The Fake Recovery

Lets examine the projected GDP number of several countries and look at their projected government budget surpluses or deficits to see how their economies are fairing:

Country        2010 GDP    2010 Budget Est     Implied Real Growth

United States  3.1%                -8.8%                     -5.7%
Japan             3.1%                 -7.8%                    -4.7%
Britain            1.2%               -10.3%                    -9.1%
Canada          3.5%                -4.5%                     -1.0%
China             9.9%                -2.6%                       7.3%
Russia            4.8%                -3.9%                       0.9%
India              7.9%                -5.5%                       2.4%
Brazil             7.8%                -1.8%                       6.0%

Data for this table courtesy The Economist July 24, 2010

We begin with China:

9.9% recorded growth rate less 2.6% budget deficit still leaves growth after government spending at a very respectable 7.3%.

Brazil is another strong performer with 6.0% after government over spending.

India and Russia also are in positive territory.

When we look at the "developed" economies let's start with Canada since it claims to have a strong economy.
Results: 3.5% growth less 4.5% government deficit leaves -1.0% "growth"
Not a strong performance for a country that is supposed to be pulling out of a recession.

When we consider the US we see that the economy is expected to grow 3.1% which is a good growth rate for a mature economy.  Once the government deficit is subtracted the picture changes.  Deduct the nearly 9% annual government budget deficit and we see the economy shrinking at a rate of 5.7%.
The weak economic response after spending $1.3 Trillion more than tax revenues and only generating $400 billion or so in "growth" (to put it another way, 30 cents returned for every dollar invested) should be a serious deflationary warning to us.
How long will the bond market tolerate this?
It seems that the Chinese, our main creditors, are reaching their limits for additional US debt.

September could prove to be an interesting month if this continues.


  1. PW, with China reducing its purchase of long-term treasuries, wouldn't the Fed use its puppet banks in the U.K. to purchase these treasuries?

  2. PW - Thanks for all the hard work, but the problem is the market will do what it wants to do regardless of who/what/when is saying. One needs to have an open mind and flexible enough to change side.

    I've been long EURUSD since July at 1.2300 and now it stands at 1.2880, which comes to 580 points(pips) equivalent to $5800/contract and I am long 3 contracts, equates to $17500/- :-)

    If I would have listened to all this so called experts/analyst I wouldn't have made a single dime.

    Ignore the noise and try to see whats right in front of you, just my 2c!


  3. Interesting analysis. However, the level of budget deficit in China excludes the amounts borrowed by the SOEs to fuel the massive real estate boom in China today.

    However, your overall thesis is very interesting

  4. Anonymous at 9:22am I suspect that your hypothesis is correct that the Fed will use whatever means at its disposal to urge and arm-twist dealers and others to buy treasuries in a desperate attempt to keep yields down as the Chinese gradually reduce their holdings. We will need to watch the results of bond auctions closely to see if this is in fact the case.

  5. Congratulations Walter on making money in a difficult market. Currency speculation is considerably more difficult that stock speculation in my experience. I am becoming more bullish on the US dollar now and expect we will see quite a run up in the dollar compared to many other currencies if the state of the world economy deteriorates. That will be a topic of a future post.

  6. An excellent point Frozen, as the state owned enterprises do tend to use the proceeds of land sales to enhance their own budgets. We would likely need to take a couple of points off the GDP number to adjust for this distortion. It will be interesting to see how long the Chinese bubbles lasts before finally bursting. Certainly the real estate boom has driven apartment prices far higher than fundamentals justify. If Andy Xie is correct, 2012 could be the year this bubble pops.

  7. PW, Thanks!

    To be honest, I am more of a technical trader than a fundamental one. I would say 60-70% technical and 30-40% fundamental.

    I use my own proprietary trading software (self written) and currently I am being extremely cautious (tight stop loss) as its pointing south.

    I think your analysis will come true sooner than later but who knows I just try to flow with the markets.


  8. The GDP is not the only indication of the health of the economy. The GDP did grow during the 1929
    Depression. However, the general population suffered economically. There was also a lack of jobs. Hey just like NOW. What a coincidence.


Post a Comment