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No sign of recovery

No sign of recovery
The Baltic Dry Index has dropped another 3.1% Wednesday on top of horrible losses in the last few weeks.

The Baltic Dry Index has dropped another 3.1% Wednesday on top of horrible losses in the last few weeks.

First Trust"s Chief Economist, Brian Wesbury, stated that the economy is in great shape and global trade is fantastic. He cited the Baltic Dry Index as an indicator of strong trade. However, there must be another Baltic Dry Index as the one everyone else follows shows a horrible past month.

In fact, the Baltic Dry Index has dropped another 3.1% Wednesday on top of horrible losses in the last few weeks. Couple that with Japan"s latest trade data which shows the China is now Japan"s largest trade partner. Furthermore Japan stated that exports to the US dropped by 43% to $40.5B which is a stunning drop since most have declared the recession is over.

The latest report from Japan also said the following:

Outlook for 2009

Looking at the whole of 2009, Japan-China trade will likely record its first decline in 11 years (since 1998), pushed by the downward trend that began in November 2008. This fall, however, will not be as severe as seen in the first half of 2009, with the global economy forecast to rebound in the second half of the year.


1) Since a rapid recovery in consumption in Japan, the US, Europe and other developed economies is unlikely, China"s exports of finished products is expected to continue its downward trend, leading to a continued decline in Japan"s exports of high-value added parts and materials to China.

2) A temporary increase in exports of pumps and other machinery is expected, due to increased infrastructure spending in line with the Chinese government"s 4-trillion-yuan stimulus package (its effect on total exports, however, is expected to be limited).

3) In the second half of 2009, China"s consumer market is expected to expand, along with a recovery in domestic production. This will have a positive effect on Japan"s exports of parts and materials, although to a limited extent, as the majority of goods for domestic consumption are low value-added items.


1) Under the current state of the Japanese economy, which is not expected to achieve a quick recovery in 2009, Japanese domestic demand will likely remain stagnant. Therefore, Japanese imports from China, which consist mainly of consumer goods, are expected to fall again this year.

2) Due to weak growth in personal incomes, Japanese consumers will turn more towards inexpensive clothing and food items from China?but this will have limited impact on a value basis.

3) Japanese imports of low-priced parts and materials from China (used in finished goods production in Japan) are likely to decrease again in 2009, as an early recovery in both internal and external demand is thought unlikely.

There is nothing in that segment of the report that is positive. In fact it looks a lot like the data we are getting here in the US. As reported yesterday the ports of Los Angeles and Long Beach are way down which is reflected in the data that Japan just put out. Simply put, there is no demand either domestically or internationally with one exception, China.

As I have stated before, you cannot have a jobless, earning-less, revenue-less and, now, demand-less recovery. Yes, we will see a good 3Q09 GDP report, but it certainly will not be 4.5% like the market is pricing in and it will more than likely not last until 4Q09. This is a global problem that has yet to be fixed and programs like cash for clunkers or cash for whatever will not work long-term.

The problem is now unemployment and, frankly, has been unemployment for a long time now. If people do not have jobs they will not buy things. If people do not buy things that means the supply of products will be in surplus for some time and earnings will be much lower. Unemployment is also the problem behind the housing crisis and housing is still a major threat to the banking system.

We can bury things by getting rid of mark-to-market and telling ourselves that ongoing unemployment claims means that people are finding work, they are not, but hoping things are better does not fix the problem. As of right now we need to let it play out in order to prevent prolonging the recession, possibly making it worse, and by hiding the very problems that got us here makes it entirely likely that the same problem will come back worse than before.


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