Gold is still cheap

See this chart comparing gold to the inverse of the U.S. Dollar Index, a chart of gold versus a basket of foreign currency.

Your gold buys a lot more today than it did almost 5 months ago, when gold hit its peak in U.S. dollars. If you view the world through golden eyes, it is doing very well as an investment. However, in U.S. dollars (or renminbi, for that matter) it is not so expensive.

I view the euro and U.S. dollar as two ends of a see-saw. The value of each goes up and down, up and down, but within their range, they're staying in place relative to the Earth. Meanwhile, each time the see-saw swings, gold ratchets up another notch, moving farther away from the ground. U.S. dollars are climbing now as the euro falls, so much that in the eyes of a U.S. dollar holder, gold appears to have dropped. But from gold's position, it is absolutely farther from the ground.




有很多很多可能性是。 这三个我看看,也买了中国稀土。
蒙古能源 0276.HK
灵宝黄金 3330.HK
中国稀土 0769.HK

Andy Xie on the housing bubble

Animal Instinct on China's Real Estate Range
At the root of the property bubble are negative real interest rates. China's bank deposit rates are extremely low: 0.36 percent for demand deposits and 2.25 percent for one-year deposits. These rates are set against a backdrop of rising inflation fueled by a tight labor market and skyrocketing prices for government-owned land.
There are occasional fads and manias and herd behavior, but every single great financial bubble was supported by credit.

This will be the first year in a long while that household debt rises more quickly than household deposits. In other words, China's household sector will reduce rather than increase its liquidity in banks. That makes the banking system more dependent on hot money for liquidity and the system vulnerable to shock.
This is exactly what happened in Hong Kong, South Korea and Southeast Asia a decade ago. Their banks were quite dependent on hot money to support lending growth. When the shock came and foreign liquidity was pulled, most banks collapsed. Hong Kong's banks remained afloat due to strong capital bases. Still, interest rates had to be raised forcefully to maintain liquid positions. These high interest rates, in turn, popped Hong Kong's property bubble.

China's household debt level is getting close to the danger level. Even if the growth trend moderates, debt is likely to surpass 15 trillion yuan in 2011, equivalent to about 100 percent of urban labor income. More importantly, China's household debt is a new phenomenon. For it to rise so fast to such heights rings alarm bells. Experiences from other countries show that whenever household debt rises at such a rapid pace and to such high levels, delinquency rates are likely to go up – a lot.
Andy offers some solid long-term solutions to housing and he's sticking to his 2012 target of the global bubble bursting.

I don't think that rating means what you think it means

AAA bonds cut to junk? Inconceivable!

Long-term bases forming?

Tim Knight had a post on long-term charts and spotting what in hindsight are obvious patterns. I noticed some decent formations on a few household names.

Look at the long-term charts of Coca-Cola (KO), Intel (INTC) and Cisco (CSCO). Coca-Cola looks the best of the bunch, and Intel looks as though it could move lower.

Cisco has no dividend, but the yield for Coca-Cola is 3.3% versus 2.6% on Intel.

Zero Hedge Headlines Say It All

Carry Unwind En Masse As Market Plunges -Yen & U.S. Dollar UP!
S&P Downgrades Greece To Junk - Full Obituary Enclosed -These agencies are beyond worthless.
Gold Is The New Goldman -Gold is money
Portugal Sovereign Credit Rating Cut From A+ To A- By S&P -Way to be ahead of the curve guys!
Greek May 19 Maturing Bonds Being Sold At 30% YTM -Market to Greece: we don't think you're going to pay us back.
Greek Stock Index (ASE) Tumbles 7%, Now At 1686, Financial Stocks Plunge 17%


Bulls should buy China now

Hot Money May Flee Property Market
Li Youhuan, a scholar at Guangdong Academy of Social Sciences, said that there are clear signs that the flight of hot money from the real estate sector will leave for the stock market, which will be felt in the next two to three months.

"In next two weeks, the stock market will feel the abundant supply of hot money," said Li.

Shi Lei, an analyst at the Bank of China, said share prices will soar in the near future as the funding will flow from the property market to stock markets.
Add to this the effect of currency revaluation, which accompanied the bull run from 2005 to 2007, and a decent run is possible. That is, if revaluation takes place anytime soon.

Update: Shanghai Composite lost 2% today. Where's the hot money?


Greece and euro still dead

Greece and the issue of sovereign TBTF
There is an an assumption now in financial markets that however country-level short-term politicking pans out in the Eurozone, Greece can count on access to funds that will allow it to avoid default over the next few weeks and months.

But next year and the year after remains another matter. In fact, gross Greek funding requirements through to the end of 2012 run to €110bn – and almost three-quarters of that is to cover redemptions.

Neither the IMF – nor ordinary Germans, French or Italians – are going to want that particular bill. For Greece, longer-term issues of solvency and the threat of a debt restructuring have not gone away.
The bounce today will be temporary. The trend for the euro versus the U.S. dollar and gold is down, government actions are just interruptions of the major trend. Greece's problem is not solved until the country can return to the debt markets, and none of the bailouts solve the problem, they only treat the symptom of high interest rates.

Finally, consider that the Greek banks may be deteriorating as everyone focuses on the government's credit: Eric Sprott: Weakness Begets Weakness: from Banks to Sovereigns to Banks
One aspect of the Greek situation that has been obscured by all the recent political wrangling is the crisis’ impact on the Greek banks. Although the banks were supposed to be rock solid after all the government-injected capital they received (not to mention zero-percent interest rates and generous lending terms from the European Central Bank), data shows that Greek bank deposits have fallen 8.4 billion euros, or 3.6 percent, in two months since December 2009.2 With no restraints on capital flows within the European Union, Greek savers are free to transfer their assets elsewhere.

Given that bank deposit guarantees in Greece are the responsibility of the national government rather than the European Central Bank, we suspect Greek citizens are pulling money out of their banks because they question their government’s ability to honour its domestic deposit guarantees. We envision Greek depositors asking themselves how a government that can’t raise enough money to stay solvent can then turn around and guarantee their bank deposits? It’s a fair question to ask.


Euro showing signs of life? Update: Not anymore.

Originally posted 4-21 at 9:36 PM.

Update 4-22 5:10 PM: The three red trend lines drawn in the chart below were all broken today.
It looks as though there some very mild improvement in the short term picture of the euro. Relative strength, price and MACD for CurrencyShares Euro (FXE) all show higher lows over the past month. But at current levels, it is likely that a break of this short-term trend will take the euro to new lows and touch off a new round of selling. On the flip side, the euro could consolidate and move higher, with the current trend continuing up to around $138 or roughly $1.38 for the euro.

Update 4-22 8 AM: Stories such as the one out today are why the euro will struggle to reach even slightly higher levels: Greek deficit spiked to 13.6 percent of national income in 2009, more than previous estimate

Another update 5:17 PM: From FT Alphaville, The Germans and the Greeks
The Free Democrats who share power with Angela Merkel’s conservatives are now calling for Greece to take further austerity measures or leave the eurozone.

And oh by the way update: Euro Sinks on Moody's Downgrade of Greek Debt
Good old ratings agencies. What is the use of ratings if they give overly optimistic ratings and then downgrade only after it becomes obvious that there's a problem? All they're good for is causing the problem to accelerate.

The urge to simplify

Here's another trend in the U.S., towards fixed gear bicycles. This isn't a new trend, as far as I can tell, but I hadn't seen it discussed before. This is another sign of declining social mood, the desire for simplicity.
Are There Really No Hipsters in China?
Irony-resisting Chinese bicyclists have skipped the fixed-gear trend that has swept the rest of the world.

With regards to why it hasn't caught on in China, it's a bit like asking why driving a car is more popular than riding a bike for 17 year-old high school students. Hipster doofuses think they're hip to ride a fixed gear bike because riding a fixed gear bike doesn't have negative associations. Their friends think they're cool, and the rest of the world is unimpressed at best.

Renminbi traveler's checks

You'd think this would make life easier, but somehow I think it will be more complicated at first.
Amex to sell RMB traveler's checks
The joint statement by American Express and BoC said that the checks will be available in Canada, India, Japan, Korea, Malaysia, Singapore, the UK and the US, and can be cashed at 2,000 BoC branches in China and 1,600 partner hotels. Amex's Global Prepaid team has doubled its investment and tripled its size in China over the last two years, said Alpesh Chokshi, president of Global Prepaid.

Chinese speculators move from housing to futures

Housing Bubble Crackdown Sparks Market Turbulence and Frantic Trading on New Stock Index Futures
For the first three trade days, the ratio between trade volume and position value has been 18 to 1, 27 to 1, and 32 to 1, respectively, well higher than international standards. In a mature stock index futures markets the ratio would be closer to 1 to 1. For example, on Tuesday, the ratio of trade volume to position value on the Nikkei 225 stock index futures, and on the Singapore Stock Exchange it was 0.4 to 1. On the domestic commodities futures market, for copper, the ratio was 1.2 to 1. The high ratios indicate the speculative nature of the market and that traders are making many rounds of buying and selling in a single day. Many are making arbitrage transactions in minutes.

So far, few institutional traders show any interest. Many traders are seasoned commodities futures speculators. Analysts say the ultra-short term trading may be to get risks under control, since traders are very sensitive to the fluctuation of prices and will quickly clear positions before huge losses and margin-call soccer.

A lot of domestic hot money is joining the game. In particular, Zhejiang speculators, some of whom are moving money from their housing market positions to the futures market, are trying to find a new quick money instrument.

The plentitude of liquidity is nicely conducive to the fledgling stock index futures market. Beijing's housing-market crackdown is forcing more speculators to sell and turn to new bets. China's housing market, estimated at 100 trillion yuan, dwarfs the stock market. Meanwhile, after the nationalization of thousands of coal mines, hundreds of billions of yuan from recently paid-off private mine owners is still looking for parking places.
While many people expected the futures market to reduce volatility, I expected it to increase volatility, as the market figures out how to use futures. And the overall weakness in stocks doesn't help...

Goldman Sachs and Social Mood

Elliot Wave International is running a series on Goldman Sachs. There's some interesting history in the second of this three part series.
Goldman Sachs Company Charged With Fraud: Who Could Have Guessed? Part II
Despite careful stewardship, Goldman's reputation faltered as stocks fell in 1969-1970. When the Penn Central Railroad went under, it was revealed that Goldman sold off most of its own Penn Central holdings before the June 1970 bankruptcy. This was another case of shifting standards, as Goldman's customers were all institutions dealing in unregistered commercial paper. They should have known the high odds of failure, as the railroad’s stock was down almost 90% when it finally failed.

As Cycle wave IV touched its low in October 1974 (S&P; see historic chart in Part I), a jury ruled, however, that Goldman “knew or should have known” that the railroad was in trouble. But Goldman Sachs company survived the negative judgment and grew quickly as the Cycle wave V bull market took off beginning in 1975.



Here's an A-share that might be breaking out in Shanghai, Tiantong (中文的博客). Since I'm expecting the Chinese market to move lower, I'm not bullish, but if I was hedging my bets, this one looks like it could run if the market moved higher.

更新: 江苏长电科技股份涨价了

我3月19日看看了江苏长电科技股份:江苏长电科技股份。。。牛? 看起来那个股份突破了。从那时候上海综合指数下降了,但是江苏长电升值了。

现在房地产的规定变成了更严格。看房客锐减 二手房买家弃定金毁约


Chinese Home Buyers Walk Away

You may have read about the growing phenomenon of "walking away" in the U.S., where underwater homeowners (who owe a lot more than their house is worth) default on their mortgage and let the bank take the house. This isn't a good strategy in all states, since some allow the banks to go after homeowners for the difference between the mortgage and the home. But where banks cannot go after the homeowner, it means that many people are able to get out from high mortgage payments and rent a very similar house, sometimes on the same street, for far less money.

In China, a different situation has developed. Due to recent changes in home finance regulations, some Chinese buyers are starting to walk away from their deposits on purchase agreements.
Buyers defaulting on price-fall fears (subscription required)
The exodus of buyers that has followed could see deal volumes in the secondary market tumble 50 per cent this week, said estate agents, while prices could fall up to 20 per cent.

"These are the most draconian measures I have ever seen. The unexpected shutdown of credit for some buyers immediately drove them away from the market," said Kenneth Pak Kei-yuen, senior general manager in the Beijing office of Midland. "We have no business today and more and more buyers are talking about walking away from deals they have already signed."

A client who had agreed to buy a 60 sqmetre apartment for 1.2 million yuan and put down an initial deposit of 50,000 yuan two weeks ago had already defaulted, he said. "After the tightening of the mortgage conditions, she decided to cancel the deal because she was worried that prices would decline."

Although the State Council's announcement did not include a start date for the new policy measures, banks had reacted immediately by freezing all uncompleted mortgage applications, Pak said. "Buyers who had just agreed to purchase homes in the past two weeks are now in panic because they worry they will have to fork out extra money as banks have also lowered loan-to-value ratios when granting mortgages," he said.
Some buyers are hanging on though, because they basically believe this is a head fake and that the bubble will continue to blow. Meanwhile, Caing reports: Gradual Wind-Down for Economic Stimulus
Brakes on new construction were applied with particular force in recent months as central and local governments sought to reduce overheating risks. For the first three months this year, total investment for new construction projects jumped more than 34 percent to about 300 trillion yuan. But the quarter-on-quarter growth rate for the same period last year topped 87 percent.

Following last year's peak for government-supported construction projects, this year's nationwide investment is slated to shift from "active expansion" to "passive continuation," which will still demand considerable capital. The 153,700 stimulus-financed projects under way in the first quarter represented a total 2.79 billion yuan in investment – an increase of 30.4 percent compared to the same period last year.

Yet the investment curve started turning downward with a slowdown in the pace of central government spending initiated by the National Development and Reform Commission (NDRC).
NDRC has yet to release details on the slowdown in central government investment. It's only public information released so far concerned the allocation of about 2.2 billion yuan from the central government for 10 energy-saving projects as part of the 11th Five-Year Plan.

Caixin learned from several local NDRC branches that, since the end of March, the agency has invested in a variety of civilian infrastructure projects including low-rent housing, water control projects, wastewater treatment and refuse processing facilities.

For example, a Gansu Province NDRC official told Caixin that the central government allocated 1.3 billion yuan for construction of low-rent housing in his province. The investment level and the construction scale are expected to rise this year, although the official added that "there will be no central government investment in other fields."
My hunch is that renminbi revaluation is unlikely to be tossed into this stew of policy action, unless the government is planning a simultaneous strategy with the property, stimulus and currency policies. Instead, the government may wait to see the impact, which could be relatively quick in the property market, and only then revalue the currency.

And then there's the IMF's view—no bubble.

Negative Social Mood in China

Anecdotal, but some Chinese friends asked me if I thought the world would end in 2012. Others fear natural disasters. Apparently this is a topic of discussion, as people in different parts of the country are all discussing things in the same negative light. This comes just after the earthquake in Qinghai killed more than 2000 people. Will try to find headlines or stories on these speculations, but its very possible these sentiments would not make it to print.


Why Economic Models Fail

The main reason I do not put any faith in modern economic theory is because it removes the human variable from the equation. In a free market, different economies will have different characteristics and behavior patterns due to structural and cultural differences. A case in point is the savings rate in the U.S. and China. Michael Pettis explains:
Rising interest rates increase the reward, and so in response, households reduce their consumption and increase their savings. The obverse is that the interest rate is the penalty for anticipating consumption, and because rising interest rates make it costlier to borrow to finance consumption, they reduce consumption and increase savings (borrowing is negative savings).

This explanation for the positive relationship between the interest rate and savings rate makes it a little surprising, then, that in China and in certain other countries, especially those typically included as examples of the Asian development model, rising interest rates are often associated with higher, not lower, consumption.

...Last year, just after the PBoC cut the deposit rate early in the year, one of my students told the class an interesting story that may at least partly explain. She said that the reduction in the deposit rate had upset her aunt and uncle because they had been saving money so as to have a certain amount for their twelve-year-old son for his university education. Every month his mother put some part of the family’s household wages into an account at the bank for that purpose.

How much should she save?

Obviously she had done a fairly straightforward calculation to figure out how much she needed to add to this account every month. The amount of money she had in the account earned interest, of course, which was added to the total savings. She calculated whatever was needed in addition to the interest income to achieve her final target, and this amount was taken out of the family wages every month and added to the account. What was taken out of wages, of course, shows up in the national accounts as the family’s savings rate. The rest is the family’s consumption rate.

When the PBoC lowered the deposit rate, this meant that if she expected to reach her target she would have to match the decrease in interest income one-for-one with an increase in the amount she saved out of monthly wages. In their case, then, a lower deposit rate was necessarily associated with a higher savings rate – and the amount this particular family consumed out of total wages declined.
As Pettis goes on to explain, part of the reason for U.S. savings rates moving along with interest rates is that a lot of wealth in the U.S. is invested in real estate and financial assets that rise in price when the interest rate falls, whereas in China, a large amount of savings is still done through bank deposits.

Read the whole thing for a discussion of how this affects the revaluation of the yuan.


Goldman Sachs PR Nightmare: The Reckoning

In July, I had a post titled Goldman Sachs PR Nightmare. In it I wrote:
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.
The fraud charges against Goldman have legs due to the negative social mood and the bad publicity the firm has received over the past two years, but this also means it will spread far beyond Goldman.

Amir Efrati of the Wall Street Journal lays out the argument in Why the Goldman Story Has Legs:
First off, Goldman has been feeling heat in recent months amid record profits and revelations of their wild success amid the credit crisis, which hit other Wall Street firms hard. To say the firm had a target on its back, politically speaking, is an understatement. An hour after the suit was filed, Goldman shares were down 13%.

Second, the SEC also has been under seige in recent months for, among other things, perceived failures to catch Ponzi schemer Bernard Madoff and some high-profile litigation trip-ups, including its failed insider-trading case against Mark Cuban. If the Goldman case is successful, it could help rebuild the agency's reputation.

Third, the case filed by the SEC prominently features hedge fund Paulson & Co., led by John Paulson, who made the "Greatest Trade Ever” by betting against the mortgage market. His firm earned $15 billion in 2007 alone.

The SEC's case focuses on a single transaction structured by Goldman, for which it allegedly earned $15 million in fees from Paulson.
Generally, I would view this news as bullish. Government is so slow that by the time it acts, the public and the markets are about to or are already moving in the opposite direction. However, I expect that at the very least, this is the tip of the iceberg. When the charges really start to fly, then it may be near at least an intermediate bottom.

Update on the euro...still weak

Vox Day reiterates the socionomic cas for a breakup not only of the euro, but the EU as well. The breaking of the Euro

Mish Shedlock notes that focus has moved from Greece to Portugal and that the bailout rally in the euro is over.
Debt Worries Shift To Portugal; Greece Borrowing Rates Back Near Highs

Here's a look at CurrencyShares Euro (FXE).

The post-bailout rally caused FXE to break through its 50-day moving average, but it needs to hold it if the rally is going to continue. As the relative strength above shows, FXE's RSI was above 50 during the rally and below 50 during the decline. The recent rally barely pushed it over 50 and at 51 and change now, it could easily slip back. MACD is rising, but when the primary trend is bearish, the bullish divergences carry less weight.

I have nowhere near enough experience with Elliot Wave to make an accurate call with it, but it seems FXE could have finished wave 5 of a larger wave 1 decline, which would mean a wave 2 corrective wave may be underway. If so, it would be an A-B-C, and the current rally may extend into the $1.40s, eventually leading into the major wave 3 decline that takes the euro well below its 2009 lows of $1.25.

Also working against the euro is a possible rise in Asian currencies. Asian currencies remained weak to stay competitive with China, and China held the peg against the U.S. dollar for the first half of the 2000s. This meant that the euro was left bearing a lot of the brunt of U.S. dollar weakness. In general, rising Asian currencies should contribute to euro weakness.


Yuan revaluation will be costly for U.S.

Picking up on my idea that yuan revaluation will expose monetary inflation, Bloomberg has an article detailing how other Asian currencies will rise even more.
Rupiah Gains 5 Times More Than Yuan on Revaluation
“A Chinese appreciation will kick off tightening in the whole Asian complex of currencies,” said Richard Benson, who oversees $14 billion of currency funds as an executive director at Millennium Asset Management in London and is backing the won and the ringgit to lead the gains. “These currencies are fundamentally cheap.”
If China imports more resources and those resources come from Indonesia (rupiah), then maybe Market Vectors Indonesia (IDX) will continue to be a winner.

On the flip side, everything imported from Asia will rise in cost for the U.S.

NYTimes makes the case for collapse

Yes, 47% of Households Owe No Taxes. Look Closer.

A look at other taxes, such as the payroll tax. Which is supposed to be a savings plan right? Not so, even the NYTimes admits its a tax:
I realize that it’s possible to argue that payroll taxes should be excluded from the discussion because they pay for benefits — Social Security and Medicare — that people receive on the back end. But that argument doesn’t seem very persuasive.

Why? People do not receive benefits equal to the payroll taxes they paid. Those who die at age 70 will receive much less in Social Security and Medicare than they paid in taxes. Those who die at 95 will probably get much more.
While the piece doesn't make the argument (it's the NYTimes, after all), reading between the lines shows that a strong case can be made for slashing Medicare and Social Security by kicking the wealthy off.


Andy Xie: Raise Rates, then the Yuan

Get the Yuan Right, Prove Pundits Wrong
But acting on the currency first, especially in small steps, would further inflate China's property bubble and inflation, potentially leading to a major economic crisis in two years. A small increase in the yuan's value would fail to resolve two pressing problems: inflationary pressure at home, and political pressure from the United States. Moreover, a small appreciation would attract hot money, stoking inflationary pressure.

Imported goods' share of consumption is too small in China for a small currency appreciation to affect the consumer price index. At the same time, a minor appreciation would fail to placate U.S. interest groups, some of whom are demanding a rise in yuan value of one-third or more. Some argue it should double in value.

Indeed, a slight appreciation would merely exacerbate existing problems by emboldening U.S. supporters of a stronger yuan to demand even greater appreciation.
Meanwhile, financial markets are back on the yuan appreciation watch. Inflation pressure at home and political pressure from the United States have inflamed expectations. Every week or two, the media reports that some notable person has predicted an imminent yuan appreciation of 5 percent or so. So much ink has been spilled on this issue that the consensus on yuan appreciation has become the longest lasting and most widely accepted consensus in financial history. It's lasted for so long because financial markets have few stories to stir fry, and an appreciation of a pegged currency is a free lunch. Nothing gets financial markets more excited than a free lunch.


End of Cheap Oil

Things to keep in mind on economics and finance: the rise of gold along with the rise of oil in the 1970s. Protectionism gone wild. Agriculture. Fertilizer. Real estate.

Politics: Entitlements and other rising costs on government in an economy that might be getting smaller every year, but which is already heading for insolvency. A shift in "green" rhetoric.

The big area of disagreement I have is where he thinks this will create jobs (since he assumes that there won't be technological innovation for about a decade at least). This will create jobs in the same way that getting rid of heavy equipment at a construction site means instead of one guy operating the equipment, there are 20 guys with shovels.

However, let's say that job losses are overestimated by free market economists and that the gain in jobs in the U.S. comes at the expense of jobs overseas. Now, the last audience question comes into full relief. Why are China and India going to agree to cut carbon in order to export to a market that he has just pointed out will not demand imported goods and which, I would argue, is too poor anyway.

The response of much of the developing will be to demand, and receive, massive technological transfers from the West, or they will burn coal. The former is possible because the West will figure, due to the high cost of oil, they are insulated from foreign competition. The other is that they continue to use cheap energy and this low cost allows them to build the capital necessary to transition to a more efficient economy. In either case, these countries will still be the fastest growing. Another possibility is that their economies stagnate and they become trapped, as will we, at current or lower standards of living. In that case, there will be serious political repercussions all around.

Finally, think about the U.S. and Western government's response to suddenly expensive oil. If oil is $200 a barrel and every oil shock has created a recession, how will the economy and government respond? The initial effect will be highly deflationary. Costs will be soaring, but this will not be inflation, as people will spend more on food and energy and less on leisure and debt repayment. Less debt repayment leads to deflation...and a repeat of the crisis of 2008. However, in a world where oil goes to $200 a barrel *WITHOUT* inflation, think of where the price will end up if the governments of the world print money to "bail out" the economy.


Auf Wiedersehen Griechenland

Oh Oh - Greece Going Supercritical

Chinese consumption in peril?

Michael Pettis argues that bad debts in China will be paid for out of consumption, as they were previously:
This is not a very scientific way of going about it, but my very back-of-the-envelope estimate suggests that interest rates in China, without financial repression, would have probably been anywhere from 300 to 800 basis points lower than the appropriate equilibrium level during the past decade. Add this to the excess spread between deposit and lending rates, which is anywhere from 150 to 250 basis points, and we could easily argue that the deposit rate is at least 450 basis point lower than it should be, and perhaps an awful lot more.

How much is that in GDP terms? A quick call to my friend Logan Wright at Medley Advisors gave me the following data. Total banking deposits in China are around RMB 64 trillion. Around 60% of the total represent household deposits (an estimate, since there is some ambiguity in the numbers). Total GDP is nearly RMB 34 trillion. Inputting all of that into my trusty Excel Spreadsheet suggests that at a minimum, households have “paid” in form of excessively low rates on their deposits a minimum of 5% of GDP every year, and possibly up to two times that amount, during the past decade.


The collapse of Western governments?

Note: I use a broad definition of collapse. It can mean various changes, such as the way people interact with their government, the form of the government, the policies of the government, the people in the government. The point is that for the ruling elite now in control and the people who benefit most from the system, the change will feel like a collapse.

Society is moving at an increasingly fast pace, where change comes rapidly, but the government is designed for the industrial society of the 19th and 20th Century. Kevin Depew picks up on several themes here, which, when put together, form a picture of a crisis for the elite and current structure of government institutions. He's not talking about government, but I'll draw the connection. I'm pulling out of order, but I suggest reading the whole article, it's solid as usual: Five Things You Need to Know: The Return of Risk Appetites

Studies have shown that the most efficient way to lose weight and develop body tone is not to set off on a five-mile jog every morning, but instead to walk, a lot, at different times, with those walks punctuated by random bursts of sprinting for as long as comfort allows.

I believe the structure to our daily life, and the problems created by the Internet and the increased flow and availability of information in non-linear bursts, is responsible for some of the unrest we feel; like a presence that seems to be lurking just behind us, turning in on itself; one we can't quite turn and catch before it escapes.

...Socionomics captures this sea-change, but it's not easy to describe to a mainstream audience. Put in friendlier terms, one of the main reasons people feel disconnected and ill-at-ease, even angry, is that we're chained, literally and figuratively, to structures that no longer help us create economic value. After all, that was the promise of the production line -- to help create efficiencies that would in turn help create economic value, both for the owner and the worker. But those promises have become antiquated and broken thanks to emerging networks and a host of new technologies that basically have unlocked time-dependence of the production line and the linear model of productivity.
It's something younger people have an easier time adapting to, but the way of life and business are flying apart because of new technology. Stop right here and think of telecommuting. The reality is that people can do many jobs from anywhere on the planet. A growing trend that is basically unnoticed is what I might call "life tourism", where people want to move overseas and do a job in their home country. If I can do my job from home, why can't I live in Germany, Thailand, Spain, Brazil or Mexico?

In a previous post, U.S. is very broke, I noted a story about IRS agents permanently stationed in Hong Kong and also going to Beijing. This is a thread worth covering in detail, but I'l leave off with a link to an article by Arnold Kling arguing for competitive government.

Getting back to Depew, or rather his link to a piece by Clay Shirky.
The Collapse of Complex Business Models. Consider the paragraphs below, but thinking of Western government (and this may include all nations with socialistic bureaucratic governments):
In 1988, Joseph Tainter wrote a chilling book called The Collapse of Complex Societies. Tainter looked at several societies that gradually arrived at a level of remarkable sophistication then suddenly collapsed: the Romans, the Lowlands Maya, the inhabitants of Chaco canyon. Every one of those groups had rich traditions, complex social structures, advanced technology, but despite their sophistication, they collapsed, impoverishing and scattering their citizens and leaving little but future archeological sites as evidence of previous greatness. Tainter asked himself whether there was some explanation common to these sudden dissolutions.

The answer he arrived at was that they hadn’t collapsed despite their cultural sophistication, they’d collapsed because of it. Subject to violent compression, Tainter’s story goes like this: a group of people, through a combination of social organization and environmental luck, finds itself with a surplus of resources. Managing this surplus makes society more complex—agriculture rewards mathematical skill, granaries require new forms of construction, and so on.

Early on, the marginal value of this complexity is positive—each additional bit of complexity more than pays for itself in improved output—but over time, the law of diminishing returns reduces the marginal value, until it disappears completely. At this point, any additional complexity is pure cost.

Tainter’s thesis is that when society’s elite members add one layer of bureaucracy or demand one tribute too many, they end up extracting all the value from their environment it is possible to extract and then some.

The ‘and them some’ is what causes the trouble. Complex societies collapse because, when some stress comes, those societies have become too inflexible to respond. In retrospect, this can seem mystifying. Why didn’t these societies just re-tool in less complex ways? The answer Tainter gives is the simplest one: When societies fail to respond to reduced circumstances through orderly downsizing, it isn’t because they don’t want to, it’s because they can’t.

In such systems, there is no way to make things a little bit simpler – the whole edifice becomes a huge, interlocking system not readily amenable to change. Tainter doesn’t regard the sudden decoherence of these societies as either a tragedy or a mistake—”[U]nder a situation of declining marginal returns collapse may be the most appropriate response”, to use his pitiless phrase. Furthermore, even when moderate adjustments could be made, they tend to be resisted, because any simplification discomfits elites.

When the value of complexity turns negative, a society plagued by an inability to react remains as complex as ever, right up to the moment where it becomes suddenly and dramatically simpler, which is to say right up to the moment of collapse. Collapse is simply the last remaining method of simplification.
Think of social welfare systems such as Social Security and Medicare, but including all welfare. The millions of broken families supported by welfare (that would not exist without it in the first place), healthcare systems funded by the government, school systems, university systems, massive government pensions.

On the one hand, all of these systems, right down to the way children are taught in the classrooms of government schools, are out of date and increasingly so. On the other, this system is unsustainable because it is based on ever increasing debts that cannot be repaid today, let alone in a few years when the debt is even larger.

Now turn back to the economy and the massive debt economy that supports this archaic government system that has as much place in the 21st Century as one from the 5th Century. Depew again:
Meanwhile, credit bears are correct in pointing to the same mistakes being made as were made between 2003 and 2007. Leverage is again increasing. The reversal of the "sell it all" trade where corporate debt was dumped willy-nilly in a panic has now led to a different type of panic, one where credit buyers are finding it difficult to find enough "risk inventory" to satiate demand for increased returns. The result is almost identical to the early stages of past credit recoveries where credit buyers, once they run out of things to buy intelligently, start buying whatever they can find, wherever they can find it.

Make no mistake: The financial system remains fragile, far worse than it was in 2002. But the important point to understand is that the debt crisis was never about the economy; it was about credit, leverage, and debt. The weak economy is the result of that crisis, not the cause of it. It's an important point to understand, but one that's easy to miss now that the focus in the media has turned away from credit markets, which are difficult for reporters to see and understand, and back toward more transparent economic issues such as jobs and manufacturing reports.

Similarities to the last credit cycle remain, despite the fact we're in a more fragile ecosystem and damaged economy. As was the case last time, stock market participants refuse to believe the credit bull market story, instead focusing on everything that can possibly go wrong, from Greece to Portugal to sovereign defaults, municipal bond market implosions, and basically everything but what should be the current focus -- namely, the transition from corporate balance sheet repair back to share buybacks, mergers and acquisitions and other pursuits that actually benefit shareholders longer-term.

Again, this is a credit cycle, unique in the strength of its reversal from near-death a year ago, but hardly different in how it will ultimately unfold. A bad end is coming, but that bad end will come later, possibly much later than many believe.
And then there's:
2. The Coming Municipal Bond Market Collapse

I'm not saying we're going to get competitive governments. A declining social mood, at least in the short run, would imply that governments will become more hostile and increase control over national borders, take a hard the line on sovereignty issues, etc. However, it is clear that the elites in the West refuse to acknowledge that the system that peaked with the 20th Century must move on because their own power and status requires the system. It is clear as well, that major corporations have a difficult time with shifting technology. The RIAA and movie industry's battle with piracy is nothing compared to the coming market where their competitors have all the advantages of the pirates, yet supply their own content. Here's Shirky talking about a user created show that the TV industry crushed:
Or it might not. Once the show moved to television, the Writers Guild of America got involved. They were OK with For and About Moms, but By Moms violated Guild rules. The producers tried to negotiate, to no avail, so the idea of audience engagement was canned (as was In the Motherhood itself some months later, after failing to engage viewers as the web version had).

The critical fact about this negotiation wasn’t about the mothers, or their stories, or how those stories might be used. The critical fact was that the negotiation took place in the grid of the television industry, between entities incorporated around a 20th century business logic, and entirely within invented constraints. At no point did the negotiation about audience involvement hinge on the question “Would this be an interesting thing to try?”
Every single union industry has gone down in flames. Airlines, autos, steel, etc. What is the largest union employer left? Government.

Government itself is like a union is to a company, in that in it able to capture surplus because of its position in the economy. Economic and technological change lay waste to every industry with a complex and rigid structure. These industries were crushed by debt and pension obligations. They borrowed and papered over their losses until they could borrow no more, and then died. How is government going to escape this fate?

Anyway, I was thinking about government today after reading Karl Denniger's Come To Jesus Part Deux, which has a graph that shows the private economy in the U.S. has declined below 1995 levels, with the gap in GDP made up by government spending, specifically deficit spending. There's plenty more consequences to consider though, so read Five Things You Need to Know: The Return of Risk Appetites for yourself and draw your own conclusions.

Now the Germans can really make some money

Yesterday the spread between Greek and German bonds was 3%, today it is 4%.
Greek borrowing rates soar on market worries
Greek stocks fell 2.2% today and bonds were down nearly as much. Pay attention, it is an event that will be repeated many times, in many places, in the coming years.


Bears ready to unleash the fury?

Ten year yields are approaching 4%...

Germany can profit from a Greek bailout

So says Reiner Eichenberger, Professor of Finance at the University of Friborg; and David Stadelmann, Senior Assistant at the Department of Economics.
Wir retten die Griechen und verdienen Milliarden!
We save the Greeks and make billions!

Eichenberger and Stadelmann propose that the Germans can finance Greece and collect the premium between the interest rates, either the full 3%, or split it with the Greeks by offering them 4.9% financing.

They draw a parallel with the 19th Century, when a Bavarian ascended the throne of Greece.
Drittens wäre eine derartige Intervention nicht einzigartig in der Geschichte der beiden Länder: Im 19. Jahrhundert füllte Otto Friedrich Ludwig von Wittelsbach, Sohn von König Ludwig I. von Bayern, das Machtvakuum, welches in Griechenland nach der Ermordung Ioannis Kapodistrias entstand. Das schon damals hochverschuldete Griechenland wurde finanziell durch eine Anleihe, die beim Regierungsantritt von König Otto von Griechenland aufgelegt wurde, zahlungsfähig gehalten (Griechenland: Geschichte eines Staatsbankrotts).

Also there is an interview with Finance Minister Wolfgang Schäuble
"Wir sind normal. Das ist auch nicht recht"
Here's the Google Translate version of parts:
TIME: Is the German leadership really agree that we need more Europe?

Schäuble: Not always. But in a democracy is not harmful. We do not want pluralism. , I believe we must continue on this European path wisely and decisively. So you have to declare that the nation approaches tend to relapse is false. The fact that Angela Merkel as massive advocating the contract, does not mean that they want less Europe, but only that they have a more efficient, an effective Europe wants.

TIME: Do we need a federal Europe?

Schäuble: Yes. Europe will not become a state, as is currently the Federal Republic of Germany. This model indeed goes from the nation's sovereignty. The federal system in Europe is to some extent be an aliud. I think that's in the European integration in the core belief that the nation state alone is not the most appropriate framework for our lives. And I am convinced that we will succeed in politics, give a federal Europe.
Germany remains committed to European integration, it just wants it to be more efficient. And here's some comments on the IMF.

TIME: How much more than Germany would have, it should come with the support of the IMF for a bailout for Greece?

Schäuble: That is a question that a finance minister wisely does not answer, because we assume that this case does not occur. The contribution of the IMF is certainly limited.

TIME: If the IMF has remained entirely outside funding - just as you did originally - would the EU countries must share information about our ten billion euros. In Germany would thus account for an additional 2.5 billion. Conversely, this means that include the IMF, Germany has saved a little money, but many countries are very angry against us. Was it worth it?

Schäuble: Actually, a currency area would have to solve its problems itself. Therefore, the IMF should be the exception. In the German population - not to mention it is so obscene - is widespread opinion that a solution involving the IMF is more acceptable than without it. The IMF is perceived as an institution, which has demonstrated that they can work towards the rehabilitation of a crisis. It puts a confidence-building element. To that extent, the argument is already weighty.

Update: Calculated Risk also covers the interest rate story and has a link to a story which says the Germans want the Greeks to pay the 6% rate.
Greece Emergency Loan: Disagreement on Interest Rate


Greece still in trouble

The IMF should impose default on Greece to end the charade
She said the model is the Uruguay default in 2003, conducted under the auspices of the IMF when she was working at the Fund. “Everybody got together in a civilized way, and it was very successful,” she said.

The average haircut was 13pc. Maturities were shuffled. Uruguay was praised all round.

Greece is a tougher nut to crack. French banks with €80bn and German banks with €40bn (and British banks too) that bought so much Greek debt at a few basis points over German Bunds in 2006 and 2007 will have to accept a bigger discount to atone for their epic error, perhaps 25pc — though Prof Reinhart did not put a figure on it.

At least US subprime had the excuse of being opaque. It was always obvious that Greek bonds was not equivalent to German bonds, and that country in a currency union running a current account deficit of 15pc of GDP was trouble waiting to happen. Creditors bought the debt on the basis of a political calculation, that EMU would bail out Greece if necessary. It was pure moral hazard.

This “pre-emptive restructuring”, in IMF lingo, has to be handled with care. “When people say there is no contagion risk because Greece is small, they are completely wrong. Thailand was a lot smaller in 1997, and look what happened.” Indeed, it set off the Asian financial crisis.

A Greek default would be twice the size of the two largest defaults in history put together — Argentina and Russia — at least in nominal terms, nearing €300bn. The “demonstration effect” in a long string of countries both inside and beyond EMU might be chilling.


Andy Xie on why the U.S. will swap words for action to bash China

In Put Down Trade Spats, Pick Up a Mirror, Andy Xie turns more negative as he believes that this time, the protectionist rhetoric isn't just rhetoric. Based on the declining social mood, I have to agree. The U.S. is about to punch China in the face, diplomatically speaking.
Quite likely, the U.S. Treasury Department will name China a currency manipulator in its April report to Congress. Such a conclusion would require that the Obama administration impose punitive tariffs on Chinese imports.

China may be tempted to strike back with a trade-war volley. But such a move would be in China's worst interests. China is the biggest beneficiary of globalization and must do everything possible to defend the global trading system. So its best response, in my view, would be to take the case to the World Trade Organization, even though any resolution would be a long time coming and would not help the current situation.

China also would be wrong to stoke a dispute with the United States in hopes of diverting attention from its domestic problems. China's biggest challenge today is how fruits of its economic growth are divided, not how fast the economy is growing. And a key to this dividing game is held by the middle class, which deserves support.
In a nutshell, China can grow more internally and the best action is to turn the other cheek as it were, and focus on internal development. This is not just a diplomatic win, since the U.S. would lose stature, but a necessary step because China can't gain from a declining U.S. economy. He goes on to list the massive economic problems in the U.S., including the expensive new entitlement program, and brings it back to the confrontation with China.
The Democratic Party may lose a lot of votes for passing healthcare legislation, but blaming China for U.S. economic problems could win votes in the November mid-term elections. Thus, pressure on China's currency value will skyrocket before November.

But as long as China remains calm, pressure will dissipate over time. The United States has been selectively imposing tariffs on Chinese products over the past few months. Nothing will change in the near future, and a massive, across-the-board tariff on Chinese products is unlikely.

Most Chinese exports to the United States are designed, owned and sold by major U.S. corporations. IPhones, Nike sneakers, and HP PCs are good examples. A massive tariff would hit their profits and trigger a stock market collapse. It would bring down the U.S. economy and trigger a double-dip.

The U.S. government doesn't have the courage to prosecute people who caused the bubble and brought down the economy, fearing negative economic consequences. Neither will it have the guts to do something against Chinese exports that would surely bring down its economy.
A lot more good analysis in the article. Read the whole thing.

A property tax in China?

A way to raise revenue and dampen speculation.
"Actually, as far as I know, related government agencies are speeding up the process of introducing a property tax," said Leng Hongzhi, director of of land utilisation at the Ministry of Land and Resources, told reporters.

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Last month I asked: Will shorts begin to pay off, finally?

The answer is no, they did not.