How the world looks in May 2010- AM

1. Economic reports in US remain strong including solid ISM manufacturing and non manufacturing data, increasing business investment and inventory building, positive retail sales, improving auto market, as well as stabilizing home sales; all signs towards 3% GDP growth for rest of the year.
2. Inflationary pressures have not yet manifested, partially due to strengthening USD
3. Consumer spending is improving and taking over from manufacturing in leading the recovery
4. US continues to display ability to finance its deficit at record low levels historically, which should further help economic activity for businesses and individuals by lowering their financing costs
5. European contagion has almost confirmed US Dollar's strength for the rest of the year
6. Chinese economy's structural flaws that include over-reliance on fixed asset investment as an economic growth vehicle, as well as the huge stimulus that was wastefully spent in real estate, are finally manifesting themselves. The inflationary concerns on top of the real estate bubble whose existence is no longer denied, threaten to derail not just the Asian role in the fledgling global recovery, but growth of commodity exporting nations like Australia. Also, it does not help that Eurozone is China's biggest trading partner, and a slower growth in Eurozone shall ensure lower exports growth; importantly it places a bigger leverage in US hands as it becomes China's most important export market by a long margin.
7. Risk recalibration is on, and shall change the growth expectations, as growth seeking capital returns to US shores due to increased perceived risk in Eurasia, with the US proving to be an Oasis of growth in a world of troubled markets.
8. China's chance of a hard landing are increasing driven by following chief reasons, a) real estate speculation is a cultural phenomenon, and will prove very hard to control, b) Financial system is extremely young and the stimulus loans will return very high delinquency rates, purely because of poor risk management practices, driven by misalignment of economic objectives between different players in the real estate supply chain,especially local governments who depend on property sales for majority of their revenues.
9. This will have an adverse effect on commodity exporters, especially Australia whose recent decision to impose a 40% tax for mining profits, along with the real estate bubble of their own, combined with extremely leveraged consumers whose debt to income exceeds even US, makes for very disturbing next few years.