The Grand Illusion Of China's Stimulus [View article]
This is why faith in numbers in China is troubling to say the least
"According to the article, under the directives of the Party organizations in the Ministry of Finance, starting in 2008, a strategic effort has been under way for the Party organization to achieve total coverage and membership in all accounting firms. By the end of July 2012, there were 3,264 Party organizations formed within the accounting firms with Party membership reaching 34,842".
The numbers in the east are red in more ways than one
The Grand Illusion Of China's Stimulus [View article]
This is the issue
"China wants the PCAOB (Public Company Accounting Oversight Board) to rely on Chinese inspectors, arguing that any action by a foreign regulator on Chinese soil raises sovereignty concerns, he said." The US PCAOB doesn't want Chinese inspectors because that is the problem. This is why all of the fraud with SinoForest etc. occurred.
Yet westerners happily accept and rely on all of the Chinese numbers, which even the Chinese leadership rejects.
The Federal Reserve has much better grasp of the numbers in the US economy thanks to an open system of government and markets and even they do not have a good grasp of what is or will be happening. Yet they are willing to take enormous bets on the outcome.
While the world continues to make even riskier and larger bets on numbers that are intentionally misleading.
Feel free to keep the faith. After 12 years and three books, I have lost mine
The Grand Illusion Of China's Stimulus [View article]
I have been following the AMCs since I wrote my first book. There were a bunch of American vulture funds who thought they could make real money on it. They lasted about a year, when they realized that the Chinese weren't going to sell anything. There basically were no sales because the prices were about 3%. There was very little documentation of collateral and there really wasn't much a bankruptcy law until 2008.
So the only 'sales' were between the AMCs themselves. Look how long it has taken most countries with clear documentation of collateral like state records of purchase money sales and good land registries. It takes years. The Chinese say they cleaned up their bad debts of 30 to 40% in a year. I pointed all of this out in 2002 in my book Investing in China, which is still 100% accurate
No I am afraid that all of the bad debts were simply swept under the carpet. The only reason that the banks didn't collapse was because they got foreign capital in 2005 during the IPOs, the debts were rolled over, and they had a monopoly on investment. The depositors had three choices. The casino of a stock market, banks and real estate. Those that could bet on real estate. Those that couldn't had to go with the banks. With a guaranteed profitable spread the banks, the banks were able to make up for the massive bad load problem or at least lessen its issue.
The Chinese would love to pull this off again, but the problem is with the new reforms the banks have to compete with the trust companies. They don't necessarily have a monopoly, so their spread has disappeared and now they are stuck loaning money to local governments who can't pay them back.
But the banks aren't the problem. The real problem is the shadow banking system and Ponzi financing arrangements in everything from cement mixers to coal. So even though the stimulus is totally bogus, it isn't the real problem.
And if you really believe that the GDP troughed in April you might share it with the Shanghai market. They didn't get the memo.
All of this has to do with information. Information is the basis of markets. For markets to work efficiently there must be free access to complete accurate and timely information. The Chinese control all information, which basically means that it isn't. So without good information investments become inefficient and the economy tanks. Free speech is not a luxury. It is the market
The Grand Illusion Of China's Stimulus [View article]
I am sure they would and have except that the bad debts are equal to about $1.5 trillion by one estimation and that is only in the regular banking system. Some of these bad debts go back to the recession of 2000 and are in the AMC bonds (bad banks). Worse reforms in interest rates have allowed depositors choices, so the bank no longer can just squeeze profits from captive depositors. So the option is probably off the table. Liquidating their reserve mountain would send the yuan through the ceiling along with US interest rates. So that one is out.
The real issue is the enormous gap between western market expectations and what is happening in China. The disappointment will be intense
Western Markets are betting on more stimulus
From the FT Despite all the concerns about the country’s slowdown, there are signs that this tradition of a politics-fuelled investment boom will start to reassert itself next month when a new cast of officials takes over at both central and local levels.
While Chinese are saying No way
From Xinhua
Massive stimulus measures would hurt China’s long-term growth and the government’s hesitation in making “bold moves” to support the economy is pragmatic, the official Xinhua News Agency wrote in a commentary.
I don't know exactly what will trigger it. The probability of one dis taster is not that high, but the combination? My bet is that it will start with a simple reassessment of earnings beginning in earnings season.
But I keep seeing stuff like this, so I do not worry so much about Israel. That is short term. A problem is China is much more of a severe global issue.
"That reflects cash constraints for China's customers in Europe and elsewhere. It means that even August's dismal 2.7% year-on-year export growth was possible only by extending credit to troubled buyers. If Europe takes a turn for the worse, China's factories won't only see export orders fall further, they will also be sitting on a pile of IOUs."
or
A respected Chinese economist told the FT: “I believe China is going to experience a very serious economic downturn and I think it has already started. The government is trying now to stabilize the economy but the instruments they have are very limited. If it can’t turn things around then I expect huge and widespread social unrest
Actually this piece is originally written for a financial newspaper in an emerging market. I am limited to 800 words. In my blog and mailing list the piece was entitled 6 reasons to fear the fall. The sixth was as you point out an Israeli attack. Here is the additional paragraph
The sixth is the most speculative, but as I was thinking about it, it began to make sense. Israel has been making noises about attacking Iran for years, but it was restrained by several factors. These include discouragement by the US, fear of retaliation especially from Iran's allies like Syria, diplomatic fallout from Iran's customers, reaction from other Middle Eastern counties like Egypt and Saudi Arabia. The odd thing is that none of these apply. The US is distracted by an closely fought national election. Syria and Hezbollah are involved in what is becoming a sectarian civil war. Europe and Japan have found other sources for oil. Egypt has a new government involved in a power struggle with its military. Saudi Arabia and the Gulf States would only make small noises about an attack against an enemy.
Also EPOL, the Polish ETF, below 21. The problem is that the markets have not discounted the depth of the Chinese issues. Germany has large exports to China and Poland is reliant on trade with Germany. But once it is cheap enough there is safety and a good upside.
Actually no one really knows what tools China has or doesn't have. If your government lacks transparency and you do not have a free press, all information is suspect including the information given to the people in charge of trying to direct the economy.
Without accurate, timely and complete information, disaster is only a matter of time.
Reuters: China rate cut sparks fears of grim May data Global cheers over China's decision to cut interest rates faded on Friday as investors and economists worried that the move signaled the impending release of grim economic data, Reuters reports. http://reut.rs/KgzTjW
Inflation In Emerging Markets: Limits Of Stimulus [View article]
I read a study once about voters. It said that only 10% were committed to an ideology; 30% voted with their pocketbooks, and most of rest sort of made it up on the day of the election.
So basically democracies are like markets. They tend to move on sentiment, often radically and overshoot as we just saw in Greece. However given time they do sort of muddle through and the pendulum swings toward more rational policies and more appropriate valuations as politician, like investors, try to ride the wave in their own self interest.
The problem is that there is one big country that can't change. That country is going to affect the rest of the world and not in a good way. The country is certainly not Greece or Spain.
Excellent point! Read my article next week. Can you say stagflation?
Actually I was trained as a tax lawyer, so I did not know the difference between first and second derivative. Thank you. However, if you look at the second derivative you will see that it is slowly increasing.
I disagree about oil. The price of oil in some ways is far more damaging in Asia because the price is heavily subsidized. So there is no incentive to conserve as there is in the west. The governments run either massive deficits like India, Nigeria or Indonesia or bankrupt the oil firms leading to less investment as in China.
I agree that it will take longer. I discuss in my book the fact that recession and inflation problem hit emerging markets (then know as less developed countries) later in the late 70's, but once they were hit, it took decades to recover because of their inflexible economies. And yes the Chinese government does control most of the economy but that does not mean that the distributional coalitions that control the economy are receptive to change. On the contrary, government policy once set is very difficult to change, because of the economic investments made as a result of policy decisions cast the status quo into stone.
Personally I would avoid both Santander and Vale. I believe that Brazil has two issues. First, it most likely has a credit bubble. Like other emerging markets, Brazil recently loosened rather than tightened. It already had an inflation issue, but the price of oil will exacerbate the problem is all of the emerging markets. Inflation expectations are never far from the surface in Brazil, so the failure to tighten early will force more drastic action later on.
Second, Brazil and the rest of the emerging markets are heavily dependent on China for commodities demand. China says its inflation rate is 4.5% which is up. Hong Kong's rate is 6.1% double from a year ago and probably a better reflection of China's actual rate. China is going to affected by oil too, so the loosening forecast by most analysts is not going to happen.
As China slows, which it is already doing, it is going to impact emerging markets in Latin America and Asia
The Grand Illusion Of China's Stimulus [View article]
I agree.
The Grand Illusion Of China's Stimulus [View article]
"According to the article, under the directives of the Party organizations in the Ministry of Finance, starting in 2008, a strategic effort has been under way for the Party organization to achieve total coverage and membership in all accounting firms. By the end of July 2012, there were 3,264 Party organizations formed within the accounting firms with Party membership reaching 34,842".
The numbers in the east are red in more ways than one
The Grand Illusion Of China's Stimulus [View article]
"China wants the PCAOB (Public Company Accounting Oversight Board) to rely on Chinese inspectors, arguing that any action by a foreign regulator on Chinese soil raises sovereignty concerns, he said." The US PCAOB doesn't want Chinese inspectors because that is the problem. This is why all of the fraud with SinoForest etc. occurred.
Yet westerners happily accept and rely on all of the Chinese numbers, which even the Chinese leadership rejects.
The Federal Reserve has much better grasp of the numbers in the US economy thanks to an open system of government and markets and even they do not have a good grasp of what is or will be happening. Yet they are willing to take enormous bets on the outcome.
While the world continues to make even riskier and larger bets on numbers that are intentionally misleading.
Feel free to keep the faith. After 12 years and three books, I have lost mine
The Grand Illusion Of China's Stimulus [View article]
So the only 'sales' were between the AMCs themselves. Look how long it has taken most countries with clear documentation of collateral like state records of purchase money sales and good land registries. It takes years. The Chinese say they cleaned up their bad debts of 30 to 40% in a year. I pointed all of this out in 2002 in my book Investing in China, which is still 100% accurate
No I am afraid that all of the bad debts were simply swept under the carpet. The only reason that the banks didn't collapse was because they got foreign capital in 2005 during the IPOs, the debts were rolled over, and they had a monopoly on investment. The depositors had three choices. The casino of a stock market, banks and real estate. Those that could bet on real estate. Those that couldn't had to go with the banks. With a guaranteed profitable spread the banks, the banks were able to make up for the massive bad load problem or at least lessen its issue.
The Chinese would love to pull this off again, but the problem is with the new reforms the banks have to compete with the trust companies. They don't necessarily have a monopoly, so their spread has disappeared and now they are stuck loaning money to local governments who can't pay them back.
But the banks aren't the problem. The real problem is the shadow banking system and Ponzi financing arrangements in everything from cement mixers to coal. So even though the stimulus is totally bogus, it isn't the real problem.
And if you really believe that the GDP troughed in April you might share it with the Shanghai market. They didn't get the memo.
All of this has to do with information. Information is the basis of markets. For markets to work efficiently there must be free access to complete accurate and timely information. The Chinese control all information, which basically means that it isn't. So without good information investments become inefficient and the economy tanks. Free speech is not a luxury. It is the market
The Grand Illusion Of China's Stimulus [View article]
5 Reasons To Fear The Fall [View article]
Western Markets are betting on more stimulus
From the FT
Despite all the concerns about the country’s slowdown, there are signs that this tradition of a politics-fuelled investment boom will start to reassert itself next month when a new cast of officials takes over at both central and local levels.
While Chinese are saying No way
From Xinhua
Massive stimulus measures would hurt China’s long-term growth and the government’s hesitation in making “bold moves” to support the economy is pragmatic, the official Xinhua News Agency wrote in a commentary.
5 Reasons To Fear The Fall [View article]
But I keep seeing stuff like this, so I do not worry so much about Israel. That is short term. A problem is China is much more of a severe global issue.
"That reflects cash constraints for China's customers in Europe and elsewhere. It means that even August's dismal 2.7% year-on-year export growth was possible only by extending credit to troubled buyers. If Europe takes a turn for the worse, China's factories won't only see export orders fall further, they will also be sitting on a pile of IOUs."
or
A respected Chinese economist told the FT:
“I believe China is going to experience a very serious economic downturn and I think it has already started. The government is trying now to stabilize the economy but the instruments they have are very limited. If it can’t turn things around then I expect huge and widespread social unrest
5 Reasons To Fear The Fall [View article]
The sixth is the most speculative, but as I was thinking about it, it began to make sense. Israel has been making noises about attacking Iran for years, but it was restrained by several factors. These include discouragement by the US, fear of retaliation especially from Iran's allies like Syria, diplomatic fallout from Iran's customers, reaction from other Middle Eastern counties like Egypt and Saudi Arabia. The odd thing is that none of these apply. The US is distracted by an closely fought national election. Syria and Hezbollah are involved in what is becoming a sectarian civil war. Europe and Japan have found other sources for oil. Egypt has a new government involved in a power struggle with its military. Saudi Arabia and the Gulf States would only make small noises about an attack against an enemy.
Monsoon Season: Deluge Following Q2 Earnings [View article]
"Over the past 30 days, three quarters of revisions to earnings of Chinese listed companies have been downwards, Thomson Reuters tallies."
http://on.ft.com/NocU48
Europe: A Contrarian Analysis [View article]
Don't Count On Chinese Growth [View article]
Without accurate, timely and complete information, disaster is only a matter of time.
Don't Count On Chinese Growth [View article]
Global cheers over China's decision to cut interest rates faded on Friday as investors and economists worried that the move signaled the impending release of grim economic data, Reuters reports.
http://reut.rs/KgzTjW
Inflation In Emerging Markets: Limits Of Stimulus [View article]
So basically democracies are like markets. They tend to move on sentiment, often radically and overshoot as we just saw in Greece. However given time they do sort of muddle through and the pendulum swings toward more rational policies and more appropriate valuations as politician, like investors, try to ride the wave in their own self interest.
The problem is that there is one big country that can't change. That country is going to affect the rest of the world and not in a good way. The country is certainly not Greece or Spain.
China's Falling GDP [View article]
Excellent point! Read my article next week. Can you say stagflation?
Actually I was trained as a tax lawyer, so I did not know the difference between first and second derivative. Thank you. However, if you look at the second derivative you will see that it is slowly increasing.
I disagree about oil. The price of oil in some ways is far more damaging in Asia because the price is heavily subsidized. So there is no incentive to conserve as there is in the west. The governments run either massive deficits like India, Nigeria or Indonesia or bankrupt the oil firms leading to less investment as in China.
I agree that it will take longer. I discuss in my book the fact that recession and inflation problem hit emerging markets (then know as less developed countries) later in the late 70's, but once they were hit, it took decades to recover because of their inflexible economies. And yes the Chinese government does control most of the economy but that does not mean that the distributional coalitions that control the economy are receptive to change. On the contrary, government policy once set is very difficult to change, because of the economic investments made as a result of policy decisions cast the status quo into stone.
Concentration In Emerging Markets [View article]
Second, Brazil and the rest of the emerging markets are heavily dependent on China for commodities demand. China says its inflation rate is 4.5% which is up. Hong Kong's rate is 6.1% double from a year ago and probably a better reflection of China's actual rate. China is going to affected by oil too, so the loosening forecast by most analysts is not going to happen.
As China slows, which it is already doing, it is going to impact emerging markets in Latin America and Asia