2010-03-31

Ireland & China have banking problems

Irish Banks Need $43 Billion in New Capital as "Worst Fears Have Been Surpassed”
“Our worst fears have been surpassed,” Finance Minister Brian Lenihan said in the parliament in Dublin yesterday. “Irish banking made appalling lending decisions that will cost the taxpayer dearly for years to come.”

The agency aims to cleanse banks of toxic loans, the legacy of plunging real-estate prices and the country’s deepest ever recession. In all, it will buy loans with a book value of 80 billion euros ($107 billion), about half the size of the economy.

“The information that has emerged from the banks in the course of the NAMA process is truly shocking,” Lenihan said.

Dublin-based Allied Irish needs to raise 7.4 billion euros to meet the capital targets, while cross-town rival Bank of Ireland will need 2.66 billion euros. Anglo Irish Bank Corp., nationalized last year, may need as much 18.3 billion euros. Customer-owned lenders Irish Nationwide and EBS will need 2.6 billion euros and 875 million euros, respectively.

NPL Concerns and New Bank IPOs Drive 600 Billion Yuan Financing Rush
The piling up of bad loans is driving the state-owned banks' refinancing rush. So far the major state-owned banks' capital adequacy ratio is not bad: for ICBC it's 12.36%, China Construction Bank (CCB) 11.7%, and BoC 11.4%. Analysts say the banks are able to replenish capital with internal resources due to recent handsome profits.

...To avoid excessive draining of the A-share market, the bank refinancing push is scheduled to finish 3 to 6 months before ABC launches its gigantic IPO at the end of the year.

The possible busting of the A-share market by the 600 billion yuan in refinancing plans is a cause of great concern for investors. At present the Shanghai Stock Composite Index is lingering in the neighborhood of 3000. Many small banks lining up for IPOs have become pessimistic over selling shares in 2010.

2010-03-30

Trouble Brewing

The 30-year Treasury bond is breaking down.

Angela Merkel doesn't want to pay for Europe

How European is Angela Merkel?
Google translate will give you the gist of it. Basically, she doesn't want to pay for Europe's problems and neither do the German people. All discussion of bailouts or aid for Greece, Spain, Italy, etc. must begin with this reality.

U.S. is very broke

In HK seeking tax treaties to silence haven claims (subscription required), there's a passage about U.S. efforts at tax collecting in Hong Kong and China:
In addition to paying local taxes, the 60,000-plus Americans in Hong Kong must regularly declare their earnings to the US Internal Revenue Service, the tax enforcement arm of the US Treasury Department. They must also disclose the combined value of their personal overseas bank accounts if they exceed US$10,000 at any time in a given year.

Since the UBS settlement, the IRS has added 800 new enforcement agents to its overseas dragnet.

In Beijing, Killfoil said she had been authorised to hire five employees to assist her in liaison work and administration of the exchange of information programmes. All the enforcement work is handled by the consulate in Hong Kong, she said.

Permanent and temporary IRS enforcement agents have been posted in Hong Kong. Last autumn, squads of tax officials made trips to the city to audit US tax returns and discuss a voluntary disclosure programme, which offered amnesty in exchange for details of how people hid their money.

By mid-October, 7,500 US taxpayers around the world had voluntarily disclosed offshore accounts.

"We're going to be scouring the 7,500 disclosures to identify financial institutions, advisers and others" who helped taxpayers dodge their tax obligations, IRS commissioner Douglas Shulman said on October 14.
The main relationship between U.S. citizens and their government is increasingly occurring through the tax department.

2010-03-29

Reform and Opening...of the Internet?

China’s Top IT Enterprenuers Call For Internet Special Zone

They want it to be in Shenzhen, which was also the location of the first special economic zone that began China's experiment with capitalism.

2010-03-27

David Murrin Extended Interview on King World News

David Murrin

Lots of great ideas to contemplate, such as:
Ascending powers are creative and find weaknesses and innovations in many areas, including weapons technology. The declining power believes it is creative, but in fact has lost its creative energy.

Eric Sprott on gold, silver, oil, interest rates

March 27 Interview from King World News

America's Rapid Fall?














Something I've notice for some time is that the Chinese are interested in taking risks and building wealth, whereas the Americans are interested in preventing risks and spreading wealth. The Chinese are looking to grow, whereas the Americans are looking to preserve. Murrin takes a very broad view, placing America at the end of a 900-year rise in Western Christendom.

2010-03-26

The perfect metaphor for Bush-Obama-FRB economic policy

Drunk Pa. Man Tried To 'Revive' Dead Opossum

Peggy Noonan is all about socionomics

Although she doesn't know it.
The Heat Is On. We May Get Burned.
What I keep thinking of is a beehive. A modern, high tech, highly politicized democracy is a busy beehive, and sometimes the bees are angry, and sometimes someone comes by and sticks a big sharp stick in the hive. The biggest thing Washington should do right now is stop it, stop poking the stick.

The beehive was already angry about a million things a year ago, and most of those things, obviously, were not the fault of the administration. People are angry at their economic vulnerability. They are angry at the deterioration of our culture, angry at our nation's deteriorating position in the world, at our debts and deficits, our spending and taxing, our threatened security in a world of weapons of mass destruction. Their anger is stoked by cynical politicians and radio ranters and people who come home at night, have a few drinks, and spew out their rage on the comment thread. It's a world full of people always cocking the gun and ready to say, if things turn bad, "But I didn't tell anyone to shoot!"

And yes, this mood, this anger, has only been made worse by this yearlong, enervating, exhausting, enraging fight over health care. The administration is full of people who are so bright, and led by one who is very bright, and yet they have a signal failure: They do not know what time it is. They cannot see how high the temperature is. They cannot for the life of them understand that they raise it.

What we need now in our leaders is the knowledge that there is so much that is tearing us apart as a nation and that the great project now is to keep us together, to hold us together as much as possible, because future trends will be to come apart, and for many reasons. To come apart because we're no longer held close and firmly by the old glue of appreciation for a common heritage, history and culture; to come apart because we're a country that increasingly feels there are people in the cart and people pulling the cart, and the latter are increasingly overwhelmed and fearful; coming apart because we're now in at least our second generation of young, lost, unguided children with no fully functioning parent in their lives, kids being raised by a microwave and a TV set. All of these things weigh and grate.
The only thing that would make her advice better is if she realized that social mood is driving the anger, not the actual legislation or policies. But maybe that makes the reality worse, since if her assessment of the society is correct, it may be unable to withstand the force of the growing negative social mood.

U.S. executives afraid to speak out, Chinese executives speak out

What a change in scenery. U.S. executives are afraid to talk about the yuan because of social and political backlash. Meanwhile, in China, executives (of companies that will benefit) are talking up yuan appreciation.
U.S. companies suddenly shy over China yuan squabble
At the same time, U.S. CEOs are reluctant to be perceived as standing up for China, Klein said. "They have nothing to gain from that."

Reuters approached more than half a dozen major companies with significant business in China for this story but all declined to comment.

China CEOs Join Obama in Supporting Yuan Appreciation
Yang Yuanqing, chief executive officer of Beijing-based computer maker Lenovo Group Ltd., said gains would boost consumers’ purchasing power. Qin Xiao, chairman of China Merchants Bank Co., said an end to the yuan’s 20-month peg to the dollar would let lenders set market-based interest rates. Chen Daifu, chairman of Hunan Lengshuijiang Iron & Steel Group Co., said a stronger currency would cut import costs.

2010-03-25

Weak yuan arguments growing

You know better than to trust politicians for economic and financial advice, right?There are actually a number of people expecting a weaker yuan. Today, ZeroHedge posted on one of them, Albert Edwards of Societe Generale.
Albert Edwards Vindicated: Discusses China's Upcoming Trade Deficit, And Why CNY DEVALUATION Is Now Increasingly Likely

I still make the very simple point I made back in November; a collapse of the current recovery seems extremely plausible in both the US and China in the not too distant future. This will only intensify the mutual belligerence seen in both nations. And despite the recent downturn last year, the yuan has strengthened decisively over the last four years.


Here's my take. China is inflating like mad. The U.S. will have permanently higher unemployment due to debt problems and an uncompetitive cost structure. Something needs to fall massively in value to balance the equation. The idiots in Washington want to weaken everything by weakening the U.S. dollar. It can be factors of production though, such as land and debt costs (if the government refused to bail out these markets), tax cuts (Ha!), it can be labor costs. Another solution, however, is to throw globalization on the pyre. It's the politically easy solution.

It's also inevitable with a declining social mood that will lead to more foreign confrontations. Relations with Israel are completely falling apart and they are a strong U.S. ally. There's a reason Google wants to be combative rather than cooperative with China all of a sudden, when nothing in China has changed policy-wise. There's a reason the ECB and Federal Reserve are "split" over what to do about Greece.
(Greek Crisis May Provoke Fed-ECB Split as Euro Slides) This is also happening domestically, as bricks and bullets are sent through the windows of Congressional offices on the left and right.

Protectionism by the U.S. would raise consumer prices. It would hurt consumers and push up savings. Instead of U.S. dollars going to China to buy goods, and then Chinese buying Treasuries, Americans will buy Treasuries. This would not be good for the country's economy or wealth, but it would be good for the U.S. dollar.

China is a cash economy—there's a lot more money floating around, unlike the U.S. debt economy. If they lose a major export market (and the Europeans would likely follow in the wake of the U.S.) they will head into major trade deficit, not to mention a weakening economy. However, cash is not extinguished in a recession, and if it is bad enough, China will print lots of money to get the economy going. And if they print money, but aren't increasing the amount of U.S. dollars due to the trade deficit/recession, then eventually Chinese individuals will start swapping RMB for U.S. dollars. At some point, the government will see the reserves going out the door...and then they will be forced to devalue.

I'm still working on translating the latest Liu Junluo piece, but he is calling for hyperinflation by 2012-2013, following up his previous call for the Dollar Index to hit 130.

Watch this Video: Manduca on euro, dollar & debt

8 minute rundown of everything that will be important in the coming days and weeks.












4% is the important level on the 10-year. Notice the run-up over the past two days. This is the opposite of what happened through much of the stock market rally. When stocks went DOWN, bond yields went DOWN, and the U.S. dollar went UP. Over the past two days, the U.S. dollar went UP, bond yields went UP, and stocks went DOWN. I don't believe this will continue (There was a similar spike at the beginning of December 2009), but this is the ultimate deflation scenario. Credit dries up, which forces real yields high. Interest rates jump, but there's no inflation. Prices of financial assets collapse and CPI turns negative. Yields will initially climb, but as soon as "the market", that is individual investors, realize what is happening, they will race into bonds and yields will tumble. Yields will still be high in real terms, however, since holding anything but the safest assets (cash, short-term Treasuries) will result in losses. It's the washout scenario, the collapse that the Fed prevented (delayed?) in 2009.


Reverse H&S on SPY? update 2

2010-03-25 Update: SPY hit $118.10 intraday (the intraday high was $118.17). It remains to be seen what happens here. The market has been going up for so long and even a weaker euro has not derailed it, but I feel a bit more confident that we may have in fact seen the highest level for the SPY for at least a few days, if not a more significant top.
Here's the chart I posted on February 16.

SPY is about $116.95, or about 1% from the target. Once it hits that point, the pattern is complete. However, with the market at short-term overbought levels, perhaps that marks a short-term top.

Update: UUP takes out $24.10 price target

Below is my post from February 9: UUP Near Term Price Target of $24.10. At this point, higher prices are likely, but I do not have any target. The downside on the euro and FXE is much clearer, at $1.25 for the euro and around $125 for FXE.
I'm slowly working my way through technical analysis study. Head and shoulders patterns are easier to spot than most, and I think I see another one here in UUP. If my reading is correct, then UUP should breakout to about the $24.10 level, which would match the percentage move from the neckline to the top of the head.

Undervalued Currency or Low Labor Costs?



Chart from Agora Financial's 5-minute Forecast.
If you want more detail, see this research paper:Burgernomics: A Big Mac™ Guide to Purchasing Power Parity

China headed for recession?

Is the Chinese economy running out of steam?
Therefore the appearance of excess capacity is signalling the emergence of malinvestments that must at some point be liquidated. Now these malinvestments are the creation of a reckless monetary policy which some are assuring us that Beijing is trying to reverse. When it comes to monetary policy — which includes monetary theory — Beijing is every bit as clueless as Washington and London. According to official PBC figures M1 jumped by 25 per cent from January 2009 to December 2009.

It's reported that in an effort to maintain economic growth and prevent "overheating" at the same time the government has curbed bank lending while also ordering the banks to increase their reserves. This is dangerous nonsense. Genuine economic growth cannot cause "overheating" which is another term for inflation. Those who argue otherwise are spouting rubbish. (One should have thought that some of these people would have noticed by now that this fallacy only appeared after Keynesian policies left us in a permanent state of inflation.)

If the present trend continues manufacturing will start to contract and the recession will then rapidly spread down China's production structure. Of course, the government can once again push down on the monetary accelerator. But in a sense this is where monetary and capital theory combine to produce an unstable and highly explosive mixture.
An interesting article to compare with Liu Junluo's latest, which calls for hyperinflation in China around 2012 or 2013.

Hugh Hendry Interviewed by BBC

Scottish roots shine through with his economical choice of automobile.
A day in the life of a financial speculator

What's on his bookshelf?
Money, Bank Credit, and Economic Cycles
Tragedy & Hope: A History of the World in Our Time
Lords of Finance: The Bankers Who Broke the World

2010-03-24

Crash Comparison Update 2010/03/24

Euro Breakdown!

The euro finally ended its consolidation phase and the next leg of the decline is on the way.

In Where is the euro going?, I said $1.25 or about $125 for CurrencyShares Euro Trust (FXE) was the point of major resistance. This move could take us to that level.

UUP is a diluted play against the euro, EUO is a daily double short on the euro, but will suffer from the compounding of the daily position. In the past year, FXE is flat, but EUO is down 5%. During a sustained decline, this distortion will work to the trader's advantage and a little more than double the decline in the euro can be achieved. That said, if you stay in it too long and sit through the consolidation periods, or worse, simply buy and hold for a long period of time, your returns will erode. In the past two years, FXE is up a few percentage points, but EUO is down about 15%. EUO is a trading vehicle, not an investment.

The big question is how the market reacts. Aside from the decline in January (which appears smaller here because I am comparing the S&P 500 to the euro), the U.S. stock market has been moving up in absolute terms, and as the chart shows, even more in euro terms. It is looking like the January drop was mainly China related, as many emerging markets and China stocks fell the most. However, if this recent rally is to end, this move in the euro could be the signal.

2010-03-22

U.S. Minted Coins for Saudi Arabia

US Mints ‘Gold Disks’ for Oil Payments to Saudi Arabia
The coins were struck in Philadelphia by the United States Mint in 1945 and 1947 to satisfy the obligations of the Arabian American Oil Company, or Aramco, which had been set up in Saudi Arabia by four American oil companies. The company was obliged to pay the Saudi Government $3 million a year in oil royalties and its contract specified that the payment be made in gold.

The United States dollar at the time was governed by a gold standard that, at least officially, made the dollar worth one thirty-fifth of an ounce of gold. But the price of gold on the open market had skyrocketed during World War II.

For a time the Saudis accepted payment in United States currency, but by 1945 they were insisting that the payments in gold be resumed. Aramco sought help from the United States Government. Faced with the prospect of either a cutoff of substantial amounts of Middle Eastern oil or a huge increase in the price of Saudi crude, the Government minted 91,120 large gold disks adorned with the American eagle and the words “U.S. Mint — Philadelphia.”
More at the link.

Google Shenghuo still up

Google Shenghuo Google 生活搜索 is still up and running. Google doesn't offer this service in the U.S. It aggregates information on apartments (rent or buy), jobs, trains, food, entertainment, etc. Very useful and still up and running. They've only redirected their main search engine at this point.

Andy Xie: Frayed String for China's Property Balloon

Andy Xie talks about China's property market in his latest, Frayed String for China's Property Balloon:
Beijing's economic policies have been favorable to people in the low-income bracket over the past few years through rural subsidies, agricultural land reform and price controls for necessities. The resettlement policy is another element designed to help them. But the middle class is paying the price while their most important expenditures – property, cars and education – are highly inflated. Indeed, China's property and car prices are among the highest in the world in absolute terms, and by far the highest relative to income. Unless policies change dramatically, the middle class squeeze will get worse.

China's property market is a massive bubble. The stock of residential properties, developer inventories and land pledged to banks by local governments exceed by three times the nation's gross domestic product. Rental yields in most cities fail to cover depreciation costs. The price-to-income ratio, a measure of housing affordability, is routinely above 20 in major cities, which means an average Chinese citizen would spend his or her entire income for 20 years to buy an average-priced property.

The bubble can continue because China's banking system has plenty of liquidity, partly thanks to hot money and because governments have many levers to channel bank liquidity into the market. But the longer the bubble lasts, the more damage it will do to the economy.
Read the whole thing.

Cry havoc, and let slip the cats of trade war

China to lose ally against US trade hawks
Less resistance for Chucky and Lindsey as U.S. business doesn't want to be seen defending China with 10% unemployment. The article also notes complaints about China's currency policy, which last time I checked, hasn't changed much for several years, except for revaluing in favor of U.S. exporters. What would make people change their opinion when the facts on the ground haven't changed? Social mood.

2010-03-19

Declining social mood in Europe sinks euro

Protectionism and anti-foreign sentiment are on the rise as the social mood declines. Now we see Europe is splitting internally:
German Chancellor Angela Merkel has defied France and the IMF, refusing to modify Germany’s strategy of export reliance or boost growth to help alleviate the deep crisis sweeping Southern Europe.

"Where we are strong, we will not give up our strengths just because our exports are perhaps preferred to those of other countries," she told the German Bundestag.
Germany is in a strong position. They can do well under a deflationary scenario and given their export status, as the euro weakens they will see their exports to non-euro countries increase. Expect these disputes to get worse before they get any better.

Also remember that the euro and EU came about at the peak of social mood, with booming stock markets and booming economies. This will probably grow to become the darkest period in Europe since WWII or at least the bleakest moments of the Cold War.

Here's FXE, getting ready to break its recent lows. Next resistance would be $1.30 if it declines, and then it's on to test the lows of the 2008-2009 financial crisis.

Another China real estate policy targets SOEs

It's like they're serious or something.
SOEs Ordered to Check Out of Hotel Sector
Sources close to SASAC said the move is aimed at reorganizing and integrating state-owned hotels, transferring them to companies that can manage them more professionally. Ninety percent of the affected hotels are now run by "third-tier" subsidiaries of large SOEs.

Some industry experts said they were puzzled by the order, and wonder whether government agencies have unannounced interests in the divestments. Moreover, company officials at some hotels targeted for spin-offs are putting up resistance.

"To be honest, we don't know the true intentions behind SASAC's actions," said the head of one state-owned company. "Perhaps they will set up an asset management company so that they can operate the hotels themselves."
15-sec investment analysis: possibly mildy bad news for Home Inns (HMIN) and Jinjiang Hotels (2006.HK) if the assets are managed better, since it means more competition. If the assets are sold off, perhaps its bullish if they can acquire good properties. Not tradable news yet, either way.

Google Chrome experiencing technical difficulties

I noticed that some Chinese websites are not loading at all or loading very slowly in Google Chrome, but I have no trouble with other browsers...

2010-03-18

Liu Junluo: RMB will fall to 20 per dollar within 3 years

刘军洛: 2010年美元时代的开启——三年内英镑跌至1 欧元跌至0.8 人民币跌至20 日元跌至150
Lui Junluo: 2010 Dollar Era Begins— Within 3 Years, the Dollar Index will be at 130, the pound will be at $1, the euro will be at $0.80, the renminbi will be at 20, and the yen will be at 150.

Liu Jinluo explains his experience in the 327 bond scandal, or 327 incident. Here is some background from an Asia Times article:
The bond-futures market that operated in China from 1993-95 is a good case in point. It was originally introduced to improve liquidity in the spot market and make bonds more attractive to financial institutions by allowing them to hedge their exposure. But there were two serious problems. First, because most of the bond issuance up until that time had been directed toward individuals, institutional investors did not have large positions to hedge. And second, most interest rates were set by the government and adjusted only infrequently so there was also not much risk against which to hedge.

There was thus relatively little demand for bond futures as a hedging tool and the market quickly became dominated by speculators trading on insider information, with positions often far in excess of the limits set by the exchanges. (Bond futures traded on the Shanghai and Shenzhen stock exchanges and also on a number of "securities trading centers" set up by local governments throughout the country.)

The regulators finally stepped in after massive losses at Shanghai International Securities Co (SISCO), at that time China's biggest broker, which had unsuccessfully attempted to push down prices by taking a short position with a notional value more than eight times the total issuance of the underlying bond. After this scandal, known as the "327 incident" after the series number of the futures contract SISCO was shorting, all bond-futures trading was indefinitely suspended in May 1995.
Liu Junluo is able to make profits due to his "trader's instinct" and he gives some examples of how people were reacting, which I interpreted as due to there being asymmetrical information in the market.

He believes China and Japan will face economic collapse. He goes on to explain how a multinational could use a large loss in China to its advantage, by shorting large amounts of Japanese bonds or Japanese yen, since this event would be very bullish for the U.S. dollar. I think in this regard, he sounds very much like Martin Armstrong, where finance and derivatives can earn very large profits and can affect economic events, but most economists, politicians, etc. have no clue as to how this world works.

In the end, he believes the U.S. will make great profit from the $600 trillion in derivatives, and goes so far as to say God gave Americans the "derivatives gene", but Chinese got the "Coolie gene"—certainly the opposite of almost every financial critic's opinion.

While I agree that the U.S. could do relatively well in a (non-USD) crisis, I suspect the deflation would be powerful enough to cause losses that exceed those of 2008. Counter-parties would be unable to pay off their derivatives bets, but the futures markets may fail as well, with governments unable to offer any bailouts. One of the only ways to profit would be to hold the safest and most liquid cash and cash equivalents. That is, to lose zero while everyone else loses big.

Translation of the piece follows.

Update 2010-03-23: This needs more work, but I haven't got time. The part where he discusses the day of trading 327 bonds is the area with the most mistakes, take it for what its worth.
The U.S. dollar Era Starts in 2010- Within three years, the dollar index will be 130

The U.S. dollar Era Starts in 2010 - within three years, the pound will fall to $1, the € will fall to $0.80, the yuan will fall to 20, and the yen will fall to 150


Before a country goes bankrupt, there will always be a strange scene-the upper class usually has ostrich-like blind optimism; the middle-class has serious mental and physical exhaustion; the lower class is resigned to its fate and give up on themselves.

In 1995, I had the honor of participating in the sensational "327 treasury bond" transactions. China's financial hegemon at that time, Shanghai International Securities, collapsed due to large short positions in 327 treasury bonds. That era was a seriously chaotic decade for the exchange systems. At that time, the SSE opened about 3 minutes later than the Beijing Exchange. I entered the war in the Shanghai Stock Exchange. At that time, my short bonds were "317 T-bonds." On that day, after the Beijing Exchange opened, my Beijing friend informed of the situation on a big brick mobile phone. I did not rush to the Stock Exchange, after hearing the first reaction was that my position was completed at the open. My instinctive reaction was to appropriate the phone and call the trade declaration young lady immediately and demand an overdraft of more than ten times the money "call market" to buy many "327 bonds". I put down this phone, crazily dialed several futures traders who were short t-bonds while running and ask them to make more "327 bonds." After calling these futures traders by telephone, I was very uncomfortable, because of the numbeness of the general reaction of these traders. And this was the opposite of the excited reaction I heard after calling Beijing "friends". At the moment of the open, I just burst into the trading room, the computer displayed the opening price and I immediately let me into a kind of "gallows" feeling.

At that time, "327 bonds" opening price was over 148 yuan. And my "call market" panic buying price was 150 yuan. Moreover, the first price position short-selling reached several hundred million yuan.And this is only 2 or 3 seconds, wiping out the first madly entered "327 bonds" thrown into the influx of orders, "327 bonds" rose rapidly to 151 yuan, 152 yuan, 153 yuan. [I did not translate this next part.-Ed]Then I commanded the young lady, display on the computer how much the price must rise higher deficit to unwind serious "317 bond" short contracts. She immediately warned that this will bring "317 bond" contracts more serious losses.[End untranslated portion] I smiled at a higher price to close a position of small plates of "317 bond", the platter of "327 bonds" was also driven up about 10 points, I immediately liquidated "327 bonds" with a large profit.

At lunch break, I already closed all my positions. At noon, I left the exchange. Afterwards, in afternoon trading the "327 bonds" staged a farce. When I left the exchange my heart was very heavy. At that time everything I did was a "trading animal's" instinctual reaction. In reality many people do not have these traders' instincts. However, these people will instinctively oppose the thinking of traders' instincts. Like the French army in World War II, its tanks, artillery, aircraft, the number of troops several other areas were better than the German army, but the French military commanders were originally infantry officers. In early 1937, the father of German tanks, Guderian, in his book "Achtung! Panzer" critcized the systematic ignorance of the infantry officers.

Within two years, China's home prices will have fallen 70%, that is until the end of 2011. A few days ago in Beijing gave a mini-lecture. A Beijing lady told me that at the end of November 2009 she read my book, "Chinese Home Prices in a Multi-Polar World" and immediately sold her house, and now rents. I said to her: "Two years later you're bound to thank me."

I'm very happy that this book saved this lady in Beijing.Because the Japanese economy will soon collapse, and the Chinese economy and the Japanese economy will collapse simultaneously. Now, there are many multinational companies' assets allocated to China. If China and Japan simultaneously collapse, these multinational companies will get rich.

Assume that a multinational in China has $5 billion worth of real estate.In theory, it is difficult for this multinational company to realize these assets while the Chinese and Japanese economies simultaneously collapse. In fact it will take the initiative at a very low price, such as $1 billion or $500 million U.S. dollars to close out China assets. By then, Chinese economists will say that the multinational would be crazy to sell at bankruptcy prices. Therefore, Chinese mainstream economists are only a group of "globalization's fools." The reason is that this multinational company will have scaled up a large short position in the Japanese foreign exchange or Japanese debt market. Presently, the global foreign exchange market leverage is up to 200 or 400 times, just a $1 billion deposit could conservatively short $100 billion worth of Japanese currency or debt. This multinational company by way of underselling its China assets will trigger a market panic, but the short-yen or short positions in Japanese government bonds will make huge profits, this is a type of crisis arbitrage.

This is a "trading animal's" world. Today's global derivatives market is $600 trillion and China's economy is only $5 trillion, by underselling real estate in China, while profiting in global capital markets, the American Age can begin.

Today, any mainstream Chinese economist's criticism says the U.S. empire will fall into a serious debt crisis, the same as the Netherlands and the former British Empire, but have no way to explain that the previous Dutch Empire and the British Empire were only trading in general merchandise. All it takes is imitation and hard work to make the Netherlands and the British Empire decline.

And today is a world of innovation and derivatives, it's a knowledge society. It's through the elimination of a nearly $5 trillion country, that there's $600 trillion profit in the derivatives market. Unfortunately I'm a Chinese, so in May-June 2007 I proposed the U.S. strategic goal is to have China's stock market crash to 2000 points in 2008; then let the Chinese property market skyrocket at the end of 2008. With a $600 trillion fortune in the derivatives market, China's property market will fall 70%, this is common sense. With a $600 trillion fortune in the derivatives market facing the victors, in the next three years, U.S. dollars will undergo, since the beginning of world history, the most spectacular and the greatest—and perhaps the creative human vocabulary cannot describe— rise, a soaring rise.

Now, the biggest problem is that this is simple common sense. Chinese people are keen to debate simple common sense. It can only be that God gave derivatives genes to the Americans; and gave Coolie genes to the Chinese. In the face of God's arrangement, the future will be beautiful, that's only the beauty of American dollars. [The Chinese word for America is Beautiful country, so this is a play on words. It could also be read as the future will be very American. -Ed]


Liu Jun Luo
2010-3-18


2010年美元时代的开启——三年内美元指数130
2010年美元时代的开启——三年内英镑跌至1 欧元跌至0.8 人民币跌至20 日元跌至150
一个国家倒闭前,总会是这么一个奇怪的场面——上层社会通常会鸵鸟政策式的盲目乐观;中层社会精神与体力方面严重疲惫;下层社会则听天由命、自暴自弃。

1995年,本人有幸参与了轰动一时的“327国债”交易。中国当时的证券霸主“万国证券”因大量沽空“327国债”而倒闭。在那个时代,是一个交易体制严重混乱的年代。那时,上交所比北交所晚开3分钟左右。我的参战地在上交所。当时,我沽空的国债品种是“317国债”。那天,北交所开盘后,我北京的朋友给我那台砖头大的大哥大通报了情况。我当时还未赶到交易所,听后第一反应是,一开盘我的仓位就全部完蛋。我本能的反应,迅速拨电话给交易所报单小姐,要求报单小姐立刻透支十倍以上的资金 “集合竞价”高位购买“327国债”多单。放下这个电话,奔跑中我疯狂拨打几个大户室做空当时国债“期友”的电话,让他们巨额透支做多“327国债”。与这些“期友”通过电话后,我的心情很不舒服,因为这些“期友”的普遍反应是麻木。而非本人听到北京“期友”通报后的一种亢奋。开盘刹那,我正好冲进交易室,电脑上显示的开盘价,立刻让我陷入了一种上“绞架”的感觉。当时,“327国债”开盘价是148元多一点。而我“集合竞价”抢购的价格是150元。并且第一价位抛空单高达几亿人民币。也就是2秒或3秒,“327国债”上的抛单被疯狂涌进的做多者消灭,“327国债”迅猛向151元、152元、153元价格上冲。这时我向下单小姐指挥,要求比电脑上显示价格高出许多平掉手上亏空严重的“317国债”空头合约。报单小姐立刻提醒这会带来“317国债”合约上更严重损失。我笑笑在更高价位平仓小盘子的“317国债”时,大盘子的“327国债”也被带动了十几点,我即刻平仓“327国债”上大量获利多单。上午快收盘时,已全部结清所有头寸。中午时分,我离开了交易所。后来“327国债”在下午交易时上演了一场闹剧。我离开交易所时心情很沉重。当时我所做的一切就是一种“交易动物”本能的反应。现实中许多人是没有“交易动物” 本能的。但这些人会本能反对“交易动物” 本能的人的想法。如同二战中法国军团在坦克、火炮、飞机、军队人数等几个方面都优于德国军团,但法国军队统帅是步兵军官出身。而在早1937年德国坦克之父——古德里安,就在其《注意!坦克》一书中批评步兵军官的思想体系愚昧。

两年内中国房价要跌去70%,也就是到2011年底。前几天,在北京举行了一场小型讲课。一位北京女士对我说,她于2009年11月底,看到本人写的《多角世界下的中国房价》一书立刻把自己居住的房子卖了,现在租房住。我对她说:“你两年后必定会谢谢我。”我很高兴这本书救了北京这位女士。因为日本经济很快会崩盘,而中国经济和日本经济一样会陷入同步崩盘。现在,有许多跨国公司资产在中国配置。如果中国和日本陷入同步崩盘时,这些跨国公司会发大财。假设,一个跨国公司在中国现有50亿美元价值房产。理论上,这家跨国公司很难在中国市场与日本市场同步不景气时变现资产。而实际上他却会主动以极低的价格,如10亿美元或5亿美元的价格抛售中国资产。届时,中国经济学家会说这家跨国公司疯了竟然破产抛售。所以,中国主流经济学家们只能是一群“全球化的笨蛋”。因为,这家跨国公司已在日元外汇或日本国债市场大规模布置了巨额空单。现在,全球外汇市场杠杆高达200倍或 400倍,只需10亿美元保证金,保守沽空日元或日本国债,仓位可高达1000亿美元。这家跨国公司只要通过低价抛售中国资产引发市场恐慌,而达到沽空日元或沽空日本国债上巨额仓位的盈利,这是一种危急中的套利交易的模式。这是一个“交易动物”的世界。今天全球衍生品市场是600万亿美元,而中国的经济规模只近5万亿美元,通过低价抛售中国房产,而盈利全球资本市场,美国时代这就可以开启了。

今天,任何批评美国帝国会陷入沉重债务危机,而会向以前的荷兰帝国和大英帝国一样衰落的中国经济学家们,都无法去解释,过去的荷兰帝国和大英帝国只是普通商品的贸易时代。任何一个工业人群,只要模仿和勤劳,都会让荷兰帝国和大英帝国衰落。而今天是创新与衍生品的世界,是一个脑力社会。是通过消灭近5万亿美元国家,而盈利600万亿美元的衍生品市场。所以,不幸的是,作为一个中国人,本人在2007年5、6月份提出的美国战略目标是——让中国股市2008年底崩盘到2000点;让中国楼市在2008年底疯狂上涨。站在全球600万亿美元衍生品市场的财富面前,现在中国楼市未来两年跌去70%,这是个常识。站在全球600万亿美元衍生品财富胜利者的面前,未来3年美元将创造全球有史以来,最壮观与最宏大,或许是无法用人类创作的词汇来形容的——上涨,再腾飞的上涨。

现在最大的问题是——这些是简单的常识。中国人却热衷辩论这些简单的常识。那只能是,上帝把衍生品基因移植给美国人;把苦力基因移植给中国人。在上帝的安排面前,未来还会很美,那只是美元的美。



刘军洛
2010-3-18

New China real estate policy targets SOEs

SOEs Exit Property Market
The spokesman of State-owned Assets Supervision and Administration Commission (SASAC) said at a press conference on March 18 that 78 SOEs, which are focused on industries outside of real estate, will exit the market gradually. The 78 heavy-weight companies will restructure to spin off their housing arm, after they have completed existing projects.

Interactive Map of Banks in Trouble

Mish has an interactive map of banks with solvency issues. I haven't had time to check it out much, but there's a lot to see. A cursory glance shows the Southeast is vulnerable.
Interactive Map of Worst Banks in the U.S. by Texas Ratio, Non-Performing Assets, and Total Capital

Reverse H&S on SPY? update

Here's the chart I posted on February 16.

SPY is about $116.95, or about 1% from the target. Once it hits that point, the pattern is complete. However, with the market at short-term overbought levels, perhaps that marks a short-term top.

German gov't wants the power to break up the banks

Schwarz-Gelb will Großbanken notfalls zerschlagen
Black-yellow want to destroy the big banks, if necessary
Black-yellow is the current ruling coalition government. The second link goes to a Google translation of the German article.

Long story short, the German government wants the ability to break up banks even against the will of shareholders. This would allow the government to break off the insolvent pieces of a bank. The more free-market oriented FDP want more of the cost of cost of failed banks to fall on the shareholders and creditors, rather than taxpayers.

Given that the Germans have basically said they are opposed to a bailout for Greece, it's important to remember this story:
Ackermann warns of a bankrupt state of Greece
Josef Ackermann, if necessary, calls for a rescue Greece. German banks had considerable billion under fire over the heavily indebted country, "said the CEO of Deutsche Bank, excluding those of his own institute, however. "If we do not get stabilized Greece, the banks have the next problem," Ackermann warned on Wednesday evening.
On the plus side, he does say that CDS are not the problem. As Liu Junluo points out, banning CDS would not be good for the markets.

2010-03-17

Stronger CDS Regulation will trigger a U.S. dollar rally and global recession - 刘军洛

Liu Junluo has another blog out, this time on CDS regulation. Long story short is that CDS did not in fact cause the collapse of Lehman Brothers. Although the CDS on Lehman debt exceeded the debt of Lehman, this was not the problem. In the case of Greece, the CDS on Greek debt is worth only about 2% of the outstanding debt. However, what CDS do allow for is a lower cost of financing. Should Europe succeed in tightening or even banning CDS when the G20 meets in June, it will send the cost of sovereign debt higher just after the Greeks sell $30 billion worth of bonds in May. This will trigger a crisis, sending the U.S. dollar higher and the world into another recession, a la 2008.

Here's my translation. There are a few spots I was unsure of and they may be updated in future. A Chinese friend critiqued some parts of the previous translated article, but I hadn't heard from them on this one yet. With that caveat:

Stronger CDS regulation will cause a U.S. dollar rally and send the world into another recession (2010-03-11 22:45:36)

Recently, the Greece sovereign debt crisis has once again made "credit default swaps" (CDS) the world's star. Financial innovation is a clear symbol of high efficiency, a robust legal system and social responsibility. A credit default swap is a credit insurance contract. Just as today we can see shipping insurance, fire insurance, life insurance, etc., are the same protectors of civilization.

Credit default swaps were developed by J.P. Morgan in 1995. An insurance contract will give society great efficiency, but also the possibility for huge property losses. Such as if the future is really facing a serious rise in temperatures, then a large number of coastal property insurance companies will go bankrupt. Modern life requires: motor vehicle insurance, medical insurance, travel insurance and so on. However, many people are unaware of these unusually distant "credit default swap" derivatives, when in fact it is important for everyone.

Today, Chinese, Japanese and Africans can do nothing about the next U.S. presidential election. However, "credit default swaps" now control the future and property of everyone on the planet. Going back to 2008, the Lehman Brothers bankruptcy cost AIG 1.2 trillion dollars due to "credit default swap" contracts on Lehman Brothers subprime debt. By the end of 2007 Lehman Brothers "credit default swap" spreads on the firm's bonds were less than 100, but by October 2008 they reached 7000. Bad luck for AIG, which had sold the CDS on Lehman Brothers. When Lehman Brothers was alive, the size of its debt was 150 billion U.S. dollars. However, "credit default swap" contracts on Lehman Brothers debt reached as high as 400 billion U.S. dollars.

Now everybody who can see this will generally believe that these financial crazies are a group of pests. But these world famous vermin were the supporters of the global economy from 2001 to 2007. If there was no AIG to sell CDS on Lehman Brothers debt, the interest rates on subprime debt would have been extremely high and the pressure from the 2000 technology bubble would have been much greater. It's like popularizing aviation insurance, while promoting the development of the world's aviation industry. Now that the global aviation industry is mired in excess capacity and debt, we should not blame aviation insurance. U.S. subprime debt was an important financial innovation that successfully drove the 2001 - 2007 economy out of a downturn. American subprime debt promoted a huge wave of American consumer debt.

Now the question is if the world noticed that from 2001 to 2007 the world's two major surplus countries, Germany and China, had a non-stop decline in consumption relative to GDP. Therefore, at last the Americans can consume no more. Even more importantly, in the first half of 2007 the U.S. sub-prime market problems appeared, and in the second half of 2007 China's central bank and the European central bank undertook what they believed was the correct anti-inflationary policy.

The promotion of aviation insurance saves significant operating costs for the global aviation industry. Today the $60 trillion global "credit default swap" market saves the world's sovereign debt 300 billion to 500 billion dollars annually in interest costs. In early 2009, dear Mr. Bernanke bought $1.3 trillion worth of U.S. bonds as part of the quantitative easing policy, and ensured that the world's sovereign debt also increased by more than $12 trillion. Now perceptive people should be well aware that the global "credit default swap" market should be further scaled up quickly to provide a relaxed environment for the financing of sovereign debt in 2010 - 2011.

Unfortunately, Greece's economy has seen debt costs rise due to their problem with CDS. Greek bonds total $400 billion, while the outstanding Greek CDS total only $9 billion U.S. dollars. Therefore, only a small number of hedge fund funds can push up Greek CDS spreads, increasing the debt problems of Greece and then short the euro. Then someone might ask, wasn't an important factor in the Lehman Brothers bankruptcy the fact that Lehman Brothers CDS market grew too large? But consider the trend in China's stock market from October 2007 to October 2008, rarely has such a large decline been seen in world history. Therefore, the real killer of Lehman Brothers was the Chinese stock market.

Europe and Greece are keen to ban "naked buying" of sovereign CDS contracts. For today's global debt holders, this will be the disaster of the Century because the rising cost of risk in the global bond market will trigger a crash. A more serious problem is that in 2009, China's consumption as a percent of GDP hit a new low since the reform and opening up period, while in 2009 the Japanese economy in 2009 had the largest decrease in GDP since World War II and the average income also had the largest drop since World War II.

In May 2010, Greece will face nearly $30 billion of debt financing. And in June 2010 at the G20 meeting, EU and Greek officials hope to strengthen oversight of financial derivatives. In a couple of months we'll be in May and June, and if the U.S. dollar strongly appreciates, many people in the world will jump from tall buildings.


Liu Jun Luo
March 11, 2010

Here's the original and the link to the original, my English translation will be up soon.
加强CDS监管将让美元强烈上涨与世界进入再衰退
近日,希腊地区的主权债券问题,再次让“信用违约掉期”(CDS)这个金融衍生品成为世界明星。金融创新是一个社会高度效率、法律体系健全、社会责任明确的重要象征。“信用违约掉期”事实是一份金融资产信用保险合同。就像现在大家见到的船运保险、火灾保险、人寿保险等等一样,对社会文明体系是一种神圣的保护者。“信用违约掉期”是由摩根大通于1995年开发出来。一份保险合同会给社会带来巨大的效率,但也有可能为社会带了巨大的财产损失。诸如,未来世界真的面临气温严重上升,那大量沿海的城市资产保险公司会大量破产。现代人类的生活已完全离不开:汽车保单、医疗保单、旅行保单等等。 但离全球许多人意识非常遥远的“信用违约掉期”衍生品,事实是对于全球每个地区的所有人是至关重要的。

今天中国人、日本人、非洲人,都可以事不关己地关注下届美国大选的情况。然而“信用违约掉期”这个金融合同却已经是现在掌握着地球上每一个人的未来和财产。追溯到2008年,美国雷曼兄弟因次级债问题倒闭,而大量接受雷曼兄弟债券“信用违约掉期”合约AIG的1.2万亿美元牺牲了。2007年底雷曼兄弟债券“信用违约掉期”利差是100不到,到2008年10月是上升到7000,卖出雷曼兄弟债券“信用违约掉期”的AIG就这样倒霉的死了。雷曼兄弟活着的时候,其发行的债券规模是1500亿美元。而雷曼兄弟债券“信用违约掉期”合约后来是高达4000亿美元。现在大家看到这里普遍会认为,这些金融疯子什么都没干,是一群害虫。但正是这群世界意识的害虫却是全球经济在2001年——2007年的主要推动者。如果没有AIG为雷曼出售“信用违约掉期”保险,那雷曼兄弟向世界发售的次级债收益率就会非常高,那世界经济承受2000年网络泡沫破灭的压力就会非常大。就像航空保险大量推广,而推动了世界航空业的发展。现在世界航空业陷入全面过剩与债台高筑,那我们不应该去指责航空保险吧。美国次级债是推动2001年——2007年世界经济成功步出衰退的重要金融创新。美国次级债推动了美国巨大的欠债消费浪潮。现在问题是,如果全球能注意到2001年~2007年全球两个重要盈余国——德国和中国,在这段时期内不停下降的占GDP规模的消费数据的话。所以,美国人最后消费不起了。更重要的是,2007年上半年美国次级债市场出现问题时,2007年下半年中国央行与欧洲央行是在拼命进行这他们自以为非常正确的国内反通货膨胀政策。

航空业保险的推广,为全球航空业节约了重要的营运成本。而今天规模在60万亿美元以上的全球“信用违约掉期”市场,也为全球主权债务们每年节约了3千亿~5千亿美元成本。2009年初美国中央银行亲爱的伯南克先生的1万3千亿美元购买美国债券的量化货币政策,保障了全球主权债务们在2009年也增加了12万亿美元以上。现在敏感的人,应该非常明白,全球“信用违约掉期”市场应该迅速更进一步放大规模为2010年——2011年全球主权债务国家融资提供宽松环境。不幸的是,近期希腊经济因为CDS的问题而引发债务成本进一步上升。希腊国债市场规模4000亿美元,而希腊“信用违约掉期”市场才90亿美元。所以,对冲基金只要少量投入资金就可以炒高希腊“信用违约掉期”利差,而引发希腊债务问题,达到沽空欧元套利的模式。那有人会问,雷曼兄弟倒闭的重要因素不是雷曼“信用违约掉期”保险本金市场过大吗?但请打开中国股市2007年10月——2008年10月的走势图,全球历史都少见的大暴跌。所以,雷曼兄弟的真正杀手是中国股市。政客们都是利益平衡的高级动物。所以,欧洲与希腊是极力希望禁止“裸买”主权“信用违约掉期”合同。这对今天的全球债权持有人来说,将是一场世纪灾难。因为全球市场债券会为风险成本的上升而引发暴跌。更严重的问题是,2009年中国消费占GDP规模创改革开放以来新低,而日本经济2009年创二战以来GDP下跌幅度历史记录包括日本平均收入也创二战以来最大下降幅度。2010年5月,希腊将面对近300亿美元债务融资。而2010年6月,欧盟与希腊官员希望在届时的G20会议,加强金融衍生的监管,再过两个月就将进入2010年5月和6月,美元如果届时出现强劲上升,那世界许多人就要去跳楼了。


刘军洛
2010年3月11日

Yuan revaluation: not if, but when and how

I thought China would be taking much longer to revalue the currency, and they may still take longer than most foreign observers expect. However, as has been apparent from growing at cross border settlements in yuan, the Chinese are serious about reforming the currency.
China Leans Toward Yuan Float
Some economists say that, from a purely market-oriented perspective, there is actually no way to gauge whether the yuan should appreciate or depreciate. They recommend a fixed policy, rather than blind action, when facing uncertainty. If exchange rate reforms raise expectations for further increases in the yuan's value, the flow of hot money into China will drastically increase, they say, creating a liquidity overflow and possibly an asset bubble, and reenact the scene after exchange rate reforms in 2005.

Nonetheless, some argue exchange rate reforms should be implemented sooner rather than later. In spite of international pressure, and even though further exchange rate reforms again point to an appreciation of the yuan, there are still inherent advantages to reform.
The biggest, as Andy Xie pointed out, is the political benefit in terms of international relations.
Ha recommends letting the yuan appreciate based on a basket of currencies. A similar view is also shared by Ding Zhijie, dean of the School of Banking and Finance at the University of International Business and Economics, who has called for the "de-dollarization" of the yuan.

Ding recommends assigning currency weights based on the proportion of export-import trade volume on a monetary basis from each country represented in the basket to China's total trade volume. The basket should include 18 currencies, he said, with the euro weighted at 17.91 percent, U.S. dollar at 14.68 percent and other currencies making up 56.15 percent of the weighted volume. "This is very important for promoting stable trade," he said.

The source close to the central bank said authorities should determine the weighted proportion for the basket of currencies by first considering the proportion that the currency holds in regard to trade settlements. Currently, more than 70 percent of China's cross-border trade settlements are in U.S. dollars, while the remaining 30 percent use other currencies such as the euro and pound. Second, most of China's US$ 400 billion in foreign debt is in U.S. dollars and "borrowing money to repay money" would require holding a certain amount of dollars. Market fluctuations also would require corresponding adjustments.

Opinions vary over whether individual currencies and their respective weights in a basket should be disclosed. Lu and Huang advocate copying Singapore's exchange rate system because authorities do not disclose currencies or their weights, and yet the system allows adjustments of individual weights based on conditions.

One-off revaluation bad for China—Ha Jiming

China and Japan: A Comparison that Falls Flat
China's situation is much different. China has flexibility in its exchange rate policy and has never promised western countries that it would let the yuan drastically appreciate. As a result, we can effectively adopt a "cocktail therapy" policy for China's yuan exchange rate. So as the yuan gradually appreciates in small increments, interest rates also will be correspondingly increased. China's current low interest rates give the central bank sufficient room to do this.

A one-off, sharp appreciation of the yuan would harm the real economy and put the country on the same path that Japan once walked. Moreover, any substantial appreciation of the yuan without a corresponding rise in interest rates would cause a significant amount of hot money to flow into the country.

Matching a rise in interest rates with an appreciating yuan would achieve more comprehensive policy results. An appreciation of the yuan would inevitably be beneficial to the stock market, especially real estate and aviation stocks. Higher interest rates at this point would to a certain extent cool any overheating in the stock and real estate markets, and prevent an asset bubble.

This kind of policy action also would be beneficial for popping the bubble in international commodity prices. China's tight monetary policy started a domino effect in global markets. Each time this year that China's central authorities raised the required reserve ratio for banks, international prices for major commodities such as oil and copper immediately fell to varying degrees.
While he's right that China's tight monetary policy caused the markets to crash, the chart of oil and RMB appreciation suggests that it was the appreciation that may have triggered the blow-off stage of the bubble to begin with.


Another article on yuan revaluation ends with these two paragraphs:
Cost-Sharing for Appreciation of the Yuan
Also worth considering are the after-effects of 2005 exchange rate reform. Some think small fluctuations and mechanisms that accompanied that appreciation trend initiated market expectations of a consistent appreciation of the yuan, leading to a large inflow of speculative capital.

"Implementing policies to prevent an asset price bubble when the yuan appreciates is beneficial for realizing a shift in the mode of economic development and controlling inflation," said Ha Jiming, Chief Economist at China International Capital Corp. Ltd. "Just as these policies can prevent an asset price bubble from forming, they can also avoid attracting more hot money."
Which is exactly the argument I made earlier today: If the renminbi goes up, then what happens?

If the renminbi goes up, then what happens?

I believe a yuan revaluation will be inflationary. Or more accurately, a yuan revaluation will unmask the inflation that has already occurred in the money supply, but has not yet translated into higher prices.

Hong Kong dollars are pegged to U.S. dollars, and ADRs trade in U.S. dollars, so the direct impact on Chinese stocks would be negligible. However, earnings would increase in U.S. dollar terms, which would be bullish for foreign investors. Therefore, I see a gradual revaluation as very bullish for Chinese stocks because investors will have time to buy into these assets. In a financial sense, gradual revaluation is a bad idea.

If the revaluation is one-off, it will be good for stocks and cause a larger initial move, but will in the end be a smaller move. A gradual revaluation would result in a larger move because investors would not know how high the renminbi will climb and therefore would likely overestimate its gains, while at the same time creating a trend that lasts for months and draws in far more investors.

That's not to say a one-off revaluation won't generate new trends, only that they will be more complex in nature relative to a gradual climb in the renminbi, and less prone to develop into a bubble in the near future.

Also, please check out Michael Pettis' latest post on the topic. This is a great piece that covers all the major questions, and if you are an average consumer of financial news then I say with certainty that you will not find a more informed article. How will an RMB revaluation affect China, the US, and the world?

Anti-foreign sentiments & protectionism rising

This rise in protectionism is part of the declining social mood. During the boom, people are more outgoing and adventurous and open to foreign things (and foreigners). In the bust, they become less so, and politicians take advantage of the situation, especially in democracies where pandering to voters is the norm (which is to say, almost all of them). Here's how the Chinese are increasing their aversion to foreigners:
Business Sours on China
China's relationship with foreign companies is starting to sour, as tougher government policies and intensifying domestic competition combine to make one of the world's most important markets less friendly to multinationals.

Interviews with executives, lawyers, and consultants with long experience in China point to developments they say are making it much harder for many foreign companies to succeed. They say the changes suggest Beijing is reassessing China's long-standing emphasis on opening its economy to foreign business—epitomized by the changes it made to join the World Trade Organization in 2001—and tilting toward promoting dominant state companies.

In the latest broadside against foreign firms, authorities in a wealthy province near Shanghai on Tuesday assailed the quality of luxury clothing brands from the West, including Hermès, Hugo Boss, Tommy Hilfiger, Versace and Dolce & Gabbana.

...Many foreign executives say they see an upsurge in economic nationalism, accelerated by China's world-beating performance during the recession and a new disdain for Western economic management.

...Beijing has long harbored suspicions the West wants to hobble its economic rise. Analysts say that lately, such insecurities have strengthened the hand of leaders who want to limit foreign presence in the economy.

While there are still proponents of openness, says Mr. Ross of WilmerHale, "there are louder voices pushing China to be more protectionist and to be more nationalist."
And we see the same anti-foreign sentiment in America, where the Democrats are bashing China over the currency once again. It's not all economics though. Last week, the Obama administration publicly slammed long-time U.S. ally Israel as part of a manufactured crisis.

2010-03-15

Liu Junluo: Historic Testimony of "Chinese Housing Prices in This Multi-polar World"

Here's an English translation of Liu Junluo's most recent blog. He has some unorthodox opinions which differ from both Chinese and U.S. mainstream opinion. He expects the U.S. dollar will rally strongly this year, among other things. Perhaps his most interesting opinion is that the U.S. is on the verge of a new renaissance, and that its policies are far more calculated than even bullish Americans would think. Also, he seems to allude that his economic warnings resulted in an incident with the police over an animal shelter for stray cats that he runs with his wife.

The reference to Ah Q can be explained in this wikipedia entry. It's a harsh way of saying someone is self-delusional.

I haven't done translation since college. I tried to stay as close to his words as possible, but in some places I translated the ideas. Any errors in translation are my own and I welcome any corrections.

Historic Testimony of "Chinese Housing Prices in This Multi-polar World"
by Liu Junluo
2010-03-09

China's economic commentators say that "The Lehman Brothers bankruptcy is a manifestation of the decline of the American era. "This "stupid" way of thinking is a standard answer from Lu Xun "Ah Q" philosophy which is an element of Chinese culture. Today, the size of U.S. debt is nearly 400% of GDP, the highest in U.S. history.

Before the outbreak of America's Great Depression in the last century, the U.S. debt reached 375% of GDP. These two different periods of U.S. debt to GDP ratios have no significant difference. Yet technical progress, social and legal systems and cultural inclusiveness makes the United States much much stronger today than in 1930. So should Americans not be afraid of the debt? The answer is yes.

Therefore, for former Federal Reserve Chairman Alan Greenspan and current Federal Reserve Chairman Ben Bernanke, correcting the massive U.S. trade deficit and the huge U.S. current account deficit has never been their objective. Even in Mr. Bernanke's testimony before the U.S. Congress, he clearly expressed that he does not want an adjustment to the United States' large current account deficit. Therefore, the objective of U.S. monetary policy is clear. That first and foremost macro economic interest of the United States is the cost of borrowing. Lehman Brothers bankruptcy caused all the world's major central bank interest rates to hit historic lows. Today, the U.S. national debt interest expense to GDP ratio is historically low. As far as the deeply indebted U.S. is concerned, this is not a gift given by Lehman Brothers, this is another God-given new era in the United States, including the return of American wealth.

Are Americans stupid? Are they crazy to borrow from the world? In particular, Chinese are America's biggest creditors. Since 1970, the United States embarked on an ambitious transformation, America's "de-industrialization." The American's goal is clear—all the labor-intensive industries need to completely disappear. Today, Americans can proudly announce that, let the Chinese, Koreans, Indians and Vietnamese compete in textiles, iron and steel, shipbuilding; let the Japanese and the Germans fiercely compete in the automotive industry, mechanical industry and chemical industry.

Meanwhile, the Americans have Microsoft, Google, Apple, Wal-Mart, Yale and Hollywood. The cost of this first big industrialized country's successful "de-industrialization" is about $3 trillion in foreign debt, or about 20% of the U.S. economy. Americans spent a full 40 years experiencing a large amount of industrial sector unemployment and family bankruptcies, and established an "Age of American Renewal" which features the control the global industries through their pioneering in the knowledge industry.

The "Age of American Renewal" is near, and they should thank the Japanese, Germans, the ASEAN people and Korean people for a lot of cheap goods and cheap financing. The funny thing is to ask the stupid "Chinese economists" who have the spirit of "Ah Q", to answer why China holds more than 2 trillion U.S. dollars in foreign exchange reserves. And these more than 2 trillion U.S. dollars foreign exchange reserves are according to 1950s accounting rules. If we have lots of courage to take the U.S. multinational corporations profits from global sales, including the monopoly profits from U.S. technological processes, add into the calculation the U.S. government debt and China's official foreign exchange reserves...then even the real "Ah Qs" will know, we are dumping our resources in the same manner as the Great Leap Forward.

Human history is entering a period of population overload. India's per capita arable land area is three times that of China, and the Indian climate is much better than that in China. China's industrialization and urbanization means that Chinese people's children and grandchildren will rely on American soybeans for survival.

In 2007, China's stock market was around 4 to 5 thousand points, I was saying that America's strategic objective in 2008 was for China's stock market to plummet to 2 thousand points, while the Chinese property market enters a frenzied wave of appreciation. Any rational person saw China's skyrocketing property market throughout 2009.

This is the collective action of Chinese savings hedging the risk of inflation. This is the inevitable consequence China's lack of public goods, such as the lack of free medical care, lack of free education, the inevitable result of low wages as well as an agricultural system controlled by the government. Because wages are too low, Chinese have strong desire to own their own home, rather than bear the burden of rent. In 2009, China's property market is just the product of pension savings and the desire to exchange their low wages. In "Chinese Housing Prices in This Multi-polar World", I explained how the United States uses U.S. resources to control China's monetary policy, to achieve U.S. strategic goals, for China's entry into the final state of collapse—when a large number of Chinese pension savings are tied up in Chinese real estate.

Not long after I published "Chinese Housing Prices in This Multi-polar World" on November 5, 2009, that same year in December, a Wall Street hedge fund manager [Chanos] said that China's housing bubble was 1000 times Dubai; and recently "Euro killer" Soros began predicting that China's property market will collapse in 2010. Also, in "Chinese Housing Prices in This Multi-polar World", published November 5, 2009, the ending says the America's 2010 strategic goal is a rapid appreciation of the U.S. dollar and a collapse in the Chinese property market. Why is a U.S. hedge fund manager and "Euro killer" Soros's thinking so consistent with the author's?

This is a question of perspective; if you try to see America's strategic interests in China's monetary policy, then the answer is very clear. So, that is why the U.S. central bank's monetary policy never had correcting the massive U.S. trade deficit and the huge U.S. current account deficit as its goal. Around May 2008, the author was intensely calling on China to prevent the United States' strategic goal in 2008- a Chinese stock market crash in 2008, and then a skyrocketing Chinese property market.

A large group of Shanghai police and a large group of city officials rushed to my wife and mother who adopted stray cats, injuring them, and my 70 year old mother cannot help but get hit, at the scene she had two broken ribs. I reported the incident to the authorities, but was ignored. Later, I complained to the Shanghai police inspector and was told I had insufficient evidence. At that time I was in Shanghai, I wrote on the big police inspector's board-black is white, history will show many of today's wrongs.

The future of human society is an intellectual society, water resources and agricultural society, excellent medical society, environmental and multi-cultural society, these and all of us, and our children and grandchildren, are not relevant.

China's mainstream economists are the useless product of China dumping its resources. Chinese home prices and the Chinese economy are entering a major collapse to last more than two decades, along with a turbulent period of social upheaval. This is America's only strategy in 2010.

The emergence of "Euro killer" George Soros should remind people that he was the instigator of the 1997 Asian Crisis. China's real economic problems will come from Vietnam's economy, India's economy, including the most terrible impact of the collapse of the Japanese economy. In this regard, China's mainstream "Ah Q" economists are just self-deceiving idiots. A group of people deceived by "Ah Qs" have bad luck; a nation deceived by "Ah Qs" in a globalized economy is a nation that will go extinct, a nation that will be in last place.

I'm very pleased to publish this book on November 5, 2009. This book will be as I wrote to the Shanghai police inspector "history will bear witness to much of today." And this book will inevitably become a powerful testimony of why China's housing market China's economy suddenly collapsed.

Thank you,

Liu Jun Luo

March 9


《多角世界下的中国房价》的历史见证
(2010-03-09 21:19:40)


中国的经济评论家们说“美国雷曼兄弟倒闭,是美国时代衰落的体现。”这种“笨蛋”的想法是中国文化元素中,鲁迅“阿Q”哲学的标准答案。今天美国债务规模高达GDP近400%,创美国历史记录。而上世纪美国大萧条暴发前,当时美国债务规模高达GDP375%。这两个不同时期的美国债务,以GDP标准衡量相差并不大。而以技术进步、社会法律体系、文化包容性来评判,今天的美国远比1930年那时强大许多许多。那么美国人应该是不害怕负债吗?答案是肯定的。所以美联储前任主席格林斯潘先生与现任美联储主席伯南克先生的货币政策从来不以纠正美国巨额贸易赤字和美国巨额经常账户赤字为目标。甚至,伯南克先生在美国国会作证时,明确表达不希望美国巨额经常账户赤字出现调整。既然,美国的货币政策目标是如此明确。那美国的宏观利益首先是——借贷成本。而美国雷曼兄弟的倒闭是把全球主要央行利率全部打到历史低位。今天,美国债务的利息成本用GDP标准衡量是有史以来最低的。对一个巨额债务国家美国来说,这不是雷曼兄弟赋予的,这是上帝赋予美国的又一个新时代,包括美国财富的再来临。

美国人是笨蛋吗?一个笨蛋会发疯地向世界举债吗?尤其是,今天中国人是美国的最大债主。至1970年以来,美国踏上了艰辛宏大的蜕变旅程,这就是美国的“去工业化进程”。美国人的目标非常明确——所有劳动密集型产业必须在美国彻底消失。今天美国人可以骄傲地宣布,让中国人、韩国人、印度人、越南人在纺织品、钢铁业、造船业去充分竞争吧;让日本人、德国人在汽车业、机械业、化学业去“充分”竞争吧。而美国人有微软、谷歌、苹果、沃尔玛、耶鲁、和好莱坞。美国人成功转移这场全球第一个大型工业国家“去工业化”进程的成本,大约是外债近3万亿美元,占美国经济规模的20%左右。美国人用整整40年时间,历经大量产业工人的失业与家庭破产,建立了以大脑控制全球产业的“美国再生时代”。“美国再生时代”的来临,要感谢日本人、德国人、东盟人、韩国人大量的廉价商品与廉价资金供应。更好笑的是,请“中国经济学家们”这帮笨蛋“阿Q”解答,中国今天毕竟有2万多亿美元外汇储备。而这2万多亿美元外汇储备,却是参照1950年世界经济的核算规则。如果我们现在有大量勇气,去把美国跨国公司们在全球各地的销售利润,包括全球各行各业的美国技术垄断利润计算进美国官方债务与中国官方外汇储备,那真正的“阿Q”都知道,我们是贱卖中国资源式的大跃进。

人类历史正在进入人口超负荷时期。印度人均耕地面积是中国的3倍,而且印度气候条件远好于中国。中国的工业化与城镇化让中国人未来的子子孙孙们只能靠美国大豆生存。2007年,中国股市4~5千点时,本人是谈——2008年美国的战略目标是,中国股市2008年底暴跌到2千点,而中国楼市将步入疯狂的上升浪。任何有理性的人都见到了2009年整整一年中国楼市的疯狂上涨。这是一场中国储蓄资金大规模对冲通胀风险的集体性行动。这是中国公共产品失缺,诸如缺少免费医疗、缺少免费教育、工资过低的必然产物以及农业体系被他国控制的必然后果。因为,工资过低,所以租金负担必然有强烈转化家庭住房产品的预期。2009年,中国楼市只是一场养老的钱与强烈转化工资过低的心理社会的大产物。而在《多角世界下的中国房价》中,详解了美国如何利用美国手中资源调控中国货币政策,达成美国战略目标,达到中国进入崩盘的最后条件——中国大量养老储蓄配置中国房产。

2009年11月5 日出版的《多角世界下的中国房价》出版不久,同年12月份,美国华尔街对冲基金巨头抛出——中国房价泡沫远比迪拜1000倍严重;而近期“欧元杀手”索罗斯也开始预言——中国楼市2010年崩盘。而2009年11月5 日出版的《多角世界下的中国房价》这本书结尾就是“美国2010年美国战略目标——2010年美元暴涨,2010年中国楼市崩盘”。那为什么美国对冲基金老板与“欧元杀手”索罗斯的思维会与笔者如此一致呢?那是因为视角的问题,您如果能尝试从美国战略利益来配置中国货币政策,那答案就会非常明确。所以,这就是为什么美国中央银行货币政策从来不以纠正美国巨额贸易赤字和美国巨额经常账户赤字为目标。2008年5月份,笔者正努力在中国呼吁一定要防止美国2008年战略目标——2008年中国股市崩盘,而中国楼市将会进入疯狂主升浪的美国战略时刻。一大群上海警察与一大群城管大爷们冲到夫人与母亲收养流浪猫的暂借地,打伤夫人与母亲,母亲70高龄不禁打,当场打断两根肋骨,笔者报案,无人理会。后来向上海警察督察大人们投诉,被告知笔者证据不足。当时笔者在上海警察督察大人们的通知单上写到——颠倒黑白,历史会见证下今天许多许多。未来人类社会是脑力社会、水资源与农业社会、优秀医疗社会、优良环境与多元文化社会,这些与我们所有人包括我们的子孙是无关的。中国主流经济学家们是中国贱卖中国资源时代的垃圾产物。中国房价和中国经济正在进入一场二十年以上的大崩溃时期与中国社会大动荡时期。这是美国2010年的唯一战略。今天“欧元杀手”索罗斯的出现,让人更应该想起这位曾经也是1997年亚洲金融危机的煽动者。未来中国真正的问题是来自越南经济、印度经济,包括最可怕的日本经济崩盘的冲击。对此,中国“阿Q们”的主流经济学家们,这群草包们,只会自欺欺人。一群人被“阿Q们”骗是一群人倒霉;一个民族被“阿Q们”骗,在全球化中是一个民族的灭亡,而成为全球化的下等人。非常高兴2009年11月5 日出版的《多角世界下的中国房价》这本书。这本书将像笔者写给上海警察督察大人们的一句话——历史会见证下今天许多许多。而《多角世界下的中国房价》这本书在未来必将成为中国房价和中国经济为什么会突然崩盘的一部有力的见证史。
多谢2010年 3月9日
刘军洛

Link to original
《多角世界下的中国房价》的历史见证

Latest Andy Xie: The Japanese Disease

Why are healthcare costs rising? Society is aging and needs more healthcare. The difference between this industry and others in the past is that the government is responsible for much of the healthcare for the retired. In the past, limited resources would limit the growth of the industry. With government backing, however, there has been no limit on healthcare spending...
When a society ages, its resource allocation increasingly favors the old. Healthcare costs, for example, rise exponentially. Broadly, an old population is unwilling to take risks, which makes social or economic change difficult. Underlying forces in an aging society favor unproductive expenditures and less competition.
Rising social burdens in an aging society obviously fall on the working population, i.e. the tax burden on the working rises over time. The diminishing reward for work decreases labor supply, as workers choose more leisure. A vicious cycle in labor incentives is quite possible.

The changes in an aging society are far greater than what the arithmetic of the so-called dependency ratio – the ratio of non-working to working citizens – suggests. A society changes in many ways to become more conservative, less hard-working, and less innovative. The society ages.

But Japan's problems will spread to other major economies. Major European economies, for example, are not far behind Japan. Unemployment and retirement benefits are more generous there, so the loss of economic vitality comes more quickly.

Rising national debts in developed economies are driven by aging. The benefits they promised during the high growth period cannot be supported by government revenues anymore. They resort to borrowing to keep promises. Japan's national debt at about 200 percent of GDP is the highest in the world. Other developed economies seem to be on the way there. The average fiscal deficit in Europe is 6 percent of GDP. Britain's is 12 percent, and America's is 10 percent. While most analysts blame oversized deficits on the recession, they could last for many years to come. Japan's deficit in the 1990s was viewed similarly. With such high deficits, it won't take long for them to catch up with Japan.

2010-03-13

The Decade Past

It’s Déjà Voodoo Economics... All Over Again
It was the Lehman Brothers bankruptcy on Sept. 15th that set everything in motion. Most market participants will remember that date - Bank of America bought Merrill Lynch the very same day, so it was certainly memorable. What many people fail to appreciate, however, is the mayhem that took place during the following days in the US money markets. The day after Lehman’s collapse, the Reserve Fund, one of the oldest and most high profile US money market funds, began to hemorrhage money as investors redeemed in panic. Large institutional investors soon began pulling money out of other major US money market funds fearing heavy losses from Lehman Brothers debt. Almost $173 billion was pulled from such funds over the next two days, threatening to collapse the entire US financial system.6 Two weeks later, on Sept. 29th, investors sent the Dow Jones plummeting 778 points, representing the largest single-day loss in the history of the index. In hindsight, it was somewhat of a delayed response, because the real damage had by then been averted by the Treasury’s blanket guarantees on all money market funds.

The fact remains that on Thursday, September 18th, the US financial system almost completely collapsed. The details of that day remain frustratingly murky. The imminence of complete disorder seemed to scare Congress into action, but we can only piece the story together through random anecdotes that have been partially revealed through subsequent interviews. In what has been dubbed ‘the Kanjorski meme’, Congressman Paul Kanjorski recounts a meeting that was held between Ben Bernanke, Henry Paulson and certain members of Congress where the conception of the "Troubled Asset Relief Program" (TARP) supposedly took place. To stem the flow of money out of US-based money market funds, Paulson had to provide an almost instant guarantee on all money market funds held within the US. Kanjorski recounts, "If they had not done that, their estimation was that by 2pm that afternoon (September 18th), $5.5 trillion would have been drawn out of the money market system of the United States, [which] would have collapsed the entire economy of the United States, and within 24 hours the world economy would have collapsed. We talked at that time about what would happen if that happened. It would have been the end of our economic system and our political system as we know it."7 Further details of these meetings have been provided by Senator James Inhofe, who recounted that Paulson had warned of martial law and civil unrest if the TARP bill failed.8 It is interesting to note that while Henry Paulson mentions several meetings that took place on September 19th in his book, the discussion of ‘imminent financial collapse’ and ‘martial law’ was noticeably absent.

The official record of the events of September 18th, 2008 comes from a research report issued by the Joint Economic Committee. The reports states, "On Thursday September 18, 2008, institutional money managers sought to redeem another $500 billion, but Secretary Paulson intervened directly with these managers to dissuade them from demanding redemptions. Nevertheless, investors still redeemed another $105 billion. If the federal government were not to act decisively to check this incipient panic, the results for the entire U.S. economy would be disastrous."9 Between the official record and the statements by members of congress and the senate, we can piece together an almost system-wide collapse that was potentially hours away.
It’s Déjà Voodoo Economics... All Over Again

Read the whole thing. The problems of the last decade are being repeated again, only this time larger and with an underlying economy that is weaker.

2010-03-12

1970s all over again

One similarity between the 70s and today is the weak American presidency. Obama is even weaker than Jimmy Carter, if that's possible. During Carter's reign, the Soviet Union invaded Afghanistan and many questioned whether it would be the Soviet Union that would win the Cold War. Concern about U.S. currency sent gold to $850 an ounce, an inflation adjusted level it has yet to reach again.

Obama's political failures are many, including the Copenhagen climate agreement. However, the place it is perhaps most evident is in the rhetoric. Consider this from the People's Bank of China Vice Governor Su Ning: "We always refuse to politicize the yuan exchange rate issue, and we never think that one country should ask another country for help in solving its own problems."

2010-03-09

America's Epic Fail

These two articles were stacked one on top of the other.

How many people drew the connection between the two?

Neither individuals nor governments have saved for retirement. The solution is greater risk taking (commodities, junk bonds, riskier stocks, etc.) and unreasonable expectations about market returns. This means that they are unlikely to save enough due to assuming large future gains (notably those gains are only possible if there's a large amount of savings to fund an economic expansion...) and they are likely taking risks that will actually cause them to underperform the real expected return.

Instead of saving more and aiming for a more conservative return, they will stretch and suffer losses. And that's assuming things work out, what happens if stock markets tumble or inflation destroys fixed income portfolios?

2010-03-05

Seth Klarman's 20 Lessons from the Financial Crisis

Plus ten false lessons:

Twenty Investment Lessons of 2008

1. Things that have never happened before are bound to occur with some regularity. You must always be prepared for the unexpected, including sudden, sharp downward swings in markets and the economy. Whatever adverse scenario you can contemplate, reality can be far worse.

2. When excesses such as lax lending standards become widespread and persist for some time, people are lulled into a false sense of security, creating an even more dangerous situation. In some cases, excesses migrate beyond regional or national borders, raising the ante for investors and governments. These excesses will eventually end, triggering a crisis at least in proportion to the degree of the excesses. Correlations between asset classes may be surprisingly high when leverage rapidly unwinds.

3. Nowhere does it say that investors should strive to make every last dollar of potential profit; consideration of risk must never take a backseat to return. Conservative positioning entering a crisis is crucial: it enables one to maintain long-term oriented, clear thinking, and to focus on new opportunities while others are distracted or even forced to sell. Portfolio hedges must be in place before a crisis hits. One cannot reliably or affordably increase or replace hedges that are rolling off during a financial crisis.

4. Risk is not inherent in an investment; it is always relative to the price paid. Uncertainty is not the same as risk. Indeed, when great uncertainty – such as in the fall of 2008 – drives securities prices to especially low levels, they often become less risky investments.

5. Do not trust financial market risk models. Reality is always too complex to be accurately modeled. Attention to risk must be a 24/7/365 obsession, with people – not computers – assessing and reassessing the risk environment in real time. Despite the predilection of some analysts to model the financial markets using sophisticated mathematics, the markets are governed by behavioral science, not physical science.

6. Do not accept principal risk while investing short-term cash: the greedy effort to earn a few extra basis points of yield inevitably leads to the incurrence of greater risk, which increases the likelihood of losses and severe illiquidity at precisely the moment when cash is needed to cover expenses, to meet commitments, or to make compelling long-term investments.

7. The latest trade of a security creates a dangerous illusion that its market price approximates its true value. This mirage is especially dangerous during periods of market exuberance. The concept of “private market value” as an anchor to the proper valuation of a business can also be greatly skewed during ebullient times and should always be considered with a healthy degree of skepticism.

8. A broad and flexible investment approach is essential during a crisis. Opportunities can be vast, ephemeral, and dispersed through various sectors and markets. Rigid silos can be an enormous disadvantage at such times.

9. You must buy on the way down. There is far more volume on the way down than on the way back up, and far less competition among buyers. It is almost always better to be too early than too late, but you must be prepared for price markdowns on what you buy.

10. Financial innovation can be highly dangerous, though almost no one will tell you this. New financial products are typically created for sunny days and are almost never stress-tested for stormy weather. Securitization is an area that almost perfectly fits this description; markets for securitized assets such as subprime mortgages completely collapsed in 2008 and have not fully recovered. Ironically, the government is eager to restore the securitization markets back to their pre-collapse stature.

11. Ratings agencies are highly conflicted, unimaginative dupes. They are blissfully unaware of adverse selection and moral hazard. Investors should never trust them.

12. Be sure that you are well compensated for illiquidity – especially illiquidity without control – because it can create particularly high opportunity costs.

13. At equal returns, public investments are generally superior to private investments not only because they are more liquid but also because amidst distress, public markets are more likely than private ones to offer attractive opportunities to average down.

14. Beware leverage in all its forms. Borrowers – individual, corporate, or government – should always match fund their liabilities against the duration of their assets. Borrowers must always remember that capital markets can be extremely fickle, and that it is never safe to assume a maturing loan can be rolled over. Even if you are unleveraged, the leverage employed by others can drive dramatic price and valuation swings; sudden unavailability of leverage in the economy may trigger an economic downturn.

15. Many LBOs are man-made disasters. When the price paid is excessive, the equity portion of an LBO is really an out-of-the-money call option. Many fiduciaries placed large amounts of the capital under their stewardship into such options in 2006 and 2007.

16. Financial stocks are particularly risky. Banking, in particular, is a highly leveraged, extremely competitive, and challenging business. A major European bank recently announced the goal of achieving a 20% return on equity (ROE) within several years. Unfortunately, ROE is highly dependent on absolute yields, yield spreads, maintaining adequate loan loss reserves, and the amount of leverage used. What is the bank’s management to do if it cannot readily get to 20%? Leverage up? Hold riskier assets? Ignore the risk of loss? In some ways, for a major fin-ancial institution even to have a ROE goal is to court disaster.

17. Having clients with a long-term orientation is crucial. Nothing else is as important to the success of an investment firm.

18. When a government official says a problem has been “contained,” pay no attention.

19. The government – the ultimate short- term-oriented player – cannot withstand much pain in the economy or the financial markets. Bailouts and rescues are likely to occur, though not with sufficient predictability for investors to comfortably take advantage. The government will take enormous risks in such interventions, especially if the expenses can be conveniently deferred to the future. Some of the price-tag is in the form of back- stops and guarantees, whose cost is almost impossible to determine.

20. Almost no one will accept responsibility for his or her role in precipitating a crisis: not leveraged speculators, not willfully blind leaders of financial institutions, and certainly not regulators, government officials, ratings agencies or politicians.

Below, we itemize some of the quite different lessons investors seem to have learned as of late 2009 – false lessons, we believe. To not only learn but also effectively implement investment lessons requires a disciplined, often contrary, and long-term-oriented investment approach. It requires a resolute focus on risk aversion rather than maximizing immediate returns, as well as an understanding of history, a sense of financial market cycles, and, at times, extraordinary patience.

False Lessons

1. There are no long-term lessons – ever.

2. Bad things happen, but really bad things do not. Do buy the dips, especially the lowest quality securities when they come under pressure, because declines will quickly be reversed.

3. There is no amount of bad news that the markets cannot see past.

4. If you’ve just stared into the abyss, quickly forget it: the lessons of history can only hold you back.

5. Excess capacity in people, machines, or property will be quickly absorbed.

6. Markets need not be in sync with one another. Simultaneously, the bond market can be priced for sustained tough times, the equity market for a strong recovery, and gold for high inflation. Such an apparent disconnect is indefinitely sustainable.

7. In a crisis, stocks of financial companies are great investments, because the tide is bound to turn. Massive losses on bad loans and soured investments are irrelevant to value; improving trends and future prospects are what matter, regardless of whether profits will have to be used to cover loan losses and equity shortfalls for years to come.

8. The government can reasonably rely on debt ratings when it forms programs to lend money to buyers of otherwise unattractive debt instruments.

9. The government can indefinitely control both short-term and long-term interest rates.

10. The government can always rescue the markets or interfere with contract law whenever it deems convenient with little or no apparent cost. (Investors believe this now and, worse still, the government believes it as well. We are probably doomed to a lasting legacy of government tampering with financial markets and the economy, which is likely to create the mother of all moral hazards. The government is blissfully unaware of the wisdom of Friedrich Hayek: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”)

H/T Zero Hedge.