“In a June letter to investors, Hayman Capital’s Kyle Bass turned his attention to a new target in Asia, according to Absolute Return.

China, he says could see a “full-scale recession” as early as next year if they do not curb the current pace of the credit expansion.

According to reports from the Wall Street Journal, Chinese officials have been equally worried about reckless lending, and intervened last month in the form of rising rates (which in turn resulted in the recent spate of Chinese bank liquidity crunches).

Bass seems to fear however, that this intervention is not enough. He also said that the People’s Bank of China would not be able to ensure the country’s growth with easy money because of the “inescapable law of diminishing marginal returns.”

From the letter (via Absolute Return):

“The scale and pace of credit expansion in China over the last 5 years is truly staggering. The compounded annual growth of bank assets as measured by the China Banking Regulatory Commission has been 30.8%,” Bass wrote. “To give some perspective, a 30.8% compounded annual growth of credit in the U.S. equivalent over 5 years would be an expansion of $33 trillion. This rate of credit growth is three times the total credit system growth experienced in the U.S. at the peak of the bubble in 2006…”

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“Rising consumer spending may be encouraging Federal Reserve officials to wind down their stimulus efforts.

For instance, Fed Governor Jeremy Stein has cited consumer spending as a reason for optimism in the economy.

“Consumers generally seem to be showing some signs of strength,” Stein said after a speech last week.

Yet increasing consumer spending may be an illusion.

Although consumer spending increased, the bulk of additional spending was on big-ticket items such as autos and home improvement, writes Fortune senior editor Stephen Gandel.

In reality, average consumers are not financially better off and are not spending more, economist Dean Baker, co-director of the Center for Economic and Policy Research, tells Gandel.

Companies paid special dividends at the end of last year to avoid higher 2013 taxes, and the stock market is up this year. Both of those factors primarily benefit the wealthy and explain the greater spending on big-ticket items, Baker says.

As the memory of the special dividends fades and the stock market flags, spending by the wealthy might falter.

Consumer spending has been flat across all income groups, according to Dennis Jacobe, chief economist for Gallup.

Americans’ self-reported daily spending averaged $90 in June, unchanged from May and not much different from March’s $89, he writes in a Gallup blog. Upper-income spending averaged $143 last month, not much different from the $150 in May and essentially the same as April’s $140.

Spending has not weakened despite the end of the payroll tax cut and federal budget cuts. Stock market gains, increased optimism about housing and refinance benefits from low mortgage rates may have helped support spending.

“The lack of increased consumer spending is somewhat disappointing given Americans’ relatively high level of economic confidence in May and June,” Jacobe says.

“However, it is hard for spending to increase without real job growth. Further, as this disconnect illustrates, economic confidence is often a necessary but not sufficient reason for consumer spending to increase.

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“The Federal Reserve’s economic forecasts are probably too high, says Mohamed El-Erian, CEO of fund giant Pimco.

The central tendency of predictions by Fed policymakers calls for economic growth of 2.3 to 2.6 percent for this year and 3 to 3.5 percent for 2014. Gross domestic product expanded only 1.8 percent in the first quarter.

Fed Chairman Ben Bernanke said June 19 that the central bank would probably start tapering its quantitative easing later this year if the economic expansion matches its projections.

Editor’s Note: The Final Turning Predicted for America. See Proof.

“If the forecasts prove correct, which, unfortunately, we question given current economic realities, the Fed would have a positive reason to exit gradually from its prolonged highly experimental monetary policies,” El-Erian told The New York Times in an email.

“It is also apparent that the Fed is getting more concerned about the ‘costs and risks’ of its policy experimentation.”

Interest rates spiked after Bernanke’s June 19 comments, sending the 10-year Treasury yield to a 22-month high of 2.66 percent last Monday. The yield stood at 2.49 percent mid-day Monday.

While the rate increase may have created some bargains among Treasurys, El-Erian said, “investors should also note that markets remain vulnerable to technical overshoots and, thus, quite a bit of volatility.” ….”

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“The Bank of Japan will discuss upgrading its assessment of the nation’s economy by using the word “recover” for the first time in more than two years, people familiar with the central bank’s discussions said.

The bank, which says the economy has been “picking up” in its current assessment, will consider stronger language at a two-day meeting ending July 11, according to the people, who asked not to be named because the talks were private. In 2010, the next step up was “starting to recover moderately.”

Raising the assessment for a seventh straight month could aid efforts by Prime Minister Shinzo Abe and central bank Governor Haruhiko Kuroda to boost confidence in a sustained Japanese recovery. Maintaining economic momentum would help Abe in an upper-house election due this month as he tries to consolidate support for the package of monetary and fiscal stimulus and business deregulation termed Abenomics….”

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“Financial markets should brace for more volatility as they digest news the Federal Reserve will scale back bond buying later this year, a senior central banker said on Friday, but this is an understandable adjustment and will not derail growth.

“This type of volatility is a normal part of the process of incorporating new information into financial asset prices and should not interfere with the moderate-growth scenario that I have presented,” said Richmond Fed President Jeffrey Lacker.

He told a judicial conference to expect U.S. growth to fluctuate around 2 percent for the “foreseeable future,” blaming structural impediments to a faster pace of economic activity.

Lacker, one of the central bank’s most hawkish officials who is not a voter this year, also said it had been “wise” for Fed Chairman Ben Bernanke to clarify the Fed’s views on future bond buying last week, but stressed policy would still be loose.

“Over the course of the next 12 months, the committee will be reducing only the pace at which it is adding accommodation,” he said, referring to the Fed’s policysetting committee.

“In other words, the Federal Reserve is not only leaving the punch bowl in place, we’re continuing to spike the punch, though at a decreasing rate over the next year,” he said.

It is a longstanding joke among central bankers to warn their job is that of official party-pooper, who must take away the punch bowl — a fruity drink reinforced with hard liqueur — just as the party is getting started….”

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“One of the most frustrating things in life is a slow computer.

Every few years, we buy an expensive new PC and love how fast it starts up, runs programs, and loads websites. Inevitably though, it starts to slow down until eventually we are pulling our hair out waiting for it to do routine tasks.

Why is this?  It turns out the answer is actually quite simple and you don’t even need to be “technical” to understand the causes and solutions.

The good news: It’s not the computer hardware that’s the problem. In most cases, the hardware you have is perfectly capable of being restored to its original glory and kept in fast running condition with minimal effort.

Rather, the problem lies with changes that occur to the PC’s software. The two most common causes of slowdown (along with easy solutions) are:

1. The most common problem: registry errors
Every time you (or your kids) load a program, game, or file, your PC’s software registry is updated with new instructions needed to operate that item. However, when the item is removed, these instructions usually remain on your PC. Every time you run your computer it tries to execute these instructions but, because the related program can’t be found, it causes a registry error. Your PC is doing a lot more work than it should be, and the result is a significantly slower computer.

One of the best ways to manage this is with a neat little tool from Support.com, a Silicon Valley based company. It’s called ARO 2013 and it scans, identifies, and fixes registry errors —resulting in a computer that’s a lot more like it was when you first bought it. On top of the amazing results it offers, it’s so easy to install and use that it was recently awarded a coveted 4.5 star rating (out of 5) by CNET’s editorial staff, and has been downloaded more than 30 million times.

You can now get a free working version of the software, which will quickly scan your entire PC and identify all of the registry errors that may be bogging it down. The free version also scans for junk and checks your PC’s baseline security status. It will eliminate the first 50 errors for free, and if you have more errors that you want to clean up or want to set the program to run on a regular basis (which is recommended), you can easily upgrade to the full version for just $29.95.  After that, registry errors will no longer be a problem.

To get the free version, simply click here.

2. Spyware and viruses…”

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“In a speech last Thursday, Governor Jerome Powell expressed some concern that QE “might drive excessive risk-taking or create bubbles in financial assets or housing.” He indicated that the Fed’s staff is closely monitoring valuation metrics in various asset markets.

Regarding the stock market, he said: “By most measures, equity valuations seem to be within a normal range. Whether one looks at trailing or forward price-to-earnings ratios, equity risk premiums, or option prices, there is little basis for arguing that markets show excessive optimism about future returns. Of course, in the equity markets there is always downside risk.” I tend to focus on forward P/Es, which suggest that stocks are neither cheap nor expensive.

As for home prices, Powell said that the Fed’s staff tracks a model that compares them to rents. I tried to duplicate it by dividing the median existing home price by the tenant rent component of the CPI. My results come close to Powell’s statement on this subject: “At the peak of the bubble, house prices were more than 40 percent above their usual relationship to rents, according to one model that the Fed staff follows. At their trough, house prices had fallen about 10 percent below fair valuation. Given the price increases over the past year, they are–by the lights of this one model–moving back into the approximate neighborhood of fair valuation.”

On the other hand, Powell was concerned about excesses in the credit markets. He mentioned Governor Jeremy Stein’s speech on this issue earlier this year. He added, “These concerns have diminished somewhat as rates have risen since mid-May.”

Dr. Ed’s Blog….”

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“European Union’s top energy official ignored a warning delivered in 2009 about potential manipulation of Platts oil benchmarks “because markets trusted” them.

Andris Piebalgs, who was EU energy commissioner from 2004 to 2010, cited the confidence traders had in the pricing system when a lawmaker questioned the reliability of Platts’ prices more than three years ago. The warning went unheeded until May, when EU antitrust officials raided Platts, Royal Dutch Shell Plc (RDSA), BP Plc (BP/) (BP/), and Statoil ASA (STL) (STL) as part of an investigation into the possible rigging of benchmark energy assessments.

The EU’s oil probe escalated global action beyond financial benchmarks such as Libor, the London interbank offered rate. Regulators warned of “huge” damage to consumers if manipulation is confirmed and drew comparisons with the bank-rate scandal, which has seen Royal Bank of Scotland Group Plc (RBS), UBS AG (UBSN) (UBSN), and Barclays Plc (BARC) (BARC) fined about $2.5 billion. Platts publishes the Dated Brent benchmark that helps determine the price of more than half the world’s oil.

If the market “trusts” in the pricing-mechanism, then it “has a reason to trust,” Piebalgs, now the EU’s development commissioner, said in an interview in Brussels on June 27, referring to the oil-pricing system now under scrutiny. “I always believed that Libor is very reliable. It seems that sometimes things need to be checked.”

‘Reality Check’…”

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Politicians will be politicians….

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“Two gauges of China’s manufacturing fell in June, underscoring a sustained slowdown in the nation’s economy as policy makers seek to rein in financial speculation and real-estate prices.

An official Purchasing Managers’ Index dropped to 50.1, the lowest level in four months, from 50.8, the National Bureau of Statistics and China Federation of Logistics and Purchasing said today in Beijing. A private PMI from HSBC Holdings Plc and Markit Economics was 48.2, the weakest since September. Readings above 50 signal expansion. (CNGDPYOY)

Weaker gains in manufacturing and a cash squeeze in the banking system add to odds that Li Keqiang will become the first premier to miss an annual growth target since the Asian financial crisis in 1998. In the latest signal that policy makers will tolerate slower expansion, President Xi Jinping said local officials shouldn’t be judged solely on their record in boosting gross domestic product.

“Although new leaders have no intention to achieve a higher GDP growth, the current growth rate is quite close to the floor that new leaders have indicated to tolerate,” Lu Ting, head of Greater China economics at Bank of America Corp. in Hong Kong, said in a note today. The lower official PMI “could worsen concerns that the liquidity squeeze in June will hit economic growth,” Lu wrote….”

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“Samsung Electronics Co. (005930) lost $25.3 billion in market capitalization last month, more than the value of competitor Sony Corp., as sales of its flagship Galaxy S4 smartphone fell short of investor expectations.

Since the handset was released April 26, the company that sells nearly one of every three mobile phones has plunged 10.8 percent as JPMorgan Chase & Co. and Morgan Stanley lowered sales forecasts and cut profit estimates. Fifteen analysts cut second-quarter net income estimates for Samsung in June, according to data compiled by Bloomberg. The company declined to comment on its share price and S4 sales…”

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The above chart shows that the S&P does not recover until it interacts with the VIX. Does this chart suggest that equities have a way to go? Developing….

“I have long held the opinion that the markets, all of them, have been buoyed by what the Fed and the other central banks have done which was to pump a massive amount of money into the system. There are various ways to count this but about $16 trillion is my estimation. The economy in America has been flat-lining while the economies in Europe have been red-lining and while China has claimed growth their numbers did not add up and could not be believed.

In other words, the economic fundamentals were not supporting the lofty levels of the markets which had rested upon one thing and one thing alone which was liquidity. I have also stated often enough that the long awaited reversal would take place either due to an “event” or due to a change in the Fed’s position where the liquidity was going to be stopped. In one of the clearest and most open meetings ever conducted by the Fed, in my opinion, they said quite clearly that the end to its liquidity operations was coming and while the postulated this and that if the markets did this and that the message was quite clear; we are going to unwind what we have we have done.

Yesterday was the first day of the reversal. There will be more days to come.

What you are seeing, in the first instance, is leverage coming off the table. With short term interest rates right off of Kelvin’s absolute Zero there was been massive leverage utilized in both the bond and equity markets. While it cannot be quantified I can tell you, dealing with so many institutional investors, that the amount of leverage on the books is giant and is now going to get covered. It will not be pretty and it will be a rush through the exit doors as the fire alarm has been pulled by the Fed and the alarms are ringing. There is also an additional problem here.

The Street is not what it was. There is not enough liquidity in the major Wall Street banks, any longer, to deal with the amount of securities that will be thrown at them and I expect the down cycle to get exacerbated by this very real issue. Bernanke is no longer at the gate and the Barbarians are going to be out in force….”

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Gapping up

Gapping down

Full Look

Strange indeud…

“The man who predicted the crash of 2008 thinks energy and heavy manufacturing have the potential to fuel an economic boom not seen since the 1950s and 1960s. Photo courtesy of Jim R. Bounds/Bloomberg via Getty Images.

Paul Solman: In 2005, Charles Morris became convinced that a debt crash was inevitable. In 2006, he began his 10th book to make and explain his prediction. In 2007, he delivered the manuscript, and at the beginning of 2008, Public Affairs Books published “Two Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash,” which received almost no notice at all until The Economist magazine wrote about it in March. Six months after that, the deluge.

What’s remarkable is how well Morris’ analysis of the crash, written beforethe crash, holds up half a decade after it. So when I saw that he was calling his newest book “Comeback,” I felt obliged to take a look.

I’ll let him take it from here.

Charles Morris: It’s the best-kept secret in the economics media: The United States is on the brink of a period of solid, long-term growth rivaling that of the 1950s and 1960s. It is not a finance-driven, self-destructive boom, like the 2000s’ housing bubble. No, the new economy will be durably grounded in energy and heavy manufacturing, even though it will take several years to come to full fruition.

Evidence? Dow Chemical has commenced a $4 billion development in new plastics manufacturing in Texas, for example, that will start coming on stream in 2015 and be fully operational only in 2017, but it will be productive for a very long time. This will be a growth cycle with staying power.

Why haven’t you heard about the boom? Official economic forecasters, like the International Monetary Fund and the Congressional Budget Office, simply have not factored America’s emerging new economy into their forecasts. Instead, they still see us limping along at an average of 2 to 2.5 percent real (after inflation) growth to the farthest horizon — a hobbled, aging power, borne down by debts and deficits, shorn of its old bounce-back vigor, tottering along just fast enough to stave off out-and-out stagnation.

There is no question that the financial crash has left deep economic scars. But the fundamentals will turn in America’s favor and when they do, annual GDP growth should kick back up to at least the 3.3 percent average real growth rate that has prevailed since 1950. That’s far from a startling forecast for a recovery, but even at that level, the budget problems that have so paralyzed official Washington will shrink rapidly in the rear-view mirror as tax receipts grow, making debts and deficits shrink. The seemingly crushing post WWII debt — 120 percent of GDP — quickly dropped from the radar screens with growth in the 3-4 percent range in the 1950s. So what are the positive portents?

The Energy Boom Is Already Here…”

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Essentially, Bernanke tanked the markets when he said if the data comes in line with current the current pace of an economy that is expanding moderately, that the Fed would consider tapering later this year. If it continues to get better over the next several quarters then the fed could end QE mid next year.

Generally what ever happens on Fed speak day is the opposite of what happens over the next few. Although, this time may be different…

Market commentary 

Market update

“The whole world has been anxiously waiting for this moment.

The Federal Reserve will wrap up its 2-day Federal Open Market Committee (FOMC) meeting today.

At 2:00 PM ET, it will publish its FOMC statement as well as an update to its economic forecasts.

Then at 2:30 PM ET, Fed Chairman Ben Bernanke will hold a press conference, which will include a Q&A with economics reporters.

Expectations

Economists expect the Fed to announce no change in its benchmark interest rate target, which is currently at 0% to 0.25%.  Furthermore, they expect no change in its quantitative easing (QE) program, which consists of the Fed buying $85 billion worth of bonds each month to keep interest rates low.

However, there is little agreement on when the Fed will begin to scale back its easy monetary policy.

Recently, there has been tons of speculation…”

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