Japan is supposed to raise its national sales tax next year from 5% to 8% and in 2015 to 10%. The country’s anemic consumer spending as seen above is projected to fall enough to cause a 4.4% contraction in GDP. The simplistic solution is to forgo the increases, but a crucial piece of Abenomics is this tax increase for deficit reduction purposes.
Japan has reached the point of no return in its debt crisis. Tax increases will not produce additional revenue as people will just cut consumption, as they have done in Greece and Spain. A collapse is not imminent as Japan will somehow muddle along—until it doesn’t. In the meantime, there is lots of money to be lost shorting JGBs.
Poland does not use the euro, yet, but it is getting a taste of Europe’s malaise as the Eurozone is its largest trading partner. The country has avoided recession so far, but its economic performance has declining in step with the Eurozone’s. Last quarter, the economy hit stall speed of only 0.5% growth.
The green shot of a nascent debt crisis are appearing. The budget deficit will be about 50% larger than projected and low rates have begun rising. Poland is in better shape than the PIIGS, but economies can deteriorate quickly in Europe.
When economic and financial troubles overtake the world, hidden frauds become apparent. Madoff’s scheme was revealed during the market swoon of 2008-9, and Enron, Worldcom, Parmalat and HealthSouth were unmasked after the Internet bubble burst.
Parmalat is the situation closest to the Pescanova saga. In both cases, regional companies in Southern Europe used cheap financing and questionable accounting to grow into multinationals before flaming out amidst bitter recriminations. Pescanova is the first of several companies that will suffer the same fate as the Eurocrisis continues to spread.
Despite the lofty heights of the stock market, corporate America continues to deliver lackluster results. GE, MSFT, GOOG and INTC among others have all reported lower revenues. Two factors are contributing to declining sales. A stronger dollar is the culprit according the mainstream media. Ignoring the other antagonist is necessary to maintain the recovery narrative, but contraction in Europe and slowing growth in China will persist in sapping revenues of large multinationals for the immediate future.
Wait, profits are in line with analyst estimates. Yes, but those estimates have been guided down several times in the last year, and profits are the easiest numbers to game Revenue is the number to watch.
China is attempting to reform its financial sector and has removed the floor on interest rates for bank loans. Reform could be a cover story. By removing the floor on loan rates, inefficient state industries may be kept afloat by below market rates. It will be interesting to see who gets cheaper loans between now and the end of the year.