2011-12-31

Current social mood in one sentence

From The World According to Ron Paul in Foreign Policy:
Indeed, after ten years of war it's striking that Ron Paul has become the only presidential candidate -- Republican or Democrat -- talking about the need for a less militaristic foreign policy.
Some positive-negative social mood pairs: desiring power over nature – over people, constructiveness – destructiveness, confidence – fear, benevolence – malevolence.

2011-12-30

The failure of the Tea Party?

Obama Waits Before Asking for Increase in Debt Limit
The budget agreement of Aug. 2, which broke that deadlock, has made it highly unlikely that Congressional Republicans could block an increase in the debt limit through the 2012 election. Since signing legislation to codify that agreement, Mr. Obama has already obtained two increases totaling $900 billion.
Still, House Republicans, who led the battle over the debt ceiling, are likely to seize the opportunity to condemn further borrowing and vote against the increase even if they cannot block it. By agreeing to the request for a delay from Senate and House leaders, the White House in effect is giving lawmakers the chance to weigh in without having to cut short their vacations. The delay also insulates the White House against accusations that it sought to push the increase through while Congress was away.
The Tea Party rose up for many reasons. Underlying the movement and Occupy Wall Street is declining social mood, but the chief stated goal of the Tea Party was spending and the deficit. Now the deficit is set to soar with only lip-service from politicians. Nevertheless, social mood is drifting lower and voters will take out their anger at the ballot box. Whether 2012 is the year of real change remains an open question, but 2012 will be more volatile than 2010, for sure. If Obama wins, the GOP will take control of Senate and hold the House, ensuring at least 2 more years of gridlock and pushing major reform out to 2016.

Is 2012 the new 1932?

The spectre of 1932: How a loss of faith in politicians and democracy could make 2012 the most frightening year in living memory
The lesson of history is that tough times often reward the desperate and dangerous, from angry demagogues to anarchists and nationalists, from seething mobs to expansionist empires. Our world is poised on the edge of perhaps the most important 12 months for more than half a century. If our leaders provide the right leadership, then we may, perhaps, muddle through towards slow growth and gradual recovery.
If this article were general opinion, we'd be near or at the bottom in social mood.

Bird flu is back

Chinese man critical with bird flu
A man is in critical condition after testing positive for the deadly H5N1 bird flu virus in the southern Chinese city of Shenzhen, state media said Saturday. The city borders Hong Kong, which has already culled thousands of chickens and ordered a suspension of live poultry imports from China after three birds tested positive with the strain mid-December.
The last case was in June, in Hubei province. One difference with this case:
He remains in a critical condition and is receiving emergency treatment. Authorities say the man had apparently had no direct contact with poultry in the month before he was taken ill nor had he left the city.

Social mood and rabies

I saw the story about rabies in South Carolina last week and thought it was odd, but possibly an outlier. Now there's another case in Massachusetts; both are suspected bat bites.
South Carolina has first human rabies case in 50 years

Coroner: S.C. woman dies from rabies
South Carolina's last documented rabies case in a person was in Florence County in 1959.
First Human Rabies Case In 75 Years Diagnosed In Mass.

See A Socionomic Study of Epidemic Disease – Parts 1 & 2 for a possible explanation for why these rabies cases hit at the same time.

Speculative euro shorts finish year at 2-year high


Tim Knight sees a possible short-term reversal in the euro and this massive short position leaves the door open to a squeeze. Looking back to June 2010 though, the previous low was set at the bottom of the first euro crisis/height of panic. This time around, the shorts have been slowly building and the euro slowly falling......it could be a rough 2012 for euro bulls.

Hungary gives Europe the finger; authoritarianism all around?

Hungary poised to widen rift with west
As well as the central bank law and a new flat tax rate that have been sharply criticised by the EU and the International Monetary Fund, other measures include reforms that critics warn will subject the judiciary to political interference and electoral changes that opponents say would entrench Mr Orban’s power for years to come.
The article is from the Financial Times. Is a government's control over its own central bank a serious issue for foreign governments? The Federal Reserve, People's Bank of China, European Central Bank and a few other large players are important, but Hungary?

One of the predicted outcomes of negative social mood is a rise in authoritarianism. Hungary is becoming more authoritarian as its government centralizes control of politics, but authoritarianism is also rising outside of Hungary, as foreign governments impose their will on Greece, Italy and Ireland, while trying to force Hungary to accept the same. The EU prosecution of Hungary makes them more popular at home because of falling social mood.

Hungary is definitely is showing some worrisome authoritarian tendencies, but sometimes its hard to separate due to media coverage. As a right-wing government in today's world of left-wing media, there is massive bias in reporting and I've yet to read a balanced article. Hungary's greater control over the central bank, forcing judges to retire a few years earlier are equated with laws such as this:
According to a proposed constitutional amendment, the crimes of the former communist party will be listed in the constitution and the statute of limitations for prosecuting crimes committed during the communist period will be lifted. The former communist party is branded a criminal organization and the current opposition Socialist Party is designated as their legal successor. It is still unclear, legally speaking, what this amendment means. But it is probably not good for the major opposition party.
Hungary’s Constitutional Revolution. One thing is for sure, for good or bad, Hungary is at the forefront of social mood driven political reform.

Here's a in-depth and balanced look at Hungary from a blogger: Difficult Hungarian lessons

2011-12-29

Tighter credit at year end in China; traders continue to sell yuan as arbitrage opportunity persists

Don't follow the headlines: China Yuan Up Late; Companies Raise Yuan Cash At Year End
On the over-the-counter market, the dollar was at CNY6.3192 around 0830 GMT, down from CNY6.3212 late Wednesday. It traded between CNY6.3173 and CNY6.3256. The People's Bank of China fixed the dollar/yuan central parity rate at 6.3157, up a tad from Thursday's 6.3146 on the back of a stronger dollar overseas.
Central bank raised parity, but the dollar traded stronger than parity all day.
Offshore, the yuan fell against the dollar in both the nondeliverable forward and spot markets amid strong dollar demand for year-end window dressing. One-year dollar-yuan nondeliverable forwards rose to 6.3960/6.4000 from 6.3870/6.3920 late Wednesday, implying a 1.2% fall in the yuan against the U.S. currency over the next year. In the offshore yuan market in Hong Kong, where the Chinese currency floats freely, the dollar-yuan exchange rate was at 6.3440 compared to 6.3305 late Wednesday.
And here's a look at 1-Week SHIBOR (Shanghai Interbank Offered Rate) over the past couple of weeks:

Shanghai land sales decline sharply

Shanghai Residential Land Prices Plunge 39.5%
Residential land transactions in Shanghai totaled 4.82 million square meters in 2011, down 16.97 percent year-on-year. Transaction value fell 39.54 percent to 47.04 billion yuan.
Premiums on land sales collapsed. Developers were paying average premiums of 100% in 2010; in 2011 the average premium was 40%. The highest value land sold this year, as priced per square meter, fell 60% from 2010's peak.

WSJ finally understands GOP primary and Ron Paul support

The Ron Paul Vote
The 2010 election was the result of a coalition that extends well past the formal tea parties. It combines Republicans of all stripes, libertarians, independents and worried centrist Democrats. They all are "fiscally conservative" and socially all over the map. The Republican nominee, however, will be produced by only one part of this fiscal-conservative coalition—the angriest, most politically committed Republicans and libertarians.
The Paul candidacy is of course doomed. But the Paul vote won't die. This vote has been building in the depths of the American political ocean since the spending spree of the second Bush term. These people see the upward spending trend in annual outlays and accumulated commitments not as a "problem," as the Beltway prefers, but as a threat to their well-being.
I don't agree with everything in this article, but it is the first I've seen in a mainstream publication that understands the situation. The attacks on Ron Paul are not going to work because his support isn't personal, it is political. His candidacy is one of ideas and knocking him out of the race doesn't ensure support from his voters. Most of his voters are absolutely up for grabs, from a candidate who speaks to the issues. The GOP's problem is that they don't have a candidate who can win these supporters. Michelle Bachmann's Iowa campaign manager has defected to Paul over the issues (not for money, as was claimed by Bachmann).

Ron Paul is benefiting from social mood and the search for a candidate who will change policy Washington, D.C. In some respects, D.C. has never left peak social mood, certainly by the standard of spending they have even reached new heights. The electorate started turning negative in 2000, but the 9/11 attacks and subsequent national security issues dominated politics and kept support for the establishment high. By 2006, conservatives were absolutely fed up with their own party and independents decided to give Democrats a shot. Democrats misinterpreted anti-Washington (seen as anti-Republican) sentiment as support. They spent up a storm with Bush the Younger, followed by a spending spree under Obama. Meanwhile, public opinion and social mood detached from DC and headed south. GOP front runners such as Romney and Gingrich, as well as Obama, simply do not understand the social mood or the current fiscal crisis. They all believe that the economy will recover, they still believe this is not a depression. The informed voters in the primaries sense that these candidates are out of touch with the mood of the country and the current economic reality.

Is gold a bubble? Chinese gold frenzy edition

I haven't covered the Chinese gold demand too much, it's a story that's out there, but I think the demand numbers speak for themselves. On the one hand gold bulls like to point out Chinese demand, but on the other, this is also where one will spot a bubble. Earlier this week, the Chinese government moved to consolidate gold trading on the Shanghai exchange. There is undoubtedly more than one reason for the move. Most importantly, China wants to build Shanghai into a global financial center and this is typical policy in China: pick the winner. China's decentralized nature means many provinces and cities try to grab their share of the market, including financial services, but China's central government sees Shanghai as the future. This move guarantees profit and importance to Shanghai.

The other aim for the Chinese government is to tamp down a market frenzy. China Clamps Down on Gold Trading Frenzy
The notice — published on the central bank website (www.pbc.gov.cn) — said the Shanghai Gold Exchange and the Shanghai Futures Exchange are enough to meet domestic investor demand for spot gold and futures trading.
Existing exchanges or "platforms" were told to stop offering new services.
The PBOC cited lax management, irregular activities and evidence of illegality which were causing risks to emerge, as the reasons for taking the decision.
Sounds like the characteristics of a bubble. Chinese inflation expectations are very high and people started using gold as a replacement for property investment. The stock market recently hit new post-2008 lows and trades less than 30% above the 2008 low. To put that in perspective, this level equates to 850 on the S&P 500.

2011-12-27

GOP Civil War; Brokered convention possible?; third party likely

The GOP is turning its guns inward as the party delivers what the public ordered with its social mood: infighting galore. The long knives are out and the topic picking up the most steam is whether someone else will jump into the race, since it is possible that Ron Paul wins Iowa, Mitt Romney New Hampshire and Newt Gingrich South Carolina. Ron Paul voters think there's no difference between Romney, Gingrich and Obama on spending and foreign policy, while some Romney and Gingrich voters would consider voting for Obama over Ron Paul. With greater proportional representation this time around (though not a major shift), there's also a greater possibility that a candidate goes deep into the race with a significant number of delegates.

During the primaries delegates are apportioned and once they get to the convention, they can vote for any candidate. A contentious primary season that leaves candidates unable to compromise could open the door to a candidate not in the running, a true dark horse, as candidates wheel and deal their delegates. It also opens the door to third parties, as voters decide to leave the party.

A brokered convention is very unlikely, but it's looking like the election will be knock down drag out. Democrats who are salivating at the prospect of Republican infighting will be disappointed to hear that not only will the rhetoric intensify in the general election, but a close race could also expose Democrat divisions. Even worse, A Down Stock Market Guarantees Obama Will Lose in 2012: Robert Prechter. Which is why I expect another round of QE......

The prediction market Intrade is a bit more sanguine. Romney as GOP Nominee contracts are currently trading at 73.6%, with Gingrich down at 6.8%, 0.1% behind Ron Paul. If Romney sails into the nomination, my bet is that we also see a first quarter stock market rally......

Taiwan elections in three weeks

The U.S. is focused on the Iowa caucus and New Hampshire primary, but a more important vote will take place on January 14 when Taiwan goes to the polls. Polling data has the KMT candidate for president, Ma Ying-jeou leading the DPP candidate, Tsai Ing-wen, by 6%. However, Taiwan's prediction market has the DPP candidate leading Ma by a similar amount. The first chart is the predicted vote totals, with Ma rising into the final weeks. The second is the probability of a win, like Intrade this is the price of the contract. Right now traders are buying Tsai Ing-wen contracts for 65.90 versus 31.70 for Ma Ying-jeou contracts. The payout is 100 or 0.

One problem with these numbers may be that the site gives out free chips to start. I signed up and filled out my personal info, so I have NT$60,000, or about $2,000 to play with. That makes me suspect the value of these numbers as compared to Intrade, where it is all real money. That said, the market is certainly inline with a socionomic forecast. I'll have to do a little research to see if the current prices make sense. My gut says the KMT candidate looks undervalued, assuming the polling data has some value. Investing isn't just about predicting the right outcome, but also buying or selling at the right price......

The site for the market is XFutures

Here's the link to the blog entry with the charts: 未來事件交易所目前對2012年總統選舉預測 蔡英文得票率50.4%、領先馬英九6.2個百分點_20111227

Who's buying gold?

Here's a link to the Q3 gold demand trends report from the World Gold Council. More research can be found at this link.


Total consumer demand is up, but jewelry sales are down everywhere except Japan, China and Russia. Total demand fell in India, the Middle East, the U.S., Italy and the U.K. Total U.S. consumer demand was 52.4 tonnes, less than Turkey. Vietnam and Thailand combined to buy more gold than the U.S., almost all of it investment demand. India and China both had demand of about 200 tonnes, or each about four times U.S. demand, for a combined 8X. U.S. demand is about 6% of the market, while India and China are close to half.

I have said it before and I say it again, if gold is a bubble, the place to look is China or India, not the U.S. Anyone focused on U.S. gold demand, be they bull or bear, is watching the wrong market.

Chinese policy noose tightens around developers' necks; developers concoct elaborate sales tactics including "group buy" and air quality

“三限”逼开发商砸锅卖铁 武汉房价下跌或掀高潮. China has three restrictive policies on credit, price and sales. The credit restrictions are coming from the central bank and also the banking sector. Price limits and sales restrictions are now expanding into second and third tier cities.
“限购令”则是由大城市向二三线城市蔓延。据中国证券报记者不完全统计,截至目前,全国已有48个大中城市实行“限购令”。“限价令”方面,目前有廊坊、秦皇岛、中山、深圳、烟台、韶关、丹东、增城、珠海等城市采用。在实行“限价令”的城市中,只有珠海和中山明确提出了全市房价的统一上限:珠海是11285元/平方米,中山则是5800元/平方米,其他城市则多是限定了各楼盘的同比上涨幅度。
This paragraph says 48 cities are using sales restrictions and that this restriction is spreading to more second and third tier cities. Only Zhuhai and Zhongshan are using price controls at this time. This article is from a Wuhan news source and goes on to discuss the Wuhan property market, with expectations of a mild price decline.

This next story discusses a sales tactic used by a developer in Qingdao designed to overcome home buyers' fear of falling prices.
“差价补偿”青岛探秘 保值还是促销?(Making up the price difference: preserve value or promote sales?)
该处置业顾问告诉导报记者,根据购房协议,业主购买的商品房在交房满两年后的一段时间内,如果该商品房与同区域的新开楼盘价格相比,低于当时业主购买价格的120%,业主可以要求开发商以该商品房购买价格的120%进行回购。
A developer used to have a policy that said if the price of real estate fell relative to new properties, the developer would pay for 3 years interest cost. Now, the policy is for two years and it says if the price of a new property is less than 120% of the current price, the developer will buy it back. Although this article says the buyers "aren't buying it."

This "spread compensation" is a new tactic for reversing falling sales. One adviser said the policy is a win-win if it calms buyers and increases sales, but that this policy alone won't reverse price declines. Other analysts were more pessimistic, saying these local policies could generate some cash flow, but can't stem the larger trend of falling prices. According to an online poll, 86% of netizens believe the policy is a sales method and developers cannot meet this promise over the long-term. I'm inclined to agree, since continued price declines could lead to bankruptcy of the developers even without this policy.

The Chinese refer to companies such as Groupon and the many Chinese copycat firms as "group buy" websites. Now, people are looking to sell homes using this strategy.“团购”买房 风险隐现("Group Buy" Buy Homes: A Glimpse of Risk)
房子可以“团购”吗?可以,不仅可以,折扣率甚至可至30%—40%。开发商似乎让出了很大一块利润,但让利的背后,却隐藏着未见的风险。这种隐形的交易,正在东北地区出现并有蔓延之势。
Can you "group buy" homes? It's not only possible, but discounts can be as much as 30% to 40%. This seems to let developers earn large profits, but behind the profits are hidden risks. These invisible transactions appeared in the Northeast and are spreading.
The article goes on to discuss some risks, the first is that buyer's must sign a contract, not transact online; the second is that some firms are making advance sales in advance of getting their licenses. One of the latter cases is in Changchun, Jilin province. At the end of the article, Centaline North China's general manager Li Wenjie says the government is protecting the developers, that since real estate faces government regulation now, the local governments are tacitly approving this sales strategy.

The Groupon business model has been analyzed every which way. From what I understand of it, the merchants are generally selling below cost, but the goal is to attract new repeat customers. Whether those customers materialize is the major question for the strategy, although the "group buy" model could survive for awhile until word that it's a bad deal for merchants got around. It also could do well with liquidations and firms such as the dollar stores that buy bulk inventory from bankrupt firms. Even if the model works though, does it make any sense for a real estate developer that will probably never have repeat business? This screams of what we saw in October when Vanke was the first developer to cut prices: a move to grab sales in a shrinking market. This isn't a novel sales strategy, but an act of desperation.

因PM2.5之名 买房新攻略 (New strategy: buy a house because of PM2.5)

If you pay attention to Chinese news, a hot topic over the past several weeks is the air quality standards. The government has the capability to measure pollutants as small as 2.5 microns, but it chooses to only report PM10 because the PM2.5 number would expose the true level of pollution. This policy has been heavily mocked by netizens on Weibo and message boards, in addition to editorials in many major papers. This article discusses the pollution levels, noting that only the very northern, southern and western (Tibet and Qinghai) regions of China, plus sparely populated areas, have low pollution. Urban developers are pushing "micro-climates", with local factors such as parks or rivers contributing to better air quality within a city. They also claim apartments above the 12th floor have less dust.

Changing mood and diversity

I've yet to finish Suicide of a Superpower: Will America Survive to 2025?, but there's a great anecdote on diversity from the book (below) that clearly shows shifting social mood. When I review the book I will go deeper into the issue of diversity, which was considered a good thing during rising social mood, but which already has a growing amount of social science research exposing it as a negative factor, i.e. more diverse societies and organizations are weaker because of their diversity.

This is what is interesting about diversity and why it may be an important area to watch as social mood declines. There is a mood driven shift in attitudes towards diversity, but diversity is also a bad policy that will be exposed as a major problem for diverse societies. Consider these pairs of characteristics, the first is a positive mood characteristic and the second negative mood: togetherness – separatism, inclusion – exclusion. Diversity is about separatism and exclusion because it is about maintaining group identity within a larger group. Diversity was viewed positively because the general social mood was extremely positive and therefore feelings of togetherness and inclusion overwhelmed the separatism and exclusion that are characteristics of diversity. Now that social mood is declining, diversity will not only be viewed negatively, but its negative traits will be revealed just like massive debt loads have been revealed as a major economic problem.

From page 301, Buchanan notes that when the French soccer team won the 1998 World Cup, the diverse team was celebrated as a "symbol of a new diverse France." The 2010 team was denounced as scum, troublemakers, "guys with chickpeas in their heads instead of brains." Buchanan sources the quotes from Racial Tinge Stains World Cup Exit in France, but I went looking for some other articles and came across these stories from earlier this year.

France football heads mired in race row over alleged quotas for ethnic players
The issue hit a raw nerve in France in 1998, where their World Cup victory by a multicultural team led by Zinedine Zidane was hailed as "black, blanc, beur", and was said to symbolise a new beginning for a mixed nation, but it mainly gave way to great unease and bickering over the racial profile of "Les Bleus". Not only did the far-right Jean-Marie Le Pen complain of too many black people in the team, a leading Socialist regional head, the late Georges Frêche, was expelled from his party in 2007 for making the same observation.
Crucially, the French team's mutiny at the World Cup last summer was privately blamed by some on black or Muslim players, including the French convert to Islam, Franck Ribéry. Speculation was that the team had fragmented over the lack of the football team's "national identity".


French football 'approved quotas on number of black players’
In February, shortly after his appointment, Mr Blaquart spoke of the necessity to “prioritise intelligence in the game with respect to the technical and, above all, athletic aspect.”
Mr Blanc is reported to have approved a selection process favouring young talent sharing “our culture, our history”.
The site’s sources added that Mr Blanc cited the current would football champions Spain, reportedly saying: “The Spanish, they say 'we don’t have a problem. We have no blacks’”.

Demographics and Socionomics

I'm currently reading Suicide of a Superpower: Will America Survive to 2025?, and I think it's a potential socionomic road map. At the "highest" level, or most simplistic level, these types of books appear when social mood is declining. However, if 2000 was the grand super cycle peak, then some of the prophets of doom are correct and they are correctly identifying the fault lines that will crack under the pressure of declining social mood.

I'll cover Buchanan later, but Spengler has an article out that has a paragraph on demographic winter and how it could affect geopolitics. The fifth horseman of the apocalypse
Why do individuals, groups, and nations act irrationally, often at the risk of self-destruction? Part of the problem lies in our definition of rationality. Under normal circumstances we think it irrational for a middle-aged man to cash in his insurance policy and spend money as fast as possible. But if the person in question has a terminal illness and no heirs, we think it quite reasonable to spend it all quickly, like Otto Kringelein in Grand Hotel or his updated equivalent, Queen Latifah's character in The Last Holiday. And if we know that we shall presently die of rabies, what is to prevent us from biting everyone we dislike? Countries sometimes suffer the equivalent of terminal illness. What seems suicidal to Americans may appear rational to an existentially challenged people confronting its imminent mortality

Chinese milk sucks

Chinese poison or contaminated milk stories are a dime a dozen. I have to assume that most of the milk is contaminated all the time, since about once every three to six months there's a story of contamination.

Mengniu Milk Reports Carcinogenic Contamination

2011-12-26

There is no plan B in Europe; plan B is thwarted

A SWIFT Denial - How In Europe, Even Admission Of A "Plan B" Is Equivalent To Failure
While we have long known that the drachma, and recently the lira, have seen significant "when issued" interest by institutional clients desiring to hedge their currency collapse exposure, and thus early markets by various trading desks, little did we realize just how destabilizing this fact to the system would be, at least according to SWIFT. According to the WSJ, this organization, best known for making an abrupt appearance any time one wishes to do a wire transfer, then promptly disappearing until the next such instance, ended up promptly shutting down any Plan B optionality when "at least two global banks took steps to install back-up technology systems that could handle trades in old European currencies like drachmas, escudos and lire... quickly found, is not so easy in a financial world that is trying to both exhibit confidence in the ailing euro and—just in case—plan for its possible demise.
Technology managers at the banks contacted Swift, the Belgium-based consortium that manages the network used in financial transactions, said people familiar with the matter. The banks wanted Swift's technology support and the currency codes that would be necessary to set up the backup systems."
And got promptly rejected: "Swift declined to provide some information for such contingency planning, including whether old codes could be used in the system, said the people familiar with the matter." The reason is that in Europe, the mere admission that Plan B is a possibility, apparently set off a chain of events that makes Plan B an inevitability: "...officials there feared that releasing the information could fuel further doubts and instability in the euro zone."
Much more at the link.

Chinese provinces default

Hunan Provincial Expressway Construction Group is delaying payment on 3.11 billion yuan ($490.5 million) in interest, documents governing the securities show this month. Guangdong Provincial Communications Group Co, the second-largest debtor, is following suit. So are two others among the biggest 11 debtors, for a total of 30.16 billion yuan, according to bond prospectuses from 55 local authorities that have raised money in capital markets since the beginning of November.
Provincial borrowers defer loan payments

2011-12-24

Chinese yuan crash underway

Get ready for a rocking 2012 as this could be the story of they year—if it pans out. I have been talking about the possibility of a depreciating yuan for several years, but the story heated up in December as the yuan traded limit down for several days in a row. This exposed the central banks maneuvers to prop the yuan up, but now ZeroHedge is reporting on this story and saying that the market has been trying to weaken the renminbi in a major way this autumn.

Intraday USDCNY Unchanged Since 2006
While all has been calmly proceeding in the right direction from US perspectives with CNY appreciation (though maybe not fast enough for Chuck Schumer's liking), under the surface there is what appears to be a fierce battle between market participants and the PBoC. By breaking down the cumulative shift in USDCNY into intraday 'market/trading' movements (from fixing to close) and interday 'government-assisted' movements (from prior close to fixing), we can draw some perspective on what the market is trying to do and what the government is doing. Evidently from the chart, the outward appearance that CNY appreciation is slowly but surely occurring (the green line) is misleading, the clear signal is a market trading the USD higher (helped by European angst) and a PBoC massively intervening.

The ZeroHedge headline implies that the cumulative intraday move in the renminbi has completely erased appreciation since 2006, which means the cumulative move would have pushed the renminbi back to 8:1 U.S. dollar. I don't believe this is the correct interpretation because the government is forcing the currency lower and the market is pushing against this in the short-term and intraday, not over the long-term. This gap implies the government is fighting the market in a major way, but it doesn't give us a good price target. What this chart clearly shows is that the yuan price has been falling this autumn. The action in December, of several days in a row of limit down trading, was market forces finally overwhelming the People's Bank of China.

Notice there was also a crash in 2008, but this was a small move and the PBOC eventually "won" the day because the market again moved in its direction. Market intervention by central banks works when the market is moving with it as shown in Illusion of Control: Central Banks and Interest Rates. Since 2009, the Federal Reserve has failed because it is fighting the market, rather than following it. Many investors wrongly believe the Chinese have more power over markets than Western governments. They have more control over markets in the short-run, but ultimately markets always win. There will be a large psychological shock to the market if the PBOC is seen to have lost control of the renminbi. However, at this moment there is just a lot of smoke. This isn't yet a fire and if the markets move back in the PBOC's favor, it will have "won" again this time, like they did in 2008, as the market traded along with the government in 2009, 2010 and the majority of 2011. Unfortunately, this is a volcanic situation. There's no way to know if and when it will erupt, but an eruption will be devastating for global markets.

Here are recent blog posts I've written on the weak yuan; all of these post have come in the past month. Before this period, I may have only covered this topic once every three or six months, if that much, but events are starting to move now. Use the renminbi tag to see all the blogs written on the topic.

11/10 Yuan can go down
11/17 China's forex weaker than perceived
11/24 Chinese yuan now flowing out of Hong Kong
11/26 Buy puts on the yuan?
11/30 Yuan crash possible?
12/07 Yuan hits limit low for fifth straight day
12/08 Yuan limit down for seventh straight day
12/15 Yuan limit down again; 12th day of losses
12/19 Devaluing the renminbi

2011-12-23

SOHO China says there's no financing crunch

In Major Chinese developer can't pay workers in Shanghai, I covered the Weibo story about a developer could not pay workers in Shanghai. The firm now says it has no cash flow problems: SOHO China Denies Rumors of Cash Squeeze
SOHO China, a leading real estate developer in China, batted away media reports of a severe liquidity crunch in a statement released December 22. The company said it has 17 billion yuan in cash, and is currently considering more projects for investment.

2011-12-21

Another step to help Chinese consumers

China to Lower Import Tariffs for Commodities
According to a recent notification by the Ministry of Finance, the State Council's tariff committee has finalized next year's tariff scheme, lowering the duties for 730-odd imported commodities to an average of 4.4 percent, which more than halves the rate enjoyed by Most Favored Nation status under World Trade Organization rules.
Also a good way to reduce inflation...

Taleb slams Bernanke


He warns against non-linear risk inherent in Fed printing, using the analogy of a ketchup bottle. They try and try, but nothing comes out of the bottle (no inflation)......and then it explodes.

Secession and localism

Nationalism is on the rise in Europe, but people tend to view this negatively because they think of 20th Century, socialist nationalism that coalesced into large states. What's happening now is a return to cultural, ethnic and linguistic roots, sometimes in the state where there is a mass movement, but often within a state. Besides nations turning away from a pan-European debt solution, we see Belgium splitting in two on linguistic grounds, a separatist movement in northern Italy and more.

In this blog post, libertarians compare Europe and the U.S. and discuss Europe's greater local and regional autonomy. The End of the Mega States?. There are links to an article and a podcast from that post.

2011-12-20

America is broke: military furloughs

White House publishes shutdown plans
The Washington Post estimates as many as 600,000 federal employees could be furloughed if Congress fails to act on the spending bills. The departments of Agriculture, Commerce, Housing and Urban Development, Justice and Transportation, along with a handful of independent agencies, would not be affected because they have already secured appropriations for all of fiscal 2012.
Below is our initial tally of employees who could be furloughed, by agency, based on the plans published by OMB. We will update it as we get more information. Defense: Military personnel are not subjected to furlough. The minimum number of civilian employees will be exempt from furlough, but no numbers are provided in the plan. Contractors will continue, but new contracts will not be executed.
Military furloughs are being discussed, active duty soldiers have been told they could be furloughed.

Must read: Jim Rickards' Currency Wars

Jim Rickards offers a new take on central banking and the global monetary system in Currency Wars: The Making of the Next Global Crisis. He explains how governments use currency as a weapon, with historical examples and predictions for the next decade. From my perspective, the book didn't have a lot of new information because I listen to all of Mr. Rickards' KingWorldNews interviews, as well as a watched a few YouTube videos. For everyone else, the book is a great way to quickly come up to speed on the "intersection of global capital markets and national security." (Even if you read the book, the interviews and videos are still good if you want a longer and more in-depth discussion of the ideas presented in it.)

The beginning of his book will be most interesting to political junkies and readers interested in national security. He describes a Pentagon war game designed around financial warfare, in which he and two associates try to open the eyes of the U.S. national security apparatus. The government is aware of cyber threats and the U.S. government used Facebook and Twitter as part of the Arab Spring, but Rickards argues that the government is not as aware of financial war, specifically the role of currencies and how they can be manipulated to achieve political goals.

There is a huge gulf of understanding between the general public and economists when it comes to the global financial system, to say nothing of the politicians who are in a position to implement policy. After reading Currency Wars, you will realize that there's just as large a gulf between economists and the real world, a scary thought given that they are the ones advising the politicians. Nouriel Roubini launched a Twitter war with Rickards because Rickards discusses the gold standard. Talking about the gold standard with mainstream economists is like waving a red flag at a bull, but the facts are on Rickards' side. One of the common misconceptions he tackles is the idea that the gold standard caused the Great Depression. Rickards argues that it was bad central bank policy that caused the depression, not gold. Gold was a component of that policy, but as he says in the book, blaming gold for the depression is like blaming a robbery on the bank teller. Gold was present, but it was not the cause. The largest factor in the Depression was central bankers who set the gold standard at the wrong price. The world wasn't on a pure gold standard where paper money was 100% backed by gold, rather paper currencies were partially backed by and pegged to gold. Setting the price too low resulted in deflation; setting it too high would have caused inflation. Rickards goes through the round robin currency devaluations during the Depression, as each nation tried to beggar-thy-neighbor. Their devaluations were necessary because the price of gold was set too low, but they did it in a disorderly fashion and this helped lengthen and deepen the depression. Murray Rothbard's America's Great Depression covers this topic in greater depth, if you are interested.

Rickards also discusses the use of IMF special drawing rights (SDRs) and the IMF's role in the global monetary system. He puts forth several possible outcomes for the current crisis, one of which is the IMF as global central bank. SDRs are a unit of currency created by the IMF, based on a basket of fiat currencies. SDRs are not backed by currency though, they only use fiat currency as a reference to value the basket. Central banks, governments and large banks would use SDRs, but everyone else would still use their local currency. Rickards doesn't endorse solving a fiat currency crisis with another fiat currency, or failed central banking with a bigger central bank because the result will be an even greater collapse in the future. Rickards also favors U.S. sovereignty over the rule of unelected central bankers (there would be no way for the people of any nation to check the power of a global central bank.) Given that central bankers always inflate, handing the power of money creation to unelected central bankers who would be unaccountable due to no single nation having authority over them would result in a particularly spectacular collapse.

Other solutions to the current crisis include using gold. Rickards doesn't believe a pure gold standard will return, but it can be used as part of a new global monetary order. As part of this argument, he estimates several prices for gold, with partial backing of the U.S., European and Chinese money supply coming in at around $7,000 an ounce. Needless to say, Mr. Rickards is bullish on gold.

One interesting part of the book is where Rickards takes up the arguments of Joseph Tainter and Eric Chaisson. Both of these men deal with complexity theory. I'm familiar with Tainter, having read The Collapse of Complex Societies. Rickards weaves their ideas into the complexity of the financial system, but he only discusses it for a few pages. The intersection between Tainter's theories and the current financial crisis merit their own book, as even well read and open-minded economists do not understand the argument. As someone knocking around these ideas in my head, I would have liked a deeper exploration by Rickards. I have an 18-month old draft post exploring the ideas in Tainter's book that I have yet to finish because my thoughts on the matter are incomplete. To be fair, this topic would not be interesting to general audience readers, but Rickards' discussion will spark an interest in those searching for a deeper understanding of the current crisis. If you are one, reading The Collapse of Complex Societies is the next step.

Finally, one can apply socionomics to Currency Wars. One area is in the conflict between nations. Rickards proposes various solutions and possible outcomes, but socionomics can be used to narrow the field, since cooperation is unlikely during a period of declining social mood. IMF as central banker to the world could happen if there's a big bounce in social mood, something Precther shows as one possible path for the markets based on his Elliot Wave count, but since the current forecast is that 2000 was the supercycle top, social mood will decline again and this could set up an IMF failure sometime in the 2020s, taking down the global economic system with it. An alternative is that there's no IMF solution now, something Rickards suggests given that it could take 5 years to launch SDRs as a viable currency and in tune with the current declining social mood.

Socionomics also plays a role in the possibility of currency collapse. On page 213 and 215 of the book (and in one of the YouTube videos linked above), Rickards shows two tables of critical thresholds for dollar repudiation. In one chart, it takes 500 people repudiating the dollar to cause the next 1,000 people to repudiate. In the second table, there are lower initial thresholds, where only 100 people are needed to cause the next 1,000 to repudiate the dollar. Part of the complexity theory mentioned above involves the idea that the same event can produce wildly different results. Tainter argues that civilizations survive earthquakes and barbarian attacks throughout their history, but for some reason one earthquake or attack, no worse that before, leads to collapse. Rickards uses the example of lightning bolts striking a forest. Sometimes there is no fire, sometimes a small one, and sometimes there's a raging fire that causes massive destruction. For the dollar, this is crowd psychology. Investors are familiar with the "dollar is trash" arguments, but at what point does this turn critical and cause a change in state? During rising social mood, these arguments could be quite loud, but amount to nothing. See the early 1980s as an example, when people feared a dollar collapse, but it didn't happen. Ricarkds says we don't know these threshold levels, but with socionomics, I believe we can expect them to become smaller during declining social mood, and that means extreme events, such as currency collapse, have a higher potential. We are in a heightened state of criticality, where the next snowflake has greater odds of setting off an avalanche.

In Currency Wars, Rickards covers a range of complicated topics in clear and simple prose. Issues such as the collapse of the U.S. dollar, the rise of the yuan and euro, and the strategic goals of major world powers are discussed. The book is great for all readers and perfect for those who cover their ears and close their eyes when the discussion turns to gold and currency wars. One cannot be an informed investor, or even an informed voter, without understanding the issues discussed in Currency Wars. It is a must read.

China cracks open the door to overseas investment

Yuan-Denominated QFII Program Kicks Off
China Securities Regulatory Commission, the central bank and the State Administration of Foreign Exchanges jointly issued a guideline for RQFII trials which allow fund management companies and securities firms to use yuan funds raised in Hong Kong to invest in mainland securities. A 20 billion yuan quota was set for the trial program, according to the guideline issued on December 16.

As predicted, real estate slowdown hits local government coffers

Governments in a Hole as Land Sales Plummet
For example, in the Shandong Province capital Jinan, not a single developer bid for nine of the 11 plots offered by the city in early November. The two plots that sold went for bottom-line prices.
A city with a serious land market crash is Guangzhou, where in November some 32 plots failed to sell. In some cases, auctions were suspended by the city government, which blamed poor market conditions.
These plots were supposed to generate about 18.7 billion yuan for Guangzhou's city government, representing some 29 percent of the planned land sale revenues written into the 2011 fiscal budget. Asking prices averaged 5,584 yuan per square meter of floor space.
How bad is the situation in China? They cannot even pay teachers' salaries:
A source at a state-owned property firm in one provincial capital told Caixin that local agencies don't have enough money to cover basic healthcare costs or pay teachers. "City officials are coming to us and asking us to buy land to bolster the land market," said the source, who declined to be identified because of the issue's sensitivity. He said his company in November complied with a local officials' order to buy a 900,000 square-meter site "whether we wanted to or not."
No doubt the inability to pay teachers' salaries is similar to the inability to pay in America. When American local governments lose money, they don't cut administration and wasteful spending, they go straight for teachers and cops to manipulate public opinion and it almost always works. In China, fleets of imported German automobiles are just the tip of the iceberg that is wasteful spending. The government still has ways to force the market though:
Of course, Chen said, government-owned property developers can be pushed by local officials to buy land, whether or not they want it, especially in second- and third-tier cities. The provincial capital developer source, for example, said if his company has the money "and it's within our power, we'll still acquire land. If we don't buy, the local government will be hard to hold on financially.
"After buying land, the government will take care of you in other ways (such as) special treatment for future land transactions," he explained.
And so the bubble blows......

Mass layoffs at Chinese white-goods maker Midea; followed by more layoffs

Midea Said to Have Plans for More Cuts
Midea Air-conditioning & Refrigeration Group, one of China's white goods manufacturers, is gearing up for another round of layoffs, according to an inside source. The company has already asked 30 to 40 percent of one sales division unit to leave, said a representative from the unit, adding that there are plans for heavy cuts to the budgets of sales offices.
The article goes on to say the company is shifting from a focus on expansion only, to a balanced focus on profitability and expansion. In other words, growth is slowing.

2011-12-19

Social mood in action: rotating front runners

Gingrich's Lead Over Romney Among Republicans Collapses
After enjoying 14- to 15-percentage-point leads over Mitt Romney in early December, Newt Gingrich is now statistically tied with Romney in national Republican preferences for the 2012 GOP presidential nomination: 26% for Gingrich vs. 24% for Romney. This follows a steady decline in support for Gingrich in the past 10 days.
RealClearPolitics has a running chart of the GOP presidential candidates' poll numbers. Notice that each candidate has only managed a lead for a few weeks and each shows a similar topping pattern.


On the demand side, voters are unsatisfied with the candidates because they are in a negative mood, they are more critical of candidates and none are able to survive the ringer. It almost looks like musical chairs, where the candidate who shows up last wins. Assuming no one else enters the race, Romney could survive the musicals chairs because he's had the most consistent poll numbers, but John McCain won by default over Romney in 2012 and Tea party and grassroots conservatives were not happy with him. Already, seeds of a third party are being sown with a lot of big name conservatives blasting Newt Gingrich and others unsatisfied with Romney. Obama and the Democrats appear unified because the attention is on the Republicans, but cracks in their alliance have shown up with Obama's Keystone pipeline decision, which is flat out insane unless one considers that he's placating the environmentalists in his base.

A fall in social mood will expose all the cracks between voters. People are looking for a fight and the appeals to save it for Obama will fall by the wayside as all the guns are brought to bear on the GOP's own candidates. This will be a prelude to an even more contentious and possibly violent (echoes of 1968) election, with a possible third party exposing the fault lines within the Democrat party.

Here's a look at what could spark open warfare on the Republican side. GOP will take off the gloves if Ron Paul wins Iowa. Speaking of Buchanan's shock 1996 win in New Hampshire:
While many Republicans dismissed Buchanan's New Hampshire win as irrelevant, arguing his support was too narrow to ever win the nomination, the neoconservative wing of the GOP darkly warned of a Buchanan menace. "People are panicked," Bill Kristol of the Weekly Standard told Newsweek. "If they're not, it's only because they don't know what's going on."
The liberal mainstream media dutifully filled out Kristol's picture of "what's going on." Newsweek put an ominously lit picture of Buchanan on the cover under the words "Preaching Fear." The article stretched itself into contortions to paint Buchanan as a white racist. (Buchanan was campaigning in South Carolina, which still flew the Confederate flag over its capitol.)
Ted Koppel, on "Nightline" in the days after New Hampshire, relied on unsubstantiated tales (for which he later apologized) about Buchanan's father as a way of tying the son to "bigoted and isolationist radio orator Father Coughlin." He also cited a Jewish neighbor of the Buchanans who was beaten up and called "Christ-killer" -- without mentioning that Pat was off at college at the time.
Insinuations of racism and anti-Semitism were the weapons of the mainstream media, but Buchanan's sins in the eyes of the GOP establishment were different. They feared Pat because he rejected a rare inviolable article of faith among the party elites: free trade. Also, in the post-Cold War era, Buchanan's foreign policy had become far less interventionist than that of the establishment.
In 1996, social mood was heading into a peak. People were optimistic, looking to work together and the assault on Buchanan pushed him out. In 2012, a similar attack risks triggering open warfare because there's no consensus. A major attack on a single candidate will push entire groups out of the party and possibly open up new conflicts. Looking at Paul in particular, his foreign policy makes him unpopular with most of the GOP, but his domestic policy is quite popular. The leaders of the GOP also consider Paul's domestic agenda to be unacceptable, but Bachmann, Perry and Palin all have spoken favorably of his domestic policies or proposed very similar policies. Paul will face similar attacks as Buchanan:
But neither his establishment-irritating adherence to principle, nor his hawk-angering foreign policy, will be the focus of the anti-Paul attacks should he carry Iowa. His conservative critics and the mainstream media will imply that he is a racist, a kook, and a conspiracy theorist.
Paul's indiscretions -- such as abiding 9/11 conspiracy theorists and allowing racist material in a newsletter published under his name -- will be blown up to paint a scary caricature. His belief in state's rights and property rights will be distorted into support for Jim Crow and racism.
Will an attack on Paul kill the messenger, or be seen as an attack on the message? This could be big because a win in Iowa also throws open the New Hampshire contest: Can Ron Paul Win New Hampshire?
Then, New Hampshire. Here is what the Granite State looks like right now, according to the RCP Average. Romney is at +11.3 percent, still hanging on to a much-eroded lead (his total poll share is 33.3 percent). Gingrich is in second (22 percent), Paul third (15.7 percent) and Jon Huntsman fourth (11.3 percent).
All of that would matter very little the minute Paul wins Iowa. If he can beat Gingrich there, the real contest in New Hampshire will be between Paul's defiant leave-us-alone-and-bring-the-troops-home Republicanism and Romney's managerial competence. Paul seems a better fit for New Hampshire voters, and Iowa can remove the taint of unelectability (see Obama, Barack).
Social mood doesn't necessarily favor a Ron Paul candidacy, but it does mean a very volatile and contentious primary season that gives an ideological candidacy its best shot in 50 years.

Devaluing the renminbi

人民币汇率:牛皮市来了. China's banks dump dollars to halt renminbi slide. Below is Google translation of relevant portions:
"But if the debt crisis can not get a breakthrough and progress slow, and even the disintegration of the euro area, it is not impossible, to continue strong U.S. dollar, the depreciation of the expected short-term effect on the market, the market is once again acting on the expected, if this into a vicious cycle , leading to devaluation of the RMB is really into the channel on the true 'Xiecai' a ', a domestic financial institutions, traders said.
Depreciation is expected, once formed, will lead to capital flight, devaluation is expected to result in more more capital outflows, resulting in the already depressed domestic A-share market and real estate market further downturn, leading to bad did not increase the risk of a hard landing for China's economy , combined with the complex financial environment, foreign and further dollar strength, lack of confidence in China's economic situation could lead to further depreciation of the RMB, and the previous depreciation on exports can bring good, but also because of poor external demand can not be played due to the effect of stimulating economic growth.
This is a sound picture of terror on the people feel, those in the A-share investment institutions have also fear in the heart.
A weak yuan is bad news for asset prices in China and the big news is that many people now expect some devaluing, with forwards pricing in a small depreciation of just over 1%. That's a small figure, but markets are non-linear. When a market tips from a heavy sentiment in one direction, the initial move will be small, but it will rapidly accelerate and then overshoot. What's behind the falling renminbi? 美元荒. Dollar Shortage!
If you are the Greeks, how would you handle your money? If you are a European business owners, how would you handle your cash assets? Investors in other countries, especially U.S. investors, including hedge funds how to handle their own money? European financial institutions to help themselves, to obtain liquidity, will be how to deal with investment in emerging markets?
All answers to these questions are: U.S. dollars in cash. Market dealers, there is an interesting statement, "If the disintegration of the euro area, 2012 has truly arrived, and that Noah's Ark and only dollars."
There's a debate over whether China should continue with currency reform during this volatile period, especially when China's horde of U.S. dollars and desire to maintain the currency value is providing a source of U.S. dollars to the world. See Year End "Dump" Renminbi Event 年终“抛售”人民币事件
"I want to buy dollars."
"I want to buy foreign exchange! Buy U.S. dollars! First settlement had not!" Voice full of similar counters at designated foreign exchange banks around. Some companies eager to import or purchase of foreign exchange abroad residents are worried that devaluation, want to purchase foreign exchange in order to advance preservation; some exporters in the country bought in advance to the Hong Kong dollar settlement, because the offshore market of RMB cheaper, can be from arbitrage.
2012 will be interesting, not because of fluctuations in the renminbi, but the United States' political and economic response to a stable or even depreciation renminbi. Socionomics says the result will not be harmonious.

Yuan could decline to 7 per U.S. dollar; Fed to respond with QE3

In his latest King World News interview, James Rickards. He sees Federal Reserve printing as a peg breaking weapon used against China. When China pegs to the dollar, it outsources monetary policy to the Fed, or to put it another way, they import U.S. monetary policy. China's economy is growing much faster and credit growth is robust, so when the U.S. prints, money immediately goes into commodities, gold and emerging markets, with a large amount of capital showing up in the Chinese monetary system. China can no longer sustain appreciation of the renminbi because their exporters have no profit margin. Rickards sees an unofficial peg and even currency devaluation coming, with the renminbi sliding to 7 from the current 6.3, to which the Fed will respond with QE3, forcing up Chinese costs and neutralizing the peg. This is unrestricted warfare, the use of currency as weapon in the economic confrontation of the day, but the result will be the destruction of the U.S. dollar and possibly all paper currencies.

Home prices down; support for stock market; religion infects the party

China’s November Home Prices Post Worst Performance This Year Amid Curbs China opens up to offshore renminbi investors No room for faith for all party members
"All religions, without any exception, belong to idealism. And in philosophy, there is fundamental conflict between materialism and idealism, which cannot co-exist, no matter when it is applied to any individual and political party," Zhu said.
There are enemies around every corner in the mind of the Marxist. Wukan rebels prepare with rocks and rice
“If they have guns, we have rocks,” said a villager surnamed Li. “If they want us to die, it’s OK too. We don’t have any land left anyway.”

2011-12-16

Liu Junluo channels socionomics

Liu Junluo's latest book is The Imminent Third World Depression. In his blog post announcing this book, he explains why China is about to lose hundreds of billions of dollars, a forecast that lines up perfectly with the predictions of socionomics. Below is my paraphrased translation of the relevant portion of 2012年中国宏观政策将继续希望股市大规模下跌和新书公告
In 2012, we will see Europe hovering between life and death, weeping about how poor she is, then happy and excited as the collapsing euro wipes out her debt; then in 2012-2013 we will see African nationalists rise to power and nationalize foreign investments. Venezuela has nationalized U.S. assets and gotten along extremely well. We are investing every sum of money into Africa, and the Africans welcome it, but wait until the nationalists come to power, then Africa's good times will begin.
He compares this to what the Europeans have done, inviting hundreds of billions in China investment only to plan on default. The result of the massive losses will be depression in China, which will spread across the emerging markets.

Euro shorts reach level unseen since 2010 Greek panic

Elevators KILL!

Frightened New Yorkers shun elevators after crush horror. Great evidence of the current social mood. I assume these New Yorkers still cross the street......but one elevator accident has people fearful. Why the overreaction to a freak accident? It's the current mood, people are in a mood to be scared.

Time for Socionomics

Why all signs point to chaos
Jacopo Ponticelli and Hans-Joachim Voth of Universitat Pompeu Fabra in Barcelona, have studied the social impact of government budget cuts in Europe since 1919. They found that "austerity has tended to go hand in hand with politically motivated violence and social instability" and revealed a strong link between the severity of budget austerity and the level of popular discontent.
They used this data to create a chaos metric representing the sum of events including assassinations, attempted revolutions, strikes, riots and demonstrations that occur per year.
The evidence finds that the deeper the budget cuts, the more severe the chaos. And deeper budget cuts certainly lie in Europe's future -- and eventually, the United States', too. We've had only a taste of these events thus far; Europe has seen most of them.
First off, this line of argument is being pushed by those who do not want spending cuts. This study is accurate, but it's pushed to advance a political agenda, not to actually serve as an explanatory model of the world. This is purely a political argument and it is also an argument for those who want inflation. I do not even need socionomics to discredit it because plain logic will do. Is it possible that "severity of budget austerity and the level of popular discontent" are not in fact a cause and result, but two factors influenced by a third factor? For what reason would budget austerity be more severe, when it makes no sense for government to impose extra austerity? Greater crises lead to greater austerity measures to save the regime/government/system. What we are witnessing isn't greater austerity leading to greater violence, but severe austerity during periods of major crisis. The government is trying everything in its power, including extremely unpopular programs that have toppled regimes throughout history, because the alternative is the destruction of the regime.

Socionomics goes even deeper. It puts forth the hypothesis that the severity of economic contraction, government response to the problem and increased violence is all the result of changing (declining) social mood.

In the The Black Swan of Cairo, Nassim Taleb and Mark Blyth modify and extend the Black Swan argument put forth by Taleb. The black swan argument from wikipedia:
The black swan theory or theory of black swan events is a metaphor that encapsulates the concept that The event is a surprise (to the observer) and has a major impact. After the fact, the event is rationalized by hindsight.
The theory was developed by Nassim Nicholas Taleb to explain:
1. The disproportionate role of high-impact, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance and technology
2. The non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities)
3. The psychological biases that make people individually and collectively blind to uncertainty and unaware of the massive role of the rare event in historical affairs
The best example from the past decade is the financial models used by Wall Street, created by genius PhDs, that failed because they did not account for random and unpredictable events. They modeled the world as rational and non-random beyond expected volatility. Unprepared for actual events, their models failed completely and spectacularly, and the rest is history.

One of the reasons for increased volatility and catastrophic failure in the financial system is the efforts of policymakers to reduce volatility. Government's fight recessions, central banks bailout the financial system when there is a major failure. This leads people to take greater risk because they believe in the stability of the system and over time this leads to conditions which trigger a massive collapse so large in size that policymakers cannot stop it. In The Black Swan of Cairo, this argument is extended to politics. By repressing the will of the people, the conditions are sown for major political crises. The U.S. supported Middle East dictators because it feared the rise of communist and later Islamic states; the result was the regimes became unpopular and turned to the very ideologies suppressed by the hated regime. By accepting more randomness and less control over events, it is possible to reduce the likelihood of these extreme events, just like releasing pressure from a valve prevents it from bursting.

Socionomics says that declining social mood will occur because it is part of the natural order. Whereas Taleb is looking at randomness, socionomics is putting forth an explanation for at least a part of that randomness. There are cycles of rising and falling mood that can be seen throughout history and even predicted into the future and these are the underlying force for major political and economic upheavals. Furthermore, there is no exit from the cycle. Rulers are affected by mass social mood and they cannot escape it. Society can make progress, but new problems will emerge. For example, assume wise rulers adopt Taleb's prescription. They no longer fight recessions, they do not bailout banks that fail, they do not repress public discontent. The result will be a more volatile economy and political system, but a more also a more robust one better able to deal with rare and unpredictable events. For awhile, that is, because in the end, "Stability is unstable."

In theory, economics and business take cycles into account because there's a clear boom-bust cycle throughout history. In pre-industrial times, the cycle was tied to nature and social mood was also much more attuned to natural cycles. In modern times, the economy is less dependent on short-term cycles in nature (we do not have a long enough record to say whether this will be true when larger cycles complete, such as ice ages), while increasingly dependent on social mood. However, one need not believe in socionomics to recognize a pattern and develop systems to deal with it, although it helps to identify the cause underlying economic and political cycles.

Which regimes will fall during a decline in social mood? As with banks or other companies in business, it is the regimes that have accumulated inefficient systems that leave them unable to deal with stress. Often there is an economic component, but it can also be political. When declining social mood stresses systems, those at their weakest or least able to adjust will break and those that survive will likely learn the wrong lesson and become more likely to fail at each greater degree of declining social mood. Therefore, the only way for people to deal with the cycle (if it is at all possible) is to understand the cause.

If political leaders understood socionomics today, they would realize they face a temporary decline in social mood. It provides an opportunity to reform systems and learn from current areas of weakness, so as to build more robust systems that do not repeat the mistakes of the past. If they instead believe the crisis is caused by symptoms, they will attack the symptom and not the cause. When social mood reverses, even states that reformed poorly may benefit from improved conditions, just as tossing virgins into a volcano can appear to work when the weather improves. It is critical to recognize that the system is being stressed and the areas of weakness are fundamental problems. Economic performance will decline no matter what, the public will be angry no matter what, violence is likely to increase, etc., and this will all happen again in the future. Repeating the laundry list of bad policies guarantees history will repeat more completely.

To take a present situation, the euro has failed to date. There are two paths forward: scrap it or deal with the flaws and try to improve it. The treaty changes are starting to move in that direction, but it's being conducted so as to avoid the economic and financial problems of the present, just like the bailouts. As social mood declines, stress on the euro's flaws will increase. Economic conditions will deteriorate, there will be greater protests, rising nationalism, less of a desire to cooperate and a greater desire to turn inwards and focus on domestic problems. If the Europeans view these as causes rather than symptoms, they are much less likely to hit upon a workable solution, if any exists.

2011-12-15

Yuan limit down again; 12th day of losses

The yuan has fallen for most of December and this news has gripped China's financial media. The correct explanation has filtered into the media, which is that the central bank is setting the midpoint price too high each day (and the yuan has even appreciated a few days during this time). However, in the Chinese media and blogs, this is mainly described as the central bank maintaining yuan stability. The question I have not seen discussed, is whether this stability is political or economic. Continually hitting the lower limit will eventually put pressure on the central bank to move the midpoint lower, i.e. depreciate the yuan. Whether there's enough market pressure to force such a move is questionable in December 2011, but if the economy weakens in 2012, it certainly could become a factor.

2011-12-14

Cry havoc and let slip the dogs of trade war

China set to tax US-made car imports

Chinese village of Wukan in open revolt

Inside Wukan: the Chinese village that fought back. Read the whole thing, excerpts will not do it justice. In terms of this village, social mood can't go much lower, but the rest of China can continue to decline until more and more incidents occur. Something to keep in mind when reading, the the final quote at the end hammers this home, the revolt is against local party officials. China is very decentralized and since it's a one-party state, it's better to think of local and central government officials as two separate interest groups. The central government tried in vain to pop the real estate bubble for years, but all their policies were end run by local officials. Only when they used heavy central control and slammed the brakes on monetary policy did it finally break the market. So, rather than seeing a revolt against communists, I see a revolt against local tyranny and an appeal to Beijing for help. If this conflict grows and spreads, it will expose internal fractures within the party as much as it exposes the rift between the people and the government.

Wenzhou loan repayments peak at year end

Remember the fleeing factory owners of Wenzhou? At year end, many loans are due and there could be a wave of bankruptcies. Repayment is approaching the peak of the phenomenon, or are business failures in Wenzhou (还贷高峰期将至 温州企业倒闭现象或现)
Year approaches, Wenzhou, private lending will as a rule for year-end liquidation, repayment of the peak is coming. Wenzhou city government-related reports, enterprise funds strand breaks caused by the phenomenon of collapse and leave business owners may also occur in some areas.
 
 "China Securities News" quoted a local official said, Wenzhou, Wenzhou, although the introduction of a number of relief measures for small and micro enterprises to give tax support, but the business dilemma or will continue until the first quarter of next year.
  
He said, "There is still simmering."

Chinese firms continue to exit real estate market

In Pop goes the Chinese real estate bubble, I discussed Chinese big box and electronics retailer Gome exiting the real estate market. Many more non-real estate firms are also exiting this non-core sector. Closer Look: Companies Backtrack on Real Estate
Statistics from consultancy Centaline Property show that a total of 102 property firm equity transactions took place in the first eleven months, with the aggregate value up 122.8 percent from a year earlier to 36.8 billion yuan.
Of the total amount, 30 percent of the equity sold was from projects in second- and third-tier cities or from companies running real estate as a sideline business, Centaline said in a recent report.
Centaline said a massive exodus of funds out of the real estate industry is expected if the government maintains its curbs over the sector for another three to six months.
This is why people are bearish on China. The extent to which mainland firms and local governments rely on real estate profits is not well understood. I suspect many mainland firms will be declaring losses and possibly bankruptcy if the real estate sector plunges (or taking flight as we saw in Wenzhou), and that seems likely because these firms were the marginal speculator these past few years. When they rapidly exit the market, prices will follow.

Mish, ZeroHedge take on Roubini on gold

Dear Nouriel Roubini: The Fundamental Case for Gold Has Not Changed; To Understand, All Roubini Need Do is Look in a Mirror
ZeroHedge: Roubini Asks of ‘Goldbugs’ on Twitter “Where is 2,000?”
Coming from the perspective of deflation, gold is overpriced. However, all assets except the U.S. dollar are overpriced and since a major deflationary wave may include more MF Global scenarios where money market and other "cash" accounts are wiped out to zero or some reduced percentage (I saw one story saying MF Global customers may get two-thirds of their cash back, or "only" lose 33% of their cash), then physical gold in your possession is relatively attractive. It also offers wildcard protection should a major central bank surprise everyone with a massive printing scheme, and by massive I mean multiple trillions of dollars. The other factor I see is that gold bulls have correctly noted Chinese demand, but Chinese demand is conditioned on a strong economy. Should the economy slow down markedly in 2012 (and I anticipate it will), demand for gold will slow as well. Here, the wildcard is a collapse in the yuan and exchange rate driven hyperinflation in China, which could send Chinese investors into gold or U.S. dollars.
FWIW, I am allowing cash to accumulate and plan on purchasing gold at significantly lower prices from today's $1600 level. I expect the $1000 level will not be breached, but a decline of several hundred dollars from here would no surprise me, if only because there's too many people who believe in inflation. While I will calmly watch a decline, those betting on inflation may dump their positions in the face of terrible declines.

Major Chinese developer can't pay workers in Shanghai

On a Chinese microblog site, an employee (or someone claiming to be an employee) of China SOHO's sales team said the developer hasn't paid wages to its Shanghai employees. Later, another microblog user claiming to be an employee says the firm doesn't pay for travel expenses. However, from the article it doesn't say whether this was always the policy or a change. The delayed wages may be a sign of financial difficulty at the firm, but I don't see confirmation of the story yet. SOHO中国上海销售部总监:公司拖欠工资遭讨薪
Tencent Financial News December 14, news, recently, there is SOHO China 's employees in the microblogging broke the news that, SOHO China, Shanghai Branch, was a result of overdue wages and pay talks.
SOHO China Shanghai Branch Sales Director Ta-Wei Hu today issued a number of micro-Bo , broke the news that the company was in Shanghai, China SOHO employees pay talks, and posted more photos. Photo, the crowd surrounded the front of the building, and security action.
Tencent Finance called the Ta-Wei Hu's phone, telephone calls on behalf of by his colleagues. Ta-Wei Hu is going out the other side to talk business on the grounds that not to accept the interview.
In microblogging, Ta-Wei Hu wrote: "SOHO China's Shanghai as early as 9 to 10 employees working for? Do not just want to create for the benefit of such a good company but also can change your life, create their own dream , to his family a better living? some employees are reluctant to even eat lunch, and some employees to borrow money to live, and some employees had to take their children to work. But why even their hard earned do not get the money?! "
And earlier today, Ta-Wei Hu through microblogging, SOHO China Shanghai expressed dissatisfaction with the company's management. "The current head of Shanghai's hoodwink is simply a tyrant, company policy flip-flop, each meeting can be called at any time to change the company's equity criteria 'White Paper', leading to disgruntled employees, because of its internal sales team management and conflict unfair intense."
Another mutual listening and Ta-Wei Hu, claiming SOHO China "sales" of users on the microblogging said, SOHO China's expanding customer staff travel required to pay for their own expenses and no salary. "As a salesperson, SOHO China, all of the employees travel to expand the customer, all costs are pay for their own, and salary are not, what we are for what, nothing more than create value to the company but also to bring their own life to protect the future development of protection, is running for a common dream. " So far, no responsible person SOHO China this position. Tencent Finance will further focus on developments.

Europe chooses new union, the FU

Facebook dying? NYTimes covers Facebook resisters

The Facebook Resisters
Those who study social networking say this issue boils down to trust. Amanda Lenhart, who directs research on teenagers, children and families at the Pew Internet and American Life Project, said that people who use Facebook tend to have “a general sense of trust in others and trust in institutions.” She added: “Some people make the decision not to use it because they are afraid of what might happen.”
And there's your social mood in a nutshell.

Does China want a recession?

Mish has a new post on China today: China Prepared to Let Housing Prices Sink in Spite of Economic Slowdown; Transition to New Regime Underway; Decoupling in Reverse

He talks about how the new leadership is likely to be more interested in consumer growth and I totally agree, based on the public statements by incoming premier Li Keqiang (statements from previous years and his recent comments are in agreement.) This post reminded me of something brewing in my mind that I hadn't posted about. Some China analysts have speculated that China doesn't want a recession in 2012 due to the leadership handover and because Hu Jintao and Wen Jiabao don't want to harm their legacy. I believe this is a short-sighted and Western opinion. On the political side, there's no election. The current regime doesn't lose power if there's a recession, it's not like in the U.S. where the party in power would shift if there was a recession in the last year of an administration. Historians look at the totality of a leader and an administration, not the short-term economic fluctuations that are mostly out of the government's control, so I don't see the leaders concerned about the state of the economy upon their exit. Since there's no power shift and most people will remain in their current positions, I see no political argument that a good economy makes for a "smooth" political transition.

Looking at the other side of the argument, if you are an incoming political leader, what's the thing you would most want at the start of your administration? If you know anything about politics and economics, you would say recession. Politically, recessions allow for easier reform because there's an impetus for change. Economically, the business cycle is such that every administration will probably see a soft patch in the economy. When a new leader first takes power, they want to implement their policies quickly and spend their time advancing their agenda. Also, since the business cycle is independent of politics, starting with a recession is almost certain to guarantee a "successful" administration because the recovering economy will seem to be a result of the new leader.
This is speculation on my part, but logically it would make sense for the incoming premier Li Keqiang to favor a recession. I recently posted a Chinese language video in a post titled: Incoming premier Li Keqiang says housing policy to stay tight into 2012. He is taking on a larger media role as he transitions into power and when the current leadership spoke earlier this year, they said tight policy would continue until year end. Now, the incoming leadership is saying policy will stay tight into 2012. Li Keqiang has spoken about the need for tax reform and he wants to build a large middle class. Aside from reducing government directed investment, another way to build a domestic consumer economy is to lower home prices, thereby increasing disposable income. Obviously there's some wealth effect during the bubble, but in the long run, lower home prices are good for consumers.

2011-12-13

Is Facebook dying?

Facebook is dying
However, looking at the pattern of the traffic received over the course of the year, I began to notice that the amount of traffic received from Facebook was declining. Consider the following numbers as percentages of the Facebook-derived January traffic.
Jan 11 100.0
Apr 11 69.3
Jul 11 45.7
Oct 11 63.5
Dec 11 26.5 (est.)
This is predicted by socionomics, so while it is a single data point, it is a good one in terms of recognizing the trend. Since Facebook may IPO in 2012 (assuming the market hasn't cratered by then) and Facebook dependent companies such as game maker Zynga are set to go public, analysts are crunching the numbers.
Analyst: Zynga growth slowing, Facebook dependency a weakness
Bhatia said Zynga’s blockbuster game Farmville has peaked, and subsequent games are coming online at a “much slower” pace. Bhatia says that “Cityville, currently Zynga’s best title in terms of traffic, is tracking, by our estimates, 50 percent below Farmville at the same point in its history.”

Also, from June: Facebook growth slows for second month in a row

Chinese home buyers squeezed by interest rates; Beijing triples transfer taxes; waterfall price declines coming

房价跌幅赶不上利息上涨 购房者纠结左右为难

The article comes from the Lanzhou Evening paper. Lanzhou is the capital of the western province of Gansu, a province much poorer than the eastern provinces. The first part of the headline translates as "Home price declines cannot keep up with rising interest rates," the second half says home buyers are in a bind. The article starts off discussing price declines in first tier cities that have spilled into second tier cities. Home buyers are tempted by the lower prices, but mortgage rates are climbing.

The reporter finds some areas have discounted prices by 4%, 3% with a mortgage. He then finds that a 15 year mortgage starting in January 2012 has an interest rate of 7.05%. The property he looked at costs 7850 yuan per square meter. A 3% savings equates to 236 yuan per square meter. The mortgage costs 1803.2 yuan per month. Since interest rates have risen over the past six months, this equals an extra 27.8 yuan per month.

Home buyer Dou Ai says, "These days I constantly hear about falling home prices, so I want to have a look, if the price is suitable then I'll buy a home." She has lived with her in-laws since getting married, so as a first time home buyer she can take out a mortgage (to reduce speculation, many areas have restricted mortgages to first homes only, or raised the down payment very high in order to deter speculation), but after carefully calculating the numbers, she finds there's no deal. The central bank raised interest rates three times this year and while prices drops have occurred in first tier cities, they're really hard to find in Lanzhou. After calculating the higher interest cost, it turns out it costs more to buy a home now than it did earlier in the year. She says she'll "continue to wait and see."

Interest costs are up 5% to 10% over last year. The reporter then drops this bomb into the story:
北京的房地产业内人士曾算过一笔账,房价如果下跌20%左右,购房者的购房成本和房价下跌前基本上是一样的。房价下跌20%以内,银行受益,而买房的人却没有任何好处。只有当房价下跌20%以上,购房者才能真正享受到实惠。
If home prices fall 20%, home buyers costs will be the same as last year. If they fall less than 20%, the banks benefit (I assume through higher volume of business), but home buyers don't have any benefit whatsoever. Only if home prices fall more than 20% can home buyers enjoy a discount. Lanzhou prices rose 0.2% in October, although that's very small, it's a stark contrast to the price declines in first tier cities.

This is the result of an October policy shift: Raises of first-home mortgage rate shadow China's real estate market
China Construction Bank, China's second largest state-owned bank by market value, on Oct. 15 an nounced an increase of its mortgage rate for first-home buyers to 1.05 times of the central bank's benchmark lending rate. China's commercial banks in at least 14 major cities also have lifted the rate by 5 to 10 percent.
Before 2010, it was common practice for Chinese banks to offer first-home buyers a discount of 30 percent off the benchmark mortgage rate. The discount was then gradually reduced to 15 percent in mid-2010, and then canceled in early 2011.
The total mortgage payment for first-home owners has increased up to 40 percent from previous discounted rates.
"Given the liquidity pressure, banks need to reallocate their dwindling credit to other more profitable loans. Raising the mortgage rate is one of the approaches we rebalance demand and supply," said Zhu Xiaohuang, vice president of China Construction Bank's Beijing Branch.
A massive deflationary stew is brewing in China and waterfall declines are coming. The 20-30% price cuts have been sporadic; citywide prices aren't down anywhere close to that amount. Rising interest rates are eating up home price declines and that is just kicking in now. On top of that, Beijing has tripled the tax on transfers.

北京市二手房最低税价猛增两倍 交易顿时变冷清

Beijing has tripled the tax on home transfers, chilling the secondary market. Up until now, we've only seen big discounts from home developers. Average home prices have remained steady until now, but this new tax could rattle the market and set off larger declines. The article mentions a woman who wants to buy a property than fell 60,000 yuan in price, but now the transaction tax is 10 to 20,000 yuan. The article gives a few examples of taxes that went from several thousand to almost 20,000 yuan. However, taxes are higher for properties sold before 5 years. One example is a 150 square meter apartment in Zhongguancun, a high-tech area in Beijing, also near the top universities. The tax on this apartment went from over 100,000 yuan to more than 300,000 yuan, or nearly US$50,000. The article mentions one person's opinion that prices were set to drop 10-15% early next year, but this tax could knock prices down another 15%, so they could come down 25-30%. It goes on to talk about the agents, who are pushing harder for business. I have first hand experience with this, as real estate text ads have become much more frequent in the past month or so. What does this mean for local governments?

房价下跌“土地财政”受挫 地方政府面临限购与增收纠结

This article covers the effect on government. Dalian, a port city in northeast China, has seen land sale revenues tumble 50% from last year. Across 25 cities in China, revenue is down 117 billion yuan, a decline of 11%. Property taxes have started in Shanghai and Chongqing, but the market is changing must faster than the government. Without stable property tax revenues, governments could see their revenues implode next year, given that many rely on land sales for the majority of their revenue.

To sum things up: home prices need to fall at least 20% in order for buyers to see their costs decline, due to higher interest rates and taxes. There's some local differences such as the high transaction tax in Beijing, but overall, it seems that 20% is a good rough estimate. On top of that, prices will need to fall at least another 5 to 10% to attract buyers who now expect price declines. Now we're talking about a 30% price decline as the baseline scenario! Markets always overshoot and China will be no different. Waterfall price declines are coming in 2012; local government and the banking sector will be severely impacted. Addendum: Here's a timely article given that a collapse of the property market will damage the banking sector. Beijing Can't Use Its Reserves to Save the Banks. The authors are Carl E. Walter and Fraser J.T. Howie, coauthors of "Red Capitalism: The Fragile Financial Foundations of China's Extraordinary Rise." I just received my copy in the mail.