World Growth Slowdown is Bad News for U.S.

The Nikkei news service reported today that office rents in central Tokyo fell below the previous month’s level in July for the first time in almost three years.

The news service said the average monthly rent for a 3,500 square-foot office in a large commercial building in Shinjuku sank by 0.03% to the equivalent of $6 per square foot.

The decline was attributed to the rising vacancy rate at large office buildings. The news service said that with concern growing about the slowing economy, tenants are becoming increasingly reluctant to expand their offices—and some companies have postponed renewing their leases because of poor earnings.

This has the makings of another leg of recession for Japan, which is the last thing the country needs.

Although Japan has held up better than China, Korea and South Asia this summer, news of slower business and higher commercial real estate vacancies will give investors pause.

I would continue to avoid Japanese stocks for now even though the Tokyo market is down 15% this year.

U.S. Banking Crisis Deepens

Dow Jones news service reported that the head of the Federal Deposit Insurance Corp. said Tuesday that her agency might have to borrow money from the Treasury Department to see it through an expected wave of bank failures. (See also: "Don’t Trust the Bank Bounce.")

FDIC chief Sheila Bair said the borrowing could be needed to cover short-term cash-flow pressures caused by reimbursing depositors immediately after the failure of a bank. The borrowed money would be repaid once the assets of that failed bank are sold, she said. Dow The last time the FDIC borrowed funds from Treasury came at the tail end of the savings-and-loan crisis in the early 1990s after thousands of banks were shuttered.

That the agency is considering the option again, after the collapse of just nine banks this year, illustrates the concern among Washington regulators about the weakness of the U.S. banking system in the wake of the credit crisis. The FDIC said Tuesday that its "problem" list of banks at risk of failure had grown to 117 at the end of June, compared with 90 at the end of March.

Dow Jones said the FDIC’s deposit insurance fund reimburses depositors who lost money in a bank failure, typically up to $100,000. The fund’s balance� fell in the second quarter to $45.2 billion. That is just 1.01% of all insured deposits, low by historical standards.

The FDIC is called in when there’s a run on the banks. So who is called upon when there’s a run on the FDIC?

It’s the taxpayer. This situation is getting uglier by the minute.

Subprime Profiteering

Bloomberg reports that bond management titan PIMCO is seeking at least $5 billion to buy mortgage-backed debt that plunged in value after the subprime market collapsed.� The private Distressed Senior Credit Opportunities Fund will invest in "senior” and "super-senior” securities backed by commercial and residential mortgages, sources told Bloomberg.�

This is very tricky business, and could easily backfire if the assets continue to lose value. Bloomberg reported that PIMCO raised $3 billion last year to invest in distressed mortgage assets—and one can only guess that most of that paper is already deeply underwater.

European Economy Reeling

The London Telegraph reported this week that almost the entire region of Western Europe, Scandinavia and the Baltics is on the cusp of fully fledged recession, raising fresh fears about the health of Europe’s banking system.

Germany’s IFO confidence index of future business crashed in July to levels last seen in the post-unification bust of the early 1990s. "Everything is coming to a head at the same time," a top Barclays Capital economist told the newspaper. "The euro’s surge over the past two years has caught up. We’ve seen a hollowing out of the euro area’s industrial sector, an oil shock and tightening credit conditions, made worse by the European Central Bank’s decision to raise rates in June," he told the paper.

Meanwhile, Nobel economist Robert Solow told the Telegraph that the ECB had made a bad mistake and was now moving far too slowly to stop the downturn engulfing the region. "I get the feeling that the mandate of the ECB is based on the notion that controlling inflation in a modern industrial economy is enough, with no further need for anything else. This not a view that is accepted any longer in economic circles. Central banks should not try to reverse oil supply shocks."

The Telegraph noted that the dramatic downturn in Europe’s core economy appears to have taken the currency markets by surprise.

The euro has plummeted by almost 10% against the US dollar since early July. Denmark is already in a fully fledged recession and now appears to be sliding deeper into trouble. Danish industrial orders collapsed by 22% in June compared to a month earlier, and the country’s central bank had to rescue a regional institution called Roskilde Bank after a run of withdrawals by depositors.

These troubles in Europe are not happening in a vacuum. They reflect and amplify what’s happening in the United States and will rebound in a negative feedback loop.

We really need to keep paying attention to our cousins across the Atlantic to ensure that we stay one step ahead of the game. In Trader’s Advantage, we have continued to play these developments over the summer opportunistically with short positions in financials and long positions in metals and energy. Come take a trial to see our latest ideas.

Jon Markman is editor of Trader’s Advantage and a regular contributor to InvestorPlace.com. To get this type of actionable insight from Jon and other InvestorPlace Media experts go to www.InvestorPlace.com today!