An Ominous Cloud

The June report on Japan's trade surplus shows why oil should keep falling in price. The highlights of the report:

1) Exports to the U.S. were down 15.4 percent, the tenth straight monthly drop and the largest since November 2003.

2) Exports to Europe fell 11.2 percent, the second straight decline.

3) Total exports decreased 1.7 percent in June from a year earlier.

An Oil Bull then pops his head up and screams, "Oh don't worry, China and the rest of the emerging markets will make up the slack, you'll see."

Well, not quite:

4)Exports to Asia grew 1.5 percent, the slowest in two years.

5)Exports to China grew 5.1 percent, less than the 12.2 percent growth in May 2008, and down from 23% growth in May 2007.

It won't be long until official figures from China show a slowdown and/or decline in China exports.

A global slowdown in economic activity starts in the U.S., spreads to Europe and Japan, and then hits China and the rest of the emerging economies of the World. This makes perfect sense since we are the largest consumers in the world, and it takes some time for a slowdown in that consumer spending to work its way through the supply chain.

Japan Export Slowdown

Japan just released its May trade surplus report, and although it beat expectations, it was down for the third straight month, hurt by rising prices for the Oil that Japan imports.

While exports to China and the rest of Asia were strong, analysts said the gain was a little deceptive, as shipments to China were artificially boosted after the recent earthquake on May 12.

Even more important was that:

1) Exports to the U.S. fell 9.5% as demand for Japanese cars and other products slowed.

2) Exports to Europe were down for the first time in 31 months.

Is this more evidence that the decoupling theory is not valid? Last week it was reported that exports from Singapore to the developed world were down as well.

Here is a list of important questions to answer:

Is it possible that the economic recession in the U.S will lead to a decline in Consumer spending on discretionary items?

Is it possible that this decline in consumer spending will be exacerbated by the increasing price of gasoline and food?

Is it possible that some Asian economies, who are heavily dependent on exports, will not be able to export as much as in the past because there aren't as many buyers?

Is it possible that these Asian economies will not grow as fast as in previous years or as much as the market or pundits expect?

Is it possible that when these Asian economies don't grow as fast, they will use less energy (oil) than the market expects?

Is it possible that the supply and demand fundamentals for oil will not meet the market expectations and we will have a surplus of oil over the next 12 months leading to a rapid rise in inventories?

Is it possible that I am out of my mind?

Enough is Enough

I've had it with all this talk about emerging markets and how great they are and how nothing can go wrong. Everyday these markets make new highs. Everyday some other talking head is on TV regurgitating some Groupthink on the Emerging markets.

I lived through a previous era where pundits said the same thing about a different market. When I first started working on Wall Street, the Japanese and its markets were like gods. Nothing could go wrong. They were like Supermen destined to take over the world economy. They made marquis purchases of our domestic assets - Rockefeller Center and Pebble Beach, etc. The Japanese Stock Market hit a new high everyday.

I was working in Fixed Income at the time at Chemical Bank in New York City, selling short term money market products. All you needed was a Letter of Credit from a Japanese Bank and it was like gold to a customer. We had another unit at the bank that sold only two funds to retail customers - the GT Global Asia Pacific and the GT Global Japan Fund. Want to guess how those funds did once the boom ended in the late 80's?

Oh I know, it's different this time. I forgot.