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The Global Economies – The Escalating Train Wreck Part 3a (#33)


In Part 1 and 2, we primarily addressed China and the United States, and briefly referred to the problems of Greece and the Euro Zone (as their problems have been well highlighted in the media recently). In this Report we want to address Japan, Russia, Brazil, Canada and Australia.

Collectively, we believe, these economies will put an additional drag on the Global economies.

With Euro Zone’s ongoing weaknesses, and now with America softening appreciably, these economies represent the majority of the rest of the developed World. The relevance of highlighting the drag is to point to the improbability of the escalating global economic decline reversing itself, in spite of the Federal Reserve, the other major Central Banks, most other experts and commentators, still insisting that it will.

In fact, as we attempt to point out in this our mid-year Economic Report, the factual reality, that the vast bulk of the developed World is continuing to contract on a long term basis, and now with the 2nd largest economy (China) in an increasingly visible free fall, the contracting economies in this Report make up the bulk of the global elevator heading to the basement.

Apart from Japan, which is not only the third largest global economy but a technologically advanced one, and yet in a sense the most in trouble, the other three are significantly resource based and are obviously being affected by the ongoing crash in commodity prices (in itself the most significant proof of the seriousness of the escalating global economic crisis).

Japan, economically the third largest, and one of the most advanced modern economies in the World, paradoxically has been plagued with age old internal structural problems that are so culturally entrenched that successive governments, for the last 25 years, have failed to resolve them to any significant degree. That is because Japan’s entrenched economic problems are rooted more in its ancient cultural traditions of hierarchical positioning, political and business cronyism, endemic corruption, and its demographic reality (a fast aging population) than any other global economic reality. And that is why, in spite of the extreme measures it took in character with its current samurai bred leadership that lives by the bushido code of ‘victory or death!’, ‘Abenomics’ is still failing.

The core strategy of Prime Minister Shinzo Abe, since coming to power in September of 2012, was to determinedly unleash the most unprecedented economic stimulus in global history. It truly makes the recent past years of effort of the Federal Reserve, European Central Bank and the other major Central Banks look downright restrained in comparison.

In the beginning everybody applauded PM Abe’s grit, determination and decisiveness, inside and outside of Japan. The Japanese people, sick and tired of being stuck in economic doldrums for over two decades while the rest of the World raced ahead, especially China and the United States, simply fell in love with their determined and tough talking Prime Minister as he swore to bust Japan out of its economic malaise. And the rest of the World while anxious about the results of such unrestrained liquidity materially devaluing the Yen, which would lead to global currency wars, still hoped to have Japan back as the third largest economy, becoming a positive contributor to global growth which was still struggling to recover from the 2008 crash.

For his part PM Shinzo Abe and his hand picked Bank of Japan Governor, Haruhiko Kuroda, were true to their word and intentions.

The Bank of Japan has spared no effort to break Japan out of its slump as its asset purchase efforts show in the Chart below (source: Telegraph.uk.com). After taking office in March, 2013, Governor Kuroda has given a new meaning to the words ‘monetary stimulus’, as represented below by the steep trajectory of the Bank of Japan’s asset purchase program.

Alas apart from an initial promising lurch, it was not to be. In spite of the most determined and unprecedented effort on the part of the Japanese Government and the Bank of Japan, its economy is again contracting (See next Chart).

While a few Quarters do not a long term trend make, unfortunately a number of other key indicators are also turning negative at the same time. One of the primary targets for the Bank of Japan was the core inflation rate of reaching 2%. As the second Chart shows, core inflation has fallen off the cliff lately.

And there is more bad news in the other economic indicators, again please see the following Charts.

Japan’s GDP has contracted for the past months in spite of every effort of the Bank of Japan. This does not bode well for the Prime Minister and his rescue strategy Abenomics.

Again, after a spleen bursting effort to raise the target inflation rate to 2%, the BOJ has failed as CPI has collapsed along with the global energy and raw material prices.

All that insane amount of economic stimulus is not showing up in consumer spending, as the public after an initial burst of euphoria, realized the odds against ‘Abenomics’ succeeding and have seriously curtailed their spending. Along with the internal consumption, the Prime Minister’s approval rating is also dropping. Last month it was reported; the Prime Minister’s approval rating fell to an all time low of 37% since his assuming office in 2012, while his disapproval rating climbed to over 46%. The Japanese public, like the public everywhere where massive monetary stimulus has been undertaken in the past 6-7 years, are not feeling the love of that generosity, as the Trillions of dollars made available from the top, stay and circulate at the top, having little trickle down effort. That leaves the public to struggle and watch their spending.

Along with the public, business sentiment is also turning negative as economic reality sets in.

After setting new precedents on monetary easing, so much so, that it would elicit a name all its own, ‘Abenomics’, the results are not only, not encouraging, but can be interpreted as downright scary. The reason being that when such profligate spending is unleashed, and all it accomplishes is a return to a contracting economy, dis-inflation, declining consumption, and negative public and business sentiment, then the only possible and final outcome can be: Japan self destructing. As Japan continues to debase itself, in an effort to lift itself out of the sinking sand its in, so are its competitors forced to devalue. It is a race to the bottom, that so far nobody is winning.

RUSSIA: Vladimir Putin came to power in 2000 when he became President. Since then he has been ‘the power’ in Russia. In fact, he has consolidated power to himself to a point that he is the defacto modern dictator of Russia. In that role he has controlled all policy in Russia over the past 14 plus years. Therefore it would be fair to say that the current Russia reflects Vladimir Putin’s personal vision of how Russia should be.

Initially it was thought that Russia would flourish under his disciplined iron hand, in contrast to his predecessor, the seemingly ill-disciplined, unstable, drunken Boris Yeltsin. But when one looks at Russia’s economic performance during the Yeltsin years, and keeping in mind the chaos that went before it, during his term the GDP growth was spectacular, albeit it was starting from a low base (see next Chart).

Putin on the other hand took over in 2000 at an economic high point. Shortly after that the ‘dot com crash’ (in the United States), had a short but powerful negative impact on the major economies and it showed in Russia (See Russia GDP Growth Charts). But after that even though the economy recovered, it never quite got to its previous high, but stayed in the positive territory till the down draft of the 2008 crash caught it and sent it, as it did the rest of the World, into a nose dive. Since then the Russian economy did recover but stayed weaker than before. In the last 5 years the Russian economy has steadily declined. As the following Chart shows, Russia’s economic growth has been contracting steadily and the country is now in a deepening recession.

To be fair to President Putin, during his almost 15 years in power (as Prime Minister he was still the man in charge) he has had to contended with the aftermath of the 2008 crash (an external event) and the more recent precipitous drop in oil prices (Russia’s primary export commodity) which has given Russia’s economy a decisive push downward and currently put it solidly into negative growth territory. Having said that, President Putin hasn’t seemed to be too concerned to steer or position the Russian economy for future growth, by restructuring the economy from a basically resource based one, to a more modern diversified goods and services economy. And during the many years of his being in control he has focused more in tying to grow Russia’s former international geo-political influence, than show much interest in growing, de-verifying or making more equitable its economy.

Putin’s efforts in recapturing Russia’s former glory as an international heavy weight has had Russia once again become the aggressor to its former USSR satellite counties, and landed him at odds with the leaders of the Western powers. The confrontation over Ukraine brought heavy economic sanctions against Russia by the West, that have also seriously hurt Russia’s economy.

Today, the Russian economy is in deep trouble and unless the price of oil dramatically reverses itself, which is not looking likely for the near future, and as Russia is unrepentant for the annexation of Crimea and its incursions into Ukraine, the economic sanctions aren’t likely to come off either. The following Charts show the serious nature of Russia’s rapidly deteriorating economic condition.

Over the past years, with the double whammy of the sanctions imposed by the Western countries, and the dramatic drop in the global oil prices, the Russia’s currency, the Ruble, went into a free-fall. Russia’s Central Bank was forced to raise its key lending interest rate dramatically (at one point to 17%; real nose bleed territory in a zero interest rate environment in the West) and since then, has had to regularly intervene in the currency markets to shore up the Ruble.

In the current economic environment, there is no relief in sight for the Ruble, or Russia’s beleaguered Central Bank. The external economic and geo-political down drafts are going to push every thing in the Country even lower. Internally, as long as international oil prices keep at its current levels or decline further, which seems probable as the global economic continues to deteriorate and oil demand weakens further, reducing Russia’s oil export cash flows, and the Western sanctions remain in place, Russian economy will continue to weaken significantly.

The Central Bank’s interventions in support of its economy, the currency markets, and the falling trade with the West, is significantly reducing Russia’s foreign exchange reserves.

With the economy in recession, currency declining in value, financial and trade sanctions in place, inflation is rising dramatically, bringing additional pressure and hardship to the Russian people.

With practically all cylinders of the economy misfiring, it isn’t much of a surprise that the long suffering and stoic Russian public haven’t a lot to spend. Like the economy, and because of it, retail sales have had the bottom fall out this year.

In a deliciously ironic coincidence, while we were writing this Report, President Putin, in one of his planned publicity stunts, decided to explore a ship wreck in the Black Sea in a submersible while visiting the annexed territory of Crimea. The picture below, perfectly captures for us Russia’s current sinking condition.

It is quite obvious now that President Putin’s expertise and passion lay more in trying to restore Russia to a semblance of its former geo-political glory than in creating a new well balanced modern economy out of the archaic, corrupt, dysfunctional old one. His past KGB training, and career, certainly was more suited to external geo-political intrigues and strategies, and internal demagoguery, rather than the comparatively mundane task of economic planning and tinkering.

We now know that while at the height of its legitimate super power status externally, Russia was a growing economic disaster internally. To an appreciable degree Putin has succeeded in recreating a smaller version of the old Russia, as it is starting to resemble it more and more.

The Russia of today, is an increasingly autocratic State, where political power is consolidated in the hands of the top few, opposition and dissension is silenced by decree, force, and at times by fatal consequence if the perceived threat targets the power in the Kremlin. Corruption is endemic and permeates the very top, and a constant barrage of State controlled misinformation and propaganda keeps the public on side and patriotic through the ever deteriorating internal conditions. Externally, Russia is a growing political and military aggressor, with territorial encroachment and expansion ambitions, brandishing its still formidable nuclear power as a threat to keep its opposition in the West at bay. And internally, it is a fast deteriorating economy that in the current global economic environment is going to deteriorate and destablize further.

Yup, it sure sounds more and more like the former USSR.

BRAZIL: Brazil today is in deep political and economic trouble. After showing real promise at the height of global boom, a decade ago, which had sent commodities soaring, Brazil was considered the most promising of all the ‘BRIC’ countries (Brazil-Russia-India-China). Today, it is considered a broken and dysfunctional State.

Even as we write this Report, there have been ongoing massive protests all over Brazil against the incumbent government, and calls for the impeachment of President Dilma Rousseff.

The Brazilians are increasingly frustrated and angry by Brazil’s latent economic promise never really materializing. And, they having to bear the certain burden of its soaring unemployment, crime, the rising cost of living, the poor quality of its education and health care system, and mostly Brazilians are fed up with the entrenched corruption at the highest levels of Government.

More recently, that simmering anger has turned into sheer outrage, as it became increasingly clear that the massive corruption scandal in Brazil’s biggest and most important oil company, Petrobras, took place under the Chairmanship of the now President Dilma Rousseff, and some of the highest officials in the incumbent government. Over $2.0 Billion in kickbacks and bribes have been alleged to been given to officials which were then funneled to political parties they favored, including the Party of the then Chairperson, and now President, Dilma Rousseff.

Brazil’s economy has been increasingly in trouble due to the deteriorating global demand over the past years. More than halfway through 2015, Brazil’s economic contraction is gathering momentum, and there is no near term respite in sight.

The steep and persistent decline in global commodity demand has seriously hurt Brazil. In the past two decades of the global boom, it exported its vast natural resources to the previously resource hungry World, and in particular to insatiable China. As China’s economic boom escalated 20 years ago and then really hit stride, post 2008 crash due to the unprecedented ‘post crash, economic stimulus’, its trade with Brazil boomed and China became Brazil’s largest trading partner.

Conversely, last year, as China’s economic growth rate materially slowed , Brazil’s exports to China began their decelerating decline.

As Brazil’s economic problems mount, its currency the Real, has been increasingly losing value against the U.S. Dollar, making exports cheaper but imports significantly more expensive and driving up inflation. The already economically stressed Brazilians are facing ever greater hardships as prices escalate nationally.

Jobs and wages which had been growing in the past years, are again tumbling rapidly.

Therefore it is no surprise that retail sales continue to fall.

The public sentiment in Brazil is very negative and growing pessimistic by the day. The Chart below shows the rapid rise in the negative assessment of the Brazilians, regarding the country’s economic situation (climbing now to 87%). Given the deterioration of Brazil’s economic fundamentals and its current political crisis, we fear Brazil faces a number of very tough years, and the Brazilian people are going to face increasingly harder times in the near future.

We can be sure the negative sentiment in Brazil will keep increasing.

To be continued... (Part 3b, will address Canada and Australia)

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