Old Trader's  Instablog

I seem to recall, way back when Bernanke was appointed the head of the Fed, a promise to speak clearly. I well recall the "good old days", when economists, analysts, and various financial pundits would agonize over every word Greenspan uttered...nay...even probably agonized over every punctuation mark in written transcripts of his utterances, in an effort to discern exactly what he meant, and his intentions, as well as his famous (infamous?) remark about if the listener understands him, he's not being obscure enough. Maybe its me, but either Ben isn't speaking clearly enough, or else old habits die hard, and the various scribes of Mammon torture and tease every Fed statement in their efforts to discern what the future may hold.

One thing I will grant Ben, is that he's holding the Fed governors on much looser leashes; allowing them to comment on a fairly regular basis, unlike back when Alan was calling the plays. I'd say that listening to what their thoughts might be would likely be more fruitful, in terms of predicting which way the Fed might be leaning.

But of greater import, is the continuation of "easy money" policy. Even ol' Alan has finally 'fessed up (albeit reluctantly) that he might have been a tad too lenient with the country's purse. I'm not completely certain that "this time is different", in terms of the degree of distress in the economy. After all, the LTCM debacle arguably posed a comparable amount of systemic risk, in terms of large financial firms collapsing like a house of cards on a windy day. Government intervention, while preventing the collapse, ended up coming back to bite us in the butt. It looks like Ben is so wrapped up in studying the Great Depression, he might well be ignoring more recent examples of events and remedies, which might be equally illuminating.

I find myself wondering if, in the near term...like within the next few months, a .25% rate hike wouldn't a timely "shot across the bow", as far as showing everybody that the Fed has no intention allowing wholesale reflation of asset bubbles to occur. And I'd guess it would do more to support the dollar than a month of Sundays worth of Timmy's jawboning about a "strong dollar". I realize that it would, at least initially, knock the props out from under the market, the price of gold, and the price of oil, but I don't think that .25% would do anything to actually delay the arrival of any REAL recovery of our economy.

Many economists and macro analysts, when the discussion turns to China's place in the global economy, point out China is primarily an export economy, with a comparatively miniscule consumer sector. These folks argue that China's place in the greater scheme of things will continue to be that "factory to the world", vacuuming up raw materials, and cranking out relatively inexpensive finished goods and/or relatively low value-added components for export.

In what I think signals a change in direction of the Chinese economy, China opened the Growth Enterprise Market, also known as ChiNext, for trading on Frtiday. Similar in intent to the NASDAQ, ChiNext will allow heretofore private companies, primarily in the tech sector, to access public capital. In the past, growing Chinese firms have had to turn to Hong Kong, London, or the NYSE to achieve this. Because of the comparatively high bars to listing set by these exchanges, the companies that were able to do so were arguably well beyond the "start-up" stage.

The inauguration of ChiNext will tend to draw internal capital into the capital markets, as well as providing Chinese venture capital and private equity firms a much needed boost by offering an exit strategy for their investments. One of the valid complaints of China's capital markets has been that they consist of state-run banks lending almost exclusively to inefficient large SOEs, starving the small and medium size private firms of needed capital. Given the speculative fervor of Chinese investors, its not unreasonable to think that at least some of the vast amount of savings existing in the broader Chinese economy will be drawn into this market.

Needless to say, this yet another small step for China, and one not without pitfalls. For the 28 companies that kicked off trading on the new exchange, the average PE was 100, far in excess of even the Shanghai exchange, which is arguably experiencing its own "bubble". John Foley, writing in "Breaking News" says

"Chinext looks like too much, too soon. China's main markets are already more volatile and risky than their foreign counterparts. Growth-stock entrepreneurs are untested when it comes to public-market corporate governance, to say nothing of the smaller underwriting firms that back some stock issues."

On the other side of the coin, Yu Zhou, a professor at Vassar College, has said she's heard that there are over 1000 firms meeting Chinext's listing requirements within Beijing's high tech district alone, so the potential of the new exchange is beyond question.

Sources: NYT DealBook
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