There’s one aspect to financial markets and individuals’ livelihood, which has become commonplace to economies around the world. Like the proverbial 900 pound gorilla in the room, the risks tied to stagnant labor markets are obvious. However, relative stability in Asian economic growth and Western stock markets has pushed the implications surrounding unemployment from the center of the room towards the corner. This week we’ll be focusing on the state of the labor market in Korea and how it compares to other developed markets abroad. We will identify differences in labor conditions and data collection, then look at ways that Korea can improve its employment situation for future success.

Download the full report below then share your thoughts. What do you agree with? Disagree with? Make us support our opinions!

Money Thrown at the Problem

Let’s review the facts, because it will have been two full years since Lehman in September and I think we all (myself included) need a bit of a reality check:

U.S. Treasury

- TARP = $700 billion USD to bail out the U.S. banking system through direct liquidity injections in U.S. banks

- 2009 Government Stimulus = $787 billion USD; Subsidized government and private sector jobs, subsidized state and local services, 14% invested in infrastructure.

- Unemployment Benefit Extensions = $120 billion USD; Eight (8) consecutive extensions of pay to unemployed.

U.S. Federal Reserve

- Total Long Term Treasury Debt Purchases = $753 billion USD; Fed bought 10+ year Treasury notes at auction to support demand for U.S. debt, taking rising pressure off of mortgage rates.

- Total Fannie & Freddie MBS Purchases (08/04/2010)  = $1.12 trillion USD; GSE Mortgage securitization  groups now state owned, as Fed swallows mortgages unfit to remain on GSE balance sheets.

- Federal Funds Rate target at 0.13%; historically unprecedented quantitative easing, which has allowed mortgage rates to ease below 5% on 30-yr fixed products.

When we add up the cash that has been dedicated to the sustainability of our financial market, and thus our economy, we see the following capital commitments:

Treasury = $1.6 trillion

The Fed = $1.87 trillion

America’s Future

It’s clear that if the Fed continues QE and the Treasury continues backing stimulus, the government will end up owning far more once private industries and the population will become dependent on anticompetitive subsidy rationing for survival. It’s been announced recently that over 4o million U.S. citizens are now on Food Stamps.

The other route suggests an imminent recession. Should the Fed and Treasury go the “austerity” path, as Europe has chosen with the leadership of Germany’s cost cutting plan, the most likely outcome would be a recession and repricing of all assets to actual market values.

The recession hurts more in the short term, but guarantees more robust long term growth, while the socialist-esque spending route will land us in an economic environment akin to somewhere in Western Europe.

Of course the Fed is attempting to eat the cake and have it too, by a little slight of hand trick where they announced a reverse repo of MBS on their balance sheet, once abducted from Fannie and Freddie, where they will take money out of the financial system by reselling MBS contracts into the market. However, we don’t know which MBS packages are being sold and which aren’t. Do you see Benny Boy selling bad debt back onto the market? We can assume that the fed is in essence serving as a purifier of bad debt, where they buy the toxic material sort out the rare gems, and sell the good stuff back to the private banks.

FOMC Tuesday

The Street is hesitantly expecting Bernanke to announce some kind of further quantitative easing, which would look something like a resumption to the old MBS purchase program from the GSE’s, which was ended in March. For the Fed to end a QE program in March and resume it in August is more than a bit frightening to this analyst. The Street, of course, is cheering the potential assistance.

If the FOMC Fed announcement tomorrow (Tuesday) includes specific promises of further QE we’ll see a short term rally. IF the FOMC continues to talk abut the economy’s “worse than anticipated” performance, but fails to outline any specific plan to stimulate through monetary policy, we will see as sell-off. In our view, any rally would be stopped cold at 1150 on the S&P 500, as a massive head and shoulders pattern comes to fruition.

Happy Hunting

June 11, 2010:

The Washington D.C. summit in 2008 crowned the Group of Twenty Nations (G20) as the official global economic summit of industrialized countries. Two years in, Korea is proud to have been chosen to Chair the 2010 G20 summit, which was kicked off in Busan last week for a meeting of the group’s finance ministers. Hosting the G20 certainly represents a milestone on Korea’s global economic ascent; however, the communiqué out of Busan begs a dissimilar fate for the unification of the group. In this edition of the Korea Economic Slice on KBC, we’ll analyze the effects of the Busan G20 communiqué on Korea’s economy and take a look at market moving economic data to be released in the week ahead…

Download the FULL report in PDF format HERE…

Download the full report above then share your thoughts. What do you agree with? Disagree with? Make us support our opinions!

As the ill-effects of a global financial crisis became evident to world leaders in late fall 2008, export driven economies with surplussed coffers of U.S. dollars did the obvious. They used the cash to stimulate their economies. In one specific nation, the Premier’s words fell like heavy boots on an ant hill, as decrees began to waterfall down from superiors to the next in command. Calls for growth began reverberating through the ranks of the quasi-communist Eastern leader, as China’s Communist Party (CCP), headed by Wen Jiabao, deployed a two pronged stimulus in the People’s Republic of China (PRC).

Step one was to simply spend a tangible magnitude of cash, $600 billion USD worth of yuan, equal to 13% of 2008 GDP. The spending was mainly split between direct investment in infrastructure and financial assistance to consumers through rebates and vouchers for consumer purchases of specifically targeted industry goods. Step two came in the form of quantitative easing, where governors set record low interest rates and lax loan requirements with PRC guarantees to back the underwriting. This pure recipe for growth has worked in the short term as real estate appraisals in the gentrified sister state of Hong Kong are 30% higher than last year, and China’s money supply rose by 27.7% in 2009.

At face value China’s economy saw GDP growth above 10% in 2009. Until recently, asset bubble fears in China have been footnotes to the apparent success of the country, as global equity markets have recovered. Unfortunately, it is the activity on the ground floor of the public sector that may house discrete risks facing China’s recovery. Public finance in China has for years been a troubling issue among academics in World Bank discussions, but the argument has proved too flimsy, given the absence of tangible negative externalities.

Rising Inequality

For all of it’s size, voracious growth, and absolute authoritarian government, China remains a very un-united place. To contrast widespread belief that a growing middle class in China will sustain absent foreign demand for Chinese goods in an immediate future void of Western consumer strength, the following points warrant attention:

1. There are no nationally universal social programs where the rubber meets the road. The central government leaves the design, planning, and implementation of most social services such as education, health care, and infrastructure up to the lower tiers of government.

2. The wealthiest Chinese province has 13 times the per capita GDP and 8 times the per capita spending magnitude of the poorest province. Likewise, the richest county has approximately 40 times the per capita spending of the poorest county. (World Bank 2008)

3. At the rural level, where 607 million citizens (46% of the population) live, it is common for education and health care to be the burden of the family if it is available at all. In 2004, urban areas housed 80% of health care facilities, where only 40% of the population lived. (World Bank 2008)

4. As of 2004, spending expenditures for education were borne 78% by townships and 2% by the central government, while the schools were nearly unregulated by the central government. (World Bank 2008)

5. From 1993 to 2003, the top tiers of government in China have greatly increased revenues through new tax programs, yet lower tiers of government are receiving a 5% lesser share of expenditures. (World Bank 2008)

These conditions are synonymous with a developing nation, and are to be expected in China, but regional wealth disparities and the organizational structure of public finance in the PRC have set the stage for problems in years ahead.

Similar to organizational structure in much of Asia, age is considered directly congruent with wisdom and rank trumps all. Evidenced by the World Bank report “Public Finance in China”, decrees from top Chinese leaders and World Bank representatives for higher outlays in education, health care, and infrastructure projects have been announced. Unfortunately, as orders funnel down from Beijing to provincial directors, county offices, and villages, more is asked of the lower tier while less funds are given. The townships are left with beleaguered budgets, lead by individuals focused on promotions rather than sustainability. As a result, the prospects of each town in china are directly dependent on industry or natural resources at their disposal, which they can then use to leverage financing for basic social services.

Path of Least Resistance

The methods, by which towns fill the gaps between revenues and expenditures, are referred to as “off budget sheet” endeavors. These sort of activities are highlighted by Northwestern University Professor Victor Shih’s book, Factions and Finance in China, as he relays firsthand accounts of openly abused relations between private enterprises and public financial policies in the PRC. Simply put, the “private sector” is forcedly co-dependent on the absolute authority of the central government, while the central government regularly turns a blind eye to unjust activities.

One method of off balance sheet financing is where local governments trade loan guarantees for kick backs or invest in private projects with government funds to meet their required levels of economic growth or social expenditures.

Chips Falling

On March 8, 2010, China announced they would “nullify all guarantees [that] local governments have provided loans taken for their finance vehicles”. These “vehicles”, Professor Shih claims, amount to approximately 11.4 trillion Yuan (1.7 trillion USD) in 2009. According to Chinese official Zhou Xiaochuan, land guarantees made by local governments as a form of capital down payment for off balance sheet private loan agreements “may pose risks for the nations banks”. In a country where average real estate prices rose in 70 major cities by 10.7% year over year in February 2010, it would appear that appraisals of land collateral may propose serious risks to the financial system.

Regardless of obvious parallels to the housing bubble in the United States from 2004 to 2007, the real concern with a Chinese led global recovery, is the uncertainty tied to a centrally planned economy that remains exceedingly opaque. Behind the “red veil” economic data is inconsistent, interest rates are manually set, and currency exchanges are pegged or de-pegged, given the best interest of the state. Many have far too tamely to relied on the Chinese led recovery, yet simple assessments of the U.K. and Japan yield debt ridden economies with retreating consumers.

Memories are short and profits idle fear. It seems impossible that China could fail because they have yet to do so in this crisis. Does this make it any less probable? Does it make it more probable?

Even after the TARP fund liquidity injections in the U.S. financial sector in 2008, the E.U. has decided to bail out one of it’s member states, Greece, from insolvency. How can this even be considered?

Yes, the EU constitution is a whopping 7 years young and therefore demands a minuscule thread of adherence by member states, but it still directly contradicts two clauses of the charter, which stipulate the EU has no role in assuming the debts of any one state or backing the credit of any such state so that it may issue debt.

In making an elementary comparison between the financial meltdown in the U.S. and similar insolvency in weaker E.U. member states, let’s first answer a simple question: “In the case study of financial institutions failing in 2008, who would best represent Greece… Bear Stearns or Lehman Brothers?”

It would seem that the role of the maiden union state to cry “uncle”, akin to Bear Stearns in Spring 2008 at the Hand of then Secretary Paulson, is now cast to Greece. However, looking at the sovereign debt situation as a whole, one could make the argument that it was first the UAE who bailed out the Dubai World Sovereign Fund on Thanksgiving night 2009. For humor’s sake, lets assume that Greece is the Bear Stearns of 2010 and limit our scope to the EU. It is after all a united body making decisions sure to cause repercussions, which will be at least initially contained within its members’ fiscal borders.

So then of course the second major nation to go effectively bankrupt, will be one of the remaining three PIGS (Portugal, Italy, Greece & Spain). Considering the leadership in all remaining states and the tie amongst them for impotence, incompetence and corruption; it could be any of the three. However the next to go will spur a decision a lot like the U.S. Lehman deliberation in 2009.

Whether anyone wants to admit it or not, it’s a good thing that Lehman was allowed to fail in 2009. Yes, I said it… growl and moan all you want, but we needed a shred of moral hazard to keep our capitalist hearts beating and Lehman was the sacrificial pig. Little Timmy Geitner would have danced the populist Obama jig right down the line bailing them out one by one, but luckily Bazooka Paulson was in the midst of a grudge match with on of the largest rivals of his alma mater, Goldman Sachs (GS). The only mistake was to then concede defeat to the frozen credit markets by shuffling around a smoke and mirrors bailout plan which ended up profiting the biggest U.S. banks at the expense of tax payer funded backstops. But we digress…

Unfortunately for the world, France is charging ahead and towing the rightfully reluctant Germans towards TARP 2.0. Germany is by far the most solvent of the EU states and the most crucial to a working bailout of Greece, yet France’s Sarkozy is pulling the reigns. The interesting sub plot here stars the leader of the IMF, the institution that would normally intercede as lender of last resort, no other than a Mr. Dominique-Strauss Kahn, the French contender for Sarkozy’s office in the next election. Alas, its no surprise that Sarkozy wants to go to bat with the tax payer’s dollars rather than admit a fellow EU member is among the ranks of Mongolia, Togo, Haiti, and the long list of states faced with the decision to admit IMF intervention or crumble bankrupt.

So will there be a Lehman equivalent EU state nearing a bond payment one dollar too high and an EU governance that tells them tough luck? Absolutely not. There won’t be a Lehman equivalent in the EU because, (a) countries are more difficult to break up and sell off than firms; (b) the expansive and centrally funded social welfare systems of European states must continue to distribute capital to citizens, lest the union be disgraced by the impoverishment of its constituents; and most importantly, (c) a currency crises due to real or assumed default by any state will have systemically negative effects on the value of the Euro itself, forcing the cost of the central welfare programs to rise across the Union. In turn there will form a negative feedback loop, where the next weakest countries to fail will default and the Euro will become even weaker.

The only option for EU leaders is to bail out as many as all four of the PIGS and hope that China keeps buying goods. If the Chinese engine starts to sputter, the gig is up and we will see one of the most atrocious currency crises in the history of money, beginning with underlying currencies of the sovereigns which have spent the most and recovered the least since the recession began.

The IMF currently has 163 billion SDRs (Special Drawing Rights) available to loan out in the event that a country needs loan assistance. Equating to almost 250 billion USD, the current lending capacity of the IMF could cover the cumulative deficits of the PIGS in 2009 (totaling $198 billion). Yet referring to the visual below, after accounting for the PIGS’ summed liabilities and net debt interest in 2009, the IMF itself may not have large enough reserves to cover the outlays of these four nations, should vacant labor markets continue to stress the fiscal resolve of European social security.

Greece now has the support of France and Germany, but no one really knows how the drama will unfold when the April Bond payment actually comes due. Will Spain face a similar fate as Prime Minister Zapatero grapples to reign in government spending in the face of striking unions and 19% unemployment? Can the economies in Italy and Spain find a way to continue making bond payments should jobs not return before state coffers are drained?

These questions should make for the most current drama in the seemingly bottomless pit of systemic risk. The nasty twin brother of the benefits of interdependency, from economy of scale and scope of multinational firms and massive trade agreements, systemic risk has matured from private markets to macro trade agreements and this time there may be no lender of last resort.

The half Joseph Stalin half Adam Smith economy continues to roar at 10.7% GDP expansion, in the final quarter of 2009, yet the majority of consumer markets have been slow to follow suit. Chinese stimulus can be thanked for the birth of domestic consumerism in China, as households have been given vouchers to buy specific goods, creating demand in centrally targeted industries. Simultaneously, all levels of government opened the faucet of liquidity, through low borrowing costs and lax loan requirements, which has accelerated the churning out of western style real estate for consumers to fill with all their new stuff. The price tag on China’s stimulus so far scans just shy of $600 billion USD, representing 13% of GDP in 2008 and well above spending in the U.S. and Korea, closer to 5% of GDP for each.

As an Expat living in Korea, I can vouch for the tangible business and expansion that has been rumored to have begun in the East. The steady export market in China has buffered job losses and allowed entrepreneurs to take advantage of the record low interest rates which have spanned the globe. The result, through the eye of an American businessman, is a crane filled skyline in motion and downtown retail epicenters furious with life. It all seems eerily familiar to the consumerism evident in the U.S. circa 2004-2006, and is founded on an assumption perhaps less ridiculous than the “forever appreciating U.S. home price” fallacy, but equally as probable. The new assumption serving as the global economic engine, is that China’s 10% growth is not only sustainable, but that it will occur for the foreseeable future.

Let’s look at some of this “sustainable” growth more closely:

- 2008 China GDP = $4,327 Billion (World Bank)

- 2009 Unrevised China GDP = $4,910 Billion (China Daily)

- 2009 Q4 China GDP Growth = 10.7% (Xinhuanet)

- 2009 Outstanding Loan Growth = +$1,400 Billion = 28.5% GDP (2009 Est.) (WSJ)

- 2009 Broad Money Supply Growth = 27.7% (WSJ)

- 2009 GDP growth = 13.5% (unadjusted for inflation)

Recently markets have operated under an irrational paradigm where prices don’t move until the reality of the situation is forced down our proverbial throat. Ironically it seems that the rumors, fears, and speculation about asset bubbles in China are enough for the communist leadership to forcefully hit the breaks on loose liquidity expansion. The ICBC will curb lending in 2010 by 25%, no doubt to moderate the pace of inflation and domestic growth, as it out-paces the anemic recoveries elsewhere across the globe.

This idea that China saw peak economic acceleration in the last quarter of 2009 hasn’t sat well with market movers. While stricter borrowing standards may benefit all, helping to avoid a collapse akin to the U.S. real estate failure, the return to reality has traders scratching their heads for reasons to buy. Added stress from a reversal in the U.S. housing recovery and a weak demand forecast from multinational Caterpillar (CAT) have contributed to the past week’s decline.

It’s fair to say that the global recovery is fundamentally based on strong growth from China, while there is evidence that GDP growth in the cheap U.S. dollar-tied-Renminbi may be eroding sales from global competitors and misrepresenting global consumer demand. This week’s negative outlook on Japan by Standard & Poors and manufacturing woes in Germany, beg that such fears are rooted in truth. Combining these symptoms with an autocratic body of leadership, resistant to allowing its currency to freely appreciate, has exposed the China led recovery to criticism.

It isn’t hard to distinguish Asia’s beating heart, albeit is any man’s guess whether the continent’s overall return to growth lives or dies. China is a formidable 1.3 billion strong populace, the world’s third largest economy, and yet the IMF ranks the nation’s per capita GDP 89th. As blind as justice, markets may now be signalling that the still developing nation cannot lead the globe from the stimulus injected foundations of recovery to global economic expansion. Whether they are right is up to each of us to decide.

These days death is so 20th century, aging is "faux pas", and failure is completely unacceptable, thus we open up the hood and start pulling wires until we seemingly avoid these outcomes in the short run, leaving plenty of duck tape and WD-40 on the fender if anything should go wrong. 

The U.S. Fed Funds is at 0%, the U.S. Fed absorbed Fannie and Freddie (in effect adding the majority of the nation's housing debt to the Fed's balance sheet), tangible sovereign debt delinquencies are beginning to arise in Europe and the Middle East, and financial firms across the globe are continuing to buckle under the weight of more delinquencies and defaults. Consumer credit reaches new historical lows each month (a good thing in the long run), choking consumers to spend little more than they could in the midst of the market crash of 2008-2009. The dollar has fallen against most foreign currencies, until it's recent rebound on speculation of a Fed Funds raise, releasing cheap money to all of the guys on Bernanke's A list (A short list which excludes mall cap firms and fewer private enterprises).

We all know the story, we all see the mayhem of economic data when we glance in the rear view, we even all expected that the music would eventually stop and the economy would have to walk "freely" by itself. It's the classic leak stopping cartoon where a guy is using one hand to cover a leak in his boat but the pressure just causes another breach and eventually he's out of appendages, but in Bernanke's boat he continues to grow arms and continues to stop leaks. Bernanke is an extremely intelligent and creative regulator who continues to invent Monetary tools to make his puppet dance, but we need a "real boy" not a puppet. When Fed Funds at 0% failed, he gave the banks money to lend, when shareholders panicked he seized the GSE's and secured their mortgages, and now that carry trades have abused excess liquidity in the system he has decided to borrow the 0% money he lent to the "too big to fail" financial firms at a CD level premium. It's a financial shell game no better than a Ponze scheme and the longer it goes on the more money it's going to cost the taxpayers who still don't have jobs.

But it will go on, because that's what the boys upstairs have clearly decided will happen, so the excess liquidity in the system has been the most recent phenomena to be traded off of. The carry trade uses cheap U.S. dollars and invests in risky assets such as stocks, bonds, foreign firms, and commodities; allowing for a booming U.S. stock market among other things. Until the masses became privy to what was making the puppet dance and the carry trade discounted in, Bernanke could enjoy the time he'd bought, but despite the struggling economy it now seems that Obama and his Europe buddies have a new scapegoat for our troubles other than the Fed Chairman.

Relations between Obama's White House and Hu Jintao's Chinese Leaders have been tense at best, as the recent pectoral flexing and anticompetitive trade tactics are squaring Obama and his cronies up against the 1.3 billion strong communist nation. Now, calls for China to re-float the Renminbi (Chinese Yuan), after it was re-pegged to the U.S. dollar in August 2008, are becoming widespread as the economy is poised to grow at rates near 10% and it's cheap goods are undercutting domestic producers across the world. But the Yuan equals the same today in dollars that it did when it was re-pegged in 2008 and it seems that in true faith Obama could save a few taxpayer dollars on the long distance in exchange for a direct line to the Federal Reserve. Bernanke is just as responsible as Hu for undercutting foreign competitors as the U.S. dollar has depreciated relative to ALL global currencies besides the Yuan. Now we see the dollar rising as U.S. Treasury debt falls out of favor ahead of suspected Fed Funds hikes in 2010 and the Yuan will pop into higher territory right along with it. It would seem that world leaders should have called for a de-pegging from the dollar in December 2008 rather than the current level near rock bottom for the currency, but we digress.

We do see further dollar weakness as the initial Fed Funds Rate increases occur, should economic growth sputter. In this scenario there will be little upside potential for the U.S. dollar and the carry trade investments in U.S. assets will be far too risky, given the underlying weakness of American firms in such an environment. The potential for bond yields to rise and the dollar to fall a second time would be high in an environment where the U.S. government and private sector are both deemed poor refuges for individuals' cash. More immediately however, commodities will pull back as the rise of the dollar continues and the ability of gains to be made by U.S. investors amidst a rising dollar takes a great deal of money out of U.S. equities and into foreign stocks instead. We see this point as a good entry for short Oil positions and short U.S. equity positions.

Disclosure: Long SDS, Long SCC, Long DTO, Long TYO

Three and six month treasury bonds will be auctioned at 11:30 am Monday and will kick off the monthly test of the demand for short term investment security. The dollar is becoming stronger and rumors, spawned from the announcement of Bond King Bill Gross's "Lehman high" cash levels, are beginning to spur renewed debate over the steepness of the yield curve. The yield on the 10-year has been following the dollar higher, and traders can look to capitalize on further dollar gains by shorting the debt with an ETF or ETN like (TYO).

Tuesday

Redbook (8:55 am) and Goldman's ICSC (7:45 am) store sales comps will be scoured for details as the market looks to zero in estimates of the amount of spending going into holiday shopping when compared to the previous year and may show signs of hope to rally stocks through the Thursday close if numbers surprise to the upside. The GDP number will get revised slightly, expected to drop 0.1% to 2.7% for the 2009 Q3, but will not have any effect on prices unless a larger revision pops out. We'll get existing Home Sales at 10:00 am and FHFA House Price index at the same time, both of which are expected to show further strength in housing. Any disappointment in housing will be a hard pill to swallow as bulls are basing more of their equity rally extension theory on the industry.

Wednesday

Housing news from the MBA Mortgage numbers will cross tickers at 7:00 am and will set a negative tone for the remaining data, should the results further the anemic results of the past week. Personal Consumption Expenditures (PCE) data, out of the Income and Outlays report at 8:30 am, is expected to show a 0.6% jump in consumption along side price increases of only 0.1%. At 9:55 am the second and final leg of forward looking Consumer Sentiment will prove or disprove the solid improvement to 73.4 earlier in the December. Traders will take this report and run with it into the Christmas weekend and positions should be closely watched if sentiment surges or dives from the 73 mark. The July peak at 430k annual U.S. homes sold has been hard to breach after a sharp drop in September, but Bloomberg economists think the November report will be the one to show builder's confidence ahead of the 2010 Spring buying season. The consensus for the new homes report is 10k higher than October at 440k, and is expected to show confidence in the disgraced industry moving towards the new year. CME traders keeping a sharp eye on the EIA Report at 10:30 will be trigger happy with January delivery futures contracts nearing expiration and crude supply leveling off at the absurdly high 330 million barrel mark. 

Thursday

Durable Goods orders out of the gate early at 8:30 am are expected to make up for a -0.6% drop in November by increasing the amount of machinery on order by 0.5%. Last month the metric disregarding automotive orders fell a larger -1.3% as manufacturing seems to have seen most of the benefit from inventory rebuilding and big ticket purchases are pared back. Jobless claims jumped 7,000 to 480k last week, but are expected to fall 10,000 as layoffs subside. However, many employers save job slashing until after the holidays, begging that January's numbers will tell the full employment story. Money Supply and the Fed Balance sheet will be closely watched for changes this week as the story of the strengthening U.S. Dollar is criticized and supported by traders on both sides.

Disclosure: Long DTO, Long TYO, Long SDS, Long SCC

Prime Minister Hatoyama announced a 7.2 trillion Yen ($81 billion) stimulus package to aid the distressed economy, as the rate of deflation was shown to be accelerating over the three months ending in September at -0.5%. In nominal terms economic growth for the period actually declined -0.9% highlighting the true effects of the deflationary environment.

The incoming Democratic Party of Japan (DPJ) has inherited a legacy of big stimulus spending from the Liberal Deomocratic Party (LDP), including $6.3 trillion worth of infrastructure outlays since 1991, and a indebted fiscal balance sheet to the tune of 190% x GDP. Thus it's not surprising that PM Hatoyama hasn't changed much as he plans to tack on the additional $81 billion in the form of a Japanese Cash for Clunkers equivalent, subsidies for "green" housing & consumer products, cheaper mortgage rate home buying incentives and more subsidized private sector salaries. Yet, the habitually borrowing stimulus crutched state won't feel stimulated, simply further drained and taxed moving forward as depicted through the visual below from the FT.

What is truly crippling the country and the fiscal policy moving forward is the inability of firms to compete as the prices of goods consumed in the country falls and prices of Japanese goods sold outside of the country rise.  The following chart will shed further light on the equally important imbalances among Japanese products sold domestically, imported from abroad, and exported to foreign consumers. Wages are falling, the government subsidizes the cost of employees salaries and firms are struggling to compete abroad.

The future for Japan looks dim as deflation takes a tighter grip, growth wanes and debt soars. Keep a close eye on the world's second largest economy as global financial markets respond to the ensuing course of events. 

Monday

While equity and commodity prices will likely pop on monday in U.S. trading, the release of real economic data will be slight. At 9:45 EST the Chicago PMI report will release its headline number, which Bloomberg analysts expect will drop to 53.0 from the 54.2 October level, the highest since September 2008.

Tuesday

Motor Vehicle sales will cross the ticker sometime during the day and will be hotly anticipated by auto analysts, looking for a trend in post-"cash for clunkers" sales. With October sales rebounded at a 7.9 million unit pace and expectations for a 7.75 million annual sales statistic in November, the street is expecting a cooling of the market leading into the holiday shopping months. ISM Manufacturing results hit 55.7 in October for the highest rate since mid 2006, but are expected to slow to 55.0 for the month on signs of less strong new orders when the report is released at 10:00 AM. Construction Spending and Pending Home Sales will also be released at ten o'clock, shedding some light on the hotly debated bottom in housing, claimed by some to have already formed. Expenditures made for construction is expected to fall from September's 0.8% monthly increase to a declining -0.4% rate. Pending Home Sales may see a decline from the drastic jumps over the past two months, where the back to back 6%+ monthly increases led to the year over year rate ballooning to 20%. Unfortunately pending contracts have been dying short of actual deals, due to obscure appraisals amidst the still uncertain price discovery process.

Wednesday

Wednesday will see the ever vague "Beige Book" released by the Federal Reserve but the report will likely be a whitewashing of rhetoric and supportive statements concerning the health of the U.S. economy, where any pessimism would certainly be against the Fed's Dual Mandate.

Thursday

The Productivity and Cost of Production report is expected to show 8.6% productivity growth in 2009 Q3, compared to 9.5% in Q2.The report, released at 8:30 AM, is also expected to cite average costs of businesses down by a -4.2% rate, less than the -5.2% in Q2. At 10:00 AM we'll hear from the Institute of Supply Management for the third time of the week, as the ISM Non-Manufacturing Report headline number comes through. Traders will be looking for a solid gain from nearly stagnant growth in October (50.2) to 52.0 on the November service sector report card. This gauge of business un-helped by inventory rebuilding, has struggled to show meaningful gains above the break even 50.0 mark.

Friday

While every day this week will birth crucial economic data, the irreplaceable November Employment Situation report will have the world glued to electronic displays at 8:30 AM EST on Friday. Jobless rates are claimed to be lagging indicators, but the constant buzz over the staying power of the current stimulus recovery has begged investors to keep a tab on the rising rate of unemployment. October saw 190,000 additional non-farm payrolls slashed, while the household survey showed a larger jump to 10.2% unemployed. This month the consensus is for 100,000 payrolls to be lost as the headline number remains at 10.2% without jobs. Later at 10:00 AM we will also see how Factory Orders have changed over November, where new orders are expected to decline to nearly even at 0.2%, yet markets will move mainly on sentiment derived from the Employment Situation.