Does Congress think that people who are driving around 10 year old cars wouldn't buy a new car without a subsidy?

Do they realize that people who keep a car for 10 or more years means they will not buy another new car until around 2020?


Prechter on Deflation

From The Guide to Understanding Deflation.

pg. 9
Because the idea of money is so highly psychological today, the line between what is money and what is not has become blurred, at least in people's minds, and that is where it matters when it comes to understanding the psychology of deflation.
pg. 19, excerpted from 2003, on Bernanke's advice for defeating deflation:
They have met the Wizard of Oz in person, and he is impressive!

He is also delusional. Can you imagine the laughingstock that the Federal Reserve System would become if its "assets" consisted of defaulted mortgages, bonds of bankrupt companies and municipalities, IOUs of shaky foreign governments and stock certificates of companies no longer in existence? Can you imagine the panic that would ensue to escape a monetary system with such assets as its reserves?
The Federal Reserve is halfway to that system today...

pg. 23, from the same excerpt:
There is no way that Fed officials will buy junk paper unless and until the social pain gets unbearable and political pressures force it to choose a terrible policy in response to public demand to "do something."
Been there, done that. Prechter even accurately predicted the "do something" mentality of the American people.

On pg. 26, in an excerpt from 2004, Prechter gives a great example of what would happen if the government decided that a specific good was necessary for economic growth, and if it promoted the production of this specific good (Jaguars in the example), and it resulted in oversupply and overownership, to the point that no one wanted any more, even if they were free. He then compares it to credit:
It may sound crazy, but suppose the government were to decide that the health of the nation depends producing credit and providing it to as many people as possible. To facilitate that goal, it begins operating credit-production plants all over the country, called Federal Reserve Banks.
Eventually, everyone has more than enough credit and they do not want any more...but the economy is built around the industry that...
People are working three days a week just to pay the interest on their debts to the banks so the banks can keep offering more credit. If credit stops moving, the economy will stop. So the banks begin giving credit away, at zero percent interest. A few more loans move through the tellers' windows, but then it ends. Nobody wants any more credit They don't care if it's free. They can't find a use for it.
And that's where the U.S. economy finds itself in 2008, 2009 and beyond.


物腐虫生 wùfǔchóngshēng "worms breed in decaying matter"

...if worms are multiplying then something must have decayed.

Americans Who Don't Spend

Now for the socionomics side of the deflation argument:
Here's a Switch: Americans Who Don't Spend
Her frugality was forced upon her when the Fulton, N.Y., accountant lost a $60,000 a year salary in 2006 and faced the frightening truth that she was unemployed with $41,000 of credit-card debt, two car payments and a mortgage that her husband's machinist salary alone couldn't cover.

"I didn't really pay attention to my debt," she said. "I always thought that I would pay it off later. But later came a lot sooner than I had planned."

Cash-Only Lifestyle

She's now in year two of a five-year program to be debt-free and is living on cash only. But here's the catch: When all the balances have been cleared and her savings is back to what she would consider a comfortable level, Case, 38, said she will not change the way she lives.

"It's liberating," said Case, who is now making about $45,000 a year in a job she loves. "I had a friend who said, 'You guys are poor.' I've never felt poor. I have to be really frugal now, but it's really all about needs. Do I really need that cell phone? Do I really need that new car?

"I'm happy with less," she added.

Welcome to the new "normal" where keeping up with the Joneses is so last millennium and living within your means is the new cool.
Anyone relying on the American consumer for their business needs to face the new reality. Though this is very bullish in terms of long-term recovery, this is not good for retailers and producers of consumer goods and services.

标题 PK: 保增长、防通胀; 河北钢铁上半年实现利润4.72亿元


Dueling Headlines:
China Central Bank Wary of Inflation
Though the indicators are still showing deflationary conditions in the wake of the economic collapse of 2008, inflation fears have been fueled by the liquidity the government has since pumped into the system. Much of that liquidity is believed to have been captured by the stock and property markets, raising the prospect of an asset bubble.

Analysts do not believe the central bank will adjust policy until 2010 or late 2009 at the earliest, when growth fueled by the stimulus becomes more firmly established. In the second quarter GDP growth rebounded sharply to 7.9 percent from 6.1 percent in the first three months. There is some way to go before the government achieves its full-year target of 8 percent growth but some fourth quarter projections for GDP are running as high as 10 percent.
Hebei Iron & Steel June Profit Surges 200%
Hebei Iron & Steel Group's June profit surged nearly 200 percent to 273.7 million yuan as an economic recovery spurred demand. China's steel products price index climbed to 101.98 points at the end of June, up about 20 percent from April's trough, as the government's huge infrastructure-focused stimulus package boosted demand.

China's 72 major steel companies booked aggregate profit of 1.3 billion yuan in May, breaking a seven-month string of losses, after a jump in demand and prices.

Why America Remains in Financial Crisis

The root of the financial crisis goes much, much deeper than most people realize. This article by Jason Zweig explains the current mentality of Americans:
But psychologists have long known that people tend to overestimate the odds of rare events. Applying that behavioral insight, finance professor Peter Tufano of Harvard Business School has devised a clever program called "Save to Win." Launched earlier this year for members of eight credit unions in Michigan, it is a cross between a certificate of deposit and a raffle ticket. Members who put $25 or more into a Save to Win one-year CD are entered into a monthly "savings raffle" for prizes up to $400, plus one annual drawing for a $100,000 jackpot. Only Michigan residents are eligible to participate.

This unusual CD is federally guaranteed by the National Credit Union Administration and pays between 1% and 1.5% annual interest, a bit lower than conventional rates. In 25 weeks, the program has attracted about $3.1 million in new deposits, often from people who have never been able to set money aside.

Takisha Turner, 33 years old, is a dispatcher for the valet-parking department at Greektown Casino in Detroit. Ms. Turner doesn't gamble, but she has always struggled to save. She had only about $10 in her savings account at Communicating Arts Credit Union when she walked in a few weeks ago and heard about Save to Win.

"The teller said somebody else she told about it won," says Ms. Turner, "so I said, 'Well, you must be good luck then.' I thought it was a good idea, because earning interest means you win anyway. So I put down the minimum, $25." This past week, Ms. Turner won $400. She plowed the $400 back into her Save to Win account, getting a second shot at winning the $100,000 grand prize.

People love to gamble and hate to save. With Save to Win, says Communicating Arts Credit Union President Hank Hubbard, "You are sort of betting, but there's no losing." If we are to become a nation of savers again, we will need more innovations like this -- and the regulatory flexibility to allow them.
From the article is sounds as though they pay you a below market interest rate and the surplus is paid out as a gambling prize, with the bank probably earning higher than normal profits. Just another financial innovation meant to separate the fools from their money.

Saving is a virtue and a benefit in and of itself. It has been destroyed culturally, but we can't leave out the central bank. The Federal Reserve pursued a policy of inflation and this pushed interest rates far too low. Americans responded by cutting their savings. Let interest rates rise and people will save more.


Goldman Sachs PR Nightmare

Goldman Sachs (GS) is reaping a whirlwind on negative sentiment. AIG held the public’s ire briefly, but the bonus issue flamed out because there wasn’t more to the story.

Goldman never had love from the left of the political aisle because it is a capitalist enterprise. Last summer, it started taking additional hits from the populist right over high oil prices. Now, in the wake of billions of dollars in government bailouts, they’ve lost the cover of free-market advocates who decry the union between Wall Street and Washington.

The financial industry is at risk for regulation and public hatred unseen since the Great Depression. While Goldman’s connections with government may ensure its survival, it also ensures that many unpopular events will have Goldman’s name attached to it. The risk here is that public sentiment finds a target for its ire, rather than a generalized hatred of everything Wall Street.

Here are two of the latest anti-Goldman Sachs videos making the rounds.




Zero Hedge posted this yesterday. Worth following, if only to see if these guys from BNP Paribus are right or wrong. They claim the equity bubble will stop inflating between July 17 and July 27, based on the synchronicity of trading (an oversimplification, read the whole thing). The team of analysts making this call also claim to have called the turn in the U.S. housing bubble and the 2008 oil bubble.

I wouldn't even call myself an amateur in Elliot Wave theory, but I assume the chart would read thus:

China Bubble


Good Timing?

On June 29, I made this post 分析金矿股票图表 in Chinese, in which I discussed the signals I was getting from the gold mining stocks. I had several charts, the first of which showed that gold miners signaled a market turn in late February, right about the time that Robert Prechter made his call for a near-term bottom; Marc Faber turned bullish around the same time.

I then showed a chart of 2008 and I highlighted the March and July periods. I've commented before about how I believe 2009 is unfolding similarly to 2008, and I though July might be a period for a downturn similar to the one caused by Fannie and Freddie in 2008. Gold miners started falling in mid-June, along with commodity prices, and I wondered if this wasn't sending the same signal as in 2008, when oil prices peaked in late-June early-July and then went south quickly. I posted this graph on that date:

Here's how things have done since:

Prechter thinks we'll have a rally in late summer, just like 2008. I think my 2009 framework holds up, but then the question is what happens this fall...

Note: if the charts on not visible, try clicking on the post title. If they're still not showing, click through to see them. Sina is spotty with their treatment of hot links.

Socionomics Anecdote of the Day

U.S. imports of Heineken are way off this year and continued to fall in May—and that's compared to 2008 when sales dropped as well. Consumers are shunning brands that smack of upscale and prefer the lower end of the market. What's interesting is that the drop in Heineken sales is similar to the drop in brands that rely on sales in restaurants and pubs, a result of people eating-out less often.

Here's an older article covering April 2009 beer imports.


A brake on Chinese loan growth?

China to Order Investment Products Carried on Bank Balance Sheets
The China Banking Regulatory Commission is likely to compel banks to carry funds raised for wealth management on their balance sheets, the latest move signaling stricter regulation and monitoring of the business.

The balance sheet treatment is expected to result in banks holding more capital in reserve, restricting their ability to expand. The rule is likely to be announced this week.
A small change, but maybe the first step of many to curtail bank lending.


Bawang (霸王) Coming to Market

South China Morning Post: Bawang and Qinfa surge before debut
Bawang, one of the top four shampoo retailers on the mainland, climbed 28.99 per cent to HK$3.07 from an offer price of HK$2.38 in the unofficial market yesterday, while coal trading firm Qinfa rose 12.3 per cent to HK$2.83, compared with the offer price of HK$2.52.

With the Hang Seng Index just completing its best quarter in more than 15 years, increasingly bullish investors are looking for new opportunities.
Exactly right. This is a bull market phenomena fueled by a near complete reversal from fear to greed.
"I believe Bawang is going to have a better debut performance than newly listed sportswear maker 361 Degrees [International]," said Mr Shiba. "The IPO market is so hot."

Shares in 361 Degrees rose as much as 18.56 per cent from the offer price of HK$3.61 before closing 8.03 per cent up at HK$3.90 on their trading debut on Tuesday. The stock finished 6.92 per cent lower at HK$3.63 yesterday.
Bawang (霸王) closed lower, at HK$3.03, following a similar path to 361 Degrees. There appears to be a lot of buying interest, but not a lot of holding interest. As the speculative fever fades, the price declines. Not sure if I would buy either stock, but I think they'll both offer lower entry points.


三六一度 361 Degrees Bull Market Fervor

If you anticipated that 361 Degrees would rally after its IPO, based on investor interest, you would be wrong. Investors oversubscribed by 1.5 billion shares, but here's the first two days of trading:


June Performance


June %


S&P 500 TR






上海 Shanghai




Entertain. Trends



Green Dragon



Best of Funds



Pharma & Dogs



China Fund



Software Security



Yield to Me



Catch a Falling Knife



My Best of Funds portfolio was a disappointment. I was burned by falling gold prices, which hit gold miners hard, in addition to several entries into short positions that for the most part did not pay off. As of today, I lifted the shorts and am considering playing the reflation trade in China, with the amount of money being poured in. At the very least, I'm going to stop trying to second guess the market and wait for it to show me it is ready to decline.

Year to date, however, my funds are holding up well and outperforming, though China has lagged due to my bearishness and the short fund has been obliterated. It's a good learning experience for working on the short side though.