indicates a 9%-plus growth rate, with trade playing a vital role. Earlier in the year, commodity prices of the raw materials used in the core manufacturing process slid due to fears that the global economy would teeter on the brink of recession.

As real demand did slow a little, the cost of shipping raw materials around the world tumbled after a strong rise throughout 2003.

The Baltic Capesize Index, which measures the average cost of tanker freight cargo costs, slid from a peak of 8,911 in December 2004 to 2,720 as trade dropped off. In many cases, the cost of shipping iron ore was more than the value of the actual cargo being moved.

Now London's Baltic Exchange has seen seven weekly gains in the index as trade picks up again.
This is the result of a pickup in demand for iron ore used in the steelmaking process. Imports of ore are expected to rise 23% to 255 million metric tons, according to Bloomberg data.

As the price of natural gas and oil increases, manufacturers are switching to alternative energy sources including coal, whose imports are also on the rise.

Both the cost of coal and the shipping rates to deliver it have risen over the past weeks. The fourth-largest producer of coal is South Africa. Recently, prices for this fuel source have risen by 3.3% to their highest levels in eight months.

Meanwhile, freight rates between South Africa and the Netherlands rose one-half of 1%. Judging by activity in the forward markets for freight shipping, traders are expecting activity to heat up further.

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2. China Fights to Cool Housing Market

Since 2003, Beijing has taken steps to cool the booming nationwide housing market by abolishing preferential-rate mortgages and demanding larger initial down payments.

And slowly but surely they have managed to curb the rate of price increases – as illustrated by just-released second-quarter figures.

The 8% rise in home prices across 35 Chinese cities marks a slowing rate of growth from 9.8% in the first quarter and 10.8% in the final quarter of 2004, according to China's National Development and Reform Commission.

In Shanghai – China's real hot spot – prices increased 11.6% during the period, relative to a year earlier. That is down from the 19.1% in the first quarter.

It would appear that the authorities have managed to extinguish the fire – but the embers still glow brightly.

Looking forward, the question will be: Can the renewed manufacturing activity add more fuel to the fire in 2006?

Editor's Note:

• This Early-Warning Indicator Alerts You to a Coming Housing Decline in Your Area – Learn More

3. Is Weak Dollar Actually Helping U.S. Economy?

We recently performed a Google search using the words "U.S. Treasury" and "strong dollar." The results yielded 732,000 archived articles.

It may seem like quite some time since we heard a U.S. Treasury official maintain that a strong dollar was in the vested interests of the United States. But in reality it might be that this couldn't be farther from the truth.

The reason is evident in the current-account deficit, which hit $668 billion in 2004.

That illustrates the fact that foreigners have poured in less money to purchase U.S. stocks, bonds and real estate than Americans have acquired abroad. That gap is plugged as America borrows more and more from the rest of the world.

However, the Economist magazine recently pointed out that the value of net U.S. external liabilities rose only $170 billion in 2004.

More curiously, the cumulative rise in the deficit has jumped to $1.7 trillion since 2001, while at the same time the Bureau of Economic Analysis (BEA) reports that net external liabilities rose only $200 billion.

The result? As a proportion of GDP, the net foreign investment position appears to be improving.

But how could this be?

The answer is uncovered when we consider the asset classes that are home to American holdings abroad along with exchange rate movements.

To begin with, U.S. claims on foreign equities far outweigh foreign claims on U.S. equities. When Americans buy foreign equities, they are purchased in local currency terms.

So when stock markets have a banner year – as they did in 2004 – the value of American wealth increases markedly. Meanwhile the relatively smaller rise in U.S. equities leaves foreign investors pleased but lagging.

Add in the decline in value of the dollar last year and you'll see that the net position of the United States actually improved, thanks to rising foreign holdings and a relatively small gain in the liability standing.

So running a soaring deficit and allowing the dollar to fall is a great way to deal with the U.S. position.

However, as we've witnessed so far in 2005, things can change. The reversal of dollar fortunes won't make the monthly current account disappear.

As Roubini Global Economics points out, the current-account deficit could surge to $820 billion in 2005 on a standalone basis.

The firm also estimates that at current exchange rates, due to a rising dollar, the capital loss on America's foreign assets is $350 billion. That would lead to a jump of some $1.2 trillion in the nation's net financial liability position this year.

As The Economist sums up: "A further drop in the dollar and a fall in American share prices could trim those liabilities again in 2006. But that is hardly a reason to buy dollars."

Editor's Note:

• 3 Best Foreign Currencies to Buy Right Now – Go Here
  

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