onebir

Book Review: Making Sense of the Dollar, by Marc Chandler

"It would be reasonable to have a gold standard once more — the trick is setting the initial price level, so that it would not be inflationary or deflationary."
& hoping there are no economic shocks in the future...

Ramping Up China's Domestic Consumption: What's Taking So Long?

Interesting but deeply flawed analysis. The supply-side in China is hamstrung by numerous structural factors that the government's loath to change - because they're the reason they make *being* the government worthwhile...
1) "Many existing companies will fail and go out of business, while entirely new ones will emerge to seize the new opportunities." Or not. Government guanxi pose a significant barrier to entry to people who (in other countries) would be potential entrepreneurs. Once you're in business, keeping guanxi sweet may involve taking commercially non-optimal decisions. So, for medium to large enterprises, 'creative destruction' in China is likely far less creative than in "true" capitalist countries.
2) 'Chinese banks need to radically reform their collateral-based approach to lending, which excludes asset-light service companies from access to capital.' From what I hear, it also excludes guanxi-light companies, favouring SOEs with political connections, reinforcing the conclusion in 1)
3) There's a chicken-and-egg problem. As the export-orientated companies close, the domestic economy is deteriorating, discouraging investment to service (non-existent) demand.
4) 'but at least they would be freed to do something productive rather than stand around a dormant factory all day long'. There might be some concern about laid-off workers becoming politicised...
5) 'export workers turn their creativity loose on China’s domestic market for goods and services?'
a) What domestic market? (see 3)
b) Is there much creativity? If so, why are contract manufacturers the 'vast majority' of export manufacturers?
c) There are plenty of private street traders now. See 1), 2) (+ a poor education system) for why very few of them will end up listed on Nasdaq.
6) 'China’s service industries, which could help expand domestic consumption, are extremely underdeveloped.' One factor behind this may be sheer lack of trust &/ legal vagaries. Disputes over quality etc of services can be very difficult to resolve. Vaguely worded contracts, lack of precedent and a less-than-independent legal system further add to the risks of doing service business (on any scale).
7) 'One of the major reasons lurking behind the Chinese preference for the status quo... is the ingrained notion that exports are “good” while imports are “bad.” ' I don't think this is true at all. The political regime's raison d'etre is self-perpetuation. The decentralisation involved in shifting to a true capitalist model - loss of control/influence over banks, companies, courts etc - would be a kind of suicide. Individuals seem pretty open to imports.
8) 'If China wants to avoid a similar trap' Hasn't it fallen into this trap (a domestic bubble in both stocks and real estate) already? For the government the question is how to get out of it without creating political unrest.

Random Walk Down What Is Definitely Not Wall Street

"I understand the same thing is happening in China but they are still building. "
Not sure about offices, but there are plenty of half-finished residential blocks standing empty, with little or no sign of construction activity. Significant chunks of completed residential blocks have been sold as investments and stand empty. (This is in a provincial capital way inland from the worst effects of the initial boom, & the exports slump, but probably not on the receiving end of too much stimulus.)

Reminder: There's a Solution to the Crisis and It Lies in China

"Rather than attempting to patch up the situation and restore the status quo ante, China plans to spend nearly a fifth of its gross domestic product on an internal stimulus focused on infrastructure in its interior."
This IS an attempt to patch up the situation:
a) a medium-term fiscal stimulus &
b) an attempt to reduce social tensions due to income inequality
It leaves other serious structural problems.

"If we follow Robert Mundell and throw out the single-country model of the Keynesians, it is obvious that Americans can save in another fashion, that is, by exporting."
If we remember our national accounts, (X - M) = T - G + (S - I)
ie net exports (X-M) = government sector saving (T-G)
+ private sector saving minus investment (S-I)
This is derived from accounting identities. So to increase net exports, americans have to save more. Period.

Reminder: There's a Solution to the Crisis and It Lies in China

"We recommended a firm link between the US dollar and the Chinese yuan, in which the yuan would have full convertibility, with a solemn commitment by the two countries to maintain a fixed exchange rate forever. That would instantly link the two countries’ capital markets."
September 1992 anyone? And that was a linkage between much more economically integrated countries at similar stages in development...

Yet Another Huge Economic Number Coming out of China. Hard to Believe

The June & H1 data are here (in Chinese):
www.caam.org.cn/zhengc...

The figures quoted in the Bloomberg article are for total vehicle sales; car sales were actually stronger (up 25.6%), offset slightly by a fall in commercial vehicle sales (0.5%).

The car sales growth figure is huge (obviously) are huge, presumably the incentives will run out at some point & sales will collapse...

On top of the incentives, other factors may have encouraged purchasing:
- falls in oil prices since H1 08
- high levels of savings (no need to get a loan to snap up a bargain)
- perhaps heavy discounting by car manufacturers (at an auto show I went to a few months back there were so many auto companies it struck me the market must be saturated...)

Earnings Rise in China: Stimulus Efforts Clearly Working

"China's equity outperformance is not a breath of hot air."
More likely a sign of overdose of hot money.

"The 80% rise in the MSCI China Index (C$) is underpinned by rising earnings, but price appreciation has outpaced earnings leading to rising valuations. This is not unusual at the beginning of economic recovery."
And at the beginning of a credit-induced bubble. H1 09 lending was three times that in H1 08. Currency controls make it pretty difficult to get this out of the country. Any guesses where some of it's ending up?

China's Migrant 'Floating Population'

"This explains why the Chinese take the situation in Xinjiang so seriously. "
I don't think so. The Xinjiang problem is about relations between Han Chinese and Uiyghurs - who are culturally, linguistically & physically very different. (Blue-eyed Europeans speaking reasonable Chinese can pass for Uiyghur...) Han Chinese make up the majority of the floating population you describe (throughout the country) and seem to have *absolutely* no sympathy with Uiyghurs.

"I am forever at a loss to reconcile reports like this with observations from the China bulls" Agreed.

"I’m sure that the Chinese are well aware of this and feel themselves in a race against time to correct it." The raison d'etre of the regime is to perpetuate the the advantages it brings its members. The advantages stem from social stratification. If it doesn't perpetuate social stratification, it's pointless.

This 'internal contradiction' is one factor that makes the regime half-hearted in dealing with (dangerously destabilising) inequalities.

An Actual Good Green Shoot, as Opposed to a Less Bad One

So was it an increase in new orders - indicating an increase in demand (ie a real green shoot)? Or was it a fall in inventories - evidence of further destocking, which (short-term) would be actually be negative for GDP?

The NO-I correlation with GDP growth does look reasonable, but answers to these questions would help with interpretation...

Trend-Following vs. Long Only: Understand the Models

"The exact method for determining whether a price series is likely to be trending is proprietary. I have, however, provided a roadmap so that you can find the way. "
...here I think:
"An optimized solution that forecasts those periods based on indicators of autocorrelation turned out to produce better risk-adjusted returns."
This sounds like a rolling autocorrelation measure.

Friday FX View: PBOC Governor Pours Fuel on the Dollar Fire

"The British pound rose against the dollar to $1.6476 despite a government report from the Land Registry that showed for the 13th straight month the average price of British homes declines. This is the overall and nationwide figure and one of perhaps four surveys. "
It's not a survey, all property transactions are registered at the Land Registry and the Land Registry figures are based on the full dataset. This *would* make it more accurate than the lenders surveys, but unfortunately constructing property price indices is complex & my recollection is the LR index has some methodological flaws.

"The others are run by mortgage lenders and at least a pair of these recently reported a blip upwards in home prices."
I doubt the monthly changes in these indices are consistent very often.

Will The U.S. Dollar Crash?

"First, China has 1.3 billion citizens, many of which save 40% of their earnings."
Because education, healthcare & pension provision are very poor & if they don't they run huge risks. Possibly at the back of their minds they also fear political instability too.
"In the longer term, it doesn't need export-led growth."
Perhaps not - *if* the government can resolve the education, healthcare & pension provision issues. But it probably doesn't because that would involve socialising wealth concentrated in the hands of the ruling elite. & what's the point of being part of that if it doesn't make you wealthy?

"The sooner the Chinese understand this and allow the yuan to appreciate, the more their own middle class consumers will be able to afford."
Au contraire - the sooner they do this, the sooner the exporting entrepreneurs of Shanghai, Guangzhou & Shenzhen lose their (remaining) shirts.

Kasriel on Why Mortgage Rates Won't Hurt Nascent U.S. Recovery

<Refinancings ... may lower monthly interest payments for the home owner and free up money for the purchases of goods and services but they also lower interest income received by lenders. So the net effect is “simply a redistribution of spendable income from ultimate lenders to ultimate borrowers.”>

Which matters a lot when the set that gets the benefit is a) credit-constrained b) has drastically cut consumption to allow it to reduce indebtedness while the side getting lower interest income has access to almost free lending from the state...

What Does ETF Money Flow Tell Us About Gold?

" If potential US government downgrade, supply-demand and North Korea’s nuclear testing could not push Gold above $1,000/oz, I wonder whatever could? "
My guesses: a collapse in the dollar, sharp simultaneous falls in stocks and bonds, &/ real signs of inflation...

Business Inventories Data: No Green Shoots Here

"Could it be that inventories is not a good indicator this time around because of efficiencies in the sales, ordering, production and delivery chain; i.e. "just in time delivery" so no need to stock a lot of inventory?"

That'd show up as a marked decrease in the stock to sales ratio. There's been a decrease, presumably reflecting these efficiencies, since the 01 recession. But it was only 5pp - see www.census.gov/briefrm...

So that would only point to about 5% less 'pain' than the historical relationship suggests...