We discussed the decoupling myth many months ago, but more recently in Global Decoupling Myth Shattered In Equity Selloff and Bulls Cling To Misguided Hopes.

Reality is finally sinking in elsewhere, including Treasury Secretary Paulson. Consider G-7 Growth Warning May Prompt Additional Rate Cuts, Lower Taxes.

Group of Seven officials, warning of further financial-market turmoil, indicated they’ll be forced into more interest-rate cuts and tax reductions to shore up the global economy.

Bank of Canada Governor Mark Carney signaled he’ll lower rates, and European Central Bank President Jean-Claude Trichet repeated that risks to Europe’s expansion have increased.

“The current financial turmoil is serious and persisting,” Paulson said. “I always thought that decoupling was a myth. What happens in any country, that’s a major country, impacts what happens in the rest of the world.”

Service industries in the euro region expanded at the slowest pace in more than four years in January, and business and consumer confidence retreated, reports last week showed. The risk of companies defaulting on high-risk, high-yield loans as measured by the benchmark Markit iTraxx LevX Senior Index rose to a record.

“We are observing an ongoing, significant market correction” and “unusually high uncertainty” is hurting growth prospects, Trichet told reporters after the G-7 meeting.

“If the situation worsens in the markets we’ll see greater coordination,” said Stephen Jen, chief currency strategist at Morgan Stanley in London. The slowdown isn’t severe enough for them to “step on the gas” right now.

Japan Machinery Orders Down

Recoupling spreads to Japan as machinery orders are down, sparking fears over economy.

Japan’s closely watched machinery orders fell for the first time in five years in 2007, official data showed Friday, sparking fears that a US slowdown may pull Asias largest economy down.

The private sectors core machinery orders, which exclude particularly volatile demand from power companies and for ships, fell 4.0 per cent in 2007 from the previous year, with orders in December alone tumbling 3.2 per cent.

The machinery orders are closely watched by policymakers and markets as a leading indicator of corporate capital spending. The December fall was significantly steeper than a drop of 0.8 per cent expected by the market and marked the second straight month of decline after a 2.8 per cent drop in November.

Is Japan Hiding Bad U.S. Debt?

The Telegraph is reporting Japan is the next sub-prime flashpoint.

There is still $300bn of bad debt out there, and Japan could be hiding most of it. Just as battered investors had begun to glimpse signs of recovery in America, the next shoe has dropped with an almighty thud in Japan. Echoes are rumbling across the Far East.

The Tokyo bourse has crumbled, suffering the worst start to the year since the Second World War. The Nikkei index is down 17 per cent since Christmas, and the shares of Japanese banks are leading the slide. Mizuho Financial, Mitsubishi UFJ and Sumitomo Mitsui have all been punished as hard or even harder than those US banks at the epicentre of the sub-prime debacle.

The nagging fear is that Japan’s lenders – the conduit for the world’s greatest stash of savings – have taken on a far bigger chunk of mortgage securities, collateralised loans obligations and other exotica from America’s structured credit boom than they have yet revealed.

Americans and Europeans have so far confessed to $130bn of the estimated $400bn to $500bn of wealth that has vanished into the sub-prime hole. Somebody, somewhere, must be sitting on a vast nexus of undisclosed losses. We may find out soon enough whether the hold-outs are in Japan. The banks have to come clean under the country’s strict new audit codes by the end of the tax year in March.

“We think this is where the next big problem is going to pop up,” said Hans Redeker, currency chief at BNP Paribas.

“We know from Bank of Japan’s lending survey that the banks are already tightening hard, so something is brewing. Right now, we are in the lull before the second storm in global markets, and Asia is going to be the source of the nasty surprises,” he said.

The iTraxx Japan index measuring default risk of 50 Japanese companies saw its biggest one-day jump ever on Thursday to 77.5. Rightly or wrongly, it is flashing a serious distress signal.

What we know is that Japan’s economy – still the second biggest in the world by far – has fallen over a cliff since October. It remains joined to America’s hip after all. The decoupling theory has failed its first test.

Britain Facing Huge Job Losses

The Times Online is reporting Britain Facing Huge Job Losses.

TWO in every five employers plan redundancies over the next three months, according to an influential survey to be published tomorrow. It comes as two leading business groups warn of weak business confidence and a sharp slowdown in growth.

Retailers had been very downbeat about prospects for January following a poor December, with like-for-like sales rising only 0.3%. This week’s figures will come as a relief, but the BRC is likely to warn that any strength is likely to be temporary.

This will be the big fear if the warning of many redundancies from the Chartered Institute of Personnel and Development comes true. Its winter labour market outlook, also in conjunction with KPMG, is set to show that 38% of the more than 1,500 employers surveyed plan redundancies over the next three months, with a quarter intending to let go at least 10 employees.

Although it is normal for a proportion of employers to be planning redundancies, the latest figure is sharply up on the 17% number three months ago.

Global IT Forecast Cut

The Financial Times is reporting Global IT spending forecasts cut on recession fears.

Forecasts for global IT spending in 2008 have been cut, as fears of a recession in the US puts the brakes on growth.

Global spending on IT goods and services is expected to grow to just $1,695bn in 2008, a 6 per cent increase on last year, according to Forrester Research, the market research group. This represents a significant slowdown from 12 per cent growth last year.

Only two months ago, Forrester predicted IT spending would grow 9 per cent to $1,7580bn this year, but the group has pared this forecast back after a series of poor reports on the US economy.

IT spending growth in the US, which accounts for about a third of the global total, is expected to slow to 2.8 per cent, from 6.2 per cent growth last year.

Spending in Asia is expected to be about 9 per cent, the strongest region for growth, but still representing a slowdown from 15 per cent growth last year.

In Europe, IT spending growth will fall from 15 per cent last year to 5 per cent.

Bad news on the global economy has been pouring out for months. Paulson had no choice to dismiss it. Then again, the administration is still talking as if a recession that 70% of the population knows we are in can somehow be prevented.

Mike “Mish” Shedlock
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