Financial Chat: Danger in QE etc

Posted by OffThePeak 12 yrs ago

Financial Chat: Danger in QE etc

originally:

The Long Term Danger inherent in QE:

People lose fear of higher rates, and become dangerously invested

===============

This is what we are seeing in HK:

The average property investor (and especially those buying properties below $5-6 million) have lost their fear of higher rates...

They are now buying, confident that they will never see high rates again, and that may leave them over-exposed.

QE is hitting its limits

[b]The unintended consequences of QE: not what you think[/b]

Posted by Izabella Kaminska on Aug 29

[i]By now, everyone is familiar with the mantra that QE is [arghh!] money-printing and that a major unintended consequence could be a chronic and uncontrollable inflation. (One could call this the goldbug, Austrian, Republican case).

Less well known, perhaps, is the theory that QE could be just as unexpectedly deflationary — because long-term micro yields come to threaten a number of financial sectors outright, as well as general expectations of risk-free returns which lead to capital destructive feedback loops.

FT Alphaville readers will be more familiar with this second point, since it’s something we’ve been arguing for a while… (see examples from our compendium on the matter here, here and here, including Cardiff Garcia’s epic case against lowering the IOER ).

Yet, it’s nice to see that someone from the economic big league is making a similar point.

Case in hand, the latest Federal Reserve Bank of Dallas working paper from William (Bill) White entitled “Ultra Easy Monetary Policy and the Law of Unintended Consequences“.

In many ways it’s a radical shift in mindset from the central banking arena, not least because of the statement on central bank independence that’s made right from the offset (our emphasis):

It is also the case that ultra easy monetary policies can eventually threaten the health of financial institutions and the functioning of financial markets, threaten the “independence” of central banks, and can encourage imprudent behavior on the part of governments. None of these unintended consequences is desirable. Since monetary policy is not “a free lunch”, governments must therefore use much more vigorously the policy levers they still control to support strong, sustainable and balanced growth at the global level.

What White goes on to suggest is that if asset purchases and ultra low yields do anything, they buy time. They are not, nor ever have been judged, an outright cure.

Ultimately, as time runs out, unintended long-term consequences will inevitably begin to impact. And these, he suggests, could manifest in many forms… deflation included.[/i]

+ continues: http://ftalphaville.ft.com/blog/2012/08/29/1136621/the-unintended-consequences-of-qe-not-what-you-think/

Why?

CB's can windup cornering the markets they seek to manipulate, and the signals become so distorted thate they know now what is actually happening in the markets. When the corner ends, the markest may be damaged beyond repair

traineeinvestor 12 yrs ago

Yep - unwinding this mess without creating a bigger mess will be a challenge.

That said, I am not that worried about the impact of higher interest rates as the overal level of gearing in the market is quite low (refer to many previous dicussions) and I expect rates to stay low for some years as a matter of policy and necessity. Sure, I could be wrong. If I am and prices crash, I'll probably view it as a buying opportunity.

OffThePeak 12 yrs ago

R. posted elsewhere:

"Its absolute nonsense that QE could lead to deflation. This article really makes zero sense. Its akin to arguing that if you drop an object it will rise rather than fall..."

No.

The point is that QE causes distortions in the economy, and once the QE ends, or merely becomes ineffective, the distortions may have been made worse by QE, and so the Deflation may becom inevitable.

This seems to be where Hong Kong is headed. People are losing their fear of rising rates, and coming back and buying property agressively - expecially under $5 million. And some banks may be financing those purchases with high LTV loans, also thinking that rates will not rise.

If rates then rise suddenly and unexpectedly, the damage may be severe. And even have deflationary consequences.

traineeinvestor 12 yrs ago

@ OffThePeak - I thought the maximum LTV was 70% (i.e. min deposit is 30%)?

One of the problems in HK is that fixed rate mortgages are either not vaialble at all or cost so much more than the floating rate mortgages that they are not worth it. This is one area where the US has an advantage.

While it goes without saying that QE creates distortions and has adverse consequences, I struggle to understand how we could end up with both rising interest rates and deflation at the same time? If we get deflation then we will have very low interest rates.

hkxxxpat 12 yrs ago

Interesting OTP. I can't be sure, but I thought the article was saying QE could lead to deflation and low interest rates. Which was I think the situation in early 2000s, property was cheap and getting cheaper despite fairly low interest rates.

So what's different now? Nothing really, so any expectation of deflation will make people fearful, and few will buy, a lot will sell - get out while you can get something. Maybe traineeinvestor will be out buying - presumably was out buying in early 2000s through to mid-2000s - but it will be an exception.

A fixed debt with a deflating asset price can lead to a game over scenario if you get it wrong, especially given that asset prices aren't cheap by any measure at present.

OffThePeak 12 yrs ago

NEWS

Bernanke "will provide accomodation as needed"

Stocks selloff after initial rally

SAME PATTERN as last two years (so far).

After the early selloff, stocks rallied to close at high.

Let's see if we get that today.

Gold is down about $1

Rates still at ultra-low levels

Ed 12 yrs ago

Once again... Bernanke does nothing other than state that QE remains an option...

How many times has he said that now? And is it a bluff? Because as long as big money fears the Fed's threat to print more money they stay on the fence and don't short gov't bonds or other asset classes...

I am thinking the Fed is effectively out of bullets - they believe that further QE will not help the economy (no kidding...)

What the Fed does hold could be called a self-destruct bomb... if the markets start to tumble and the threat of QE no longer has any effect... they will actually have to launch more QE... and that perhaps causes chaos...

Food and gas prices are already spiking big time... recall that QE a couple of years ago resulted in riots in the middle east due to high food prices... imagine what happens if QE were unleashed into the current environment...

OffThePeak 12 yrs ago

TI:

"I struggle to understand how we could end up with both rising interest rates and deflation at the same time? "

Rising rates can trigger DEFLATION in housing prices.

Ed:

"Once again... Bernanke does nothing other than state that QE remains an option... "

It is hard to trigger QE when SPX is hovering above 1,400. But a 10% or 15% drop may be enough to trigger it.

So it sounds as if Bernanke is promising a sort of "Bernanke Put"

OffThePeak 12 yrs ago

JAKE Van Der Kamp tells it like it is here: (Sunday's column)

LACK OF FLATS is not what's sending home prices up

CYL appears not to understand that low rates are the real driver in city's property bubble

+ Rate impact is huge: "it amazes me that our CE, an estate agent by trade, cannot see it.

+ He attributes high prices to a shortfall of available flats, and promises to start-up the construction of more

+ HK already has 250,000 more flats than households

+ CYL always mentions incomes, and rates, but does not mention interest rates

+ Rate burden is light, with rates at lowest level in history

(He provides charts: Affordability, US Fed Funds rate - near zero)

There's a real danger that CYL will start up a massive construction programme, and HK will get hit by both an over-supply and higher rates.

=== ===

(My idea):

======

There's another way to "fix" this problem: HK could put an "interest surcharge" on loans above HK$2 mn (cf. +1%), and over HK$4 mn (cf. +2%), and that would dampen down house prices - since people would be reluctant to borrow-more-to-pay-more. Also, Investors would want a higher yield (lower price) to justify the purchase of another property.

OffThePeak 12 yrs ago

At Jackson Hole last week Don Kohn asked:

"What is holding the economy back? Why is it that we have had such incredibly accomodative monetary policy for so long, but we've had so little growth? I think it remains a puzzle?"

Meantime, Bernanke warned that stagnation in the labor market was "a grave concern", and the economic situation "is obviously far from satisfactory."

== ==

So why is QE not working ? - It can push the stock market higher, but does little for jobs.

==========

Some possible answers:

+ Banks arent lending much. They as so worried about their (weak) balance sheets, and the risk of getting repaid that they are reluctant to lend

+ The wealth has been drained from the Middle Class, and they can no longer afford to buy much while credit remains tight

+ The wealth has become concentrated in the Top 10%, and the Top 1%, so it is not widely disbursed enough to be spent, and gets invested instead

+ The US imports much from overseas, where salaries are lower, so when Americans do spend, it gets sent offshore, rather than re-circulated in the economy

+ Corporations have loads of cash, but much of it is held offshore due to tax reasons. They are unwilling to spend it so long as policy decisions from Washington seem so erratic

WHAT MORE CAN YOU ADD ??

Ed 12 yrs ago

Yes all true...

But these are all symptoms of what is fundamentally wrong with America... namely...

Crony Capitalism.

Democracy exists only in name in America - votes are meaningless - there is minimal difference between the GOP and Dems... what differences there are would be related to which companies donated the most cash to which party..

Basically the country has been captured by corporations - and corporations don't give a damn about the country - they care about their bottom line - and if that means lobbying to reduce their tax rates, get bail outs, or whatever else enriches management and shareholders... that's what they will do.

And they are getting tremendous value for their investment into lobbying...

Unfortunately, they will ultimately destroy the country...

traineeinvestor 12 yrs ago

@ OffThePeak - two other reason banks are not lending as much are (i) because higher regulatory capital requirements such as Basel III make it more expensive to len money and (ii) political grandstanding mean that banks are very wary of exposing themselves to criticism - this is showing up in more conservative lending practices

@ Ed - it's not so much crony capitalisim as entitlement capitalism - some sectors of the corporate world benefit (esecially IP, clean tech and oil & gas) but the bigger drain and the post powerful politcical force in America is the majority of voters who are net takers of entitlement payments. Since no amount of additional taxation is going to solve the deficit problem, there have to be substantial cuts in entitlement payments - and no party is really willing to do anything about it. Plan B is eventual collapse.

I agree that the differences betwene the Republican and Democratic parties is almost non-existant. Both are far to the left, big interventionsist government parties. Look at Obummer's clean energy fiascos, Bush II's war mongering etc etc etc

They can't even administer welfare handouts properly: http://tickerforum.org/akcs-www?post=186411

OffThePeak 12 yrs ago

TI:

"crony capitalisim = entitlement capitalism"

Yeah. That's a good way to put it.

The selfishness at both ends of the spectrum are squeezing "the productive middle." Those who are dependent on the state want more benefits (cf. Health Care) and they don't care where it comes from, and who pays for it - so long as they don't.

And the wealthy paint themselves as "job creators" but behave like renters, trying to live off whatever low risk returns they can grab, while pushing for the lowest possible taxes.

I have been against this for years, but I have come around to the idea that the US should have a 2-3 year "wealth tax" on anyone whose wealth is beyond something like $2 Million, $10 Million, and $100 Million. In effect, this would be to claw back the "unfair" advantages they have had in generating wealth over the last decade or two. The idea would be to get their share of total wealth back to what it was 10-20 years ago. And I would give at least half the tax collections to the middle class, in some sort of tax credit for those who create jobs in small businesses.

Softy:

"Oh well, Romney is going to sort that out, because after spending 50 years thinking only about himself, he has now magically turned around and thinks about the middle class."

LOL. Right.

But don't forget: "Only Nixon can go to China", and maybe only R-Money could properly soak the rich, with a "fair" tax on wealth. (Maybe I am dreaming here.)

Ed 12 yrs ago

In case you weren't convinced that the global economy is 100% centrally planned... and 100% dependent on QE... this is worth reading...

How can it possibly be that countries that are sinking into recession... or worse ... depression... have rising stock markets?

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9515510/Technicals-flash-amber-as-ECB-and-Fed-struggle-to-validate-rhetoric.html

Makes me want to sing:

QE me to the moon Let me swing among those stars

Let me see what spring is like On Jupiter and Mars

In other words, hold my hand In other words, baby, kiss me

Fill my heart with QE Let me sing forever more

You are all I long for

All I worship and adore

In other words, please be true In other words, I love you

Why don't you fill my heart with QE?

Let me swing forever more

Because you are all I long for

All I worship and I adore

In other words, please be true In other words In other words, I, I love, you

I love you QE... I love you baby...

traineeinvestor 12 yrs ago

@ OffThePeak - they already have inheritance tax which basically does this but staggers the collection accross a number of years. Doing it all at once would collapse the economy.

There are better ways of helping the middle class - tuition costs are a major issue if you don't come from a wealthy family. Why? The number one reason is the explosion of university costs relating to admin and research. How to lower university costs? Impose a minimum amount of time which academic staff must spend in teaching undergraduate classes (at least half) and limit the amount that can be spent on admin to $X per full time student. The legions of non-productive admin resource wasters would be forceably eliminated.

Cut the red tape needed to start a small business: Example: want to open a restaurant in NY? Typically around 8 separate approvals/licenses are needeed. Change the law so that only three permits are needed - health/hygiene, fire and building.

Taxes: remove the double taxation as well as a lot of other distortions (like carried interest) and then set a series of tax rates which broaden the tax base and are more progressive - the result will be less money locked up in companies, more contributors to the tax base (reduces moral hazard) but high income earners will be paying more (unfortunately, there is no getting away from the need for higher taxes). Two more benefits (for America) of removing double taxation - more incentive for American companies and individuals to invest domsectically instead of overseas and more incentive to favour investing in companies which actually pay taxes (instead of tax loss vehicles).

"fair" is not a word that should be used when it comes to taxes - it means different things to different people.

OffThePeak 12 yrs ago

"they already have inheritance tax which basically does this but staggers the collection accross a number of years. Doing it all at once would collapse the economy"

I disagree.

Do it right, and you would see a boom.

Limit the timeframe, and give back at least half the revenues to those who create SME jobs, and the number of jobs would soar.

As Softy said, above:

"the rich don't care about creating jobs, and prefer to make money gambling in the stock exchange (in spite of the republicans calling the rich, the 'job creators'). I mean, why should they? If you had 100 million HK$, would you rather start a new company, with all the hassle and risk of losing money, or would you buy shares of HSBC, etc.?"

The risk/reward needs to change. Wealth folk pat themselves on their backs for being job creators - Now let them DO IT to save tax.

traineeinvestor 12 yrs ago

@ OffThePeak -We'll have to disagree on whether the one time wealth tax would be beneficial or detramental.

Softy's comment on the rich applies to everyone - very few people care about anyone outside their immediate family. Sure we all give some money and to charities, but the bottom line is that everyone is in it for themselves - the only difference between the rich and the rest of us is that the rich have been more successful at it. Make it easy for people to start businesses and to hire/fire people and more jobs will be created. Keep cranking up the red tape (e.g. Obummer Care) and the taxes and jobs will not follow as people will find easier ways to make a living.

As a side note, the role of SMEs in net job creation is overstated. Yes, it is important and yes SMEs create more jobs in most OECD countries than larger companies BUT they also lose a lot more jobs as well due to the much higher incidence of business failure. Favouring SMEs over large coprorations is very unlikely to be as beneficial to job creation as many people think. Also, if you penalise the large companies in the process, not only will investors lose out but you give large corporations another incentive to send jobs overseas.

Nobody is or should be obliged to create jobs for other people - the focus should be limited to making it as easy as possible for those who want to.

traineeinvestor 12 yrs ago

@ Softy - it's a fact. Please read what I said carefully - your response is irrelvant to the statement I made.

Ed 12 yrs ago

Jake V... agree - the reason property prices are through the roof is partially because of the HKD USD peg... HK interest rates are ridiculous low and blowing bubbles...

This is being compounded by the PRC governments massive stimulus and loose lending policies over the past 3 years... much of this cash is showing up in HK where mainlanders pay cash for apartments...

I suspect there is not much the HK government can do because they can only attempt to address symptoms... there is little they can do about the disease... the disease is QE to the moon...

traineeinvestor 12 yrs ago

@ Softy - I did, hence my reply. A simple google search will verify my statement.

Here is a link and an extract:

"Thus, when one accounts for job destruction, small businesses appear to account for a significantly smaller share of net new jobs created in the private sector than many people might believe."

http://www.stlouisfed.org/publications/re/articles/?id=2087

This is the second time you have resorted to unprovoked personal attacks. This is the last time I will reply to any statement you make.

@ Ed - Agree on the excesses of QE but don't see a viable way out either. A combination of QE, negative real interest rates and policies which support rather than harm entrepreneurial behaviour and consumer spending would appear to the be best bet but the deficit/debt holes are just too big. Alien intervention might offer better odds.

traineeinvestor 12 yrs ago

On QE: a claim that Bernanke has become something of an irrelavancy: http://finance.fortune.cnn.com/2012/08/31/ben-bernanke-irrelevant/

The obvious ommission from the article is the convention that the Fed does not take action close to an election. If that convention is maintined and the Fiscal cliff issue is not resolved, then the last few months of 2012 are going to be interesting.

OffThePeak 12 yrs ago

"the Fed does not take action close to an election..."

Here's another reason:

+ Israel wants a war (so it can wipe out Iran's nuclear capability)

+ Obama is against the War

+ Romney has said he will "support allies in Israel"

+ If stocks and the economy weaken into the election, Romney's chances improve

+ With Romney, Netanyahu gets his war

+ Bernanke is Jewish (like most top Central bankers)

I think predicting a slide in stocks into the election is not a tough forecast. VIX is low, and options are cheap - So I am looking for a put-buying opportunity this week.

OffThePeak 12 yrs ago

Why are there NO JOBS when:

+ "As Bernanke said in his speech on Friday, the central bank's two controversial rounds of buying bonds - so-called quantitative easing - has lowered long-term interest rates by as much as 1.65 percentage points, and added as many as 2 million jobs."

+ Obama told the audience, "Three years later, the American auto industry has come roaring back. Nearly 250,000 new jobs."

(from News reports)

With Bernanke and Obama claiming their policies created so many jobs, why are so many Americans out of work? Could it be because they do not count the jobs that their policies are destroying? And how about the FOUR WAYS that I have mentioned that the US economy Drains Wealth from the Middle Class. Why do we never hear about those?:

- ie: The War Machine, The inefficient healthcare system, the Suburban living arrangement, and the Predatory connection between Wall Street and Washington

The real issues are not being discussed by politicians, and neither by the Fed

Ed 12 yrs ago

Well... there has been a nett increase in jobs since 2008...

Imagine what the job situation would look like without QE... we would be in a depression ... or possibly economic collapse... instead we have delayed that with printing...

traineeinvestor 12 yrs ago

Ed is correct - the US economy is creating new jobs. The problem is that they are not creating them fast enough to both aborb the growing number of people of working age and the aleady high number of unemployed persons.

OffThePeak 12 yrs ago

"Imagine what the job situation would look like without QE... we would be in a depression"

Maybe not - We might be coming "out the other side" after a severe clean-out of the economy. That clean-up is still needed now.

The "jobs created since 2008", is mostly an Inventory-related bounceback, and flaky efficiency-destroying jobs in the public sector (for lawyers and paper pushes, etc). Jobs were cut in a panic in 2008, and companies over-reacted. Do you really think a healthy economy can be created around the jobs "created" directly by government stimulus. If that worked, than the Feds could just hire millions to hand out Food Stamps, fill-in medical forms and act as Tax collectors, and the economy would boom. It isn't happening.

The private sector is the engine of job creation in a healthy economy (because those jobs are supported by VOLUNTARY spending, rather than tax-and-spend, or borrow-and-spend.) And the most important part of the private sector is SME's (small business). If Romney can stimulate that while cutting government spending, he can reshape the economy towards something healthier.

Ed 12 yrs ago

Softy... "now"...

Where have you been the past 4 years - I've been pounding a drum about how QE is what is driving the HK property market and asset prices across the world through the roof...

I am 100% aware and have been since TARP that money printing and stimulus are the only things between us and an economic abyss...

However money printing will not prevent us from crashing into the abyss... money printing is not a solution...

My suggestion - at the time of Lehman - was to wipe out the bondholders and shareholders of the banks - nationalize them - then float them again when things recovered...

No panacea - there has to be severe ban no matter what - my fear is that we have now essentially bankrupted countries by bailing out the banks... and the end result will be far greater than if we had taken the pain in 08...

Perhaps we'd be recovering by now?

Ed 12 yrs ago

OTP - as indicated above I agree... we might be recovering by now... but make no mistake... if the central governments did not act - we would have experienced a massive economic implosion...

Global trade stopped after Lehman because credit was frozen. If that would not have been addressed quickly you would have arrived at ParkNshop to empty shelves....

I don't think it was / is possible to avoid some sort of depression-like scenario... again I fear that we have made things far more difficult by attempting to pervert the course of nature...

OffThePeak 12 yrs ago

Here's a great interview with Billionaire Mining investor, Frank Guistra

https://youtu.be/9o30gNfPq_k?si=uuj1OBvItGC6nIef

It is full of interesting points.

But here's one small thought I took away:

+ Spain was once a great nation. It came from nowhere, rose to pre-eminence, and then went back to insignificance - all within maybe 150 years.

Why?

+ Because when Spain became wealthy, the Spanish people became big consumers - and spent their wealth, becoming an indebted country

... Here's how I ran with that idea...

The US is in the same bind. 70% of the US economy has been consumer-related. And Americans maintained a high-spending (suburban!) lifestyle after the economy turned down in 2000-2002. And they had to go into debt to do it.

That over-consumption will need to be balanced by a long period of under-consumption to reduce those debts. Private households are going through it now. But the governnent has stepped up its over-spending to compensate for the belt-tightening in the private sector. So the budget deficit has ballooned in an unsustainable way.

In the Video interview, Guistra talks about how the current situation is likely to lead to inflation, and with QE and other measures, the government seems to be preparing for it. Also, wealthy people find it easier to make money in inflationary times than in deflationary times. So they will tend to back inflationary steps taken by governments.

In the long run, most Americans will wind up with a reduced standard of living. How will they react at the end of this drama, when they find that a few wealthy folk (the smart part of the 1%) has actually benefitted from exaggerated price moves, while the average guy is much poorer?

That question may hang over the USA for years to come

Topol 12 yrs ago

The US election will be important in seeing how this pans out. The Republican dominated senate will not approve any stimulus ahead of the election - high unemployment and faltering economy raises the chances of a Republican election victory. This leaves Bernanke and the Fed to go it alone for QE3 - so expect a larger than previous QE as the Fed takes up the slack - perhaps even intervening in the stock market as well as the bond market to drives prices higher. The Fed has the capacity for further QE but the danger is inflation - as seen in QE1&2 and even the mention of QE3 this week has pushed equities, gold, silver, oil and commodities higher. Unfortunately this widens the rich/poor divide making basic food stuffs more expensive for the bottom 1/3 of the worlds population (remember the various food riots in the wake of previous QE) the social instability would be a problem any democratic government would look to avoid in their own backyard.

traineeinvestor 12 yrs ago

@ Ed - TARP has not actually cost the US taxpayers anything. From Wikipedia:

"Of the $245 billion handed to U.S. and foreign banks, over $169 billion has been paid back, including $13.7 billion in dividends, interest and other income, along with $4 billion in warrant proceeds as of April 2010. AIG is considered "on track" to pay back $51 billion from divestitures of two units and another $32 billion in securities."

There will be other recoveries as well.

The situation is quite different in the UK and some other European countries.

I agree that moral hazard needs to be kept alive and well - shareholders, unsecured bond holders and other creditros of companies (not just banks) should be required to bear the losses from financial failure. I'll allow retail protection of small deposits and ring fencing of assets held in custody to prevent bank runs, but people have to learn to take their losses - whether it comes from buying shares in Lehman or a mini-bond. Expectations that someone else will wear the loses incurred from decisions to invest is one of the things that got us into this mess in the first place.

There is a better solution to wiping out the bondholders - mandatory conversion to equity. In a lot of cases this will allow the company to keep functioning and avoid the costs and further damage to its business from going through some kind of insolvency/state take over proceedure. It won't work in all cases, but in enough to be worth considering.

@OffThePeak - agree completely. While some government is both necessary and desirable, ultimately the cost of government is born entirely by the productive private sector. The issue with unproductive wasting of resources does not stop there - there is also the wasteful need to employ so many people to simply comply with all the regulations.

Ed 12 yrs ago

TI: my point was.... Tarp was the beginning of the bail outs... I am against all bail outs... banks are still being bailed out as they can obtain billions at 0 interest...

Softy - I think the reason that doesn't happen is because American politicians seldom do the right thing any longer... they work directly for corporations and their lobbyists... and of course corporations have competing interests... so basically they are all greedy pigs rooting around in slop each trying to eat more than his fill...

That was another drum I was beating since the Bush regime exposed American politics for what it is - completely corrupt - Obama has since reinforced my views on that.

Ed 12 yrs ago

OTP: interesting comment above... the 'found' wealth (actually stolen wealth) that the Spanish got from the Americas parallels the 'found' wealth that the US got from massive credit binge and low interest rates the US enjoyed in the run up to 07... both resulted in spending sprees... and both ended badly of course...

Spain: this article demonstrates just how impossible Spain (and others) situation is... death by a thousand cuts http://www.zerohedge.com/news/spain-running-out-cash

Topol 12 yrs ago

As you pointed out Ed without the bailouts we would have experienced a massive economic implosion. As the creation of credit (or debt) has fuelled economic growth since abandoning the gold standard we are in the credit bubble. Without the creation of more credit (QE) then businesses will fail, unemployment and defaults will rise (destroying credit) equities fall (destroying savings), this will lead to bank runs, then currency runs then sovereign defaults. Then the paper money economy collapses.

I believe Bernanke is well aware of how precarious the situation is and will keep the printing presses going until inflation starts to get out of hand - but it is a dangerous game he is playing.

Unfortunately I don't see any good ideas to get out of this mess appearing from business or political leaders. The US government appears blind to the seriousness of the situation and the Bernanke has his fingers crossed.

Ed 12 yrs ago

Yes... what else can be done? I agree - nothing.

Because printing money and ZIRP are policies of governments who are a) desperate and b) out of options.

Unfortunately I don't think we can use the 1930's as a guide to what will happen when this unravels...

I believe the majority of the people in the US were working in agriculture... so they could sustain themselves - relative to people now most of whom are living in cities...

We also have 7 billion people on the earth now... vs 2 billion then... look at youth unemployment rates... imagine what happens to those rates when we really get hit...

I get a rather unsettling feeling in my stomach when I think this through to the likely conclusion

traineeinvestor 12 yrs ago

@ Ed - your point on the discount window (banks borrowing overnight from central banks at or close to zero and then reinvesting in government securities) is spot on - it's effectively a wealth transfer from the taxpayers to the banks and abuse of it should be prevented. That said (i) I do not blame the banks for taking advantage of something the government is stupid enough to offer (ii) the discount window should not be closed off as it serves a useful and necessary function. We need a mechanism that penalises banks who use it without doing so in a manner which worsens the position of a user which is there out of necessity rather than opportunism. Possibly interest in the form of equity?

Absolutely right about the effect of Spain's looting of the "New World" - it did so much long term damage to the Spanish economy that it never recovered. A comparison between Spain's colonial experience and today's welfareand bail out states is an interesting one and the same principle applies - give people access to "free" money and they lose all incentive to do anything productive.

Ed 12 yrs ago

Softy - one word - EXACTLY

Confessions of an Economic Hitman: https://youtu.be/yTbdnNgqfs8?si=C-8cKL8iASJZ0Szm

Ed 12 yrs ago

OTP - outstanding video - thanks for this

Full Interview With Billionaire Frank Giustra http://www.youtube.com/watch?v=9o30gNfPq_k

traineeinvestor 12 yrs ago

Agree - the video was excellent. I can't see myself putting much money into junior resource companies. Maybe some more in the big ones.

Off to buy some more gold this afternoon.

OffThePeak 12 yrs ago

TI, your:

"Give people access to "free" money and they lose all incentive to do anything productive..."

Right. Few "people" have access to free money. Mostly, it is the banks. And they find it easier to put it back into government bonds, and securities, rather than making commercial or personal loans. A easy yield-curve-pick-up beats taking credit risk for genuine customers.

Junior miners were a great investment - back in "the day" (2001-2006). And I made some very good money on Guistra creations like: Wheaton River, Silver Wheaton, Gold Wheaton, etc.

Maybe we will see a time like that again. Rob McEwen thinks so - and he told me that in a one hour 1-on-1 meeting I had with him a few months ago. (What a treat that was !) His four year cycle has the Gold stock index doubling between the summer low, and the end of next year.

traineeinvestor 12 yrs ago

@ OffThePeak - precisely. It is much less risky to lend money to governments than to the private sector. The central banks are giving them an opportunity to make a low risk profit and they are taking it. There have been reports that the banks are being coerced into buyin government bonds but I'm not sure if that has been verified?

I put "free" in quotes because (i) the money is not free - they still have a cost of capital associated with the trade and (ii) there is some degree of risk involved - either from credit down grades affecting the value of the bonds etc purchased and/or an increase in interest rates (both of which would lower the value of the bonds while leaving the obligation unchanged) and (iii) the discount window could be cut off leaving them with a funding gap that would have to be filled.

OffThePeak 12 yrs ago

"I put "free" in quotes because (i) the money is not free - they still have a cost of capital associated with the trade and (ii) there is some degree of risk involved - either from credit down grades affecting the value"

There's NO RISK, until there is HUGE RISK

Here's a story about credit risk.

I used to be a shipping banker, and one of our customers was a old partrician Greek Shipowner. My bank was lending alongside another bank (BofA.) When "the old man" died, the fortune went to the first born son, but other members of the family contested the will. We were happy to keep lending so long as we could get the son's personal guarantee. But he refused. Soon, we got taken out by another bank (Morgan.)

Years later, I met the lending officer from Morgan, and she told me the story. Her bank agreed to lend without a guarantee based upon a Verbal Assurance from the son that he would pay them back. "Don't worry," he said. 18 months later, the shipping market was collapsing and the loans were troubled. Meantime, the son's own shipping business was thriving - he was in a different sector of the market.

Morgan then went to the son, and asked him to paydown some of the loans to the father's old company. "I cannot do that," he said. So she objected: "But you told us: Not to worry !"

"Okay," he said, "You can start worrying now."

Banks often change there minds about how risky a loan is very quickly.

traineeinvestor 12 yrs ago

Good story - like you, I've been around long enough to know that when it comes to money, promises are no better than the collateral (and somethimes not even that good).

It could happen so easily - imagine if Greek banks had been doing it with the Greek government - borrow Euros and invest in Euro denominated bonds issued by the Greek government. Even before the default, the bonds are worth a fraction of what was paid but the obligation to repay the full amount is still there. Result - the Greek banks are (more) broke.

Ed 12 yrs ago

Oh my...

Spain's Capital Flight Now Worse Than Asian Crisis

The flight of capital from Spain is now worse than what Indonesia, one of the hardest hit countries during the Asian financial crisis, experienced in the late 1990s, according to analysis by Nomura.

http://www.cnbc.com/id/48891162

OffThePeak 12 yrs ago

Makes sense to take money out now.

If the Greece leaves, and re-introduces the Drachma, and it devalues 30-40%, there will probably be a big move of capital BACK INTO GREECE. Many Greeks have money outside the country, and are WAITING to invest. They want to see their currency cheaper first. So the large devaluation may trigger at least a temporary boom.

If we see that in Greece, then other mediterranean countries may learn from it, and copy Greece.

There's a "feeling of inevitability" about this. And so moving money safely out of Spain, and into a stronger currency or gold should make good sense. One has to do this BEFORE capital controls are introduced. The window may not be open much longer.

Ed 12 yrs ago

America's parties... 100% captured... http://truth-out.org/news/item/11304-the-party-is-over

traineeinvestor 12 yrs ago

@ OffThePEak - agree. If I was living in a struggling EU country, my money would have left the country long ago (incluing any physical gold).

elsdon 12 yrs ago

I think specifically, if HSBC gets run on in Spain, will HSBC globally be impacted? Can they siphon money from their other LE's to their Spanish one? Can they just cut their losses and declare bankruptcy on their Spanish entity?

When I've tried to withdraw money from my HSBC HK account in another country at their HSBC branches, there is absolutely no connection between the two.. It's like I have to wire myself the money as if it wasn't an HSBC->HSBC transfer. In laymen's terms, my interpretation of this is that they're absolutely separate.

traineeinvestor 12 yrs ago

@ elsdon - If they are separate legal entities, the answer is a qualified "yes" because the obligations of one legal entity are not the obligations of another legal entity (even if related). It would be very unusual to see any kind of explicit guarantee. The two qualifications are (i) banking regulators often require a letter of comfort from an offshore parent company. While a letter of comfort is not a guarantee, it does give the regulator some ability to pressure the parent to support the local subsidiary in times of distress (ii) reputational damage, cross default clauses and other group wide consequences - if a multinational bank let's a subsidiary go under, it will face a wide range of potentially very severe consequences - as an example, it would probably trigger cross default clauses on many of their ISDA contracts around the world.

Even if it is a branch (and not a separate legal entity) buried in the fine print of many account terms and conditions you may find a "ring fencing" clause which says that an account holder's rights of recourse are limited to the jurisdiction in which the account is held. In otherwords, if you open your account with XYZ International Bank in Spain, you do not have a right to bring a claim against the bank in any other location. The law on ring fencing is less than fully settled and probably not consistent between jurisdictions but would be a point of concern.

elsdon 12 yrs ago

TI: Good to have a lawyer in our midst. :P

It'll be interesting to see when the impacts of this Spanish bank run are realized.

traineeinvestor 12 yrs ago

A very strong correlation between the creation of the Fed and inflation: http://www.zerohedge.com/news/chart-day-803-years-global-inflation

Not a surprise, but certainly makes the case for holding real assets rather than bank deposits or fixed rate debt instruments over the long term.

OffThePeak 12 yrs ago

Softy, regarding Capital fight. Your:

"Is it such a big problem if it ends up in other Euro countries (e.g. deposited in German or French banks)? I don't know, I am just asking."

YES !

Here's why: The Spanish banks use those deposits to fund loans they may WITHIN SPAIN, such as loans to small business and also Spanish mortgage loans.

It is not easy to get homeowners to repay them quickly, so when the deposit base flees, the Spanish banks cut back on their loans to SMEs. In most countries, small businesses are the backbone of the economy. Cutting back sharply on loans, is putting many of these companies out of business. That is very bad indeed for the Spanish economy !

OffThePeak 12 yrs ago

How Republicans Went Crazy, Democrats Became Useless and the Middle Class Got Shafted

04 September 2012 .. By Bill Moyers

"Long-time Republican Mike Lofgren describes the modern corruption and dysfunction of both Republican and Democratic parties. After a tremendous response to his commentary on Truthout, Mike Lofgren has released a new book, "The Party Is Over." In it he explores what he calls the "company town" of Washington DC, where "the company's products are politics and military hardware."

Bill talks with Mike Lofgren, a long-time Republican who describes the modern dysfunction of both the Republican and Democratic parties. In Lofgren's view, Republicans have become overly obsessed with obstructing President Obama, and the Democrats suffer from political complacency. Lofgren's new book is The Party is Over: How Republicans Went Crazy, Democrats Became Useless, and the Middle Class Got Shafted.

Transcript

Bill Moyers: The growing power of the religious right is one reason my guest left the Republican Party and became an Independent. "The mixture of politics and religion," he says, "debases both, and has turned the GOP into an apocalyptic sect." He has his problems with Democrats, too. For one thing, he says, both parties "are captives to corporate loot."

/more: http://truth-out.org/news/item/11304-the-party-is-over

Nice clear title - I must watch this !

traineeinvestor 12 yrs ago

@ OffThePeak - it was an interesting interview with some good points mixed in with what sounded like some simplistic generalisations.

Like walkup7, I have reservations - not only is he a recent departee from his job but he has written a book and is trying to promote it. That said, the reviews on Amazon (and the comments on the reviews) seem to gather support from both sides of the aisle:http://www.amazon.com/The-Party-Over-Republicans-Democrats/dp/0670026263

OffThePeak 12 yrs ago

Yes. I'm watching it now...

"Both parties don't seem to care about having a vibrant manufacturing base in the country."

(It seems both Dems and Reps are happy to "shaft" the middle class, because they get their money from corporations.)

"The Republican party is acting on behalf of the rich... using religious "Rube bait" to get people to the polls.

== ==

How do we get back at them?

If voting for Rom-Bama is no choice, then here's an option:

http://www.godlikeproductions.com/forum1/message1947065/pg1

traineeinvestor 12 yrs ago

@ OffThePeak - I'm not sure if that is the answer. The Libertarian candidate is far more likely to split the Republcan vote and see Obummer re-elected than to actually gain office (or even a voice in the political decision machine in Washington). IMHO, this election is between bad and worse.

OffThePeak 12 yrs ago

Sure.

And if the race is close, you may find me voting for Romney, but with little enthusiasm. It seems like:

+ A Vote for Obama is a vote for Entitlements

+ A Vote for Romney is a vote for tax cuts for the Rich

Where does the Middle Class go for the leadership they see the country badly needs??

In short...

A Vote for Rom-Bama is a vote for "Business as Usual"

And a Bigger and more Dangerous Government, and a shrinking middle class.

== ==

Here's one Long Shot possibility:

THE FADING MESSAGE ...

Are we headed to a Romney versus Ron Paul finale ??

: Thread: THE FADING MESSAGE ... are we headed to a Romney versus Ron Paul finale ??

http://www.godlikeproductions.com/forum1/message1978772/pg1

BULLET POINTS:

=============

+ BREAKING: Obama speech about to be moved to 20,000 seat arena after failing to fill 74,000 arena

+ Obama is tired

+ He's not "doing his job" - Valerie Jerritt is doing it for him:

+continues: http://nesaranews.blogspot.hk/2012/09/wsi-delivers-valerie-jarrett-exposed-by.html

+ Obama's mother-in-law, Michele's mother has been telling friends in Chicago, that the Obama family may soon move to Hawaii. So clearly, they have been thinking through their back-up-plan.

Can a tired and incompetent President keep "the show on the road" and win in November?

Perhaps not. And it may some become more and more clear that he is fading.

Obama's only "secure support" seems to be Blacks and some poor hispanics.

Everyone else is "severly disappointed". Can Obama run as "the entitlement candidate" ?

Will that be enough to win him a serious number of votes ??

Here's one possibility : Ron Paul may pick up the gauntlet of the Libertarian Party.

His votes were not (fully) counted in the Republican primaries. Does he want a revenge?

OffThePeak 12 yrs ago

The big point in Obama's favor (and for me, one of the very few) is that he does not want to go to war in Iran.

Romney, on the other hand, has said he will "support America's allies" - and I think I know what that means

What a sad country the USA has become. Both candidates feel they need Israel's money and Israel's support and help from the Jewish-controlled media (whatever size you may think that is) to become President. Even when winning that support may require helping "our allies" to start an unnecessary war, which could ruin our country's future, and maybe life on the entire planet.

Ron Paul was the only major candidate with a foreign policy that made sense. I am tired of war-monging. Tired of Americans losing their lives in foreign "policing operations" and (phony) Wars on Terrorism. Along with that, I am tired of paying for those adventures in higher taxes, and lost freedoms.

I think Americans are waking up to the empty rhetoric, and Ron Paul has done his country a great service in standing for principle and common sense.

Amongst the majority of Americans who have not yet woken up, some will awake before the election. And others will awake before 2016. I just hope that is not too late.

Ed 12 yrs ago

Germany is unraveling...

Another outstanding article from the Wolfman... Germany has been riding the coat tails of China / US stimulus cash... and the ride is over...

http://www.zerohedge.com/contributed/2012-09-04/german-economy-tanks-ecb-throws-gasoline-fire-and-eurozone-bailouts-enter-pha

Does the EU unleash the printing press?

Remmy 12 yrs ago

Ed, yes not just Germany, but rather the US, China and Europe will roll-out the printing press. Worst thing people can do is stay in cash right now, as value of cash will fall. People should move into income producing assets, primarily land, property, and stocks.

Ed 12 yrs ago

I read with great amusement that Obama has enlisted Bill Clinton to help fix the US economy...

That makes a lot of sense (not!) seeing as Clinton was responsible for dismantling Glass Steagall allowing banks to bet with deposits...

Now if only Reagan was still alive Romney could bring him onto the team ... after all Ron was the man who created the brilliant Voodoo Economics theory (cut taxes - spend like mad - borrow to make up the difference) - Reagan is the one who put the US and the world onto this wheel of madness ...

Now that we have realized Voodoo Economics is... well... Voodoo Economics i.e. it is sheer idiocy... and we can no longer borrow enough to keep the wheel spinning... we print... because if we stop printing - we collapse...

We are surrounded by idiots...

traineeinvestor 12 yrs ago

@ Ed - Glass Stegal's separation of commercial and investment banking was breaking down anyway because of globalisation. The non-US banks could do it - the US was just playing catch up. It's also worth noting:

1. most of the losses that led to bail outs did not come from investment bankinng. They came from proprietary trading, poor hedging and bad credit decisions

2. many of the biggest bail outs went to companies that were not banks and which were not subject to Glass Stegal in the firts place: Lehman, Bear Sterns, AIG etc . The real problem here was the SEC rule change in 2004 which allowed SEC regulated non-banks to greatly increase leverage: http://www.parapundit.com/archives/005558.html

3. regulatory issues which failed to apply appropriate risk weighting to various assets (particularly derivatives and illiquid securities) were also a major issue. If banks and securities houses had been forced to apply higher risk weightings in the wake of Long Term Capital Management situations like Lehman's 40:1 leverage would not have occured

4. and don't get me started on Fannie Mae and Freddie Mac - their contribution to the mortgage mess is huge

We are led by idiots - many of the same political leaders and regulators who created the mess are the ones who are putting forward new regulations which impose massive costs on financial institutions (which adversely affect customers, employees and shareholders) without actually addressing the problems.

Ed 12 yrs ago

I will leave it to the honourable Barry Rithhotz to explain the implications of repealing Glass Steagall...

http://www.ritholtz.com/blog/2012/08/repeal-of-glass-steagall-not-a-cause-but-a-multiplier/

Ed 12 yrs ago

Myths die hard eh...

traineeinvestor 12 yrs ago

@ Ed - just to be clear, I am noy saying that the repeal of Glass Stegall was not a major contributor to the crisis, only that there were a number of other causes as well.

To add one more - in 2000 some genius decided that credit default swaps be expempted from regulation.

There's a good range of articles on the role of Glass Stegall here: http://www.redlands.edu/docs/URSB/4_GLASS_STEAGALL_-_formatted__edited.pdf

And here is a neat piece on one of the most hypocrictical contrubutors to the mess: http://larouchepac.com/node/14919

OffThePeak 12 yrs ago

"2000 some genius decided that credit default swaps be expempted from regulation."

Hmm.

TI,

Can you explain why that might have been more important than:

1. Greenspan's cutting of interest rates to ultra-low levels after the 2000-2002 stock market drop (and 9/11) to intentionally trigger a boom in housing

2. Bank's throwing away sensible limits of LTV percentages, because they knew that the crooked guys in their Investment banking division could "repackage" all those aggressive mortgages and flog them off on unsuspecting fools, because some bought-and-paid-for Rating agency would slap a AAA or AA rating on the resulting toxic garbage

3. An out-of-control boom in suburban living, which assumed: Oil prices would stay cheap forever, and that suburban living (and all that mindless driving it requires) are somehow good for people

???

traineeinvestor 12 yrs ago

@ OffThePeak

I'm not suggesting either that CDSs were more important than the other factors that I listed (or that I listed everything that made a material contribution - the ones you list are also highly relevant), but they played a very significant role and were the primary cause of AIGs downfall.

There's an explanation here: http://moneymorning.com/2008/09/18/credit-default-swaps/

A USD 62 trillion derivatives market (notional value) that is unregulated and can be used as the equivalent of a highly leveraged pre-1930s short squeeze is an awfully big elephant to be allowed to run around in the play pen without supervision.

To put this in context, the notional value of outstanding CDSs in 2008 (globally) was multiples of the total value of outstanding US mortgage debt at the same time. This is not an apples to apples comparison - the CDS notional is a global number and is actually a complex derivative involving margin while the mortgage numbers as US only and are real numbers, but the comparison gives you some idea of how big an issue CDSs were at the time.

The US mortgage data is here: http://www.federalreserve.gov/econresdata/releases/mortoutstand/current.htm

OffThePeak 12 yrs ago

Okay.

I used to be a senior derivatives guy (but not CDS), and at one stage I came close to working for AIG (in their very early days.) So I know a bit about the derivatives market. AIG was a one-off. The incentive structures were skewed, the people were greedy, and the risk management function was very poorly managed. If they had been under the bank regulators the problems would have been spotted earlier, and they never would have been allowed to build up such a huge loss-making exposure. (I know that, since I had to spend a fair amount of my time dealing with risk management issues at a top Global bank.)

The biggest error was the way the bailout was handled. The Treasury was not wrong to gtee AIG's exposures, but they were wrong to gtee 100%. They should have offered a 70% or 80% gtee in return for a payment by those taking the gtee. That would have stopped a meltdown from happening, and cost taxpayers much less.

On top of that Fannie and Freddie were "disasters waiting to happen", that I spotted years earlier and wrote about in articles like this one:

Debt Bubble - The Smoking Gun / June 2004:

http://drbubb.blogspot.hk/2004/06/smoking-gun-prelude-to-property-crash.html

"DEBT is a four letter word rarely spoken by central bankers and mainstream economists. They would rather talk about supply and demand, public confidence and consumer spending. But the fact is that American consumers (and indeed, most consumers in the developed nations) have become too complacent about borrowing money to fund spending. Savings rates in America have fallen for decades. Yet our economists have told us not to worry."

Anyone in the finance industry who did not see the bubble was blind, criminally negligent, or a crook IMHO.

I wasn't alone in spotting the dangerous over-gearing, and unsound business practices. The Regulators and Greenspan should have lost their jobs and maybe part of their pensions for gross incompetence.

Strong words, yes. But I am not happy that such large problems, with catastrophic impact were allowed to fester for such a long time - with no one i n a position of leadership willing to address them. Why should we let those responsible "off the hook", or worse yet, with large fortunes of ill-gotten gains ?

Ed 12 yrs ago

So... as expected... the EU joins the US, Japan, UK, in printing 'unlimited' money...

Apparently there is a such thing as a 'free lunch'

traineeinvestor 12 yrs ago

Yeah! Where can I get mine?

Remmy 12 yrs ago

You can get your "free lunch" by buying an income producing asset, financed in USD or HKD. HK property being a prime example.

traineeinvestor 12 yrs ago

Sometimes it's good to be a borrower.

If ZIRP stays with us until 2015 (per Janet Yellen), a lot of leveraged HK property owners will be very happy.

OffThePeak 12 yrs ago

R.:

"You can get your "free lunch" by buying an income producing asset, financed in USD or HKD. HK property being a prime example."

Yeah, but thanks to ultralow rates, most of those assets are now overvalued

traineeinvestor 12 yrs ago

Agree that it's hard to find undervalued assets to buy. Parts of the US look cheap and there will be some bargains in Europe at some stage but I don't have enough local knowledge to buy or am put off by the high taxes. Some cheap stocks listed locally or elsewhere but I have no interest in buying shares on margin.

Really open to ideas.

Ed 12 yrs ago

By free lunch I mean there is no risk ... no downside... to money printing ... with the press of a computer key all our problems are solved (sarcasm intended...)

Perhaps Draghi's or Bernanke's next announcement (when these current policies fail to restart their economies) will be:

"A money-printing machine in every home. Hard work and intelligence are hereby declared barbaric relics (along with gold). Consumer is officially king. If you want it - hit print - and got get it'

traineeinvestor 12 yrs ago

@ Ed - I think we are already at that stage - the culture of entitlement has reached ridiculous and unsustainable levels

Ed 12 yrs ago

Bill Gross: Why Gold Is A Better Investment Than Stocks & Bonds

Bill Gross, manager of the largest bond fund in the world at PIMCO, shook up the markets at bit last week when his fund's holdings showed they had significantly increased their position in the barbaric relic: gold. He discusses in this interview why he sees gold as an even better investment than.....stocks and bonds?

All the largest money managers around the world, the big smart money, continue to take massive positions in gold. They must have all really lost their mind.

http://www.ftense.com/2012/09/bill-gross-why-gold-is-better.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+ftense%2FsymR+%28The+Future+Tense%29

punter 12 yrs ago

So, has anybody looked at Draghi's plan? Where will the money to buy bonds come from (printing)? What happens if sovereigns can't repay (which is what's it is supposed to solve. if can't pay, sell bonds anew. And on and on.). etc.?

The markets are loving it.

OffThePeak 12 yrs ago

TI, your:

"@ Ed - I think we are already at that stage - the culture of entitlement has reached ridiculous and unsustainable levels"

Right.

So we now have the "Entitlements President" with his voters mostly dependent on the government, running against the Cut-Taxes-on-the-Rich Candidate.

So where does the badly-squeezed Middle Class go in an election like this? Both candidates say the want the votes of the Middle Class, and they think waving signs might win them over, but the reality that neither party really works for those in the middle. The two main parties are the creatures of a Corpotocracy, and you might even say a Zionist-favoring corptocracy, inclined to go to War, if Israel's leaders want that.

This becomes more obvious with every election. But the Middle Class will remain frustrated until a New Third Party rises up that really wants to fight for them.

You could say that the Tea Party and Occupy Wall Street movements were potential efforts to break away from the two party system, but they were quickly co-opted. And that's sad. So was the shameful way that the Romney-ites treated Ron Paul.

I have been invited to a Republican fund-raiser, and if I was a few decades younger, I might be tempted to think of ways of making a mild protest - by having a sign that can be seen by attendees. (I am now far too old for this sort of drama.) The object would be to make some points about how out-of-touch the Republicans are with the Middle Class, that has been the core of American freedom and democracy. The Republicans assume that any Americans in HK are pampered bankers and lawyers, etc who want lower taxes, and will automatically favor the Republican candidate. They are wrong. There are voters here who don't have enthusiasm for either major party.

In fact, the Middle Class in Hong Kong has many of the same concerns and poor choices as the Middle Class in the USA. It is becoming a global phenomenon, given the way the global media has grabbed control of most organs of communication.

(I keep wondering when Ed is going to SHUT ME DOWN here. Maybe, just maybe, he is on the same wavelength with some of this message.)

OffThePeak 12 yrs ago

I won't disrupt it, and I won't be attending either. If a mustacheod middle-aged man was there carrying a sign, someone might misunderstand his intentions, and make a bigger drama out of what might have been intended as a mild form protest - simply to show that the Republicans are taking too much for granted about political yearnings of US Citizens overseas.

However, I am tempted to send a carefully worded email to the organisers.

traineeinvestor 12 yrs ago

@ OffThePeak

I agree - neither Obummer or Rotney stand for the beleaguered middle class or even the working class. Both are proposing policies that are divisive and economically damaging to the middle class and America in general. It would be refreshing to see a credible alternative. Unfortunately, there isn't one. My $0.02 worth is that the debt/deficit problem is too deep to be solved without considerable pain and the regulatory framework being constructed is often doing more harm than good.

We appear to have diverted a long way from anything that is relevant to HK property or investment in general. Perhaps a separate thread for non-economic matters?

OffThePeak 12 yrs ago

This thread IS the separate thread : QE and other (-) fads

You think the Big Parties care what their members think?

Here's Democracy in action:

But, HEY!, they still want your money - and your vote in November. I think it is clear what you need to do... and that doesn't include voting Democrat or Republican.

/ Yeah, I expect Ed to shut me down any time now /

Ed 12 yrs ago

Apparently there is no free lunch with QE...

http://www.zerohedge.com/news/scary-math-behind-mechanics-qe3-and-why-bernankes-hands-may-be-tied

Ed 12 yrs ago

Jim Rogers On Europe, The US Election , & The Next Big Election Opportunity

The legend Jim Rogers spoke with Reuters this week on his thoughts on the global economy and financial markets. Rogers, who co-founded the Quantum Fund with George Soros, explains why the next downturn will be far greater than the last and where he is investing his money today.

http://www.ftense.com/2012/09/jim-rogers-on-europe-us-election-next.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+ftense%2FsymR+%28The+Future+Tense%29

OffThePeak 12 yrs ago

WTF is Ben doing with QE-ing new securities when the stock market is banging up near record territory?

The market expects QE3:

( LINK: http://jhaines6.wordpress.com/2012/09/07/after-disastrous-us-job-report-qe3-expected-next-week/" )

...so if he fails to deliver, there's room for another September disappointment, and a big market slide.

"THE CLIFF", it has been called:

http://tinyurl.com/GEI-CliffEdge

OffThePeak 12 yrs ago

(Back to Danger in QE):

Mauldin: QE is "trickle down monetary policy" ... that stores up financial risks

Ultra Easy Monetary Policy and the Law of Unintended Consequences

EXCERPT

"Lemme go back now and give you the reality version of the Bernanke portfolio balance channel.

"He relieves investors of the lowest risk-bearing vehicles, forcing them to seek yield elsewhere and at the same time, take on increasing risk. Until, increasingly yield-starved as this 'balancing' is relentless, they arrive at the door of the stock market. And mindlessly take the plunge. Because they have no choice. They are now balls-to-the-walls exposed. Waiting for the next round of QE.

. . .

Let me get this straight. If I design a tax policy that somehow might benefit "the rich," I am immediately labeled a Luddite supply-side theorist, as well as heartless, etc.

It is pretty standard for Keynesian economics professors to deride supply-side economics and what they call trickle-down economics. Cutting taxes on the rich will translate into a better economy and jobs? They scoff at such notions, as do almost all the liberal elements in politics.

[b]Which brings us to this delicious irony. While they abhor trickle-down economic policy, they love what is in effect trickle-down monetary policy[/b].

. . .

Understand, I am NOT arguing that an easy monetary policy doesn't have an effect on stocks and that it will have an effect on the overall economy. There is clearly a wealth effect. It is just that almost all (not quite but almost) of the arguments that one can make for trying to boost the stock market are the same that one uses for arguing that tax cuts also increase consumption and the wealth effect.

(Later he says):

White anticipates his conclusion:

"One reason for believing this is that monetary stimulus, operating through traditional ('flow') channels, might now be less effective in stimulating aggregate demand than previously. Further,[b] cumulative ('stock') effects provide negative feedback mechanisms that over time also weaken both supply and demand. It is also the case that ultra easy monetary policies can eventually threaten the health of financial institutions[/b] and the functioning of financial markets, threaten the 'independence' of central banks, and can encourage imprudent behavior on the part of governments. [b]None of these unintended consequences is desirable[/b]. Since monetary policy is not 'a free lunch', governments must therefore use much more vigorously the policy levers they still control to support strong, sustainable and balanced growth at the global level."

/more: http://www.marketoracle.co.uk/Article36319.html

OffThePeak 12 yrs ago

QE in Europe ??

Felix Zulauf: Europe’s Recession Will Worsen Next Year−Expect Massive ECB Money-Printing

===

Zulauf: We are in the late stages of the fiat money system; get into gold while you still can

NEWSHOUR, GUEST EXPERT, PREMIUM 07/Sep/2012

This Financial Sense Newshour program is available only as a premium, paid "FS Insider" release.

Jim welcomes back legendary asset manager Felix Zulauf from Switzerland. In a very timely and powerful interview, Felix covers many important issues, foremost among them the European debt crisis. He believes politicians will not solve the crisis, leaving the European Central Bank (ECB) to begin massive money-printing and devaluing the Euro. Felix sees the ECB balance sheet expanding even more dramatically than the Fed’s next year. He also sees Greece exiting the Euro, possibly even late this year, and next in line would be Spain and Portugal. Felix also forecasts the end of the great bond bull market, and advises selling all bonds over 5-6 years in maturity. He sees a big move out of bonds and into real estate and stocks. In the US, the economy only appears to be healing because of its 9% deficits of GDP. Subtract the deficit spending, and the US is in recession. As to gold, Felix sees decisive new highs for gold in 2013.

/see: http://www.financialsense.com/financial-sense-newshour

traineeinvestor 12 yrs ago

Expecting the same politicians who did so much to cause the crisis to solve it is not something that I would expect either.

I had a read of Zulauf's blog. Some interesting ideas - he sounds a lot like Marc Faber - but I found it difficult to make much sense of his predictions on gold and found it interesting that he was favouring deflation rather than inflation.

OffThePeak 12 yrs ago

Is the Financial World's Fate in the hands of a few German Judges ?

http://www.guardian.co.uk/world/2012/sep/09/german-judges-to-rule-on-euro-fate

They have the potential to throw the stock exchange into turmoil, trigger frenzy on bond markets and bring down the German government. So the eyes and ears of the eurozone will be on the eight red-robed judges of Germany's highest court this week when they deliver a long-awaited verdict over whether a financial rescue fund considered crucial to the future of the euro gets the green light.

The constitutional court is under international pressure to rule in favour of the European stability mechanism and fiscal pact. A dissenting ruling from the court, based in Karlsruhe, southwestern Germany, would probably cause havoc on money markets and cast doubt on the future of Europe's single currency.

"The German constitutional court cannot afford to be seen as not being independent, but it also cannot afford to be seen as the court that brought down the government,"

Ed 12 yrs ago

From what I see the problem in America is not the GOP or Democrats it is the corrupt system that allows corporations to legally bribe elected representatives.

This, combined with the need to raise millions or even billions of dollars, to get elected has created a 100% corrupt system.

America is a bastion of crony capitalism - where corporations and special interests battle to purchase favours from the government ... not much different from say, the Philippines... which is exactly the direction America is headed... a small elite, minimal middle class, and tens of millions living in utter destitution.

Krugman and the NYT, as usual, is addressing the symptoms of the crony capitalist state... they never deal with what is truly wrong with the country - because the MSM is part of the machinery that allows this descent into hell to happen.

Remmy 12 yrs ago

Ed - I agree with you, although the comments are not unique to either America or Philippines. Its every country in the world that works like this, only some do a better job of creating an illusion of democracy/equality etc.

OffThePeak 12 yrs ago

Of course, Krugman is a complete idiot, and anything he says can be rejected out of hand. Maybe the fact that he teaches at Princeton is indeed a sign of how low educational standards have fallen in the US. (haha) Fortunately, I attended university at the other place (Harvard), and there are still a few good professors there that teach economics (Rogoff) and history (Niall Ferguson), and at least one of them makes a sport of blowing to pieces some of the nonsense that PK writes.

Since NF doesn't post on this board, then I shall try my hand, by:

(1) Quoting PK:

"First, obstruct any and all efforts to strengthen the economy, then exploit the economy’s weakness for political gain"

(2) Pointing you to today's Wall Street journal, which speaks of Obama's two big faliures:

+ A massive Obamacare health program, which BO allowed his Democratic colleagues to be design with minimal input from the Republicans,

+ His failure to achieve a "grand compromise" with John Boehner, even when JB came to him offering tax increases, in return for spending cuts. This compromise would have cost JB his job, buy he was willing to do it for the sake of the country. BO refused it.

Obama was too inflexible, too ideological to strike the type of compromise that made Clinton an effective President in BC's second term.

Result? Here's BO's record on Jobs creation:

( http://danieljmitchell.files.wordpress.com/2012/09/unemployment-by-president.jpeg )

Let's hope that as a new President, Romney can strike a compromise, and back down from his war-making agenda, agree some cuts in defense spending and in entitlement programs, and some moderate rises in taxes. Then Romney would be on the way to being the sort of effective leader that BO never was.

Ed 12 yrs ago

Desperado...

Fed Stuck at Zero Into 2015 Seen in Swaps, QE Odds Reach 99%

http://www.bloomberg.com/news/2012-09-10/fed-stuck-at-zero-into-2015-seen-in-swaps-qe-odds-reach-99-1-.html

Can we stay away from discussion of Romney vs Obama? It's as unbecoming and pointless as an argument that Chelsea is better than ManU...

It's as simple as this - if you want to know what policies either man will implement if elected - look at who has donated the largest bribes.

traineeinvestor 12 yrs ago

@ Ed - agree. Both teams suck.

Agree that interest rates will remain low for longer than a lot of people expect. Back in 2008, the "experts" were saying that they would start rising in late 2009. Four years later, people are now talking about 2015.

OffThePeak 12 yrs ago

"Maybe employers pay a bit more, but people pay a lot less"

???

How does that work?

What are employers going to do, BORROW the money to pay more for healthcare? Oh, that's right, they might have to raise prices, then who pays for it?

The real problem is the gross inefficiency of the US system, which rewards: Doctors, pharmaceutical companies, insurance companies, and paperwork pushers.

Someone needs to "take an axe" at that hoary group of interest groups, if they are going to make the US system cheaper. We need a leader with the courage to take on the AMA, big pharma, and the insurance industry. But such a wise leader might wind up dispatched the same way that JFK was, for taking on too many vested interests. Such a leader would need a big mandate

OffThePeak 12 yrs ago

The longer low rates go on, the longer people think they will last.

The reality is likely to be that they will move up suddenly, and faster than anyone anticipates. That's just the way markets change course

Remmy 12 yrs ago

OffThePeak - rates are not likely to move up sharply. They are likely to stay low for an extended period, ie the next 5 years, and will only then, rise slowly if at all. I don't want to sound rude, but anyone who understands financial markets will agree with this. Your best indicator is the US Treasury yield curve.

Softy and Trainee are correct. We will likely see rate rises when we have not only evidence of a sustained recovery, but indeed further if/when that recovery and growth becomes stronger than expected. This is still a relatively long time away. Right now, the most likely scenarion is indeed the very low borrowing rates we have now continuing for another 5 years.

traineeinvestor 12 yrs ago

My expectation is that interest rates will remain low until either US inflation reaches politically unacceptable levels or unemployment reaches politically acceptable levels. A return to higher growth rates may trigger one or both of these conditions but may (or may not) be sufficient on its own. I'm not holding my breath.

It's also worth bearing in mind the effect of higher interst rates on the US debt burden. While higher rates only affect new borrowings (including rollover), higher interest rates will start to bite pretty quickly.

I agree with Remmy on the yield curve being a good indicator but I have to wonder to what extent Operation Twist has distorted it?

Ed 12 yrs ago

Remmy - not every country works like this http://www.elections.ca/content.aspx?section=pol&document=index&dir=lim&lang=e

Ed 12 yrs ago

http://www.theglobeandmail.com/report-on-business/economy/with-no-rebound-in-sight-theres-never-been-a-slump-like-this/article4528610/

Ed 12 yrs ago

Conversation with a friend who has worked in China for years...

"man i went water skiing this weekend - friend has a villa near lake saw this ghost town basically 400 high end villas all sold bought for 1M now they are 5M each - only 2 families living in entire complex - driving through some place have no doors or doors open just empty - rotting away"

Ed 12 yrs ago

This sums things up nicely - I like to call it the Twilight Zone Economy... the worse the news the more the markets rejoice!!!

http://www.zerohedge.com/news/david-rosenbergs-new-normal-economy-does-not-drive-markets-any-more

Ed 12 yrs ago

More insanity:

The fundamental backdrop, in the shape of economic lead indicators and earnings momentum, has been deteriorating: manufacturing PMIs for the US, China, Japan, Korea, the Euro zone, and the UK are all now sub-50, and consensus earnings growth estimates for 2012 have been halved in recent months. What has this meant for Global Equities? Well, as UBS notes, in the last three months, very little. The MSCI AC World index is up more than 12% from the 4 June low. That markets have rallied while fundamentals have deteriorated in this manner is unusual. Historically, equity market rebounds have tended to coincide with a trough in PMIs and earnings momentum – that is, when PMIs have stopped going down and the pace of earnings downgrades slows (waiting for PMIs to recover to 50 or for earnings momentum to turn positive is usually too late). Markets now appear to be taking their cues from central bankers: potential policy actions are becoming a sort of ‘lead indicator of the lead indicators’, if you will. Given the recent rally, in addition to underlying macro weakness, policy action - and effective action at that – has become increasingly important for investors.

http://www.zerohedge.com/news/its-different-time-pmis-and-global-stocks

traineeinvestor 12 yrs ago

@ Ed Interesting but I'm not sure if I agree with everything said in the article - a discussion of whether or not the economy drives the market is too simplistic.

I've always believed that the economy is one of the factors influencing the markets (equites, bonds FX etc) - but it is not the only thing. Monetary policy certainly plays a big role. There are other factors as well. And of course, each of these exerts a fluctuating degree of influence over the others.

(Sidestepping the question of what is the "economy")

Right now, equities and US housing make a lot of sense. Bonds are showing negative real yields, property in HK (among other places) is expensive and offere miniscule yields, gold is too small a market and FX is just moving cash from one place to another. Almost by defualt, equities are being supported by the lack of large scale asset classes with at least the potential to generate positive real returns.

@ Loyd - a follow up on shipping stocks:

http://www.ft.com/intl/cms/s/0/5ae5b384-540a-11e1-8d12-00144feabdc0.html#axzz267fOU9ig

Ed 12 yrs ago

I think the point is ... and I completely agree... pretty much every single measure of the global economy is either negative or trending negative...

That in every single instance in past decades... if PMI's indicate contraction (sub-50) then stock markets drop.

They are not dropping - why? - because Central Banks are printing or threatening to print...

And thus - as I have been saying for months - the only thing that matters with respect to any investment is not fundamentals... but money printing

This is absolute insanity http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2012/09/20120910_PMI3.png

traineeinvestor 12 yrs ago

Either that or the world is filled with contrarian investors.

There is certainly no shortage of bad economic news and expectations that things will get worse (especially in the Euro zone). But we still have and expect inflation which brings people back to the search for a safe haven for their money.

Like most people, I want a positive real return over the long term. Equities offering stable or growing dividends and/or selling for substantial discounts to NAV are a good place to hide (IMHO).

traineeinvestor 12 yrs ago

An interesting article from Soros: http://www.project-syndicate.org/commentary/why-germany-should-lead-or-leave-by-george-soros

Ed 12 yrs ago

TI: Central Banks have been printing trillions and lending at ZIRP for nearly 4 yrs now... and the global economy is sinking in spite of it ... and now the ECB supposedly is going to join the party with unlimited monetization.... because they too are out of options...

What is the contrarian play here? Suddenly the money printing is going to inspire screaming growth?

Or perhaps some are expecting the global economy to suddenly start growing - in spite of the massive debt loads that nations are carrying? In spite of a banking system that if forced to mark to market would be insolvent?

I don't think there is a contrarian play - the only play is 'don't fight the Fed' - or better 'don't fight the Central Banks'

If they print - or even say they are going to print - markets are assumed to go up... so you want to ride the wave...

Unfortunately at some point - as many are pointing out - the money printing will fail to have any impact - or there will be a toxic side effect - and we are going to get the mother of all collapses.

"We can evade reality, but we cannot evade the consequences of evading reality" Ayn Rand.

traineeinvestor 12 yrs ago

@ Ed - agree. More printing should result in higher asset prices.

At the risk of sounding a discordant note of optimism: Global GDP has grown in recent years (small contraction in 2009): http://en.wikipedia.org/wiki/Gross_world_product

The US is experiencing positive real GDP growth, although at rates which are too low to absorb the new entrants to the work force or to come even close to closing the deficit. In fact most of the world is still growing (with the main large economy exceptions being in the Euro zone).

Here's a random question which I have been grappling with. The Fed holds around USD1.7 trillion (give or take a lot) of US federal debt. What happens if the Fed/US Treasury simply agree to cancel this debt? I can think of all sorts of implications (mostly positive) but I can't find any anaylsis on the internet.

Ed 12 yrs ago

Yes - but how has this minute 'growth' been generated? Take away the trillions and what do you have? Collapse...

Not sure what cancelling the debt would do - but if it were that simple then why not run up trillion dollar deficits forever and have the Fed by the debt - then just cancel it every so often?

traineeinvestor 12 yrs ago

@ Ed Now I'm confused. On the one hand the pundits are saying that the QE has had no effect and on the other that it's the only thing which is causing the world to generate positive real GDP numbers? That's not consistent and I'm sure that the truth lies somewhere in between. Things are bad, but not as bad as the tinfoil hat brigade would have us believe.

On cancelling the debt held by the Fed, I agree that it's not that simple (which was why I said I had been "grappling" with the idea. In effect this is what Greece did - they just cancelled a chunk of their debt and had a partial reset. Lot's of other countries have gone down the default road before (to the detriment of just about everyone involved). The difference here is that they are only cancelling/defaulting on the debt they owe themselves. Third party creditors would not be directly affected - I can't think of an historical precedent for such a move????

Ed 12 yrs ago

I think by no effect... I believe they mean it is not kick-starting the economy... i.e. not leading to significant or sustainable gdp or job growth...

It is certainly juicing asset prices... and it is certainly preventing complete collapse of things... let's make no mistake - an announcement of no further QE would topple everything immediately.

Actually the ECB didn't 'eat' Greece's debt... part of the debt was forgiven but bondholders suffered the haircut... I believe the ECB took no loss on their holdings...

traineeinvestor 12 yrs ago

Agree - QE3 is priced into the market. If it doesn't happen (or is pretty small) it will come as a huge disappointment. The ECB bond buying proposal is expected but there are still plenty of doubters so failure would be a negative but I'm not sure how big.

Creditors took the hit on Greece's debt default (and will when they default again). I can't think of any national debt default which has not been bourne by creditors? This is what makes the possibility of the Fed's holdings of US treasuries simply being cancelled interesting. It's not an answer to the underlying problem of wildly excessive spending, but it would make the optics look better for a while.

Ed 12 yrs ago

Perhaps this answers why forgiving the debt won't work... it would seem doing that will not solve the core problem

Central banks used to have a solution for that. When growth slowed, they would simply buy securities (usually government bonds) on the open market, driving down interest rates. Investors who wouldn't lend into the economy if they could get 8% on a risk-free bond might change their minds if the rate were only 5%, or 2%. Rates that low would stimulate a flood of credit, jumpstarting the economy. Today that tool isn't working, but central banks are still trying it nonetheless. With risk-free interest rates near zero, they continue creating money through the same means as before, now calling it "quantitative easing". The thinking seems to be: "If you have more money than you know what to do with and are afraid to lend it, how about giving you even more money?" It is like giving a miser an extra bag of gold in hopes that he'll start sharing it.

Most commentators interpret Bernanke's remarks as signalling the possibility of a new round of quantitative easing. If so, the results will likely be the same as before – a brief churning of equities and commodities markets, but little leakage of the new money into the real economy. In all fairness, we cannot blame the banks for their reluctance to lend. Why would they lend to maxed-out borrowers in the face of economic stagnation? It would be convenient to blame banker greed; unfortunately, the problem goes much deeper than that.

The problem that we are seemingly unable to countenance is the end of growth.

http://www.guardian.co.uk/commentisfree/2012/sep/03/debt-federal-reserve-fixation-on-growth

Topol 12 yrs ago

QE has the effect of:

1) reducing leverage - in QE1 the Fed bought $1.75t of debt mainly from the finance sector - which improved their financial position

2) buying debt raises its prices and lowers it yield - higher debt prices improve bank balance sheets and lower yields supports the peoperty market.

3) QE raises stock prices

traineeinvestor 12 yrs ago

The other reasons the banks are reluctant to lend:

1. higher risk weighted capital requirements under Basel III

2. regulators and politicians bashing the banks at every opportunity - sometimes justified and sometimes not. It's not an environment conducive to lending money

3. the discount window - borrow from the Fed at a very low rate and invest in higher yielding US treasuries. Not quite risk free but as close as they are likely to get. Any bank not taking advantage of the nearly free lunch is not doing their job properly

4. costs. in a low interest rate world, spreads are narrower. Add in the additional compliance costs imposed by new regulations and at least some loans are becoming less or even unprofitable

The Guardian article is sheer nonsense from start to finish - you would need(i) a population that is stable in both absolute numbers and demographic make up and (ii) a global command economy to achieve a "steady state" economy. The former would overturn the entire history of evolution and the latter would require a global dictato and (iii) acceptance of much lower standards of living by all. Even if all of these conditions were satisifed, it would break down very quickly. Perhaps the author was inspired by Logan's Run or THX1138? I prefer to live in the real world.

OffThePeak 12 yrs ago

"QE raises stock prices"

Too right !

Ultra-low rates have pushed up prices of most assets:

+ Certainly for equities, especially US equities

+ House prices, in countries (like HK) where sentiment was not broken by previous drops, and it is still easy to get a mortgage.

Some people run calculations, showing prices are reasonably priced, or even cheap, but those calculations depend on the interest rate assumption plugged in, which is an ultra-low number determined by QE

Meantime, countries like China continue to pour money into infrastructure spending as a way to prop up overall demand. But, hey-quess what?, the infrastructure is over-built, in the same way that US Housing was overbuilt, and so those projects are not serving real demand.

Where the projects are financed by debt, the cash flow generated is unlikely to be sufficient to support the debt - in the same way that so many McMansions built in the US in 2004-2006 were delivered into a market that did not want them.

When does the crunch come in China?

I suppose it comes when the banks and governments confess that the capital backing these projects is impaired. Cheap money may help to delay the Day of Reckoning, but that just means that more new bad debts are piled ontop of old bad debts.

History shows that Days of Reckoning often come in September or October, after the delusional days of summer are over.

So I am thinking that some "shock news" will appear from some "unexpected corner" soon. There are so many vulnerabilities, so it is hard to predict where the fear will breakout.

The weak volume we have seen in stock markets give me no confidence that a healthy rally can be ignited on such wet kindle.

Ed 12 yrs ago

I agree. Eventually the weight of gravity will collapse the entire rotten edifice of 'extend and pretend'.... or we will get some sort of Black Swan that will kick the legs out.

Ed 12 yrs ago

TI: I think the reasons that the banks are not lending is mainly because a) most people are drowning in debt or do not meet credit risk requirements and b) there is no end demand from consumers so businesses are reluctant to expand and incur debt to do so...

As for the Guardian article - I suspect they have the 'End of Growth' theory right ... I think we reached the end of growth in the 70's... that was when we substituted growth with voodoo economics (borrow - cut taxes - spend = growth)...

Obviously that could not work in the long term - and we are now in the long term 30 years later - and debt fueled growth has failed as we reach the limits of debt...

So what's the next rabbit out of the hat? Money printing... We won't kick the can 30 yrs with that trick

The big problem is we are at the end of cheap oil:

When the national highway system was originally constructed, of course, oil prices were at an inflation-adjusted level of around $12-$14 per barrel. That oil prices now trade at 8 times those levels has completely changed the economic return on road building. http://www.zerohedge.com/news/guest-post-demise-car

What I disagree with in the Guardian article is that we could transition to a sustainable world that has no growth... as if we disregard human nature and all sit around the camp fire and sing koombya and share the peanut butter...

If we have indeed reached end of growth then I suspect this is the more likely outcome:

"If you want a vision of the future, imagine a boot stamping on a human face - forever." George Orwell

Of course I am sure the author of that Guardian article realizes the repercussions of 0 or negative growth when you have a population of 7 billion ...

Let's keep in mind that prior to the mass use of fossil fuels, growth was basically stagnant... http://colli239.fts.educ.msu.edu/wp-content/uploads/2009/06/popgrowthprb1998cc.jpg

Going back is not an option - well at least not one that will happen without some major purging...

traineeinvestor 12 yrs ago

Everytime we have one of these discussions, it makes me want to go out and by some more gold......

Or maybe re-read "The Rational Optimist" again.

Ed 12 yrs ago

It is all rather disturbing... and I am hearing the same thing from increasing numbers of people... including those who not so many months ago reckoned this was just another business cycle... but the problem is - we are not recovering... and it's been 4 yrs... and the only answer we are getting is 'print more'

Anyway... rather than dwell on negatives... I have found a most appropriate song... https://youtu.be/hqwIifgs7KU?si=2111kgHjOFGrvmcw

traineeinvestor 12 yrs ago

Or something more in keeping with the times: https://youtu.be/Z0GFRcFm-aY?si=VDewOZ-COWIWdzsS

OffThePeak 12 yrs ago

"The End... as we know it"

Actually, if you can get a good fix on what the coming world is going to look like, you may Thrive, as others struggle. I have a video too that may help you see an alternative future:

https://youtu.be/lEV5AFFcZ-s?si=Vu7fZM28oLpOQd0i

(How much of this is true? I cannot tell you, but I think you will find it thought-provoking.)

Ed 12 yrs ago

Here's a canary in the coal mine in China... imports were down last month... seems that without easy money the consumer wilts...

Burberry cuts profit forecast after flat sales (shares down 17%)

Burberry, the fashion and luxury goods group which has been hit by falling demand in China, warned full-year profits will be "around the low end of expectations" as it reported flat second-quarter sales.

http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/9534820/Burberry-cuts-profit-forecast-after-flat-sales.html

OffThePeak 12 yrs ago

Yes...

And then there's the MISSING CANARY in China.

Where has Xi Jinping gone?

Remmy 12 yrs ago

Ed - your negative news is valid, except don't you realise that you are not looking at the canary. Signs of the canary existed 7 or 8 quarters ago. We are likely very close to a bottom, so any of the mainstream negative news you are seeing now is really fully priced in, if not overpriced in, and are perfect BUY signals for value investors.

Remmy 12 yrs ago

Some more good news, this time out of the US: http://money.cnn.com/2012/09/11/investing/stocks-markets/index.html

OffThePeak 12 yrs ago

Yeah, R. : Dow closes at 5-year high on 9/11

Do you find anything "wrong" in:

+ The clamor for more QE when the Dow is at record highs?

+ The low volume which has brought stocks to this level?

+ The lack of confirmation from other indices?

+ The big gap between (strong) US stocks, and (weaker) stock indices in other countries, such as Europe, and China?

OffThePeak 12 yrs ago

What Makes Mario Draghi So Dangerous For Europe

http://theautomaticearth.com/Finance/what-makes-mario-draghi-so-dangerous-for-europe.html

Any country that wants a bailout under Draghi's terms .... must relinquish a substantial part of its sovereignty. At the very least, such a country will no longer be in charge of its own economic policies.

And it doesn't stop there: the countries that will need to pay for and/or guarantee the bond-buying will also be called on .... to relinquish a substantial part of their sovereignty: the ECB wants much more control over the banking system across Europe. The drive is towards more centralized ..... control, leading to far stricter fiscal union and political union, which would take away much of the control eurozone countries presently have over their economies.

Ergo, Mario Draghi's plan is not an economic one, it's political all the way ..... And ... Draghi's .... neither a politician nor elected. He should not be allowed to have any say whatsoever in it.

...... the essence of the entire crisis: the people in the street being forced to pay for the long lost wagers of those in penthouses and ivory banking towers.....

traineeinvestor 12 yrs ago

My HK$0.02 worth is that the US market is "high" because (i) people expect QE3 (ii) bond yields are low to the point of providing negative real returns unless you go a long way out on the yield curve or accept lower credit quality (iii) the US economy is growing (however slowly) (iv) US corporates as a group are in good financial shape and (v) the multinationals are still benefitting from globalisation.

The Euro zone bailouts are essentially a wealth transfer from the taxpayers in the stronger countries to the non-taxpayers in the weaker countries who failed to comply with the Euro zone deficit agreements and lived beyond their means for too long (Greece, Italy, Portugal). Spain is a little different in that a major housing market bust has dragged down many of the regional banks which, in turn, are hurting the more solvent national banks.

Ed 12 yrs ago

TI : my understanding of the EU bail outs is that they are actually bailing out the German and French banks who stupidly loaned money to the PIGGS who are unable to pay it back...

So, instead of allowing the PIGGS to default - because that would collapse German and French banks, they put the yoke to the backs of the taxpayers in the PIGGS rather than directly bail out their banks... because that is the more palatable solution.

At the end of the day German and French banks are responsible for much of this disaster - it is the creditor who is meant to determine the ability to repay a loan when making the loan - they knew very well that countries like Greece were credit risks from the get go - yet they made the loans.

You make a bad loan you eat the default. But of course the taxpayers of Germany and France would not be very keen to hear that...

traineeinvestor 12 yrs ago

@ Ed - anyone who lends money should wear the loss if they can't get it back. To repeat something I have said many times - if a bank goes bust, then the first thing that should happen is that the subordinated debt/Tier 1/2 capital should be mandatorily converted into equity. If that isn't enough, then other creditors (bond holders, deposit holders above the protected level, derivative counterparties etc) can take a haircut as well. There shouldn't be any need for a bailout at all if this is adopted.

On the financial incompetence of the Euro zone, the banks have a lot to answer for (and I would add GS's role in Greece to the hall of shame) but it bascially comes down to the governments spending too much money and the banks lending too much money.

Ed 12 yrs ago

The Germany court votes later today... can you imagine what will happen to markets if 'nein' is the answer to the bail out fund...

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100019947/only-the-german-people-can-renounce-their-sovereignty/

OffThePeak 12 yrs ago

XI ?

===

Fringe sources are talking about a rebuffed assassination attempt, where Xi was injured.

OffThePeak 12 yrs ago

"my understanding of the EU bail outs is that they are actually bailing out the German and French banks who stupidly loaned money to the PIGGS who are unable to pay it back...

So, instead of allowing the PIGGS to default - because that would collapse German and French banks, they put the yoke to the backs of the taxpayers in the PIGGS rather than directly bail out their banks... because that is the more palatable solution."

======

Yeah.

Think of it as a plot, for unelected bankers to grab power in Europe.

Truly, I am hoping that the German judges will have the wisdom to shoot down this hoary power grab.

Some bankers belong in jail

traineeinvestor 12 yrs ago

@ OffThePeak - some bankers certainly do (and a few non-bankers) but the politicans have first claim on prison cells.

One of the furstrating things (one of many) is that the taxpayer funded bail out is completely unnecessary - just do a waterfall conversion of the debt into equity until the bank becomes solvent again. Let the losses fall where they should - equity holder first (which will include a lot of employees), subordinated/junior debt second, other bond holders third, general counterparties and creditors fourth, preferred creditors (deposit holders, employees and suppliers for the first $XXX) ,fifth and no claims against assets held in trust/custody/safe deposit. No need to screw taxpayers, the employees who created the mess take a big hit and people will stop thinking that lending money to banks is backed by the taxpayers.

If I was German, I would be hoping the court stops the bail out. I'm not German, so I hope they approve it. It's also worth bearing in mind that Germany has benefitted hugely from the weak Euro.

punter 12 yrs ago

It's almost a given the German court is going to say it's okay. Everything points to it.

Ed 12 yrs ago

David Stockman discusses why it is pointless to argue back and forth on an Obama/Romney discussion when the entire capitalist market system is controlled by decisions the Federal Reserve makes with their printing press.

http://www.ftense.com/2012/09/cnbc-interview-david-stockman.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+ftense%2FsymR+%28The+Future+Tense%29

Great interview - however I take issue with the comments re: Reagan..

Voodoo Economics (cut taxes - spend - borrow = prosperity) was madness and it's one of the main reasons the US is on the verge of collapse

traineeinvestor 12 yrs ago

http://www.bloomberg.com/news/2012-09-12/germany-can-ratify-esm-bailout-fund-with-conditions-court-rules.html

Conditionally approved. Haven't been able to find the conditions yet (only one was mentioned in the article) but the initial reaction from the markets was positive.

Ed 12 yrs ago

No surprise there eh...

Interesting... heading to Italy on the weekend... hotels are asking for payment in... USD...

Ed 12 yrs ago

So much for Draghi's 'unlimited' printing.... seems there is a 190B cap... not sure how much debt Italy and Spain are issuing in the coming months but this should buy a bit of time... before they agree to print even more...

http://www.zerohedge.com/news/karlsruhe-decision-german-taxpayer-pillage-can-continue-conditions

OffThePeak 12 yrs ago

Interesting comment on the FT

"When Lin Biao, China’s then heir apparent, died in a aeroplane crash, it took the Communist party two months to inform the public.

Although it happened more than 40 years ago, some observers have been reminded of the incident this week because vice-president Xi Jinping, who is expected to be elevated to party’s top post next month, has not been seen in public for 11 days."

Could there be any truth to the Rumor that Xi has injured in an assassination attempt?

If it is true, they may want to keep the true state of his health a secret,

until those involved in the assassination attempt have been fully identified.

China may not know how wide the group of conspirators is.

Fortunately, the Government will not grind to a halt, since the "old guys" are still in place

Loyd Grossman is Miss Venezuela 12 yrs ago

Ed. Which hotel is this? Strange that they would want USD.

Ed 12 yrs ago

Yes Softy I am making it up...

Lloyd - you are aware of the massive currency flight out of PIGGS into what are perceived as safer currencies ... because of the fear that a EU breakup will result in them being forced overnight to exchange Euros for a new devalued currency?

Billions of Euros have gone into Germany assuming Germany will retain the Euro in said event... even more Euros have been shifted to Switzerland... no doubt substantial sums having been moved into USD.

So if you were running a business in Italy and you could take payment in what is perceived as a safer currency why not? Saves you all the hassles and expense of converting and shifting offshore...

Why would transacting in USD be considered illegal? USD is legal tender in pretty much every country in the world.

Ed 12 yrs ago

Discussion of whether or not QE is beneficial http://www.zerohedge.com/news/schiff-vs-insana-matter-vs-anti-matter

OffThePeak 12 yrs ago

TI,

I recall that sensible notion of moving claims down the priority chain to solve a problem of excess debts. Thomas Lamont and JP Morgan used it effectively about a century ago. Perhaps Henry Paulsen doesn't read history, or maybe he was really "in the back pocket" of some of the creditors.

It is a disappointment to me, that we don't have one of the candidates in the two top parties running on the platform: "I promise not put have an ex-Goldman Sachs guys in my cabinet." They would get my vote, if I liked their other policies

Ed 12 yrs ago

I pulled this commentary off of ZH.... I post it because it provides a theory as to why many remain optimistic... even though the writing is on the wall:

- trillions upon trillions of dollars printed - and more to come

- ZIRP forever it seems

- yet rising unemployment - collapsing GDP

Unlike a handful of die-hards and dead enders (thanks, Don Rumsfeld) here @ ZeroHedge, most of the people in the world do not want a second Great Depression. There are very few on this planet that do not acknowledge the possibility/likelihood of another depression: they will do whatever it takes to forestall it. If this includes believing the establishment's lies ... they are believers. They will repeat whatever lies they must to themselves, to their children, they will live the lies until they are submerged by them.

When the central bankers promise the children that they will save them, the children act accordingly even though the fact of the central banks having to make such promises speaks for itself. When the Fed and the rest are the last line of defense, there really is no last line of defense.

What people don't understand is the nature of our crisis, it is an energy crisis in drag. High real input prices due to scarcity are stranding trillion$ of infrastructure used to waste resources, (sunk capital investment). There is no coming back from this. When capital resources are gone they are gone forever, wasting infrastructure is worthless junk. The process has arrived at the point when the various actors are beginning to come to understand what 'forever' actually represents and that they are confronting it.

The monstrousness of our predicament is almost beyond the ability of the human mind to grasp its scale. We burn up our resources today, there will be no more cars used to burn resources for millions of years. We're it. Apres moi le deluge!

Graham Summers would be on more solid ground by stating the central bankers cannot issue value-on-demand. They cannot offer anything other than symbols for value, items that have worth only under circumstances that do not currently exist and cannot again! They cannot print crude oil, topsoil, surface water, they cannot increase waste-carrying capacity, they can add to the assault on these things by way of their lies and the willing credulity of others. They can only make matters worse, the central banks are at odds with themselves.

As far as it goes, the entire world is in the grip of resource deflation, from which there is no escape. Our voracious machines dig the graves of our grandchildren faster and deeper, capital is destroyed more utterly, what remains becomes unaffordably expensive, at some point the costs are bankrupting ... see 'Greece'.

Greece is all of our futures, our children's futures, our granchildren if they are very, very lucky and can dodge the consequences of our stupidity and blindness. They will live in small villages, they will till what fertile soil they can find, they will make things by hand they will wish all of us had died before we were born.

OffThePeak 12 yrs ago

" monstrousness of our predicament is almost beyond the ability of the human mind to grasp its scale"

It is simple: Financial asset prices will not be as secure as they were in the past. Many people who are relying on financial assets and government promises to protect their wealth and wellbeing, are going to be disappointed

Covering up this big truth for a longer period through QE is not going to change reality, and may just make the eventual shock bigger.

If you know this truth, then you can use the "extra" time you have been given to prepare for the Hard times that are surely coming. Those who think that we have "business as usual" will be the ones who suffer the biggest shock when the music stops, and they scramble for safe seats, that are suddenly not there.

OffThePeak 12 yrs ago

Down.

Higher rates don't Push prices higher.

They are a normal RESPONSE to higher prices.

If prices go up because Incomes rise, then maybe rents can go up, and that might help property prices

Ed 12 yrs ago

Are Chinese Banks Hiding “The Mother of All Debt Bombs”?

Financial collapses may have different immediate triggers, but they all originate from the same cause: an explosion of credit. This iron law of financial calamity should make us very worried about the consequences of easy credit in China in recent years.

From the beginning of 2009 to the end of June this year, Chinese banks have issued roughly 35 trillion yuan ($5.4 trillion) in new loans, equal to 73 percent of China's GDP in 2011. About two-thirds of these loans were made in 2009 and 2010, as part of Beijing's stimulus package. Unlike deficit-financed stimulus packages in the West, China's colossal stimulus package of 2009 was funded mainly by bank credit (at least 60 percent, to be exact), not government borrowing.

http://thediplomat.com/2012/09/10/are-chinese-banks-hiding-the-mother-of-all-debt-bombs/2/?all=true

Repeat after Dr Evil https://youtu.be/cKKHSAE1gIs?si=8vnOA3mbmSrHAbOa USD5.4 TRILLION DOLLARS....

Ed 12 yrs ago

Ron Paul: "Country Should Panic Over Fed's Decision"

What took Ben Bernanke sixty minutes of mumbling about tools, word-twisting, and data-manipulating to kinda-sorta admit - that in fact he is lost; Ron Paul eloquently expresses in 25 seconds in this Bloomberg TV clip. Noting that "we are creating money out of thin air," Paul sums up Bernanke's position perfectly "We've Lost Control!" From mal-investment to Bernanke's frustration and the unintended consequences, the full 5-minute interview is a must-watch.

http://www.zerohedge.com/news/ron-paul-country-should-panic-over-feds-decision

OffThePeak 12 yrs ago

(I was just about to post the same)

Here are some Quotes from Ron Paul:

"The Fed has expressed a Lack of Confidence ... They don't know what to do."

“It should not surprise anybody, but it is still astounding. To me, it is so astounding that it does not collapse the markets. [Bernanke] said, ‘We are in very big trouble. We are going to do something unprecedented and we believe it will not hurt the dollar.’ And yet the stocks, they say ‘we love this stuff.’ But the dollar didn’t do so well today and the real value of the dollar is measured against gold, and gold skyrocketed from its very low to its highest. It means we are weakening the dollar. We are trying to liquidate our debt through inflation. The consequence of what the Fed is doing is a lot more than just CPI. It has to do with malinvestment and people doing the wrong things at the wrong time. Believe me, there is plenty of that. The one thing that Bernanke has not achieved and it frustrates him, I can tell—is he gets no economic growth. He doesn’t do anything with the unemployment numbers. I think the country should have panicked over what the Fed is saying that we have lost control and the only thing we have left is massively creating new money out of thin air, which has not worked before, and is not going to work this time."

Remmy 12 yrs ago

The biggest "danger of QE3" is for those people who do not understand its effects. In particular those people who feel its "safe" to stay in cash or bonds.

To property benefit from QE3, you need to be leveraged, seeking the lowest possible borrowing rate, and then invest in assets that produce a return. Your best assets to invest in are property, especially HK and Singapore (both residential and commercial) and stocks (look at how well the US markets are doing, but I would actually be looking at the Hang Seng, which could easily rise 40% once stronger evidence of a global recovery emerges).

traineeinvestor 12 yrs ago

@ Remmy - agree that cash is a depreciating asset and fixed income investments that return less than the rate of inflation are also losing investments. I prefer enough short term cash/near cash to cover a few years of living expenses and the rest in risk assets - in the longer term I hope that the rents and the dividends will at least keep up with inflation. No guarantees of course.

On leverage - it's a wonderful thing when it works for you (as it has for HK property investors over the last decade or so) but really really painful when the markets move against you. This seems to be a lesson which investors need to relearn every market cycle.

elsdon 12 yrs ago

I just wonder if the HKMA/Government will have the balls to come to terms with the fact that US/China monetary policy is grossly skewing the economy on this tiny island.

Hong Kong has no need for QE, and nowhere on this scale. Some people on this forum have mentioned quite adamantly about us not being in a bubble by 'definition'.. But easing a healthy economy is unprecedented in history isn't it? How can we use tools/definitions we've devised from history if this has never been seen before?

I for one hope somebody grows some nuts and ends this ZIRP for HK.

Ed 12 yrs ago

100% agree. HK's peg to the USD and monetary policy has put HK onto the boil... then add to it the stimulus that is coming out of China that is throwing fuel onto an inferno..

Of course everyone says after the fact you can never identify a bubble while it's blowing...

I've said it before - I'll say it again - this is the Mother of all Bubbles. And Ben keeps on trying to blow it bigger.

traineeinvestor 12 yrs ago

There have been times when the currency peg has helped HK and times when it has been detrimental. Right now it continues to contribute towards local asset inflation.

Today we have near full employment, moderate taxes (although off a very narrow tax base), affordable and extensive social support for low/no income groups, no negative equity, very few bankruptcies, no corporate insolvencies of note and a healthy banking sector. If we are going to adjust the peg, it should be done very gradually - possibly an initial move towards a RMB/USD mix or a broader basket.

An alternative idea: a tax on HKD inward remittances for capital account. Since I am not a fan of higher taxes going to our wasteful government, this should be off-set by reducing the tax burden elsewhere. One positive of this is that it's easier for the government to undo once the cycle turns. Obviously, some issues as well.

Ed 12 yrs ago

Panic http://globaleconomicanalysis.blogspot.co.uk/2012/09/panic.html

OffThePeak 12 yrs ago

"An alternative idea: a tax on HKD inward remittances for capital account. Since I am not a fan of higher taxes going to our wasteful government"

My Plan:

Mortgage Interest Surcharge : to bring rates to where they should be.

Give back the money, in a Reverse Stamp Tax (call it a stamp tax refund) paid to sellers.

traineeinvestor 12 yrs ago

@OffThePeak - assuming it is revenue neutral, your plan would make entering the market easier but make servicing a mortgage more affordable. Also, stamp duty is higher on more valuable properties. I don't know, but I suspect that there is a greater use of mortgage finance at the lower and mid ends of the market (?). If this is correct then sellers of more valuable properties would benefit possible to the detriment of buyers of cheaper properties? Maybe?

Given that 60% of transactions involve no mortage (per Citigroup quoted in SCMP this week), I'm not sure how much impact this would have.

Separately, how would a rebate of stampt duty tie in with the SSD? If it undoes the SSD, then the speculators are let back in to the market. If it doesn't, I'm not sure how it will help liquidity unless you are trying to encourage longer term holders to sell?

OffThePeak 12 yrs ago

assuming it is revenue neutral, your plan would make entering the market easier but make servicing a mortgage more affordable. Also, stamp duty is higher on more valuable properties.

Good Points:

===

+ Mortgages would be LESS affordable, which is the whole point. HK SHOULD have pushed up rates 1-2 years ago, but could not, because of the Peg. The Mortgage Interest SURCHARGE that I am suggesting, would apply to any loan where the purpose is to buy or refinance an property, and/or where the underlying security is a mortgage on a HK property

+ I would share your concern about giving too much money back, and so would CAP the Stamp Tax Refund at whatever it might be for a $10 million property

OffThePeak 12 yrs ago

Felix Zulauf - Gold, Systemic Collapse & The End Of Fiat Money

September 13, 2012

Today world renowned money manager Felix Zulauf warned King World News, “... the fiat currency, paper currency standard, is in the final stage of the super cycle.” Zulauf, who founded Zulauf Asset Management, also declared, “I do believe the 30 year bull market in government bonds is over.

. . .

I think we first see, over the next couple of years, the transfer of government debt from private balance sheets to central bank balance sheets. I do believe the 30 year bull market in government bonds is over. I mentioned in the media (Barron’s) Roundtable that one should be selling half of what he owns, and should sell the other half in September at the latest.

I think the whole game is over. Bonds are very overvalued. The real return is negative. Normally bonds yield at least as much as nominal GDP growth. Nominal GDP growth at the present time is about 3% or 4% in the US. I’m not suggesting we go right there tomorrow (in terms of yield), but bonds are very overvalued.

I have stayed bullish, but it’s over. The game is over and we have to look for other assets.”

Felix also predicted a plunge in stocks: “I think over the next two years or so we will probably see 1,000 in the S&P again (a decline of more than 30%).”

Felix also added: “Obviously policymakers are completely lost in this environment. Therefore, when the market forces are such that it jeopardizes they system, and they dislike it, then they change the rules. For instance, if interest rates of government paper shoots up, like it was the case for Spain or Italy, then the central bank comes in and provides the money, and buys whatever it takes to move the interest rate to levels it likes.

When you do that again and again, you distrust the invisible hand of Adam Smith, so to speak, and you trust the hand of the political class in central banks and in governments. I really doubt that bureaucrats know better than the markets how to allocate money and assets in our world.

Once they start doing that, and they do it more and more and more, there are going to be, and there already are, misallocations of major proportions, and not to the benefit of our system. So that’s how they create a bigger and bigger, growing monster.”

/more: http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/9/13_Felix_Zulauf_-_Gold%2C_Systemic_Collapse_%26_The_End_Of_Fiat_Money.html

traineeinvestor 12 yrs ago

Looks like the govt is thinking of extending the SSD lock up in response to the lateest QE: http://www.aastocks.com/en/News/HK6/61/NOW.507335.html

Surely this will discourage people from selling? Or am I reading the statement incorrectly?

Ed 12 yrs ago

Greece Denies Report It Will Need Third Bailout

http://www.cnbc.com/id/49028798

Sound the countdown is on to BO3.. or is 4... or 5?

Maybe they can make a movie... theme song: https://youtu.be/ZvEnIkz82A0?si=Cr_pu6b0TutRxDmb

Ed 12 yrs ago

ZIRP to 2015 now ...

Watch pension funds start to collapse as they are unable to achieve minimum returns that allow them to remain fully funded...

Calpers, one of the biggest funds in the US needs 7.5% per year to stay afloat - they generated 1% last year....

The only way to hit their targets would be to engage in more risky investments... even if they were allowed to do that... hugely risky investments are exactly that - hugely risky - a bad move could crash a fund...

Just one of the many unintended consequences of QE to the moon...

Ed 12 yrs ago

Dr Doom: http://www.ftense.com/2012/09/marc-faber-fed-policy-will-destroy-world.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+ftense%2FsymR+%28The+Future+Tense%29

Ed 12 yrs ago

Nigel Farage On The European Madness

http://www.ftense.com/2012/09/nigel-farage-on-european-madness.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+ftense%2FsymR+%28The+Future+Tense%29

Ed 12 yrs ago

America already in recession? http://www.ftense.com/2012/09/achuthan-re-confirms-we-are-in.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+ftense%2FsymR+%28The+Future+Tense%29

Ed 12 yrs ago

Our ancestors who correctly judged the climate, soil and rainfall and planted crops that flourished were rewarded with a bumper harvest. Those who planted the wrong crops did not get a bailout — they got a lean harvest, and were forced to either learn from their mistakes, or perish.

While some surely perished from misfortune, and some surely survived from luck, this basic antifragile mechanism ensured the survival of the fittest agriculturalists and the transmission of their methods, ideas and genes to further generations. In the financial sector today the Darwinian mechanism has been turned on its head; in both Japan and the West, financiers have not been forced by failure to learn from their mistakes, because governments and regulators protected them from failure with injections of liquidity.

Markets have become hypnotised and junkified, trading the possibility of the next injection of central banking liquidity instead of market fundamentals.

Government life-support has given Wall Street failures the resources to continue their dangerous and risky business practices which caused the last crisis.

Effectively, Wall Street and the international financial system has become a government-funded zombie — unable to sustain itself in times of crisis through its own means, dependent on suckling the taxpayer’s teat, alive but yet failing to invest in small business and entrepreneurs.

http://www.zerohedge.com/news/guest-post-krugman-newton-zombie-banks

traineeinvestor 12 yrs ago

Sooner or later governments will run out of other people's money to squander. At that point things will get a lot worse.

punter 12 yrs ago

"Don't fight the fed" mantra is in play. As long as it achieves its goal of propping up markets, they're not going to stop. Scary, because they're doing it as if there's going to be no side effect in the future. Maybe they (the powers that be) really don't know anything else.

I understand that they just can't wait and see how things will play out. The bailout/QE is their answer to the financial troubles the world is facing. It's simplistic to say that they learned from the great deppression, and they're doing what they think was not done then. But it looks like this is a valid analysis on what's being done.

traineeinvestor 12 yrs ago

@ punter

I think the Fed has multiple goals with QE:

1. proping up markets (especially the US housing market)

2. assisting borrowers

3. weaker USD

4. higher inflation

5. easier to finance the US national debt

6. kicking the very dented can a bit further down the road

7. preventing a collapse of the banking system

Ed 12 yrs ago

Problem is the printing is not creating any 'wealth' ... we are not seeing job or significant growth... it is not working...

Yet central banks continue to print... why?... I suppose because they have no other options...

Printing money at ZIRP is an act of the truly desperate....

I notice 1.5 million people were on the march in Spain over the weekend... there are powder kegs all over Europe now - at some point people will reach their breaking point...

I am also looking at the impact of drought in the US + QE on food prices... I believe there is much more behind these anti-US riots in Muslim countries than that film... I think the film is just an excuse to vent their anger... throw high food prices onto that fire and this could escalate out of control... recall high food prices triggered the Arab unrest that started last year...

My Italy trip was delayed until tonight... will be interesting to understand what the man on the street is experiencing there - and what their expectations are for the EU.

punter 12 yrs ago

TI, yes of course.

Ed, they're doing what they think is best for "them". They'll be lynched too if they don't do anything.

They themselves can see what's they've done so far is not working as they've expected that's why they continue doing them. They've got no other options. Each one of us has got to protect our own (assets, investments, future, etc.). I believe that this is in play right now and most people/investors/funds are with the "don't fight the fed" side. They may not like it (I don't), but there's no other play. Again, in this forum we've seen some who have taken steps to "protect" themselves. For example, TI, how much physical gold have you got already?

traineeinvestor 12 yrs ago

@ Ed - yes. Food prices are a huge worry right now.

Enjoy the trip to Italy and keep an eye out for bargains: http://www.0-60mag.com/news/2012/03/cars-italy-war-on-horsepower-volume-ii-the-taxman-cometh/

Topol 12 yrs ago

The inflationary impact of QE as oil and agricultural prices rise have a major impact on the 3billion of the population who live on less than US$2 a day. The subsequent social unrest - seen in many cities after QE1 and 2 - could lead to severe political upheaval. China could be particuarly at risk - export markets slowing, lead to job losses and inflation leading to higher food prices could lead to social unrest and political instability.

OffThePeak 12 yrs ago

(Tom Holland, writing in today's SCMP):

Bernanke may have a hidden agenda in printing money

The real objective of the Fed's QE3 may not be to push down interest rates

and stimulate the job market so much as to create inflation

. . .

QUOTE

According to James Rickards, the chief operationg officer of hedge fund JAC Capital Advisors and author of the 2011 book Currency Wars, the Fed is aiming to produce an inflation rate of 4 per cent, double its official target and more than twice the benchmark long-term interest rate. The object is not only to cut the country's real debt burden but to shock consumers into spending by scaring them that prices are going to be even higher in the future.

...But stocking inflation by printing money can be difficult when consumers are busy deleveraging and a shell-shocked financial system is reluctant to create fresh credit.

(Unfortunately) once inflation hits 4%, it can quickly rise to 8%.

UNQUOTE

The sad truth is that this policy of BB is very dangerous. This is especially true when incomes are unlikely to rise, thanks to weak economic growth. As I am fond of saying, inflation does not reduce the real burden of debt UNLESS INCOMES rise. If inflation rises without a rise in incomes, it will simply reduce living standards. The Fed and US authorities should be looking for policies that increase wealth, not policies that rob savers and those on fixed incomes.

Ed 12 yrs ago

Another epiphany from Mr Holland... of course he's trying to 'soft default' out of the mess he and Greendspoon have created by inflating the debt away...

Problem is you need growth to be able to do that ... the problems are structural (crony capitalism, offshored jobs, etc...) so he is of course failing ... in fact I think this is going to backfire massively because this inflation is destroying growth - the US needs consumers to consume and borrow ... they are tapped out - wages are going backwards ... and prices are going forwards...

I believe that 'this time is different'... they won't succeed...

Ed 12 yrs ago

Beware China’s quantitative tightening

After all, in the aftermath of the Lehman financial crisis, it was China — not the U.S. — that deployed a mega stimulus that helped lift not just its own economy, but everything from commodities and luxury goods to properties from Hong Kong to Vancouver.

http://www.marketwatch.com/story/qe3-rules-for-now-2012-09-17?link=MW_story_investinginsight

OffThePeak 12 yrs ago

Ray Dalio talks about deleveraging and a lot of other things

http://www.alsosprachanalyst.com/economy/ray-dalio-talks-about-deleveraging-and-a-lot-of-other-things.html

OffThePeak 12 yrs ago

Who are these guys?

Who will they vote for?

http://imageshack.us/a/img696/5620/aaane.jpg

Ed 12 yrs ago

Jens Weidmann said that efforts by central banks to pump money into the economy reminded him of the scene in Faust, when the devil Mephistopheles, “disguised as a fool”, convinces an emperor to issue large amounts of paper money. In Goethe’s classic, the money printing solves the kingdom’s financial problems but the tale ends badly with rampant inflation.

Without specifically mentioning Mario Draghi’s bond-buying programme, he said: “If a central bank can potentially create unlimited money from nothing, how can it ensure that money is sufficiently scarce to retain its value?” He added: “Yes, this temptation certainly exists, and many in monetary history have succumbed to it,” Mr Weidmann warned.

http://www.telegraph.co.uk/finance/financialcrisis/9551348/Debt-crisis-central-bank-action-is-work-of-the-devil-says-Germanys-Jens-Weidmann.html

Ed 12 yrs ago

For anyone who thinks more QE will eventually get the world out of its rut... keep in mind Japan has been engaging in money printing for two decades... yet the economy has stagnated for 20 years now...

http://www.telegraph.co.uk/finance/comment/jeremy-warner/9554201/Money-printing-has-only-allowed-governments-to-duck-their-problems.html

punter 12 yrs ago

So QE can last another 20 years? Rich economies may not improve and just stagnate just like Japan, but at least they've dodged a great depression. I'm thinking that nobody sitting in position will get caught as the one sitting when it comes. QE therefore is a better alternative for a GD (great dep). They're hoping that QE will not lead to GD or an even greater one.

Ed 12 yrs ago

I don't see QE lasting another 20 yrs... I think the only reason japan has gotten away with this is because the rest of the world was relatively stable and not printing... so Japan could survive by exporting.. but now the US UK and EU are all printing.... and their economies are stagnant or shrinking...

traineeinvestor 12 yrs ago

I dont believe that global QE on the present scale can continue for 20 years either, although if QE is roughly synonymous with creating more money, then we have to remember that QE has been going on for decades already.

Separately, there is at least one important difference between Japan and the US - Japan has a population which is declining and a declining working age population. In the US both the total population and the working age population are still growing and are expected to continue to do so for many years to come. This growth is a huge plus for the US economy as a whole - but the growth in the supply of labour may continue to put pressure on the beleaguered American middle class.

Ed 12 yrs ago

Herein lies the problem for all these countries that are printing... no growth....

Japan suffers steep fall in exports

Japan's national flag, the hinomaru, flies above the Bank of Japan in central Tokyo

August shipments to western Europe drop 28%

http://www.ft.com/cms/s/0/05f90de0-02c8-11e2-9e53-00144feabdc0.html

Topol 12 yrs ago

As mentioned earlier the economic growth has been driven by credit - 1952 to 2007 saw US credit grow 5% a year (inflation adjusted) and GDP grow 3.3%. However 4Q 2008 credit contracted and subsequently grown at less than 1%. The private and business sector are walking zombies leaving the US government ie Fed, to pick up the slack. How this plays out depends on wheter credit expands or contracts - if credit contracts then we enter a depression. The US currently has debt to GDP ratio of 103% which compared to Japans 230% implies that the US has US$19tr of ammo (in reality the US would enter a depression long before reaching US$19t) so expect higher government spending as more QE as the Fed expands its balance sheet. The result should be higher asset (gold, commodities, equities and bonds) inflation, widening economic divide (as poorest get hit hardest), weakening USD, global social instability, possible political upheaval. This would provide a fix but not a solution with the long term outlook growing more pessimistic. Some fresh thinking and ideas are required but I do not see any business leaders, politicians or groups with any coherent ideas or even understanding of the issues.

Ed 12 yrs ago

if you factor in the US federal govt's social security and other obligations + their backstopping of Fannie and Freddie... their debt load is dramatically higher... Now of course they could renege on those obligations... but that is obviously no solution as it would destroy their economy...

Rock and hard place come to mind

traineeinvestor 12 yrs ago

@ Ed - by reducing the value of the USD through money printing and fiddling around the edges with entitlements (e.g. pushing up the eligibility age) they are already "defaulting" in the sense of giving people less than they were expecting. Of course, they haven't gone nearly far enough to make the whole entitlement ponzi system remotely sustainable (even with the higher taxes now being imposed) so further cuts or defaults are going to be needed.

Debt obligations are much the same - by deliberately inflating away the real value of the debt they are defaulting in all but name.

punter 12 yrs ago

That's why it's very surprising that inflation rate is not going thru the roof. My hunch is, most of the printed money goes straight to bank accounts instead of being used to buy tangible goods.

If QE actions continue as promised, it's just a matter of time before prices (of tangible goods) go much higher.

ltse 12 yrs ago

Deflationary collapse is the only logical outcome. As stated, the debt burden is so massive, especially if you include the derivatives obligation, there is just no other way out but the marking down of all assets across the board. A common misconception about the Fed is that it can "print money". The Fed does not print money, as Gary Shilling states, the Fed buys bonds from the Treasury and create cash reserves. Money creation is actually left to the banking system, it creates money via the fractional reserve system ie thru lending. But right now most consumers are not credit worthy, so they can't borrow, students are already loaded up with debt, even credit worthy people don't want to borrow they want to save for fear of unemployment and banks don't want to lend either, assuming they could lend since capital is scarce, with interest rates at zero, people are discouraged to put money into their banks, "why save in the bank for a fee when you save under your mattress for free".

http://www.financialsense.com/financial-sense-newshour/big-picture/2010/12/25/01/robert-prechter/a-conversation-with-bob-prechter-final-end-game

More importantly, Robert Prechters work on Elliott waves suggest 2016 to be the bottom of the cycle, this is a 6 year cycle to the bottom, but the first 3 years ie from 2009 to 2012 is the optimism phase of the down cycle, and from 2013 to 2016 this is the capitulation phase.

Call me superstitious, but as an investor and trader I always use financial astrology to get a heads up of when things may/will happen. I don't think this is a co-incidence that the "Uranus square Pluto cycle" is happening between 2012 -2015, this hasn't happened since the great depression of 1932-1934

http://www.benzinga.com/personal-finance/financial-advisors/12/05/2628530/financial-astrology-the-key-to-future-investing

And here another:

http://www.commodityonline.com/news/may-the-stars-be-wrong-global-depression-forecast-for-2014-50216-3-50217.html

http://astrology-reading.com.au/World_Astrology_Predictions_2012_2013_2014_2015_2016_USA_China_Germany_Italy_Japan_Australia.html

Even amateur astrologers know about this:

https://youtu.be/NMNhGCw7Qfk?si=etmMJYZu3eOeKkdW

The stars coincide with Prechters Elliott wave forecast. I think 2013 really is the last chance to get out of stocks, commodities and real estate and Bonds. I am so convinced this will happen, that I will ride the market as high as possible before selling my primary residence and exit into cash. Not cash in the bank, but actually physical cash, and anything in the banks should be under 500,000 HKD (government insured). I would probably short the Dow and The Hang Seng as well, I be expecting Dow around 1000-4000 and Hang Seng 5000-10000, the challenge with this time round however, shorting may be very difficult. Governments may ban shorting and put options, exchanges and clearing houses and brokerage house may default. This has happened before:

http://www.guardian.co.uk/business/blog/2011/oct/24/clearing-house-collapse-mayhem-bank

traineeinvestor 12 yrs ago

@ ltse, I'll pass on commenting on astrology as I know little about the subject.

However, it's worth bearing in mind that Robert Pretcher has such a bad record on forecasting that he has been compared to Harry Dent. He may or may not be right, but he has been wrong so often and so badly that I cannot take him seriously enough to read anything he writes anymore (and yes I have read one of his books and used to read his newsletter).

The claim that the Fed does not create money is simply not true:http://www.mindcontagion.org/fed/createmoney.html There are many many other links on this point. Fractional banking can and does cause the money supply to expand or contract and the banks may or may not use that money in ways that help economic expansion, but those are separate issues to the question of whether or not the Fed creates money. It does.

Side note: I tried to buy a few gold coins from BOCHK today and were told that they were out of stock! Which one of you guys cleaned them out?

punter 12 yrs ago

Banks are hoarding their own gold.

OffThePeak 12 yrs ago

"The stars coincide with Prechters Elliott wave forecast. I think 2013 really is the last chance to get out of stocks, commodities and real estate and Bonds."

I AGREE.

It's simple really : The game is over when rates rise. The US government has so much debt now, it becomes unsustainable when rates rise. Then entitlements will have to get cut: either by design, or through price inflation

Ed 12 yrs ago

Forces of factory decline trump Fed’s easy money

Commentary: Manufacturing is slumping around the world

http://www.marketwatch.com/story/weak-demand-trumps-easy-money-2012-09-20

Topol 12 yrs ago

Seems all in agreement that we are on the road to oblivion - but any ideas what the tipping point might be?

I was thinking

a) trader blowing a hole in a mid-sized bank that forces it's collapse which then creates a domino effect.

b) sovereign default

c) Fed loses control of the economy

Incidentally reading about 1930's collapse recently and all gold was deemed the property of the state. All access to safety deposit boxes had to be with a bank officer who confiscated any gold found in the boxes.

OffThePeak 12 yrs ago

OK.

That could be another trigger : A cutoff in credit.

If banks are too frightened to deal with each other, and clear transactions, and honor LC's, global trade will grind to a sudden halt.

Ed 12 yrs ago

The US govt fixed the price of gold and forced people to sell it to the state... I don' think any other country did that...

The PRC government is buying large amounts of gold and encouraging their citizens to acquire... can you imagine if the PRC government tried to force people to give it up at some point...

Can't see that happening - too many people in China own gold now - there would be mayhem....

There could be a black swan event that tips things... but if not I think the fact that all this QE is not generating any growth is what is going to tip this thing...

No growth = no jobs = less taxes collected .... govts will not function - social programmes will collapse - people will go hungry - there will be riots perhaps wars...

'We can evade reality, but we cannot evade the consequences of reality'

Print all you want... printing money does not create real wealth or prosperity... and without growth it does not inflate away debts (debts continue to grow)

Eventually the consequences will make themselves felt.

Topol 12 yrs ago

At least we will have Asiaxpat!

Ed 12 yrs ago

PIMCO's Bill Gross now Ray Dalio getting behind gold... not a very tough call after central banks announced QE to infinity...

So not unexpected ... but nevertheless... disturbing when you see these guys shifting into PM - clearly they fear the worst....

We discussed Bridgewater's Ray Dalio in depth late last week and his historical perspective on the world we are living through. It appears CNBC has found this intriguing too and the largest hedge fund manager in the world has been espousing his views all morning.

Most notably he very concerned at the possibility for social unrest (just as we have pointed out again and again) highlighting the rise of Hitler in 1933 and its parallels to the current social disruptions around the world as global economies sufffer painful deleveragings. His suggestion is that gold "should be part of everybody's portfolio" as he explains the reality of the endgame of fiat monetary systems.

As far as Warren Buffett's distaste for the yellow metal, he opines "I think he is making a big mistake."

http://www.zerohedge.com/news/dalio-gold-buffett-making-big-mistake

Ed 12 yrs ago

How many 100 billion has the UK printed... and yet they are sinking....

Borrowing hits record August high

Britain's Chancellor of the Exchequer George Osborne leaves Downing Street in London

Blow for chancellor as latest figures mean deficit has widened 22% so far this year compared with target of 4.6% cut

http://www.guardian.co.uk/business/2012/sep/21/uk-government-borrowing-record-august-high

Ed 12 yrs ago

http://www.theatlantic.com/magazine/archive/2012/10/the-next-panic/309081/?single_page=true

http://www.zerohedge.com/news/2012-09-22/whats-next-simon-johnson-explains-doomsday-cycle

OffThePeak 12 yrs ago

"Borrowing hits record August high"

Yeah. That's govt borrowing... but not mortgage borrowing - which is slowing.

Be careful, HongKongers:

UK Developers have plenty of new properties that they will want to unload on soembody

OffThePeak 12 yrs ago

An old debate here... concerns the 9/11 attack on the Pentagon

Here's the Truth - (or at least a tour de force of facts):

What didn't hit Pentagon:

http://www.kpfa.org/archive/id/84219

"What Didn't Hit the Pentagon" with Dave vonKleist, Barbara Honegger and April Gallop. Dave vonKleist examines mainstream media coverage of the attack on the Pentagon; Pentagon survivor April Gallop describes her experiences on September 11th, 2001, her first day back at work after maternity leave, as an administrative specialist with the U.S. Army at the Pentagon; and Barbara Honegger, senior military affairs journalist and former White House policy analyst, discusses her article, "The Pentagon Attack Papers".

LISTEN, and get your pitchforks ready, the official story of 9/11 is falling apart, and some real villains are going to face justice, at long last.

Ed 12 yrs ago

The Einhorn Cycle: http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2012/09-2/20120923_cric.png

ltse 12 yrs ago

OffThePeak - Indeed. The official story is full of BS, there's a documentary "Loose Change" that documents how this was all a planned in advanced govt operation, code "Operation Northwoods". Sounds like your an American Patriot, thought you'd like this video, if only Ron Paul was President.

OffThePeak 12 yrs ago

"if only Ron Paul was president"

Agreed!

I tried to start a new thread here about political topics, but it got moved to "conspiracies" or some such place (I haven't bothered to look for it).

Maybe Ed will let me sneak in a single post here - Please let him know if you think we should have a political thread in this section. If so, I may try to start up again, but more gently...

== ==

Wealthy Corporations want to Buy the next President

The system is now set up, so they can do it - But only if we let them, by voting for one of the major two parties.

Take a look at this video : http://tinyurl.com/MittToJews

"I am going to turn to you for advice and suggestions... including on tax policy."

Hey, don't believe for even a second that it is different with Obama.

He is also raising money from rich people, including wealthy Jewish people, Wall Street bankers, and people from many religions and ethnic backgrounds, with favors they will want after the election.

WHAT TO DO ?

Don't give these two guys a penny.

Don't vote for either Democrats or Republicans.

Vote for a Third party, and urge them to change the campaign financing laws.

As Jesse Ventura said in this video : http://tinyurl.com/Jesse4GJ

A wealthy foreign company can now set up a PAC, or a Super PAC, and provide so much in campaign funds that they can "Buy" the President.

Don't let that happen !

Vote for real people running on less money, who are not for sale

The USA is a mess now, and we need to start to change that !

Don't waste your vote (or your money) supporting the current corrupted system.

Send the candidates of both major parties a big fat message... and NO MONEY.

traineeinvestor 12 yrs ago

@ OffThePeak - while I agree that both candidates are terrible - both stand for more regulation, bigger government and a more divided society and neither has a credible economic (or foreign) policy, the unfortunate reality is that voting for a third party is effectively voting for Obummer.

The claims of corporate ownership of the presidency are supperfciially attractive - both candidates raise most of their campaign funds from corporates and wealty individuals but only stack up selectively when you look at what Washington actually does - Cleantech/Green tech, selected agriculture and oil benefit from subsidies and other preferrential treatment (probably a few others) but corporates generally and high income individuals get hammered both in terms of taxes paid and regulations imposed - all of which imposes a cost in terms of job creation and return on investment (which has a direct impact on things like pension plans). Neither party is going to fix anything.

Change is needed but I don't see how or where it will come from.

Ed 12 yrs ago

The candidates are irrelevant... http://www.truthdig.com/report/item/how_do_you_take_your_poison_20120924/

OffThePeak 12 yrs ago

Changes needed:

Let's discuss them on the New Political Thread that I want to start.

Ed 12 yrs ago

How's the austerity working in Portugal?

Unemployment has reached 15.7pc (36.4pc for youth). Citigroup expects the economy to contract by 3.8pc this year, a further 5.7pc next year, and yet again by 1.3pc in 2014. (and even then the current account will still be deficit – proof of the absurdity of EMU)

The slump will be so severe that the budget deficit will rise, not fall. Shrinking tax revenues will outweigh gains from cuts. Lisbon is chasing its tail. Citigroup says the deficit will be 5.1pc of GDP this year, 4.9pc next year, and 5.4pc in 2014.

This will play havoc with debt dynamics. Public debt will explode to 134pc of GDP by next year. At which point there will have to be debt-restructuring.

If Citigroup is right – and views differ on this – Portugal is going into the same sort of self-feeding downward spiral as Greece. Debt-deflation is choking the country.

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100020306/patience-snaps-in-portugal/

OffThePeak 12 yrs ago

Unfortunately, Ed, that downwards spiral is a necessary (& painful) part of the Cure.

But Portugal and Greece have not yet moved to the Remission phase, by exiting the Euro. Who can doubt that such is coming ?

Ed 12 yrs ago

The cure is ending the EU... allowing countries to return to their own currencies... and devalue to become competitive.

The current 'cure' is aimed at curing German and French banks who loaned money to the PIGGS and who will be bankrupt if they default.

traineeinvestor 12 yrs ago

@ Ed - agree. The Euro was founded on the premise that a bunch of countries that had long histories of spending too much money and racking up too much debt would suddenly become more fiscally responsible if given easier access to credit makets and separated from the discipline of a floating currency. No one should be surprised that the result is a cataclysmic failure and a wealth transfer from the current and future taxpayers of the stronger countries to the spendthrifts of the less responsible countries via the banks.

If I was a German citizen there is no way I would feel obliged to hand over my hard earned money to people in other countries who decided that living withing their means was a lifestyle choice.

Remmy 12 yrs ago

Manufacturing jobs starting to boom in the US - http://money.cnn.com/2012/09/10/smallbusiness/manufacturing-jobs/index.html

Who was it who recently posted that US manufacturing jobs were gone for good?....

Ed 12 yrs ago

Sounds like a PR article from the Obama camp... just like GM is booming (car sales are up on subprime lending - again - anyone with a pulse can buy a car....)... and just like the housing market is recovering (it's not - banks are holding millions of properties off the market - millions of more home owners are foreclosing/underwater)...

America is not recovering - it will not recover. Crony capitalism is destroying the country

traineeinvestor 12 yrs ago

@ Ed - The US is creating more jobs now. The total number of people employed has been rising. The problems are that the number of jobs is rising more slowly than the growth in the working age population and that incomes (especially for the middle class) are being squeezed by higher costs (education, health care and taxes in particular).

In parts of the country the housing market is recovering - prices are rising and the level of mortgagee sales is falling sharply. In other places it is still dire - and likely to remain so.

What is destroying America is not "crony capitalism". What is happening in selected parts of the agriculture industry, the cleantech sector and energy is bad but like the military adventurism it is a side show compared to the main issues which are killing America's future - the debt/deficit problems arising from entitlement programmes, disfunctional university structures, excessive spending and excessive and pointless regulation.

traineeinvestor 12 yrs ago

A couple of links on what is wrong with America:

The macro view: http://www.zerohedge.com/news/2012-09-25/decling-economic-freedom-united-states

A case study: http://www.city-journal.org/2012/cjc0920hm.html

Remmy 12 yrs ago

America is definately recovering. Its human nature to be productive, and America is no exception. Unless you believe the human race will end, you can be pretty certain that any country that is at the bottom of an economic cycle will recover, which is what is happening in the US now. Some more positive data now about employment and consumer spending in the US picking up.

http://money.cnn.com/2012/09/25/news/economy/consumer-confidence/index.html?iid=SF_E_LN

Remmy 12 yrs ago

More evidence supporting a US manufacturing recovery - Boston consulting group also predicting US exports are about to surge:

http://wallstcheatsheet.com/stocks/heres-why-u-s-exports-are-set-to-surge.html/

traineeinvestor 12 yrs ago

@ Remmy - please cut that out. This is a forum devoted to the dissemination and discussion of bad news only. :-)

And an update on the recovery in the US housing market: http://www.reuters.com/article/2012/09/19/usa-economy-idUSL1E8KJ2AE20120919

Ed 12 yrs ago

If America is recovering then why did the Fed just announce Money Printing to Infinity - and extend ZIRP into 2015?

Such policies do not create recovery - what they do is delay the crash into the abyss...

America is not creating more jobs - last month they generated 90,000 jobs - not nearly enough to even absorb new entrants into the market...

Recall during the earlier 'recoveries' the US was at times creating 200k+ jobs - so much for those recoveries eh...

By comparison I believe Canada - which has a stagnant economy - created 35,000 (population is a tenth of the US).

What is happening in the US is millions are no longer looking for work because there are no jobs... so they are falling off the count - so the jobless rate looks slightly better (the real jobless rate is nearer 20%... note the record number of people on food stamps in America - there simply are no jobs)

As for the so-called housing recovery - I suggest people do some research here... there are literally millions of foreclosed properties being kept off the market in an attempt to artificially boost housing prices... and there are literally millions more with late payments (i.e. headed for foreclosure)

How can you have a broad housing recovery when there are no jobs?

When the take home income of Americans is regressing?

When student loan debt is at record highs?

When food stamp recipient totals are breaking records?

http://www.zerohedge.com/news/spot-housing-recovery-building-construction-workers-one-year-lows

http://www.zerohedge.com/news/robert-shiller-has-chiller-housing-recovery-hopes

http://www.zerohedge.com/news/david-rosenberg-explains-housing-recovery

http://www.zerohedge.com/news/what-housing-recovery-existing-home-sales-miss-most-2-years

Remember the MSM's 'green shoots' - and their dozens of other attempts to inspire CONfidence?

Anything printed by the MSM needs to be examined in the context of having been planted by the PR arms of vested parties - particularly governments and central banks...

i.e. I have heard this bullshit far too many times to believe any of it... you don't announce that you are going to print to infinity if you think there is a spark of recovery... because that spark would very quickly turn into an inferno of inflation what with all these trillions that are sitting on the side lines waiting for recovery...

BTW - when the last QE was launched a bit over a year ago... I had a debate with a hedge fund manager who thought there would be a recovery... we agreed to disagree and revisit in a year...

And of course within a year jobs went back off a cliff... PMI's and other measurements were indicating recession...

And of course - Ben then announced yet another QE - this time to infinity....

I find Zero Hedge is the best for exposing the lies...

traineeinvestor 12 yrs ago

Ed , with all due respect (i) America is creating new jobs and (ii) the number of "discouraged workers" (the official terms for people who want to work but are not actively looking becuase they believe that no jobs are available) has fallen dramatically - a decline of 133,000 last month alone.

Labour force participation would appear to have stabilised - the claim that "millions...are falling off the count" was probably correct back in 2009 and 2010 but is certainly not true in recent months. The number of people in this category is still high (IMHO) but is now falling.

A spin free summary is here: http://www.bls.gov/news.release/empsit.nr0.htm

The problem is that the number of new jobs being created is only more or less keeping up with the number of net new entrants to the job market.

On the housing market, I agree that the news is not all good but for every negative article you cite, there are plenty which show falling rates of deliquency, increase in new builds, falling mortgagee inventory, increasing buying by investors and stabilising or rising prices. People can pick and choose which data to look at and what it means, but in at least some parts of America housing is recovering to some extent or another. Other parts are still looking pretty sick and likely to remain so. And that's an important point - America is not a single housing market. It is many markets each with their own supply and demand characteristics. If I was living in part of America which offered properties carrying net yields of 8% plus with low vacancy rates and long term cheap fixed rate financing in areas with growing populations and healthy state finances (e.g Texas, Georgia and a few other places) I would be buying everything I could afford.

It's also worth remembering that America's population is growing and all those people have to live somewhere. Eventually that has to translate into growing demand for housing. What they can (or cannot) afford is another matter. For now at least, the era of the McMansion is gone (I hope).

Ed 12 yrs ago

So if all is improving why the QE to infinity? And why add another year to ZIRP? These are acts of utter desperation...

Why is gold again closing in on record hights?

The US is running a trillion+ dollar deficit year after year now ... interest rates are at record lows - and they are getting less than 2% growth out of that...

I've heard this 'green shoots' stuff far too many times to believe it - if anything I believe things are going to get far worse in the coming 12 months....

Ed 12 yrs ago

Let's have a look at the last jobs report...

"15,000 manufacturing jobs were lost"

"Birth Death added 87,000, up from July's 52,000. The reason for the drop in the unemployment rate: labor force participation dropped to 63.5%, down from 63.7%. Oddly enough, this report leaves the NEW QE door open, even as Obama can take the accolade for a declining unemployment rate. Win-win for everyone."

http://www.zerohedge.com/news/us-added-just-96000-jobs-august-far-lessthan-expected-unemployment-rate-slides-81

Also - the seasonally adjusted numbers are what needs to be looked at:

http://www.zerohedge.com/news/seasonal-and-birth-death-adjustments-add-429000-statistical-jobs

QE was announced not because there is a recovery (why announce more printing if there is a recovery?) - it was announced because Bernanke could see that the US job situation was deteriorating ... and the the economy was in danger of falling into a recession....

http://seekingalpha.com/article/698611-bad-ism-number-strongly-suggests-upcoming-u-s-recession

traineeinvestor 12 yrs ago

@ Ed - "all" is not improving in the US. Some things are getting better (whether they continue to do so is a matter of speculation). Employment is rising, unemployment is stabilising and labour force participation is either stabilising or improving very slightly (depending on how you read the stats). Some of the US housing markets are improving and some are still looking like a financial wasteland - years from now I would imaging that some of Detroit's derelict neighbourhoods will be making a comeback as the setting for post-apoclypse Hollywood movies.

QEternity? Becuase not enough new jobs are being created. Because it helps businesses make better profits and generates more taxes (and possibly employ more people). Because it helps households with consumer debt and mortgages. It helps with the deficit by cutting interest rates on Federal borrowing. Above all it helps avoid a deflationary collapse. QEternity may not have produced the growth that America and its trading partners would like to see, but it has at least avoided a deflatonary collapse (whether for good or for a short time remains to be seen).

Of course QEternity comes with baggage - it is a bit hard on people living off the interest on short term debt or deposits and those looking to buy annuities and a few other groups.

The real problem is that the Fed does not have the powers to address America's biggest problem - perennial unsustainable deficits. ZIRP helps paper over this problem but does not solve it. I expect things to end badly (and they are pretty bad already), but perhaps not as badly as those who make a living preaching the end of the economic world as we know it.

Some of the commentary you find on the internet reminds me very much of what was being said about Hong Kong towards the end of the Asian crisis/SARS - so many people wer saying the Hong Kong was finished and would never bounce back. Likewise after 1987 crash - all those comparisons with 1929 - and the savings and loan crisis which was going to destroy America etc etc etc.

Ed 12 yrs ago

TI : things were actually far better in terms of growth and jobs a year ago... so how are they getting better? From what I see from jobs, growth, and the ISM... + the macro picture in the EU and China...

They are actually getting worse...

I believe that is why Bernanke just announced massive new money printing... and why the EU is apparently going to begin money printing.

These are policies of desperate people.

Same policies year after year - and no growth - no jobs. Einstein had something to say about repeating the same thing over and over again and insanity....

Printing money on this scale has never worked - it hasn't worked over the past 4 years (unless success is measured by preventing the collapse of the global economy) - and i cannot see how it can possibly work going forward

After the dotcom crash and 911 the US started on this path to 'recovery'.... they lowered interest rates - they flooded the economy with easy credit.

Oh ya - they got a recovery alright... but it was false... and it was a bubble ... and it exploded spectacularly.

So what did they do for an encore?

Lower rates even MORE.... and even better - they printing trillions and attempted to unleash that into the economy... but unfortunately they are unable to reblow their bubble because the trillions are sitting on the sidelines this time...

Not only are they repeating the same insanity... they are attempting to double down on their madness... I cannot see how this can work.

Real wealth - real prosperity - are not generated off of a Xerox machine....

traineeinvestor 12 yrs ago

Ed - China has certainly deteriorated over the last year or so. Manufacturing in particular has been hit hard. Again, things are not good but not as bad as some of the doomsayers suggest - domestic consumption is still rising and corporate failures have been few and far between.

Europe is an unmitigated disaster - worse than the US or just about anywhere outside Zimbabwe.

Personally, I like negative real interest rates - it's helping my retirement plans along nicely. It would be nice if it could continue for a several more years. (Of course, I will think differently once my relationship with the banks goes from being a net borrower to a net creditor.)

Lastly, real wealth is generated off a Zerox machine - but only if you are Zerox. More seriously, we don't control what goes on in the world. All we can do is try to get by as best we can and we do that by investing according to the world as it should be but by investing according to what the economic world will be like in the years ahead. I'm sticking with mostly real estate and equities with a small helping of bullion and cash on the side - I'm not expecting a return to good economic times anytime soon but I'm not betting on financial armageddon either.

Ed 12 yrs ago

TI: wealth is generated from hard work, more good than bad decisions, rule of law, good government... not from printing money - money is a representation of wealth - it is not wealth.

When you say things are not as bad as some suggest - think about this - how many trillions have been printed at zirp to get a situation that 'is not as bad as some suggest'... and what would happen the moment the money printing stopped.

Is the global economy not completely reliant upon - and addicted to - QE? If so - is this a situation that can go on to 'infinity?'

I have no answers here - all I can say is if you look back on these forums about 10 years... around the time Bush was invading Iraq... I was banging on about how the corruption that was engulfing the US was going to end badly - not only for the US but everyone... heretical thoughts at the time...

The bulldozer is now at the gate revving it's engine...

traineeinvestor 12 yrs ago

Ed

One part of the definition of "money" is its function as a store of wealth. Paper currencies are very poor at performing that role over any length of time. The USD has lost (about) 97% of its value since the Fed was created in 1913. (In spite of which the US has been one of the best economies in the world in terms of preserving and enhanching it's citizen's wealth and standard of living over that time period.)

I don't see an easy or pleasant end game either but all in all I am not sold on a financial armageddon ending. I can see inflation continuing. I can see the possibility of an extended period of stagflation. I can see the possibility of a period of high inflation (double digits). I can see a smaller possibility of deflation. But at the end of the day, markets will keep functioning, people will keep consuming and innovation will keep happening and society will carry on.

By saying that things will collapse if the printing stops means that the printing will not stop until inflation gets to politically unacceptable levels and/or US unemployment reaches acceptably low levels. The value of the USD will decline and our cost of living will all go up while we wait for one of these events to happen but I don't see the printing stopping until then.

I've been listening to predictions of imminent financial collapse since I was a teenager - it hasn't happened yet. Maybe I've become numb to all the doomcasters?

Ed 12 yrs ago

This just showed up in one of the newsletters I pick up...

Home Prices Rise In September: Only 28% Of Mortgages Now Underwater

http://www.ftense.com/2012/09/home-prices-rise-in-september-only-28.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+ftense%2FsymR+%28The+Future+Tense%29

TI - I am generally not one to buy gold or assume the worst... keep in mind I have been through the .com bust...

However I see no way out of the current predicament.

The levels of debt boggle the imagination... the amount of money being printed is absurd... the printing is not working - yet the only solution we have is to - you got it - print more money...

To my knowledge there is no parallel in economic history.

So how does this all end?

No idea... but check this out http://en.wikipedia.org/wiki/Normalcy_bias Just because there has been no calamity in our life times does not mean there never has.... (I have witnessed calamity after the Asian crisis - I was in Bangkok and Jakarta - it was hellish - particularly jakarta... no cars on the roads... most lights out... beggars everywhere)

There are plenty of examples throughout history of Depression (which is essentially economic collapse)...

Ironically since 1930 and the implementation of Glass Steagall... there were no Depressions... Glass Steagall comes off and here we are....

As for armageddon, that is not something I bother to think about much other than a world war was caused by the 1930 Depression... we cannot have that result from this calamity because many countries have nukes now...

That said I do have some concerns about the fact that oil charges well over USD100 the moment there is a whiff of growth... and I feel a bit queasy about the fact that the arctic will be free of ice in the summer in a few years...

Rather inconvenient truths that people would rather not think about - nor do anything about.

elsdon 12 yrs ago

http://www.finviz.com/bubbles/bubbles.ashx

An interesting chart.

@traineeinvestor,

In regards to your comment about QE being the solution to engage small business again, I don't think that's the case. Most of the problem is that the QE money isn't being circulated and small businesses are finding it tough to get any credit at all.

Their 'solution' is to somehow rebuild the middle class through small business but QE cant do it. They would literally be better off putting the cash in helicopters and dropping it over the country.

traineeinvestor 12 yrs ago

@ Ed - you may well be right. The banks are being told to reduce credit risks and build up more regulatory capital (Basel III, Dodd Frank etc) which is squeezing their ability and willingness to lend and small businesses are being very cautious about expanding because of a combination of rising costs (new regulations, higher taxes, etc) and uncertain access to credit.

Maybe I should go and buy some more gold....but sticking with coins or maybe even paper gold:

http://www.businessinsider.com/fake-gold-bars-2012-9

Ed 12 yrs ago

Fed Virtually Funding the Entire US Deficit http://www.cnbc.com/id/49180320

And yet we have a 'recovery'... surreal.

Ed 12 yrs ago

US GDP And Durable Goods - Heading To Recession?

Exports, as discussed previously, have made up roughly 40% of corporate profits since the end of the last recession. The recent announcements by CAT, FDX, NSC, UPS and others, all discussed the rising weakness with international trading partners - primarily in the Eurozone and China.

Not surprisingly we saw a decrease of $0.3 Billion in exports in 2Q GDP. This was a 110% decrease from the previous estimate of a $3.1 billion increase. This decrease in exports is very important as it relates to current forward earnings estimates and the belief that the U.S. can remain decoupled from the rest of the world. The following chart shows this is clearly not the case.

http://www.zerohedge.com/news/2012-09-27/guest-post-gdp-and-durable-goods-heading-recession

Ed 12 yrs ago

America's time bomb... tick tock: http://www.theatlanticcities.com/jobs-and-economy/2012/09/next-big-financial-crisis-could-cripple-cities/3433/

Ed 12 yrs ago

How Long Can These Markets Run on QE ?

Date: September 28, 2012

Today marks the end of the month and quarter. Hence, it is a good time to look over the key economic and market data, and try to assess where we are in the overall cycle.

The data itself suggests several contradictory factors are driving markets. Durable goods orders — those big ticket items like autos, washers, and machinery — have plummeted, suggesting a rapid slow down in the economy may already be occurring. The most recent GDP revision at 1.3% seems to confirm this. Overall income gains have been mediocre. Unemployment remains stubbornly high, with people out of work for an extended time period also at record levels. ECRI, which has one of the best track record in forecasting recessions, is sticking with their 2012 recession call. (See this and this)

This mediocre recovery is, as Reinhart & Rogoff forecast way back in February 2008, exactly as we should expect. This is what the typical post-credit crisis recoveries look like — barely above stall speed.

At the same time, Housing has remained surprisingly robust. While metrics like Existing and New Home Sales volume and prices are still far below the 2006 peak, they have moved significantly off of their lows.

All the while, the market continues to grind higher, disbelieved by a significant percentage of market participants. For the month of September, the S&P500 looks to be up 2.69%; for Q3, the gains were 5.98%. YTD the markets are up 13.32%.

How can we reconcile these apparent contradictions?

In a word, it is the Fed.

My read is the only thing standing between you and an ordinary cyclical recession — including a 20-30% drop in the SPX — is monetary policy. The impact of QE and the FOMC mortgage backed purchases has kept the economy from a full blown recession — but only just barely. Indeed, the data we have seen this week strongly suggests that but for the juiced Housing market — artificially propped up by unprecedented low interest rates — the US would already be in a recession.

Typically, we see some sort of Fiscal stimulus in environments such as this. A misguided and AWOL Congress has managed to avoid doing that for suspect reasons. Whether its a flawed belief that austerity will be our savior or the partisan adherence to Party first, Congress is not acting the way they typically due following major recessions. The public seems to recognize this, and gives Congress its lowest approval ratings in history.

For the investor, ALL IN or ALL OUT makes little sense. Instead, they should be paying closer attention to the the signs as to which of these forces is winning the battle. This quarter, the Fed has trumped economic concerns. But with each subsequent QE generating less and less bang for the buck, a fair question to ask is “Just how long that can continue for?”.

History suggests that markets — artificially jacked up or not — tend to run for much longer than most people expect. That has already been the case since the March 2009 lows, now up over 100% in three and half years.

The danger is that “longer than expected” does not mean forever.

http://www.ritholtz.com/blog/2012/09/how-long-can-these-markets-run-on-qe/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+TheBigPicture+%28The+Big+Picture%29

Remmy 12 yrs ago

We havn't seen any stimulus from China yet, who have been happily and deliberately holding off, quite rightly wanting to cool the market. But they certainly will be preparing for stimulus after the political transition. Now is probably a great time to buy China stocks with a view to strong growth in 2013:

http://www.thestandard.com.hk/news_detail.asp?we_cat=2&art_id=126910&sid=37773475&con_type=1&d_str=20120928&fc=8

Ed 12 yrs ago

“The Fed will write $1 trillion or more in checks over the next twelve months, the ECB will write the same,” Bill Gross, the founder and co-chief investment officer of Pimco, the world’s biggest bond funds, wrote via Twitter late on Sunday. “(There is) reflation ahead. (It) will create asset bubbles but little growth.”

That view appeared to be shared by Martin Feldstein, a former chairman of the Council of Economic Advisers which advises the U.S. president on economic policy, who had critical words for the Fed when he wrote an opinion piece in Friday’s Financial Times newspaper.

Feldstein, an economics professor at Harvard University, said the Fed’s decision to buy mortgage-backed assets for an unlimited time means the central bank has now embarked on a “very dangerous strategy” that could lead to high inflation and destabilizing asset bubbles.

http://www.cnbc.com/id/49235722

traineeinvestor 12 yrs ago

In other words, the experts quoted do not anticipate a deflationary depression.

If we are going to get asset bubbles and inflation then that suggests that holding risk assets such as property, shares and possibly bullion and collectables is the way to go.

Ed 12 yrs ago

But what happens when the asset bubbles explode? Reference the massive HK property bubble of 1997... tulip mania 1632... US housing bubble 2007... etc.. etc... etc...

Ed 12 yrs ago

Reality Check America and Beyond

http://www.ftense.com/2012/09/stream-of-consciousness-global-economy.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+ftense%2FsymR+%28The+Future+Tense%29

Ed 12 yrs ago

Euro zone manufacturing put in its worst performance in the three months to September since the depths of the Great Recession, with factories hit by falling demand despite cutting prices, a business survey showed on Monday — pointing to a new recession.

Factories helped lift the 17-nation bloc out of its last recession but the survey suggests a downturn that began in smaller periphery countries has taken root in core members Germany and France.

Earlier figures from Germany, Europe's largest economy painted a picture of sustained contraction.

In France the situation worsened dramatically with its PMI seeing one of the biggest one-month falls in the survey's 14-year history.

"France is perhaps the new worry, with its PMI slumping to the lowest for three-and-a-half years," Williamson said.

Italy and Spain, the third and fourth biggest economies in the bloc, both saw their PMIs remaining firmly in sub-50 territory.

More http://www.cnbc.com/id/49236771

Ed 12 yrs ago

Record unemployment numbers in Europe... recession with indications of a deepening malaise... riots in Greece and Spain...

http://s.telegraph.co.uk/graphics/ChartGenerator/Version3/charts/5751.html

And yet stock markets in Europe are UP!

http://www.zerohedge.com/news/2012-10-01/overnight-sentiment-improves-record-eurozone-unemployment-14th-consecutive-pmi-contr

This is either insanity - or we now live in a magical, wonderful world where money printing is a panacea.

Ed 12 yrs ago

And more excellent stuff from ZH... with some indication as to how this all ends...

Excerpt: I apologize for alarming you on this Monday morning. It was in March 2008 that I began to warn amount the American Financial Crisis. You may say what you like but the call was correct. We have shimmied and slithered since then mostly due to the liquidity provided by the world’s Central Banks but there are limits; there are always limits. I can smell the breath of the Beast once more and I can hear him breathing just behind my back. I began today’s piece with a factual accounting of the ECB and the state of its financial condition. I remind you of the American Financial Crisis and what caused it. I take time today to intone the words of the Prophets once more:

“Lest we forget; lest we forget.”

http://www.zerohedge.com/news/2012-10-01/lest-we-forget

Ed 12 yrs ago

FIAT ITALY NEW CAR SALES FALL 24% IN SEPT

FRENCH CAR SALES FALL 18.3% IN SEPTEMBER, DOWN 13.9% THROUGH SEPTEMBER

PORTUGUESE LIGHT VEHICLE SALES DROP 42% THROUGH SEPTEMBER

http://www.zerohedge.com/news/2012-10-01/european-september-car-sales-datapoints

Ed 12 yrs ago

In the perfect words of Volker Pispers: "Was glauben Sie, was hier los wäre, wenn mehr Leute wüssten, was hier los wäre?"

= "What do you think would happen if more people knew what was happening?"

Ed 12 yrs ago

Classic article on ZH:

If You Prop Up An Artificial Economy Long Enough, Does It Become Real?

http://www.zerohedge.com/news/2012-10-02/guest-post-if-you-prop-artificial-economy-long-enough-does-it-become-real

traineeinvestor 12 yrs ago

A small piece of good news (just for a change): http://www.aastocks.com/EN/News/HK6/61/NOW.509659.html

Ed 12 yrs ago

Fed Policy Is Working — Moral Hazard Is Back

by John Rubino on October 3, 2012 · 2 comments

A near-death experience isn’t something one gets over right away. So it’s no surprise that the US leveraged speculating community was a tad more cautious than usual for a while. Real estate investors, for instance, still bought houses, but only on very favorable terms where rental income would clearly exceed expenses. And investment banks still repackaged loans into asset backed securities, but on a very small scale, since there weren’t that many willing/able buyers for exotica that was “toxic” so recently.

This was completely unacceptable to Washington, of course, since the only way an over-indebted economy can “grow” is if speculators can be induced to take unwise risks. So this year we entered the whatever-it-takes phase of the process, where borrowed money became nearly free and permanent, open-ended quantitative easing was promised.

It was a Hail Mary pass, but it seems to have worked, at least in the narrow, Twilight Zone terms in which today’s system operates. That is, moral hazard — the sense that you can do pretty much anything you want because the government will bail you out — is back as a driver of deal making.

See this on the return of a practice last seen during the housing bubble:

http://dollarcollapse.com/inflation/fed-policy-is-working-moral-hazard-is-back/

Ed 12 yrs ago

Good interview with Kyle Bass http://video.cnbc.com/gallery/?video=3000119228

Remmy 12 yrs ago

More evidence the world has not ended, and that in fact we are recovering. This time, news that the US housing recovery is underway.

http://money.cnn.com/2012/10/02/news/economy/housing-recovery-economists/index.html?iid=HP_Highlight

As I have said before, you can sit around scaremongering about how the world as we know it will collapse, or you can make money from current trends. US stocks at record highs, housing recovering - it all looking very good for people who invest now.

punter 12 yrs ago

So Remmy, in your opinion there's no more chance of a downturn?

Remmy 12 yrs ago

Of course there is a chance. But the chances of a "recovery" vs a "downturn" from the point we are at now are much higher. And the chances of "the world ending" - ziltch.

Oh, but what about Europe some might say? See now here for those who took an alternative view:

http://money.cnn.com/2012/10/01/investing/contrarian-value-investing.moneymag/index.html?iid=HP_LN

traineeinvestor 12 yrs ago

There will always be a chance of a downturn. Waiting until there is no chance of a downturn before investing is the same as saying you will never invest.

Sure there are many things to worry about - excessive government spending, environmental degradation, inflation etc etc etc but there are always things to worry about and always will be. I have been listening to people preaching the end of the economic world since I was a teenager - it hasn't happened (yet).

The good news is that the multitude of people preaching doom and gloom have given those willing to take a few risks better opportunities to buy assets at reasonable prices. Sure, that involves taking risks but history has repeatedly shown that investing when all the news is bad is more rewarding than investing when everyone is making money and feeling optimistic.

I'm not saying things couldn't get worse - there are some huge issues to be addressed and I don't really see how they will be addressed without some serious economic pain but the chances of an economic collapse of developed world economies is pretty low. Not zero - just low which is why I keep some cash/bonds/precious metals in the portfolio.....just in case.

Case studies: Ireland and Iceland - both went through some pretty severe problems and are now well on the way to recovery.

punter 12 yrs ago

Yeah, exactly my point. There are green shoots (remember that talking point?), and QEs have a lot to do with them.

Since even if the world ends (where no one will be able to use their assets anyway) we still need to make investment decisions.

So having a good understanding of what's going on (which is quite difficult to do) is an advantage. And I agree too that those who took some risks (e.g property) were rewarded.

Ed 12 yrs ago

Even if you believe the worst is ahead that does not mean you do should do nothing...

Not so familiar with the Irish situation although I do know they have by far the lowest corporate tax rate so they are a tax haven for companies doing business in the EU so that helps...

However Iceland has done ok because they refused to make good on the debts of private banks... essentially they said get stuffed - the tax payer is not going to pay these billions.

I am not sure why the EU let them get away with this .... (the UK made threats) perhaps the numbers weren't big enough to bother with?

But the EU has not allowed other countries to do this... they forced out leaders in Greece and Italy and overturned democracy by putting in place their unelected minions... anyone who doesn't play ball with them goes...

This is because German and French banks have loaned 100's of billions of dollars to these countries... and there is no way they can absorb defaults without themselves going bankrupt then requiring a government bail out....

So rather than bailing out their banks (politically unpalatable + they probably don't have the money to do so and would quickly find themselves downgraded if they had to bail their banks) they force the taxpayers of these countries to stand behind their sovereign debts bleeding them dry....

So the EU situation is much more complex that simply saying follow Iceland's path... we are talking trillions of dollars of debt in the case of Italy and Spain...

And now France is sinking quickly into the quagmire... http://www.testosteronepit.com/home/2012/10/1/worse-than-the-infamous-lehman-september-frances-private-sec.html

The EU is as a whole in recession.... Ireland and Iceland have anemic numbers off very low bases... this is in spite of unprecedented volumes of money printing and ZIRP....

Doesn't sound like a very optimistic situation to me.... to me it sounds like a very desperate situation where central banks are struggling not to restart the economy rather they are trying to prevent it from going off a cliff...

Ed 12 yrs ago

Re: 'the world ending'

This seems to come up a lot... can someone define what they mean by 'the world ending?'

Does a Depression similar to or worse than what happened in the 1930's qualify?

traineeinvestor 12 yrs ago

@ Ed - the "world ending" probably refers to a complete breakdown in the functionality of modern economies - banks stop working properly, supply chains break down, law and order deteriorates, rule of law starts to fail (more) etc. A gradual drift to countries where the private sector is more or less crowded out by the state sector. (Of course, the latter is already happening as governments' share of the economy continues to expand.) That said, it's all a question of semantics - anyone can define it any way they like. Something less extreme like a period of prolonged deflation or high inflation would amount to that for many people.

We have an example going on right now that (IMHO) qualifies: Iran. The currency is is free fall. People are scrambling to get get their money out of the country or, if the can't, buying whatever tangible goods that they can. The banking system must be under severe stress and the Iranian government is taking some fairly tough measures to stop people from either preserving the value of their "money" or protest against the problems. This one could get very ugly.

@ Iceland. True but I get confused. A lot of people criticised the US and Europe for bailing out their banks. Iceland gets criticised for failing to bail out its banks (the shareholders did get wiped out). There was also the basic problem that Iceland could not have bailed out its banks even if they had wanted to - their size relative to the Icelandic economy made that a complete impossibility. A good read on Iceland's meltdown is here: http://www.amazon.com/Why-Iceland-Smallest-Countries-Meltdowns/dp/0071632840 The book itself is a rather unconvincing attempt by an insider to pin the blame on outsiders but it gives some insights into the midnset of Iceland's bankers and politicians.

@ France - The French are different. Hollande seems to be devoting all his efforts to destroying as many jobs and as much private sector economic activity as possible and he appears to have an exceptional talent for doing that. He is well on the way to creating a full blown depression in France.

Ed 12 yrs ago

TI;

Collapse: so basically we define end of world as another Great Depression... if that is the case then I think the likelihood is quite high. We were on the verge of that after Lehman... and we prevented collapse with massive stimulus and money printing... yet we are headed back downhill in spite of all that money...

Iceland: I think the difference is that Iceland's banks are minnows... if a major US or EU bank defaults the entire global banking system goes down with it - recall what happened when Lehman tanked... international trade froze - the entire financial system froze...

That said, I believe governments made (well... the lobbyists force them) a huge mistake with the bail outs... what they should have done is wiped out the bond and shareholders... recapitalized the banks... and refloated them... that would have purged the system of bad debts...

But because the banking lobby is so powerful nobody even took even the slightest hair cut....

France: France was going down the drain long before Hollande came on the scene... but he without question is not helping the situation...

When you read the Richter article on France above... is not pretty much certain that France is about to join the PIGGS? France is the FIFTH largest economy in the world...

I reference a comment from Ray Dalio, most successful hedge fund manager of the past decade... Economist Buttonwood conference about 8 month ago:

'Europe is headed into recession... they have used up all the tools that governments would normally use and then some (stimulus... ZIRP...) my concern is how do they get out of recession'

The EU was an impossible construct from day 1 - and many warned of the time that it would not survive a crisis... I cannot see how the EU recovers from this dire situation.

traineeinvestor 12 yrs ago

Agree completely that the European montary union/common currency should never have happened - exactly what is happening now was widely predicted before the Euro was created.

On bank bail outs, I agree completely - if a bank goes down start converting it obligations into equity. Begin with the tier 2 capital/subordinated debt and work up the priority chain until the bank is back on its feet. Note that this only adresses solvency - not liquidity which is a separate issue.

OffThePeak 12 yrs ago

Is France now a PIIG?

Facing recession : No bank haircuts taken, No tools left unused

==

Yet Global stock markets rise on the back of hopeful signs from China etc

Ed 12 yrs ago

Contest... let's create a new word out of F-P-I-I-G.... (later we will add a G for Germnay...)

Now let's go to the fount of all knowledge... the only web site that tells it like it really is ... that does not simply regurgitate press releases... that does not accept money not to run damning stories (who could that be???)

From Zero Hedge:

This is a post in three sections. First I want to outline my conception of the price level phenomena inflation and deflation. Second, I want to outline my conception of the specific inflationary case of hyperinflation. And third, I want to consider the predictive implications of this.

More http://www.zerohedge.com/news/2012-10-04/guest-post-explaining-hyperinflation

Excerpt:

So why would a government end up running the printing presses (?M) to oblivion?

So in many cases, the reason may be political expediency. It may seem easier to pay workers, and lenders, and clients of the welfare state in heavily devalued currency than it would be to default on such liabilities — as was the case in the Weimar Republic. Declining to engage in money printing does not make the underlying problems — like a collapse of agriculture, or the loss of a war, or a natural disaster — disappear, so avoiding hyperinflation may be no panacea.

Money printing may be a last roll of the dice, the last failed attempt at stabilising a fundamentally rotten situation.

I think he's hit the nail on the head with that last statement....

Ed 12 yrs ago

And the headlines SCREAM!!!!!

Jobless rate falls to 7.8% Shall we celebrate?

Hmmm... to absorb new entrants into the work for the US has to generate well over 100k jobs per month ... that is not happening...

So how is the jobless rate falling? Workers are simply giving up... or looking for other ways to survive this Greater Depression.

Record numbers on Disability: http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2012/07-2/Disability.jpg

Record numbers on Food Stamps: http://www.mybudget360.com/wp-content/uploads/2012/04/food-stamp-record-2012.jpg

Record numbers going back to school - then failing to repay student lonads: http://tcftakingnote.typepad.com/.a/6a00e54ffb96988833016303669f11970d-800wi

Not much of a recovery...

Remmy 12 yrs ago

Should we celebrate? Yes if you did what I have been reccomending, which is to buy stocks and property. Right now these are the two best assets to be invested in for the next 5 years as the world starts to stabilise and move into recovery.

Ed 12 yrs ago

And of course Zero Hedge is about the only place you will find this:

US Foodstamp Usage Rises To New Record High

While the 0.4% perfectly unmanipulated and totally coincidental swing in the unemployment rate in an Obama favorable direction one month before the election came at a prime time moment for the market, one hour ahead of the open, setting the market mood for the rest of the day (which despite all best efforts still closed red, valiant efforts by Simon Potter and the FRBNY's direct pipe to Citadel notwithstanding), there was one other, far more important data point released by the government's department of agriculture, sufficiently late after the market close to impact no risk assets. That data point of course was foodstamps (or the government's Supplemental Nutrition Assistance Program, aka SNAP), and we are confident that no readers will be surprised to learn that foodstamp usage for both persons and households, has jumped to a new all time record.... Finally, and putting it all into perspective, since December 2007, or the start of the Great Depression ver 2.0, the number of jobs lost is 4.5 million, while those added to foodstamps and disability rolls, has increased by a unprecedented 21 million.

http://www.zerohedge.com/news/2012-10-05/us-foodstamp-usage-rises-new-record-high

Ed 12 yrs ago

Monetary Mystification

NEW YORK – Central banks on both sides of the Atlantic took extraordinary monetary-policy measures in September: the long awaited “QE3” (the third dose of quantitative easing by the United States Federal Reserve), and the European Central Bank’s announcement that it will purchase unlimited volumes of troubled eurozone members’ government bonds. Markets responded euphorically, with stock prices in the US, for example, reaching post-recession highs.

Others, especially on the political right, worried that the latest monetary measures would fuel future inflation and encourage unbridled government spending.

In fact, both the critics’ fears and the optimists’ euphoria are unwarranted. With so much underutilized productive capacity today, and with immediate economic prospects so dismal, the risk of serious inflation is minimal.

Nonetheless, the Fed and ECB actions sent three messages that should have given the markets pause. First, they were saying that previous actions have not worked; indeed, the major central banks deserve much of the blame for the crisis. But their ability to undo their mistakes is limited.

Second, the Fed’s announcement that it will keep interest rates at extraordinarily low levels through mid-2015 implied that it does not expect recovery anytime soon. That should be a warning for Europe, whose economy is now far weaker than America’s.

Finally, the Fed and the ECB were saying that markets will not quickly restore full employment on their own. A stimulus is needed. That should serve as a rejoinder to those in Europe and America who are calling for just the opposite – further austerity.

More http://www.project-syndicate.org/commentary/quantitative-easing-3--qe3--and-the-problems-of-the-fed-and-ecb-s-expansionary-monetary-policy-by-joseph-e--stiglitz

Remmy 12 yrs ago

Quoting from the above article "...the Fed’s announcement that it will keep interest rates at extraordinarily low levels through mid-2015 implied that it does not expect recovery anytime soon. That should be a warning for Europe, whose economy is now far weaker than America’s."

... I feel we should replace the last sentence and/or add "That should be acted upon by people who want to make money, that stocks and property will continue to rise".

I love all the doom and gloom stuff, as this is exactly what puts of some people from investing and, ironically, ends up providing opportunities for those who see the big picture and look for opportunities to profit from it.

What I like about this discussion here, is that we not only have people citing the negative stories, but also others pointing out how to profit from it (which is ultimately, I believe, what most of us want to be doing).

PS - Dow hit another new high last night. US unemployment continued to fall (still a looooong way to go which provides great support for continued low rates). All of this is great for HK property investors, Singapore property investors, and people who are moving into equities.

traineeinvestor 12 yrs ago

@ Remmy - very true. The last three years have been good ones for most investors - there have been plenty of opportunities for investors to make money in real estate, equities, bonds and bullion. Negative real interest rates on deposits and mortgage finance have certainly helped.

Of course, what has happened in the last three years tells us little about what the markets will be like going forward but as long as interest rates stay where they are and we have at least some inflation I am happy to keep most of my money in risk assets. I am also encouraged by the fact that US bank deposits are at record levels meaning that there is plenty of cash sitting on the sidelines.

Ed 12 yrs ago

Remmy - how can US employment be falling when the US is not even averaging enough new jobs to absorb new entrants into the market?

What surely is happening is more and more people are simply throwing in the towel and giving up on finding jobs... so they fall off the unemployment stats...

Here's the evidence supporting that assertion:

Record numbers on Disability: http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2012/07-2/Disability.jpg

Record numbers on Food Stamps: http://www.zerohedge.com/news/2012-10-05/us-foodstamp-usage-rises-new-record-high

Record numbers going back to school - then failing to repay student lonads: http://tcftakingnote.typepad.com/.a/6a00e54ffb96988833016303669f11970d-800wi

traineeinvestor 12 yrs ago

Ed - I don't think that is quite correct. According to the US government which compiles the numbers, the labour force participation rate ( the part of the population which is availble to be employed)has essentially been flat for 2012 in spite of the increase in population. What has changed is not people dropping out of the labour pool but the number of people who are working reduced hours on an involuntary basis - that number has gone up quite a lot this year.

The raw numbers are on the BLS website (sorry, I haven't figured how to copy a link on an iPad).

The people racking up all the student loans should ask themselves where the money they are paying is going - most of the increases are going to pay for ever increasing admin costs (all those diversity officers etc) and an increasing number of academic staff who are more interested in doing research and writing books than teaching. Very much a case of paying for what you are not getting.

Remmy 12 yrs ago

Ed - you are one of the most negative people I have ever seen, actively seeking out "bad news" even in light of very positive news.

Can I ask, ultimately, assuming you are right, what's the point of all these negative claims? (I may have missed he earlier discussions, but is there ultimately a "solution" or a way to profit from what you are predicting, that you have proposed?

Can I suggest that this zerohedge site, its perhaps not the most unbiassed or objective sites to rely on?

Meanwhile, http://money.cnn.com/2012/10/05/news/economy/september-jobs-report/index.html?iid=HP_LN

Ed 12 yrs ago

No - I seek out the truth.

That's why I avoided getting crushed in 08 and was able to do well on various investments including gold and property...

And that is why I didn't get crushed in the Dotcom crash - while fools were joyously going on about how they had massive burn rates and hundreds of staff (assuming that even bigger fools would keep shoveling cash into their gaping maws forever)... we were hunkered down looking at the P&L. That has worked out no so badly as well...

Let's not pretend this requires any level of great intelligence... all it takes is stepping back... realizing the con game that is being played... and working out what is PR and what is the actual reality...

Let's touch base with reality:

- the EU is in the utter, uttersh*t and going into recession - they have used up all the ammo that is normally used to escape recession - the EU will implode - it's only a matter of time

- China launched the mother of stimulus post Lehman hoping for their export markets to recover - they have not recovered - they will not recover - China is slowing quickly... I don't see this ending well

- Japan ... 230% debt to GDP - endless recession ... this country is a ticking time bomb... this cannot last

- UK - public and private debt is at insane levels.

- another stat from ZH: Finally, and putting it all into perspective, since December 2007, or the start of the Great Depression vear 2.0, the number of jobs lost is 4.5 million, while those added to foodstamps and disability rolls, has increased by a unprecedented 21 million. Oh and about $7 or $8 trillion in debt. Who's counting really.

- to top it off the UK, the US, the EU, and Japan are all printing trillions - it has not helped a single one of these countries recover - all that it has done is keep them from falling off the cliff.... you can't print forever without a bad outcome at some point (note Ben just said he will print forever... good luck with that)

Unfortunately the reality happens to be very dire and absolutely does not point to recovery.

I must admit, at times I find myself hoping that an anecdotal stat here and there (e.g. when the US had a few months of 200k+ jobs after the last QE) that there might be a light at then end of the tunnel...

But then I remember that out of trillions of dollars of stimulus and ZIRP all we are getting a few sparks that amount to nothing... and I remember the TV hacks screaming over and over again 'green shoots are here - green shoots are here'.... then I remember how every time each QE in the US ran its course... GDP and Jobs headed back towards zero...

Clearly one can still profit from what is happening... but I think we make a big mistake if we believe the worst is over... and bet the farm on that assumption.

Is there a solution to the problems I have outlined above?

I'd like to say they'd inflate the debts away but when your debt is growing faster than inflation that is not going to happen.

So what is the solution - eventually I believe there will be defaults on a monumental scale.

Another reason I focus on pointing out the insanity of all this is because ignoring the madness is exactly what has got us into a situation from which there seem to be no good outcomes...

This can kicking has been going on for ages... and we've all been buying into it and accepting that this is the way it is so let's figure out how to make money from it...

And meanwhile we have no reformed the system.... and in fact the system is far more dangerous than ever because of it...

In 08 we almost went off a cliff... but it's business as usual ... what's going to happen the next time we run into a wall?

Ed 12 yrs ago

TI : agree - no doubt some of these people are finding part time jobs... but the numbers speak for themselves... massive increases in people on disability, food stamps and heading back to school...

None of this - not even the fact that some people are finding part time work... points to any sort of recovery.... let's face it - nearly 50 million Americans cannot feed themselves...

This is frightening.

Remmy 12 yrs ago

Ed - forgetting for a moment trying to save the world, or critiquing the major Governments, poloticians and economists etc who are deciding current policy - her is my question for you - Do you have any suggestion as to how you or I can personally benefit from the current state of affairs as you perceive them?

Ed 12 yrs ago

I made my moves in 2007 when I saw the stream roller coming - when I could still get into various hard assets before the money printing blasted them through the roof. So I am not the best person to ask because having set aside emergency funds, I blow all excess cash on wine, women, travel and song… and I waste the rest 

But off the top of my head…. I believe that stocks, property and bonds are all false markets made by the central banks. Take away the money printing – or (more likely) endless money printing stops having any effect – and I believe these investment crash – I prefer property over stocks and bonds because property does not go to 0. Fiat currency can go to 0. I like gold – even at the current price – it will not go to 0 – it is a hedge against both hyperinflation and economic collapse.

3 of the very short list of people who anticipated and made money off of Subprime – Michael Burry, John Paulsen. Kyle Bass… all put a significant portion of their personal wealth into gold post Lehman. Brilliant investors including Jim Rogers, Soros, and Marc Faber are all long gold. Those are more reasons I like gold - these guys do their research and they have great track records.

Coincidentally I had dinner tonight with a London metal trader and a hedge fund analyst from Singapore – they like gold… but they like gold mines more…

Anyway it is impossible to predict specifically what will happen and when. Will we have deflation? Hyperinflation? Deflation followed by hyperinflation?

The one thing I am fairly certain of though is that there is not likely to be a recovery without major suffering first... perhaps something similar or worse to the 1930's....

You cannot cure debt with more debt…. Nor with money printing.

Also, in the back of my mind I am quite concerned with the fact that oil seems to always be at or above $100.... if we have in fact hit Peak CHEAP Oil... then I wonder how we ever recover so long as we rely on oil for virtually everything... because any whiff of real recovery will surely send oil to 150 as it did in 2007... or higher.... which will again lead to a global recession... i.e. we have reached the end of growth?

That is a concern of mine...

hkxxxpat 12 yrs ago

It is like saying you can't cure cancer with poison - oh wait, that is what drugs do, so it isn't so simple. ("It's not supposed to be easy. Anyone who finds it easy is stupid." Charlie Munger)

Sure you can cure debt with more debt, if you survive and have some underlying basis for the debt. I think the US has some basis for their debt.

And Ed what do you expect metal trader and hedge fund guy to say, except maybe to buy silver (to a man with a hammer everything looks like a nail).

"Risk means more things can happen than will happen". I think there are reasons for optimism - of maybe it is just the first hint of cooler weather in HK that is doing it. Still things will change fast when they do.

And doesn't gold have massive transaction costs, 10-15%? And a lot bitch about buying it, so doesn't that simply show that instead of buying gold you should own a gold shop? Asiaxpat gold shop?

Remmy 12 yrs ago

@Ed - thanks for the reply.

The comments from the traders are of course typical of any type of trader. Ie, if you believe something will move up, borrow to buy and/or leverage it.

So, if you believe in gold, of course buy a gold mining company, which typically moves 3x that of the underlying gold price (both up and down, I might add). Or to follow the thought further, borrow at almost zero % and then invest in into gold mining stocks...

I do like the idea of wine, women, and travel - that's always a good way to spend your cash :)

Regarding the point about there not being a recovery without suffereing, I agree with you, although in my mind, those who will "suffer" are those who remain in cash. They will pay the price overall, in terms of devaluation of spending power, earnings increases less thanthe rate of inflation, etc. I think we should also (selfishly) look at how we can benefit this (or at the least avoid being one of those who suffer). In my mind, land, property, stocks are the place to be.

Gold, yes it will likely rise, but I have explained a few times before, why I think its a fundamentally flawed (and highly risky despite appearances) investment.

traineeinvestor 12 yrs ago

I'm happy to invest in wine - even after the recent sharp correction, good Bordeaux have done reasonably well ( not as well as HK property though). The problem is the stock shrinkage :-)

My HK$0.02 worth is that there are usually some asset classes that represent good value. I have friends who are picking up US real estate in places which are recovering. I recently purchased a few shares in one of th PRC sportswear companies (lots of cash, positive cash flow, a good yield and one consumer discretionary market where the PRC middle class can afford to spend money).

I'm now giving India a good hard look - the country has favourable demographics and if Singh manages to push through a few more reforms could actually grow at a reasonable rate. It's also worth bearing in mind that India's economy is far more domestically driven than many other Asian economies. Any thoughts on this idea appreciated.

As far as the HK property market is concerned, while I have no idea where the market will head I the short term, history shows that the market goes in cycles. At some point in the future, I would expect another opportunity to buy at better values than today.

Remmy 12 yrs ago

Trainee - a few comments. Rather than India, consider Sri Lanka.

Secondly, be careful with PRC sportswear companies. Yes, they look extremely cheap based on published earnings. I was attracted to them too, based purely on published earnings reports (and I can tell you I research PRC stocks extensively). However, some are fudging their figures, by selling to distributers at ever increasing amounts, who then hold the stock (which they have a right to return) enabling the company to report ever increasing sales. Eventually this catches up with the company, and when it does stock prices take a BIG hit.

Overall though, I agree PRC stocks (including PRC consumer) are a VERY STRONG buy. I'm expecting many PRC listed companies to double in value over the next 12 months. I am happy to share my specific reccomendation if you or anyone else is interested.

traineeinvestor 12 yrs ago

Hi Remmy

Thanks for the comments - I'd be very interested in any recommendations you may have.

On Sri Lanka - I don't think there is an ETF in HK for it? What is the easiest way to get some exposure?

Remmy 12 yrs ago

Re Sri Lanka, I would suggest buying directly. Do your research of course on location, price, as well as ownership structure, and of course be sure to use a reliable conveyancing lawyer. I have not myself bought yet, but I do plan to go take a look around and I have been researching online and speaking to others who have already bought in.

For China stocks, I first of all, for a range of reasons suggest buying those listed on the Hang Seng. What I (actually me and a group of investors) look for are stocks with the types of rations that Buffett likes - low PEs, strong growth, high return on equity, and high dividend payouts. We then further look for stocks that, due to their size and/or business nature are significantly more volitile than the Hang Seng itself. We plan to buy into a range of stocks over the next half year, including the following:

189 DONGYUE GROUP

317 GUANGZHOU SHIPYARD INTL

633 CHINA ALL ACCESS HOLDINGS

710 VARITRONIX INTERNATIONAL LTD

904 CHINA GREEN (HOLDINGS) LTD

921 HISENSE KELON ELEC HLD-H

1863 SIJIA GROUP CO

3838 CHINA STARCH HOLDINGS LTD

8045 JIANGSU NANDASOFT TECHNOLOGY

Do let me know your thoughts on these.

punter 12 yrs ago

I'm interested to see whether other investors have a strategy in dealing with the eventuality of Central Banks drawing back the monies they've pumped into the system.

Remmy 12 yrs ago

Theoretically its possible for a Central Bank to "draw back" money pumped to stimulate, but in practice, for many reasons is almost never done. Easing off or slowing down stimulus yes, but to reverse money already in circulation? That would be extremely unusual.

Ed 12 yrs ago

hkxxxpat - I don't believe metal traders normally trade gold... they are primarily involved in the major industrial stuff like iron ore copper nickel etc....

The metal trader was very negative on those metals due to the situation in china... he was mentioning how many chinese buyers were walking away on contracts because they have massive stockpiles and reduced demand from factories... also they expect prices to drop... of course because china is the biggest buyer these days they can get away with this....

You can't cure debt with more debt when you are insolvent... why do you think the ECB is buying the bonds of greece, spain etc... it's because nobody else will because they do not expect to be paid back...

I think it was Jim Rogers who said 'you can't cure debt with debt' - he is correct. When you are insolvent lending you more money fixes nothing.... debt relief (default) is what cures too much debt

Ed 12 yrs ago

Real Unemployment Rate At 23%: Close To Great Depression Peak

http://www.ftense.com/2012/10/real-unemployment-rate-at-23-close-to.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+ftense%2FsymR+%28The+Future+Tense%29

traineeinvestor 12 yrs ago

@ Remmy - thanks for the suggestions. I'll have a look and post my HK$0.02 worth of comments later. I used to hold Varitronix but sold earlier this year.

@ Punter/Remmy - while it is rare for central banks to take money out fo the system, they have done so. Volker effectively did this in the 1970s to combat inflation and China sort of did it more recently when it hiked the banks' reserve ratio requirements. In some cases when it happens, it is not so much about taking money out of the system but slowing the rate of growth of the money supply (M3) to less than the rate of inflation.

Remmy 12 yrs ago

@ Ed Re "Real Unemployment Rate At 23%: Close To Great Depression Peak".

... And what happens after depression peaks like this? We move to RECOVERY! Which is of course why I am so bullish. The biggest fortunes, historically, have been made by people who invested at the "worst" of times. 2008 to 2012 will prove to have been one of such times, so I am reccomending people to leverage, borrow cheaply, and invest in property and equities...

Remember the Buffet mantra - "buy when others are nervous...". Now is most clearly such a time of you look at all the uncertainty and "angst" along the lines of that you keep highlighting...

Remmy 12 yrs ago

@ Trainee - yes, agree re Volker, but the thing is, right now the Fed WANTS inflation. They desperately want assets to reflate, to reduce negative equity and restimulate building and spending etc. They will keep stimulating until they achieve this (which is extremely bullish for HK property and equities)

elsdon 12 yrs ago

LOL@alluding that the current time is the 'worst' of times.. DUDE its the historical BEST OF TIMES. What has history shown you about that?

I don't think others are nervous, I feel like the nervous ones are in the minority.. or why else would exchanges around the world be hitting their 52-week highs.. Why would the HK Property market be at a historical high, not because of nervous people.. but because people are piling into these respective markets with confidence.. It's the ones sitting on the sidelines like myself who are nervous, in the minority.

punter 12 yrs ago

Prices of goods here in HK have gone higher. Inflation is going to be a problem sooner.

Since QE will not end soon, a lot of HK people will feel the pinch.

Ed 12 yrs ago

Remmy - the problem is ... we are not recovering... in spite of all these trillions, things are worsening:

- China is sinking

- Japan is printing over half the yen they spend

- US is printing over half the dollars they spend

- the EU has completely reversed and is in recession - and they have promised to print...

Might I suggest that 'this time is different'...

We had by far the biggest global stimulus launched in 2008 hoping to get things back on track ... and it has failed.... and now because of it, most major countries sovereign debt is near or well past 100% to GDP...

Research shows that once a country passes 90% it does not recover because the cost to service that debt punishes growth...

And what are central banks doing to deal with this? Yep... more of the same failed policies...

Einstein "insanity is defined as doing the same thing over and over again and expecting a different outcome"

From what I read about Buffett these days is he doesn't invest until he first gets a guarantee from Obama... http://www.reuters.com/article/2009/08/04/columns-us-column-buffett-idUSTRE5735JC20090804

traineeinvestor 12 yrs ago

@ Remmy

Some very preliminary thoughts on the companies you have listed. I've only spent about 10 minutes on each one and have yet to read the recent annual/interim reports and other announcements or look into their industries so this is very preliminary and is very much initial reactions. Please feel free to point out where I'm wrong as I am very much a small private investor with no qualifications.

189 Dongyue Group. The Balance sheet is okay but the first half profit plunged. very good cash flow from operations but substantial new investment. Worth a further look.

317 Guangzhou Ship. The balance sheet shows something like HKD4.2 billion in net cash. I need to crunch some numbers but it looks pretty solid. However, there was negative operating cash flow and it is in an industry characterised by oversupply and intense competition.

633 China All Access. Good balance sheet but negative operating cash flow and a reduced profit. Possibly worth a further look.

710 Varitronix: I used to own shares in this company but sold earlier in the year. The company is well run and well focused. If/when the automarket recovers this will be worth another look. Right now, I feel it is too soon to jump back in. That said, the liquidity is now a bit low for my liking.

904 China Green: The average daily turnover is too low for me to seriously consider (see below). Also the auditor is not one of the big four. That said, the company has a sound balance sheet and excellent operating cash flow but a lot of money is being put back into investments. If it was more liquid, I would give it a more detailed look.

921 Hisense Kelon. This is a manufacturing company with a very average balance sheet (net debt) and which operates in a competitive industry. The subsidy programme which has helpd it in recent times is expected to come to an end soon. I can't see myself getting excited over this one.

1863 SIJA Group. Good cash flow and a good balance sheet. Lack of liquidity is a problem for me.

3838 China Starch. This looks interesting. Very good balance sheet. Operating profit plunged in the last interim - not sure why? Another negative is the steady dilution of shareholders - equity capital has been increased every year. Worth a more detailed examination

8045: Nandasoft. No liquidity at all.

Since I'm intending to take early retirement next year, I'm becoming increasingly selective about the investing risks I take. With equities, I like to see enough liquidity to be able to exit quickly if I wish to. Given some of the recent (and not so recent) scandals I also think a bit harder about investing in companies which do not have one of the big four as auditors.

I'll start doing more work on 189, 633 and 3838. 710 remains on my radar screen but liquidity remains a concern.

Any thoughts on China Metal Recycling (773)?

Ed 12 yrs ago

Global Economic Recovery Hits the Ropes

Tiger (Tracking Indices for the Global Economic Recovery) shows the world's recovery to be "on the ropes", despite the best efforts of the world's central banks to boost demand.

The deterioration in hard data and sentiment has forced economic forecasters to lower their estimates of growth this year and next.

The Tiger index shows momentum in the global economy dissipating despite action by the Federal Reserve, European Central Bank, Bank of Japan and Bank of England to boost the recovery.

In this release of the index, the Brookings Institution produced a separate indicator for the troubled peripheral European economies of Portugal, Italy, Ireland, Greece and Spain. Only Ireland, among these five countries, has avoided a sharp descent towards the levels last seen during the financial and economic crisis of 2008-09.

http://edition.cnn.com/2012/10/07/business/world-economy-reovery/index.html

http://www.brookings.edu/research/opinions/2012/10/07-global-recovery-prasad

Ed 12 yrs ago

Slowdown set to take toll on US earnings

The slowdown in the global economy and anaemic US recovery is expected to result in one of the worst US quarterly earnings seasons since late 2009.

http://www.ft.com/intl/cms/s/0/a3e9c5cc-0ef7-11e2-ba6b-00144feabdc0.html#axzz28iQmUa3U

Remmy 12 yrs ago

@ Trainee - I have said it before. You seem to be one of the smarter posters here. Your comments on my stock picks above confirm that. We think very much alike.

I will address your specific comments a little later when I have time, but in general I think they are all valid (and I have thought of all these points myself as well prior to starting to buy in).

One quick comment on your concerns re liquidity. Yes, some of these stocks are relatively thinly traded. That may potentially be a concern, although arguably that is a concern that is priced in, meaning you are getting an even better value stock (liquidity issues aside).

Secondly, it can also be a big plus that a stock is relatively tighty held - especially when good news starts to come out (which as you know typically happens after a market bottoms, which is where I think we are at now). Suddenly, on good news, people need to pay a premium to get in - take a look today at 2678 (a stock that was also on my 2nd tier "buy list" and up 15-20%).

One other quick comment - look at 300. If you believe China has bottomed and that we will get stimulus next year, more infrastructure, this stock then looks very cheap.

I'll check out 773 little later.

PS - if this is not the right thread for this disucssion do let me know and I can move it to a seperate thread. We have kind of branched off from QE3 to specific "botique" China stocks...

ltse 12 yrs ago

This rally in stocks is not going to last, I can't paste charts here, but all you need to look at is the Transportations Index and The Baltic dry index, while the S&P has been making higher highs, both of these transport indices are not moving higher, these transport indices are important because they confirm what is going on in the real economy ie transportations of goods, obviously we have a negative divergence.

Another economic indication is the Aussie yen AUD/YEN pairing, its also fallen back to substantial levels since the QE3 hype, the Aussie Yen is an important economic indicator (Japan imports most commodities, and Australia exports mostly commodities), so when the AUD falls against the Yen, it means demand for raw material is falling.

My opinion is that this is all a QE3 and election rally, I would position to short the market at these highs.

Ed 12 yrs ago

ltse - you are in good company - many including Jim Rogers said early in the year that the obama would move heaven and earth to prop things up to try to win the election....

Remember the LTRO when the Fed printed 1.5 trillion dollars... and handed it to the ECB ... who then handed it to EU banks... who then bought the bonds of insolvent Pigs to keep them from becoming Greece?

If anyone doubts the resolve of the Fed to prop the dead horse up look no further than that...

Nobody has done anything to improve the situation ... QE and other policies have basically kept the global economy from crashing... I am of the opinion that there is no way to re-start things... the debt levels are beyond salvage... growth is trending quickly downwards in spite of all these measures...

Any number of things could topple things over... but looking at the situation and I think the biggest dangers are social unrest (people in the Pigs will not accept endless austerity and Depression)... and the other trigger I see is no prospects for growth... this will only exacerbate the job situation and drive people to desperation...

And as long as there is no growth there is no escape from this mess - because all that austerity does is strangle these countries even further... look at the UK and most of Europe... they have enacted austerity with the expectation that there deficits would reduce... in most instances their deficits are WORSENING... because without growth tax revenues crash and costs for social support programs increase...

Normally governments would try to soften the blow of a downturn with stimulus... but unfortunately over the past 40 years they have been running deficits year after year after year... so stimulus is no longer an option - their debts preclude it...

So austerity isn't working - stimulus is rules out... so what are the options? Oh ya... turn on the printing presses... and even that is not working....

D-E-F-A-U-L-T-S... on a massive scale on the way?

Remmy 12 yrs ago

Just a note on Jim Rogers - his investment history has been disasterous, and his timing (by his own admission) has been very poor. The real brains behind any initial success he had was George Soros.

Jim is a good self promotor and seller of books though, good at getting soundbites into mainstream media, and a very nice guy on top of that, but he's not actually one of the smarter people out there so I don't take anything he says too seriously.

Ed 12 yrs ago

Really? Can you provide some facts to back up what you are saying...

It is my understanding that Rogers does not disclose his portfolio details so where are you getting this info about his 'disastrous results?'

Also he co-founded Quantum - and he made big money from it - are you saying he was Soros' janitor? Anything to back up your claim that he was only along for the ride to billions?

As for timing he is one of the few people who are honest... as Naseem Taleb points out ... nobody gets timing right - they just get lucky... if enough people are making enough best some will obviously get it right sometimes and they will be hailed as geniuses... they are nothing of the kind...

Roubini for instance... he called housing but he's missed everything since. Peter Schiff likewise...

It is pretty much impossible to time a market - because there are too many factors involved that cannot be predicted... e.g. QE... you can guess that QE is coming and you can guess what the impact will be ... but there are so many moving parts nobody can do more than guess at the outcomes...

Jim Rogers always says he cannot time a market - because he knows nobody can - but over the past 3+ years he has a huge track record... he was long ago screaming buy commodities ... buy gold... and he has been exactly right on all of this...

So broadly speaking his calls have been superb throughout this crisis... and I suspect he has made a killing.

Another excellent article from the Telegraph today which carries on from my comments above:

Spain’s economy is expected to contract by 1.5pc this year and 1.3pc next as austerity bites, pushing public debt to 97pc of GDP in 2013. The estimate was 84pc as recently as April, showing how quickly the debt dynamics have gone horribly wrong.

http://www.telegraph.co.uk/finance/economics/9594804/IMF-sees-alarmingly-high-risk-of-fresh-global-slump.html

traineeinvestor 12 yrs ago

@ Remmy I actually agree with you on illiquid and tightly held stocks - it can certainly work in your favour when things go well. However, as I move from living off earned income to living off the return on the money I have saved and invested, I am slightly more focused on avoiding unnecessary risks than seeking the highest possible return. I'll reevaluate once I'm comfortably past the transition phase.

As far as investing goes, I have made plenty of bad calls and have the financial scars to prove it - I brought Sino Oil (702) as high as HK$0.52 (fortunately only a small position) and Xstep (1368) still owes me an average of HK$3.95 (also only a small position). There's a few other duds in the portfolio as well. Happily the winners out number the losers and I put more money in the larger cap stocks which have generated steadier returns. Very much a case of being lucky rather than good.

@ Ed/Remmy - I can't comment in the relative contributions of Soros and Rogers to the success of Quantum because I don't know. I think Rogers has been pretty good in terms of the big pircture (commodities and bullion) but the shorter term records have (I think) been a little less reliable although I couldn't find an anaylsis on point so I'm happy to be corrected. As Ed points out, no one gets it right consistently (Madoff excepted). On the whole, he's worth listening to. That said, I do agree that he is a bit too much of a self promoter. I actually prefer listening to Marc Faber.

@ ltse - there is no historic pattern of US stock market performance following an election: http://money.usnews.com/money/personal-finance/mutual-funds/articles/2012/04/19/what-the-presidential-election-means-for-the-stock-market

I agree with Ed's comments on Roubini and Schiff - They got one mega call rights and just about everything else wrong. Schiff was one the case studies in Future Babble by Dan Gardner. The book is well worth a read - it's somewhat reassuring to know that the best forecasters tend to be those who tallk in terms of probabilities and possibilities rather than certainties. Uncertainty is inherent in all decisions involving the future. My take is that you can't avoid risk.

Ed 12 yrs ago

This pretty much sums up why I believe the US ain't gonna recover... the guts of the article are after the discussion of the balloon people....

Here's a taste:

The propaganda being flogged by the oligarchs since 2009 is the supposed deleveraging by the American consumer and trying to convince the ignorant masses to resume borrowing and spending. It’s working. Consumer credit outstanding is at an all-time high of $2.73 trillion as the Federal government has dished out billions in student loans to 50,000 University of Phoenix MBA aspirants sitting in their basements quivering with anticipation of on-line graduation and future six figure job with Goldman Sachs.

The Feds have also added the impetus to the “strong” auto sales through their 85% TARP ownership of Ally Financial by doling out 7 year 0% auto loans to subprime borrowers in urban enclaves around the country. The oligarchs aren’t worried about these loans being paid back, because they are reaping the profits today. The future losses will just be foisted onto the taxpayer, as always.

Total credit market debt of $55 trillion now exceeds 350% of GDP. The National Debt of $16.2 trillion will exceed $20 trillion in 2015 no matter who wins the Presidency in November. The oligarchs adapt and control whoever occupies the White House. It is essential for our owners to keep debt growing at an exponential rate or the Ponzi scheme collapses.

http://www.zerohedge.com/news/2012-10-08/guest-post-decline-decay-denial-delusion-and-despair?page=4#comment-2869988

Ed 12 yrs ago

And let's interrupt with a little humour.... this is one of the funniest gags I have seen in a long time....

Barclays Bank Wins the Award for Interest Rate Manipulation

https://youtu.be/WXhqvAbUDmg?si=8FSobRbKnmSYa_br

Ed 12 yrs ago

And not so amusing...

Spain is imploding...

Spain Foreclosures Spread to Once Wealthy: Mortgages

http://www.bloomberg.com/news/2012-10-08/spain-foreclosures-spread-to-once-wealthy-mortgages.html

Rajoy’s Deepening Budget Black Hole Outpaces Spain’s Cuts

‘‘Even as you cut, the gap between spending and revenue collection keeps getting larger,” said Jonathan Tepper, a partner at research firm Variant Perception in London.

http://www.bloomberg.com/news/2012-10-08/rajoy-s-deepening-budget-black-hole-outpaces-spain-deficit-cuts.html

And remember Greece... they were allowed a partial default... so much for debt forgiveness... they are pushing back towards 200% debt to GDP http://www.cnbc.com/id/49339567

Ed 12 yrs ago

And yet another example of how much of what we get in the mainstream is propaganda...

ALCOA announced numbers yesterday - as usual very significant since aluminum sales are a big indicator of economic health...

Various MSM I checked earlier this morning had headlines that indicated benign or even positive headlines such as 'Alcoa Beats on Revenues'

Now if we go to an independent media source... we can find the real story:

ALCOA CUTS 2012 GLOBAL ALUMINUM DEMAND FORECAST TO 6% VS 7%

And for the punchline check out the graph which shows the historical correlation between Alcoa and GDP...

http://www.zerohedge.com/news/2012-10-09/alcoa-launches-earnings-season-whimper

And another bell weather company is anticipating bad times ahead http://www.zerohedge.com/news/2012-10-09/global-growth-reality-hits-cummins-cuts-guidance-and-1500-jobs

Then there's this http://www.zerohedge.com/news/2012-10-09/david-rosenberg-does-fed-matter

Recovery in the US? We've got GDP barely over a % ... a global downturn underway....and of course an election ... hmmmm....

traineeinvestor 12 yrs ago

@ Ed I'll agree that Alcoa is something of a bellweather stock and the result is not great but it is worth bearing in mind a few things:

1. the share of US GDP attributable to materials such as aluminium has been declining steadily for a number of years now (more emphasis on services and a few other things) meaning that the relationship between Alcoa and US GDP would be expected to break down

2. Alcoa faces more competition from both other producers and recycling than every before. I would expect its profit margins to remain under pressure

3. Aluminium uses huge amounts of electricity and water. Historically, water has been grossly underpriced. That is something that is slowly changing which is bad news for Alcoa.

In short, I don't think Alcoa is as useful an indicator of economic activity as it once was. I'm much more interested in retail sales and shipping volumes (not shipping rates).

US retail sales are still trending up: http://www.census.gov/retail/marts/www/download/text/advt1.txt

This is consistent with the US economy growing slowly over the reported periods.

Forward looking data is a bit harder to find and it is worth remembering that even industry experts are generally as bad as economists at predicting future demand figures.

Ed 12 yrs ago

One issue with the above... GDP historically tracks Alcoa fairly closely http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2012/10/aagdp.jpg

Also if you check that Rosenberg analysis... it demonstrates that there are many head winds in the US... earnings and manufacturing indices are down... many companies are reducing guidance... etc...

About the only spark of light I see is jobs inexplicably improved slightly... but I am very skeptical of that one... everything is headed downward globally and the US and the job situation is improving? Doesn't make sense...

Until you remember - the election is two months away... and those numbers can be manipulated ... Bush had his WMD... Obama gets unemployment below 8% ... just in time...

Moving to Europe and the bigger picture... this certainly opens up a big can of worms...

Christian Schulz, from the German bank Berenberg, said Mrs Merkel has come under heavy pressure from the US and NATO allies to prevent a strategic debacle in the Eastern Mediterranean. "There is a geopolitical story behind this. The Samaras coalition is seen as the last chance for a stable, pro-European government. If they let Greece go into default and leave the euro, the next government will either be extreme Right-wing or Left-wing. You could have a situation where Greece starts offering naval bases to Russia, or the risk of further instability in Syria, Egypt, and Turkey. President Obama has been in close touch with Merkel over this," he said.

http://www.telegraph.co.uk/finance/financialcrisis/9597514/Angela-Merkel-recoils-from-Greek-showdown-on-Spain-contagion-fears.html

traineeinvestor 12 yrs ago

@ Ed - I'm not disputing that Alcoa has tacked the US economy quite closely historically (clearly it has), my point is that there are good grounds for questioning whether it will continue to do so. My heavily depreciated HK$0.02 on the US economy is that it is growing but too slowly to help help the middle class which is still under seige from a succession of oppressive government policies or address the other underlying problems (of which too much government spending and too much red tape are far and away the biggest ones).

And Europe? A basket case. If I was German, I would be demanding that Germany leave the EU immediately. All the "cures" for Europe's problems ultimately represent a wealth transfer from current and future German taxpayers to other countries which can never be paid back. Socialism at its very worst.

Ed 12 yrs ago

My big picture view on the US (world) is that it hit a wall in the 70's - Reagan came into power with his voodoo economics... the US cut taxes, spent and borrowed and never stopped... they've been running deficits almost every year since...

And now they have moved on to printing... the last refuge of the truly desperate...

I am not blaming anyone - I think they had no choice...

Because my even bigger picture take on this is we live in a finite world - with finite resources - we live in a world that was built on cheap oil (everything from fertilizer to cosmetics needs oil)... and I think we have run out of cheap oil...

Oil is 8x more expensive now in inflation-adjusted terms than at any time in history http://www.zerohedge.com/news/guest-post-demise-car

There are other reasons as you point out... but I suspect the end of cheap oil is why we have stopped growing - I actually think we stopped growing in the 70's... only debt has allowed us to stay afloat... and now money printing...

I hope I am wrong but I have done a lot of research on this and I have a feeling that we are starting to experience the acute symptoms of end of cheap oil...

The telling number is the figure "8x more expensive" - that is putting a MASSIVE drag on the economy...

There are a number of excellent books on this - one of the best ones is http://www.amazon.com/The-End-Growth-Adapting-Economic/dp/0865716951

Before anyone dismisses it as hype... I suggest you read it if this topic is of interest... it is very well written and researched... and it debunks a number of myths about oil and possible substitutes...

Amazon lets you read a few pages for anyone who is interested to explore this thesis...

Indeed Europe is the more imminent problem... I don't think there is much room for debate on whether or not the EU is getting worse... it is truly a dangerous situation politically and economically there...

traineeinvestor 12 yrs ago

@ Ed Oil is indeed more expensive that it has been historically, although somehwhat less so than the 8x claimed for the simple reason that oil is now used much more efficiently than it has been in the past - look at the mpg on the average car, the amount of airline fuel per passenger mile, the fuel usage per ton of sea freight etc. All much lower than historically.

Still more expensive and still a drag but not as big a one as some claim.

I'm sure we will experience Peak Oil at some point and things will get worse BUT it's worth remembering that there is plenty of uranium on this planet (supply shortages are largely a product of environmental restrictions), there is no shortage of coal (although we may need smog masks if coal replaces oil), gas has become more plentify in recent years (shale gas) and clean tech is still improving (especially solar) although it will be a while before it is as efficient as oil. There will be some bumps in the road and the possibility of a supply shock is very real (and would be painful), but in the longer term, I am less worried about future energy supply than I am about things like environmental degredation, fiscal imcompetence of our elected and unelected leaders, the demise of personal financial responsibility and the rise of entitlement.

I think I have just about persuaded myself to go and buy some more gold......

Ed 12 yrs ago

Oh...I have been told another very provocative book on the above subject is The Great Disruption - I've got that waiting for me when I next visit hk...

http://www.amazon.com/The-Great-Disruption-Climate-Shopping/dp/1608192237

Watch https://youtu.be/Cm2NVc7-RSk?si=AJ0Iv1j2HJCeWurQ

Ed 12 yrs ago

TI: I had thought similarly... we'll work it out...

But then I read first Our World is About to get a Whole Lot Smaller by Jeff Ruben Chief Economist of CIBC.... then I read the far more intellectual book End of Growth... and I became far less sure of our ability to kick that can...

I am sure you'd enjoy Heinberg's book...

I agree very much with your other points... not sure if you saw this here the other day... but this does a very good job of explaining the causes of the entitlement culture.... the real meat starts after he goes on a tirade against the grossly obese...

Some very good insights here: www.zerohedge.com/news/2012-10-08/guest-post-decline-decay-denial-delusion-and-despair?page=4#comment-2869988

traineeinvestor 12 yrs ago

@ Ed

I don't think there can be any debate that economic growth will end at some point - we are on a finite planet with finite resources (absent colonising other planets outside our solar system which will not happen in my lifetime).

The questions are "when" and "what are the implications". In places like Japan it is happening already but the country is getting by because (i) Japan is a very disiplined society and (ii) households built up very high levels of savings which they can draw on and (iii) they are still able to supply a lot of things which the rest of the world wants and the rest of the world is still growing. The problems will really start (if they haven't already) when countries which are more heavily reliant on stealing from future generations, whose peoples have low savings rates and who don't have as much to offer the rest of the world go ex-growth.

Entitlement culture: the belief that you are entitled to something you have not fully earned or which you delude yourself into believing that you are entitled to. A wide spread phenomena afflicting millions of people around the world.

Ed 12 yrs ago

Japan has not collapsed (yet) because their people have been buying their sovereign debt (as they retire that is reversing though)....

But also because as you point out, the rest of the world has been relatively buoyant and buying Japanese products.... however now the rest of the world is joining Japan in the quicksand....

We can support one sick mega-economy... but with all mega-economies sick...

When and where... those are definitely the big questions.

Re: Entitlement

"The conscious and intelligent manipulation of the masses by the invisible government Alphas has transmuted citizens into overweight, non-thinking, debt dependent, egocentric consumers. This was not a mistake. The powerful interests used their control over the banking system, media outlets, and political system to lure the willfully ignorant into a debt financed lifestyle through the Federal Reserve created inflation, Wall Street peddled credit cards, auto loans and “creative” mortgages. The manipulators convinced the manipulated that borrowing today to buy houses, cars, bling, tech gadgets, clothing, and fast food was preferable to what previous generations of Americans had done – save to buy things they wanted or needed. This behavior seems to be completely irrational as a people that once saved 12% of their income and carried a moderate amount of debt chose to reduce their savings to 0% and not worry about tomorrow."

http://www.zerohedge.com/news/2012-10-08/guest-post-decline-decay-denial-delusion-and-despair?page=4#comment-2869988

traineeinvestor 12 yrs ago

A note of optimisim for investors in equities: https://p2g.miebanking.hsbc.com.hk/News/NewsPopUp.aspx?source=DJ_CFW&news_id=CFW_c-20121010DN002083

Not mentioned is the possibility of rotation from the US market (which has outperformed) to markets like China which have underperformed.

Remmy 12 yrs ago

Trainee - I can't seem to access the link, but I think the point you are making is that CHina equities may be at their lows and about to rebound. That is certainly my views. I have made the bold statement before that I am picking the China index to double in the next 12-18 months. My own preference to het exposure is via HK listed stocks of companies with substantial China business.

traineeinvestor 12 yrs ago

@ Remmy

Sorry about the link. It was a snapshot of a broker's report pointing out that stocks in the US have now outperformed bonds over not only the last 18 months but the last 10 years and suggests that the period of out performance may be only just beginning.

The suggestion of rotation for the US to China was my own additional thought.

I am heavily long HK stocks and many of them are essentially China plays. Even with China slowing, I viewed them as good value in both absolute and relative terms - a bit less so now than 3-6 months ago. It's getting a bit harder to find value plays. I'm also giving some thought to buying an A share ETF. I guess that puts us on the same page.

Ed 12 yrs ago

Oil in Inflation Adjust Terms since 1970... almost 8x at the time of the financial crisis ... still 5+ times... http://static.seekingalpha.com/uploads/2008/10/19/saupload_temp.png

And it would seem the moment we have a whiff of growth (QE driven or real)... oil spikes well over $100...

Had lunch with a UN guy who was based in Beijing for 3 yrs and he was mentioning 700,000 new cars take to the roads in BJ alone each year... we hear about new oil fields but never about the ones that are fast depleting http://www.guardian.co.uk/science/2005/apr/21/oilandpetrol.news

Once again - Peak Oil is one issue.... Peak CHEAP Oil is another ... doesn't matter if there are 10 trillion barrels of oil in the earth... if the cost to get them out means $300 a barrel oil... we will indeed stop growing...

The question is - have we reached a tipping point on this - oil was almost 150 in 07 - and if so we obviously are nowhere near having the technologies ready to replace oil as our source of energy.

Remmy 12 yrs ago

@ Trainee. Below is an artice from a few months back (very valid now actually, just a matter of timing...I'm continuing to buy in).

Bonds from China's industrial sector are returning to favour as credit investors bet that the world's second biggest economy has turned a corner.

Industrial credits have underperformed their property peers in recent months after a rash of profit warnings and rating downgrades.

But, with Beijing moving to arrest the economic slowdown and boost domestic liquidity, credit markets are betting the gap between some of these industrial bonds and star performers in the property sector will narrow.

"The Chinese industrial space represents the biggest opportunity for outperformance at this point. Profit warnings have added to the bearish mood already in place following the corporate governance issues and in some cases prices reflect 1-2 notch downgrades," said Tim Jagger, Asia fixed-income portfolio manager for Aviva Investors.

The underperformance of industrial credits versus the property sector has been dramatic since the start of the year. Property trends are easier to spot because of monthly reported sales figures and publicly known prices.

The outperformance of property names has been more pronounced in the last two months as manufacturing companies unleashed a barrage of profit warnings. In contrast, property companies reported solid monthly sales data which showed most developers were either in line or ahead of their annual targets.

But analysts believe the worst may already be over.

"The first half has been difficult across the board due to the economic slowdown and liquidity tightness, but the second half should be better," said Kalai Pillay of Fitch Ratings.

"The negative earnings have mostly been factored in, and the second half looks better with liquidity in the banking sector improving and monthly sales picking up. It's not a phenomenal rebound, but sectors like property and cement have turned the corner."

When it comes to high-yield companies in particular, markets have tended to throw the baby out with the bathwater, and this is where stock picking abilities would matter.

"We are negative on the sector as the outlook is still murky, but there could be selective opportunities. Those with SOE linkages or infrastructure related sectors will benefit from policy easing, while the private sector will benefit with a lag," said David Lai, fund manager with Eastspring Investments.

Still, there are hiccups along the way as a downward revision of earnings estimates continues - an estimated 15% of the 1,500 companies covered by a Credit Suisse survey have issued warnings since April.

STIMULUS HOPES

Analysts reckon the profit warnings have been well anticipated and the next move for many of these companies' bonds should be upwards, driven by improving cash flows.

"One has to look beyond warnings. Shanshui Cement gave a profit warning and then gave full year guidance - they said project approvals have been sped up, from the normal three-month cycle. Expectations of stimulus measures are now going up and Q3, Q4 earnings should see the impact," said Sandra Chow, analyst at CreditSights.

"Cement makers like Shanshui and West China and construction companies should benefit from the higher infrastructure spending," she said.

Although a big China stimulus package is not a done deal, at least the shocks from rating downgrades, one of the reasons these bonds underperformed in H1, should decline.

Clara Lau, China corporate rating analyst at Moody's, said that profit warnings do not necessarily mean downgrades will follow, with many of the ratings already reflecting the business downtrend.

"My expectation is there will be fewer downgrade actions in the second half even if the proportion of companies having negative outlooks is relatively high - these ratings may not be cut in that period as the outlook has a 12-18 month validity."

The segments to benefit first would be state-owned enterprises and infrastructure plays, although not all manufacturers will gain. Some will continue to suffer on account of overcapacity and commodity price volatility.

traineeinvestor 12 yrs ago

Question/poll:what is the best way to protect yourself and/or profit from current and expected economic conditions:

1. hold mostly cash and/or bonds because you expect a deflationary contraction and/or a substantial fall in the prices of other asset classes and hope that monetary obligations will be paid in full

2. hold mostly tangible real assets which yield an income of sorts (e.g. property and shares) in the hope that enough income will keep flowing through the bad times to keep you afloat

3. hold physical bullion because it's the only thing you can trust and hope that the government does not confiscate it

4. First bonus question : for #1 and #2, in which countries/currencies do you invest?

5. Second bonus question: how closely is your asset allocation aligned with your views on #1-4?

I am mostly #2 and mostly in Hong Kong with some allocation to Australia and New Zealand and a small allocation to cash/bonds/gold....for now. I probably have too much invested in Hong Kong and should move some money elsewhere.

elsdon 12 yrs ago

I'm spread across 1 & 3..

Holding cash in HKD because I expect either deflation or a de-peg/re-peg.

Holding Gold bullion (Canadian Maples) for about 25% for what I'm worth.

Gold sort of hedges against #2 (inflationary case). I'm afraid of currencies because I don't fully understand their relationships yet.

Ed 12 yrs ago

Why is it that with all this printed money the Fed doesn't simply wipe out the massive mortgage debts of underwater home owners in the US?

Instead they use it to bail out banks (no hair cuts) ... and they pass it along to banks at ZIRP ... corporations also take big chunks and sit it idle...

Yes of course there is the issue of moral hazard - why bail out home owners who got in too deep... but the Fed has already demonstrated moral hazard is not a problem by bailing out banks that screwed up...

Here's a theory as to why the Fed is doing what it is doing... https://youtu.be/_WrMWK-FJzU?si=OmQ_sAzgm-x2XvSZ

Ed 12 yrs ago

More garbage out of the MSM.... Weekly Jobless Numbers Lowest in 4 Years ... scream the headlines...

Unfortunately they forgot (purposely...) to mention one thing:

U.S. jobless claims sank to 339,000 in latest week, though data didn't include one large state. The U.S. trade deficit widened 4.1% in August.

Like ZH says "This is just getting stupid"

http://www.zerohedge.com/news/2012-10-11/data-massaging-continues-initial-claims-tumble-339k-lowest-2008-far-below-lowest-exp

Remmy 12 yrs ago

Meanwhile, European markets are up today, and US markets poised to rise today...which is lucky because I measure my performance by what the markets do (and not by what zerohedge write). :)

Remmy 12 yrs ago

Another sign China is about to bounce back?

Friday, October 12, 2012

Equity buyback plan props sagging market

State-owned enterprises have been raising their stakes in listed companies in a bid to prop up the lackluster equity market.

Among the latest beneficiaries are China Southern Airlines (1055) and China Coal (1898).

China Southern confirmed its parent company had acquired five million A shares of the carrier, while China Coal said its parent bought 2.52 million A shares and 700,000 H shares in the firm yesterday.

Meanwhile, Central Huijin Investment pledged on its website to continue buying back shares of the nation's big four banks without any time limit.

As the controlling shareholder of Industrial and Commercial Bank of China (1398), China Construction Bank (0939), Bank of China (3988) and Agricultural Bank of China (1288), Huijin made the original pledge to buy back shares starting on October 10, 2011 for one year.

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Since last October, Huijin purchased 339 million shares of AgBank, 251 million shares of BOC, 116 million shares of ICBC, and 113 million shares of CCB, for a cumulative three billion yuan (HK$3.7 billion).

As of September 30, Huijin's interests in the total issued share capital of the big four lenders ranged from 35 percent to 68 percent.

Shares of ICBC and BOC have risen for three straight days. ICBC jumped 4.3 percent yesterday while BOC climbed 2.7 percent. AgBank and CCB gained 3.1 percent and 2.6 percent respectively.

"Huijin's move is to stabilize investors' confidence in the equity market," Xinhua News Agency said. China's securities regulator also encouraged firms to repurchase their shares.

The lock-up period of increasing holdings for major shareholders - or those holding at least 30 percent of total stakes - was reduced to six months from the previous 12 months.

From September 21 to October 10, six larger state-owned enterprises spent about 1 billion yuan absorbing their own listed shares.

traineeinvestor 12 yrs ago

@ Remmy - I noted that as well. It suggests that the PRC government is propping up the share market. This is unfortunate as it means that we have to pay more for what we buy and may well be missing out on some bargains.

I'm reminded of the time the HKSAR government was propping up the HK market post-1997. Everyone was screaming "sell" and it turned out to be the best time to buy.

I'm still looking at the airlines and starting to revisit the toll roads. They've been hammered by government policies but the number of vehicles on the roads is still rising.

@ elsdon - that sounds like a lot of maple leafs! Do you have a safe deposit box? I tried to open one recently and HSBC said they didn't have any more.

@ malka - is this with HSBC premier? Malaysian Ringgit doesn't show up as one of the currency options on my internet portal?

Remmy 12 yrs ago

@ Trainee - the way I look at this is that the PRC will soon stimulate. They want to make sure that the PRC companies themselves get the max value of such pending stimulus, and what better way to do that than to encourage them to buy up some of their own shares now at rock bottom prices. Lets see - as you know I am callinf bottom for PRC now, and strong upside next 12-18 months....

ltse 12 yrs ago

"Question/poll:what is the best way to protect yourself and/or profit from current and expected economic conditions"

Good question.

The number one thing to own is cash or cash equivalent. When I say "Cash" I am refrring to the USD, and the physical note you can hold in your hands, not digits in the bank.

The second best thing to own is very short term Treasuries like T-Bills 3-6 months.

Worst things to own right now are shares, hard assets in general including gold, the RMB/Yuan (which will soon be devalued) and the AUD.

traineeinvestor 12 yrs ago

@ ltse - thanks for chipping in. We are largely at opposite ends of the investing spectrum here. Could I ask if your views are based on an expectation that we will see deflation or or is it a "flight to safety" approach? Not criticising - just trying to understand.

Ed 12 yrs ago

TI: I think the 'Donald Tsang' moment post 97 and the massive potential upside was right after Lehman... what was Citi - 20 cents?

Remmy - check your China data... there's quite a bit of analysis that says PRC cannot repeat their recent binge ... basically they built too much stuff that nobody needed and there is no return on these investments... so no appetite for more...

traineeinvestor 12 yrs ago

@ Ed I think that is partly true. There is plenty of need for things like reforrestation, water treatment and distribution projects, environmental cleanup, schools, hospitals and transportation (road, rail) that they could usefully spend money. Beijing depserately needs more avaiation capacity (I am sick of the flight delays both arrival and departure) and if all else fails, they can stimulate the consumer with good deals on cars and other items.

What they do not need are things like conference venues.

Ed 12 yrs ago

Good article from Art Cashin ... I like Art... he seems like a stand up dude... I wonder why he always has a red nose though...

Cashin Remembers Germany's Hyperinflation Birthday

When things began to disintegrate, no one dared to take away the punchbowl. They feared shutting off the monetary heroin would lead to riots, civil war, and, worst of all communism. So, realizing that what they were doing was destructive, they kept doing it out of fear that stopping would be even more destructive.

When things began to disintegrate, no one dared to take away the punchbowl. They feared shutting off the monetary heroin would lead to riots, civil war, and, worst of all communism. So, realizing that what they were doing was destructive, they kept doing it out of fear that stopping would be even more destructive.

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some…..Those to whom the system brings windfalls….become profiteers.

It is why so many, including some of the FOMC, express concern about unintended consequences of each new wave of quantitative easing.

Read the whole thing here http://www.zerohedge.com/news/2012-10-11/cashin-remembers-germanys-hyperinflation-birthday

That's the thing... no two crises are alike... but central banks are in totally uncharted waters right now... and it is impossible to predict an outcome...

Someone deep in my inner core... in my gut... I am cringing at what the Fed is doing... and this little fellow is saying Ed... Ed... this is crazy stuff dude... it's madness - can you see how mad it is... and he's saying - do you wanna be eating dog food out of a can... of course not Ed... and then he's telling me to prepare for a tsunami, super volcano, and mega hurricane - all at once...

And then unfortunately he disappears before I can ask him exactly how I am supposed to prepare

ltse 12 yrs ago

@ TI - Thanks for allowing me to explain, I spend alot less time on the forum these days.

If your repelled by the idea of holding USD, you are not alone, I used think like a goldbug and act as if hyperinflation is going to consume us, but then I knew it was wrong when every guy on the street, most newspapers talk about QE, and every average Joe in this forum (no disrespect to anyone) and even one of my friends kid told her mum to buy gold because the USD is being devalued, I knew I was in the wrong crowd.

I mean really if only investing was that easy right? just buy gold, and we all be safe.

I can understand people's resistance the idea of deflation because the idea of inflation seems so rational. Deflation is simply the opposite of inflation, which simply means when credit/debt collapses, the existing dollars become much more valuable, because there is a shortage of dollars to pay of the debt.

If your in the inflation crowd, then you ought to explain to your self the following:

- Iron Ore price had fallen $200/metric ton to $100 current or 50% from the peak

- Copper price had fallen from $4.5 to $3.80/lb current or 16% from the peak

- Oil price from $140 per barrel to $92 or 34% from the peak

- Gold price from $1900/ounce to $1771 still down 7%

- Silver price from $49 to $34 or down 31% from the peak

If we have all this rampant inflation, why are these commodity prices down by so much?

You see there always a fundamental story in the media you should ignore, in 2000 it was technology being the new economy, in 2008, it was "peak oil" driving oil to insane prices, and now with Gold, its the hyperinflation story.

One day, people are going to be amazed, I mean absolutely shocked that the USD happens to be the last man standing, and as Mark Twain says "The rumours of my death has been greatly exaggerated".

Hyperinflation remains a possibility, but only once we cross this huge huge deflationary valley, we've already had the first shot across the bow aka warning shot in 2008, and people think things are back to normal? once the huge collapse happens, thats when you use the preserved dollars to buy oil @$10 per barrel, silver at $3 an ounce and gold at $200 an ounce.

Now onto China, as to why I think the Yuan will devalue, this again is something people don't even consider, let alone think about. My view is that because China is a communist country pretending to practice capitalistic principles, the property bubble engineered by the Chinese government is on an unprecedented scales, now suppose the Chinese property bubble collapses, and the Chinese banks are short of liquidity due to bad assets on its books, ie a 5 mill RMB property is now worth 2 mill RMB, how do you suppose the Chinese government rescue the banks? they will do it by devaluing the RMB, so now the 5 mill RMB property will still be 5 mill RMB in nominal terms, but the RMB that used to buy 1.05 HKD may now only buy 0.70 cents HKD in real terms.

Similarly, with HKD, notice I recommended USD despite HKD is pegged to the USD? I am extremely concerned, when this deflationary period enters, HK Property and many banks exposed to this derivatives monster unwinding, they will need HK Govt bailout, will the govt not devalue/depeg from the USD?

When the world markets runs towards the USD, could the HKMA have enough USD reserves to maintain the peg? last time I checked it was like a puny $300 Billion USD? The HKD has a high likelyhood of being depegged to the downside.

Speaking of which, I recently took out $200,000 USD bank note cash from a local bank, you be suprised how much they tried to discourage me from withdrawing and all the questions asked.

Conclusion, deflation is coming, seriously for your own sake, just watch these videos completely, and listen to this fund manger speak, his name is Peter Campbell.

elsdon 12 yrs ago

@traineeinvestor,

Yeah I have a safety deposit box at HSBC.. Got it a while ago, probably like 8 months ago? They don't have that many, I got the big one. I'm not surprised they don't have any left.. It's kind of a small place. I'm not holding my stuff there though.. I've went with Brinks instead for all the stuff worth any money. I figure if there's ever a 'confiscation' issue I might as well hedge against that as well by using a 'private' security solution.

Ed 12 yrs ago

ltse - the first thing I am gonna do once we get this site relaunched (they are working on the last stages of the skin now - we decided we may as well to the back and front at once... so it's soon) is add a LIKE button...

Since we don't have one - here's my LIKE of your post.

I have held HKD - not a huge amount in safe boxes in HSBC - rationale was HKD is a natural hedge - HK will unpeg if the US goes to far in devaluing... I don't keep in an account because while they say up to whatever amount is insured... that's fine if your bank fails... if many fail that is a worthless policy...

My concern about staying to heavily in cash is impact of inflation - we just quoted for more Super Mondays cards the other day and the price is up nearly 25% in less than two years... so I think inflation is much more than what we are lead to believe...

So it's all about timing - central banks have been kicking the can for a few years now - i have no idea how much longer... that can really eat into the cash and that has been one reason i have favoured gold.

I hear you re: the deflationary scenario... and I think that is definitely one possible outcome here... of course I am sure you will agree nobody knows for sure what will happen...

Bernanke squeals as if he's been stuck in the butt with a red hot poker the moment deflation is mentioned. He seems to believe that inflation is the devil from hell and under no circumstances shall it be allowed to rear it's ugly head.

Benny has also stated in his research papers that he will 'dump money out of helicopters' to the masses if he has to to combat deflation (so far he's only dumping cash to his buddies in the banks).

In 08 deflation was definitely rearing it's head and Ben unleashed a hurricane of liquidity into the global economy... and that sorta worked (toxic side effects aside)

I know the numbers you are posting and I agree there is a whiff of deflation in the air... obviously Ben knows those numbers - probably why he said 'alas we will have QE indefinitely'...

So my question is this:

Being aware of Ben's opinions re: deflation... and having seen him in essence, walk the walk, when faced with deflation....

How do you not conclude that as things begin to sink further he will not simply go balls to the wall regardless of the consequences... regardless of if he is pushing on a string ...

And just hammer trillions of dollars into the economy - which surely will result in hyperinflation (it will of course result in utter global chaos).

The fact that the ECB is now saying they will print (they don't make the decision without Ben's input) seems to indicate they are committed to this course of action primarily because they fear deflation - yet they have no other options.

traineeinvestor 12 yrs ago

Question for those holding HKD in cash instead of in a bank account - will it still be honoured if the issuing bank folds? With the exception of the HKD10 note which is issued by the government, all other notes are issued by and represent claims on HSBC, SCB or BOCHK. Does this make a difference to your thinking? (I note ltse mentioned USD)

@ ltse - thanks for the detailed explanation. I actually prefer the USD to the Euro or the Yen on a long term basis. I haven't felt too much need to hold USD investments because I am paid in USD. This changes next year so maybe I should rethink. I'm agnostic towards the AUD and the NZD (they look expensive but there is a lot less money printing going on) and not sure about some of the other Asian currencies.

On currencies v other assets - I keep coming back to the fact that the USD has lost 97-98% of its value since the Fed was created in 1913. As long as the Fed exists and continues to printmoney, I worry more about inflation than deflation.

On commodities, most of them are well off their recent peak prices but many of those were short spikes (e.g. silver was only over $40 for a very brief period) and they have recovered from their post sell off lows. Commodities are volatile and marginal cost of production is generally trending up and the big producers (BHP, Rio, Vale etc) have begun cancelling projects which will underpin prices on a long term basis....maybe. I'd look at the longer term price trends for the longer term expectations rather than shorter term moves.

If the peg were attacked would USD300 billion be enough to defend it? I suspect the answer today is yes because they would be defending it from rising above the peg. If things changed as we saw a repeat of the Asian crisis, they held the line then without looking like being under pressure and this time around they have Beijing to support them if it looked like they needed help. I think the risk of the peg being broken (as opposed to voluntarily changed or scrapped) is pretty low.

elsdon 12 yrs ago

@ltse,

If you're using the 'mob mentality' factor to stay out of gold and stay in USD, imagine the # of people holding USD in their bank accounts because they don't know what to do. You're probably a factor of a few million into the majority holding USD vs holding gold..

Ed 12 yrs ago

I share all of your concerns and have similar questions TI

Re: HK bank notes... if it's not in a bank account then sure then hell it ain't gonna be guaranteed...

However I think I mentioned earlier, I think these deposit guarantees are only of any use if one or a few banks go down....

If HSBC goes down (one of the healthy banks) - then I suspect that means the whole system is going down...

I think an analogy is fire insurance - if your home burns you will collect - if every home in your country burns... you are outta luck.

Another issue with putting cash in an account - in the past there have been limits imposed on how much you can withdraw on a daily basis - I have read the fine print re: safe boxes and I have been assured that I will have access under all conditions are per the current terms (obviously the terms could be changed later...)

traineeinvestor 12 yrs ago

Ed - good point about banks having the right to change the terms. I should know - I wrote them for a few of the banks over the years. But IIRC the HKAB code of conduct requires advance notice for material changes. In any case, if all hell breaks loose, and we can only count on what we actually hold....well, I just don't see that happening.

Ed 12 yrs ago

I'd hope not to see that scenario... but in this environment... I don't rule anything out... this is printing on an epic scale - and in many of the world's biggest nations... History is littered with the carcasses of people who didn't take recognize madness...

ltse 12 yrs ago

@ Ed

Thanks for the compliment. With regards to the Bernank and the Fed. When this $700 Trillion derivatives monster unwinds, I think the Fed whatever it decides to do, they are going to be late. Just as in QE1 and 2 didn't come until after the 2008 crisis, the Fed and the Treasury are going to be late in their response in this next crisis, there is going to be a window of opportunity to buy cheap assets to get rid of those dollars.

More importantly, the Fed has limits as to what it can do, the market has more money than the central banks, when credit collapses its going to collapse quicker than the Fed can decide what to do. They simply are not and cannot bail everybody out, because the Fed is at the mercy of its bond holders, right now its has $2.9 Trillion on it balance sheet compared to an outstanding derivative obligation of $700 Trillion, its just impossible to monetize this debt, and if they did bond holders would get spooked, dumping all US Treasuries and sending interest rates to the sky.

Another factor to consider is the US Congress, whether they will allow the Fed to "go all in", politics and austerity would play an important role, I don't think Congress would allow the Fed to destroy the dollar, its simply not in the Fed's interest either to destroy the golden goose. Just consider how much bickering and trouble were involved in getting the previous US debt ceiling raised. I highly suggest Robert Prechters book "Conquer the Crash" where he addresses this argument in detail.

With regards to hoarding cash, I like give my view on this. I think holding a big portion of your saving in physical cash, is superior to holding it in the banks. Most people don't know that when you deposit say $1 mill HKD in HSBC, it now means that you own an IOU, that is the bank owes you that money, they are in no way safe keeping it for you.

Forget about about the FDIC (Federal Deposit Insurance Corp) which covers any US bank a/c up to 250K USD or the Hong Kong Deposit Protection Board for that matter, which covers HKD deposits of up to 500k HKD. My fear is that when deflation happens, this scramble for cash will overwhelm the banks, bank holidays may be declared, the last thing you want to do is line up with the masses, trying to no avail to get access to ATM cash or a branch.

HK has already had 2 notable failures before, namely Overseas Trust Bank (now known as DBS Hong Kong) and Wing On Bank (now known as Dah Sing Bank)

http://en.wikipedia.org/wiki/Wing_On_Bank#Collapse

http://en.wikipedia.org/wiki/Overseas_Trust_Bank

I am mostly concerned about HSBC in its derivatives exposure, if there is a bank run of this magnitude, HKD could be devalued to save the despositors money, and the bank. But at a lowered valued HKD.

Conclusion, nevermind trying to make money in this environment, if you could avoid deflation, when 99% of the people around you have lost money, than relatively you've made a huge gain in purchasing power especially considering how much assets prices has fallen.

Again as Mark Twains says "I am not so much concern on the return ON my capital, as I am on the return OF my capital", right now the play is defensive. The Treasury market with 10 yrs yielding 1.66% is saying the same thing, these are soverign funds and ultra high networth individuals, they're definitely not stupid. I mean if they are willing to hold Treasuries below the rate of inflation, then the only conclusion is they are concerned only about capital preservation, what are they afraid of? in one word - DEFLATION or DEFAULT.

What they lose to inflation right now will be more than made up for in capital gains when defaults happen, sending bond prices much much higher.

If inflation was such a threat, people will get rid of dollars, why would they hold it at negative yield?? again contrary to popular opinion, Treasuries right now are NOT in a bubble. Just consider, what if the Treasury market is right?

Again whoever can conquer this crash, is going to have a buying opportunity of a life time!

@elsdon

I hope the above has address your question as well, if you read back on my earlier post, I said holding USD cash in hand, not in the bank, so alot of people holding USD in US banks, are not going to have them available in the event of a bank run.

Remember out of all the USD debt obligations, only 5% of all USD available exist in physical cash, when this scramble for dollars happens, there is not enough available.

Ed 12 yrs ago

That makes a huge amount of sense... I agree - although Ben says he will fling money from helicopters... at some point he will see that would be futile ...

This is excellent:

"The Treasury market with 10 yrs yielding 1.66% is saying the same thing, these are soverign funds and ultra high networth individuals, they're definitely not stupid. I mean if they are willing to hold Treasuries below the rate of inflation, then the only conclusion is they are concerned only about capital preservation, what are they afraid of? in one word - DEFLATION or DEFAULT.

What they lose to inflation right now will be more than made up for in capital gains when defaults happen, sending bond prices much much higher."

Note to Self: convert some HKD cash into USD as another layer of hedge...

Agree - do NOT hold cash in a bank account - interest rate is 0.00000001 so there is nothing lost...

Ed 12 yrs ago

ltse - I was thinking further about this while careening back down the mountain trying to outrun the rabid barking dogs a bit earlier...

What happens when 'the last man standing' i.e. the US and the USD topples?

It's not as if the US is exactly a bastion of sanity and stability in world of turbulence.... how can we be certain the USD in it's current form or any form - will still be in use?

A good friend of mine headed the bond division of a major bank in Asia for years put it this way during the Lehman crisis 'if a major sovereign defaults expect....'a mad max scenario'...

I don't think he meant that literally - I think he meant that there would be a certain degree of chaos... no doubt rioting... possibly wars... basically a very bad situation that cannot be predicted.

We are getting a taste of that now aren't we - endless unrest in the middle east triggered by high food prices and high unemployment... likewise in the PIIGS... and of course the global economy is not improving rather it is worsening... so is this just the tip of the iceberg?

Might we be left with no man standing at some point? And fists full of worthless dollars?

Just throwing this out there - I am still going to move some HKD to USD because I am still going to keep a chunk of change in cash ... so it may as well be USD.

traineeinvestor 12 yrs ago

@ ltse - what will happen to your portfolio if we continue to experience inflation (even at the mild levels of the last few years) for some time?

@ Ed - at what point does flinging money from helicopters become futile? In a deflationary scenario, he can keep that up indefinitely because people will want the money/cash. If things get really bad, he can run the physical printing presses. It's only when we get high inflation and/or the value of the USD breaks down that flinging money around fails to have any useful effect.

Put differently, what I am trying to understand is how we can have both deflation and a time when issuing more money is useless at the same time? The only case that I can think of where this could happen is if we have a complete failure of the banking system as we know it. I just don't see this happening - in spite of the many failures (some very substantial) since the current crisis began, small savers have not lost out and the banking system has continued to function. Quite frankly, such a scenario looks pretty unlikely to me.

Over a 50+ year time horizon (which is how long our savings may have to last), I worry about inflation far more than I do about deflation. If we get deflation, my portfolio will take a hit (although the size of the potehtial damage will reduce over time) but I will get by on anything short of a complete collapse of the banking system.

Ed 12 yrs ago

TI: I agree - this could go on for years... or maybe not... that's why I am not changing my gold position... what I will do is shift some cash into USD... impossible to know the outcomes here so I have been hedging in various ways... this will be one other way.

I think this answers the second question:

"A liquidity trap is a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to lower interest rates and hence fail to stimulate economic growth. A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war. Signature characteristics of a liquidity trap are short-term interest rates that are near zero and fluctuations in the monetary base that fail to translate into fluctuations in general price levels"

One might argue we are well on our way to such a scenario... the impact of each round of QE seems to be less and less... again - timing is impossible.

Remmy 12 yrs ago

I'm taking a break for a while, but my "gift" for you guys here is this following list of stocks that I have carefully picked. All have risen since I posted 6 days ago, and I am saying it again, I expect as a portfolio, that these stocks will double over the next 12-18 months and based on my reasearch I have concluded are the best China stocks to buy:

189 DONGYUE GROUP

317 GUANGZHOU SHIPYARD INTL

633 CHINA ALL ACCESS HOLDINGS

710 VARITRONIX INTERNATIONAL LTD

904 CHINA GREEN (HOLDINGS) LTD

921 HISENSE KELON ELEC HLD-H

1863 SIJIA GROUP CO

3838 CHINA STARCH HOLDINGS LTD

8045 JIANGSU NANDASOFT TECHNOLOGY

We have China stimulus on its way. We have the 10 year Chinese political transition concluded in the next month or so. We have the US market recovering, and yes, believe it or not Europe has bottomed out, with lots of pent up demand about to positively affect China.

We have a number of early indicators showing China stocks are about to rise.

For example:

http://buzz.money.cnn.com/2012/10/11/coal-china-stocks/

We have the Chinese government "hinting" to Chinese companies that now would be a good time to buy their stocks back.

We have the IMF forecasting solid growth for China this year at over 8%. Incredible for a country the size of China.

http://e.nikkei.com/e/fr/tnks/Nni20121011D1110A15.htm

http://www.thenews.com.pk/Todays-News-3-137196-Briefs

I could go on - the information is out there for people - I suggest you go for it. For anyone who is holding cash, now is the time to deploy it. It sounds so simple - buy low, sell high. Now things are VERY LOW in China, and to me its a definate time to buy.

Two other stocks I forgot to mention last time is 300 KUNMING MACHINE. Looks very cheap to me, and is poised to rise as soon as infrastructure spending picks up (which is an obvious stimulus area). Secondly 8086 ePro Ltd. I believe the Chinese Government will heavily support certain IT companies, and ePro will be a big beneficiary of this.

OffThePeak 12 yrs ago

"When this $700 Trillion derivatives monster unwinds, I think the Fed whatever it decides to do, they are going to be late"

SORRY - But I don't get comments like that

I used to run a global derivatives business for one of the big banks - and the comment seems uninformed. Yet you often see comments like that in the global press.

You do understand that nearly all these derivatives contracts are CONTRACTS FOR DIFFERENCES that amortize automatically. ??

What that means is that they may have huge face amounts (adding up to the $700 Trillion, or whatever), but they individually may settle for zero if there is no price change/ Thus, the entire $700 Trillion may melt away like a snowball with no impact on the markets, if they stay quiet.

This enormously important fact never gets mentioned in the press articles.

Why?

Either people are scaremonging, or the articles are written by uninformed reporters.

It is shameful reportage

THE DERIVATIVES SNOWBALL IS NOT DANGEROUS, if it does not roll

ltse 12 yrs ago

@ OTP

From the Bank of International Settlements, Notional Amounts of derivatives Outstanding is anywhere between $600T- $700T.

http://www.bis.org/statistics/otcder/dt1920a.pdf

Under normal circumstances, business can be conducted as usual right? options can be rolled once they expire, or if equity or futures positions are hedged, or sufficient collateral are in place, then all should be ok right?

This is akin to saying, so long as people can make their mortgage payments and interest rate stays low, subprime loans are fine. The fact is these derivatives contracts are highly leveraged instruments, with gearing ratio as high as 100-1.

If you recall the example of LTCM, Long Term Capital Management, this is a classic example of how things can turn sour so quickly. At the beginning of 1998, the firm had equity of $4.72 billion and had borrowed over $124.5 billion with assets of around $129 billion, for a debit to equity ratio of over 25 to 1.

LTCM trading strategy is fixed income arbitrage trading 30 yr government bonds taking advantage of the spreads, it just happened they were doing this on the Russian bond market. By August 1998, Russia had its own financial crisis, the Russian government had devalued the ruble and defaulted on its debt. So all the long bond positions held were worth nothing, their losses in this trade snowed balled as they unwind their other positions to raise cash for margin.

http://prmia.org/pdf/Case_Studies/Long_Term_Capital_Management_Shory_version_April_2009.pdf

And according to this study, their cash based quickly dwindled to a mere $1 billion, and

"The danger was a single default by LTCM would trigger crossdefault clauses in its’ ISDA master agreements precipitating a mass close‐out in the over‐the‐counter derivatives markets."

Conclusion, how much more at risk are we today of a soverign default? the sums and exposure are much bigger, this can quickly turn into a wild fire.

OffThePeak 12 yrs ago

The aggregate Face Amount of Derivatives transacted is $600-700 Trillion, not Billion, but most people do not understand what that means.

Some have said that it is like a Mortgage Book of $700 Trillion, which is "fine as long as interest payments are made on time", but it is nothing like that at all - Very different in terms of the way that money is at risk. A Face Amount of Derivatives Exposure, is nothing like the Amount of a Loan exposure..

Here's why:

With a mortgage loan, money is paid by the bank to the lender at the inception, and then the borrower has to pay back the loan with interest. So a Loan exposure is the actual amount at risk, which will have to be written off, if the borrower defaults, In the world of Derivatives the exposures are purely notional, and they are used to calculate the actual amounts of expoure based upon future price moves, in the way that A and B are needed, tio calculate the difference "C", in the calculation: A - B = C, where A is a known Face amount, and B will depend upon a future price move. If there is no price move, then C will be zero, and nothing will be paid. These sorts of exposures are called in the UK: "Contracts for Differences." The reason that they are reported as the Notional Amount "A:. is that such Face amount is known, but trhe actual amount to be paid at maturity will normally be far. far smaller, even smaller. But since that future is unknown, the normal practice is to report the large Notional Face amount/ So thinking it is similar to a mortgage loan exposure is like comparing Apples and Oranges, they are very different things. But lazy reporters will not make the effort to explain why and how they are different.

Explaining this another way: normnally no money at all is paid at the inception, and then at maturity, money will only be paid at maturity if the price moves away from the agreed settlement price. If the price of the underlying derivative closes exactly at the contracted price, no money is due at maturity, since there is no "difference" amount. For a particular derivative contract with no pricer change, the thing would be created with no money changing hands and melt away to zero, with no money changing hands. I think of it as a snowball that has not rolled, since there is no risk exposure at maturity, unless the price moves away from the initial contracted price..

Here's an example:

Bank A enters a 1-year fixed/floating Libor interest rate derivative on a Notional $100 Million Loan, at a contract fixed rate of 1%. If Libor at settlement is 1%, then the settlement amount is zero. If it is 2%, the bank paying the floating amount in the derivative, will pay the 1% difference, ie $1 million, to the bank paying the fixed 1%. So you can easily see in this example, that the likely settlement amount is a tiny, tiny fraction of the $100 million face amount.

The other point is that these transactions are done back and forth between the same small handful of banks. And so the real Net Exposure of risk between the banks is futher reduced by the fact that the real risk exposure between two banks, A and B, is the net amount of the differences due. So if A owes B $10 Billion of Net Difference amounts, and B owes A $9 Billion of Net Diffference, the real amount at risk is only the Net Amount of $1 Billion.

These numbers get very, very big, because they are not so easy to extinquish until maturity. If A buys a loan or investment from a client, and then sells it on to B at a later date, the exposure gets extinquished. But Bank A may create an Over-the-counter derivatives exposure with a client, and then sells that exposure (or something similar) on to Bank B, these are over-the-counter exposures which stay on their books until maturity, then do not get extinguished if there is no clearing arrangement in place. So Bank A will carry both sides of that trade on its books and report it within its total derivatives exposure, even though the trading risk may have been fully hedged.

Does this make sense?

If you are struggling with it. The point you need to remember is that a trillion dollar expsoure may boil down to only a few billion of mark to market exposure within a group of banks. This is why the bankruptcy of Lehmans in 2008 did not trigger a meltdown of the whole banking system. Fears were projected to a huge level, but the reality of risk was much smaller.

hkxxxpat 12 yrs ago

OTP: thanks, I do struggle with the reality of this topic, so I do appreciate an insider view. So you are saying AIG's demise wasn't about to bring the system down and people were concerned for no real reason? And also, were you hoarding cash/gold at that time?

Personally I freaked, especially when the rumour was that senior bankers were taking chunks of cash out from HK banks - it seemed like those who knew got to the head of the queue, the equivalent, to me, of the captain and crew taking the first (and maybe only) Titanic lifeboat.

OffThePeak 12 yrs ago

I would not use those words

At one early stage, I nearly went to work for AIG, but it wasn't a good fit. I am not a rapacious liar.

AIG had a culture of greed, and a very powerful incentive structure, and weak risk controls, so their books wound up loaded with risk. The Bernanke was upset when he saw that mess because if it had been part of the banking system, then the losses would have been caught earlier, since bank regulators would have seen it.

The huge mistake with AIG was te government guranteeing 100% of the exposures. They should have guaranteed 80% or 90%, in return for an immediate 20% or 10% haircut. IMHO, it is never a smart move to guarantee 100% in a case like that. Those who take on bad exposures should suffer some loss. But Hank Paulsen had his friiends at Goldman to protect, which was why he got the job.

OffThePeak 12 yrs ago

(From a similar discussion on another thread):

B----Wong, on 14 October 2012 - said:

====

Thanks.

I think I understand now. The real net amounts at risk are much smaller. But they report the larger National Face Amounts simply because those numbers are known and easier to calculate.

Do they report it like that to generate fear?

-- UNQUOTE ---

That's right: Huge numbers get reported, because more realistic, smaller numbers are unknowable

It does generate needless fear, because reporters are too lazy to explain the complexity.

I have done my best in a few words, but not everyone will get it - The big numbers will still get used, as if they were meaningful, even on GEI

HKLEV 12 yrs ago

The whole way derivatives are looked at by the mainstreammedia and politicians is nonsensical. it is the same as warning about getting caught in the longest possible traffic jam in the states. there were some 250mio passenger vehicles in 2009, each takes about 10 meters of road, meaning that tomorrow each us citizen taking a car risks getting caught in a 2.5million kilometre traffic jam or about 62 times the circumference of the world. based on that fact who would live in the us?

just as calculating the risk of traffic jams, ultimately the risks are much more complicated, diverse and there is no indisputable way of measuring or predicting them, other than overly simplified and misleading ways such as above. and yet, like vehicles, derivatives can still be quite useful if properly and carefully used, and still devestating if drivers are out of control, roads are not maintained and planning officials are not independent from vehicle manufacturers and road builders.

ltse 12 yrs ago

That example of a simple interest rate swap is not the only type of derivative instrument out there. Even in the case of the simple interest rate swap example you given, if it were done between cross currencies, there is the risk of capital loss due to currency fluctuations.

But here, let me give you an example of an equity swap, I used to book heaps of these on the trading desk. Suppose Party A enters into an equity swaps agreement with Party B, Party A pays x % HIBOR on 100 million HKD to Party B (this is called funding cost), in return Party B delivers the performance/exposure of the HSI to the same notional amount in contract terms, ie 100 million HKD in the same number of futures contract on HSI equivalent.

Party A would have to put up say 10% collateral ie 10 mill HKD as insurance for any adverse move of the HSI against its long position on the HSI. Now the real exposure is 100 Mill HKD, but they've only put down 10 million ie leveraged 1:10, all its takes now is for the HSI to move 10% down for Party A to lose 100% of its capital, ie collateral. But what if the HSI moves 20% against party A, so now you owe 20 mill or 200% loss on your collateral. Under normal circumstances of course, they will hedge their position by having another swap agreement in place, ie Party C.

Meaning, Party A will offset its risk, by delivering to Party C the performance on the HSI.

So get this Party A receives performance of HSI from Party B, and then in turn passing it on to Party C, why do they do this? because if they could capture favourable difference in the hibor rate or by other means they can charge a higher cost of funding from Party C, they can still make money, its called arbitrage trading. Party A's futures position risk is zero, Party A now makes money purely on the funding legs, ie difference between what its pays Party B, and what it receives from Party C, so long as C is greater than B, it makes a profit regardless of the equity movement, especially given the large notional value involved.

So the issue then is this, Party C has its own hedging in place as well with a Party D, all it takes is just for 1 major event to go wrong, one party to default, then all these "hedges" will be useless, somebody now has to absorb the loss on equity, so now we have a domino effect. Where D can't pay C and C can't Pay A therefore A can't pay B etc etc. Soverign defaults are a likely trigger, over leveraged hedge funds can also be a catalyst.

I do not trust these banks, banks like HSBC engaged in these type of trading activities is putting your financial well being at risk. Also, I cannot believe I am typng all this on a weekend!

Remmy 12 yrs ago

Re my post a few weeks ago re 921 HISENSE KELON ELEC HLD-H...

I hope some of you bought. Take a look at the news and stock price today. We can expect a lot more type o thing of this over the next 18 months....

Remmy 12 yrs ago

From today's SCMP, more welcome news from China...

China’s annual consumer price inflation ticked down to 1.9 per cent in September from August’s 2.0 per cent, official data showed on Monday, leaving plenty of room for further policy easing to shore up growth.

Analysts say consumer inflation running well below the 4 per cent annual target set by the government leaves room for policymakers do more to support the economy, which Q3 data due on Oct. 18 is likely to confirm has suffered a seventh successively slower quarter of annual growth.

“This is little surprise in the inflation data. It’s mainly caused by the drop in food costs,” said Zhou Hao, an economist at ANZ Bank in Shanghai. “On monetary policy, we can only say that there is a little more room for further policy easing. Exports have showed signs of stabilisation, but the economy still needs some policy loosening.”

The National Bureau of Statistics said China’s producer price index in September dropped 3.6 per cent from a year earlier, which was also in line with forecasts.

It marked the seventh straight month of producer price deflation, hurting corporate profits and underpinning expectations that consumer inflation will stay tame in the coming months.

The central bank is widely expected to ease policy further, having cut interest rates twice since June and trimmed banks’ required reserves three times since November.

Easing consumer prices and outright falls in factory gate prices are signs that the world’s second-biggest economy is struggling to escape the tug of a global slowdown that has set China on course for its weakest full year of growth since 1999.

Yi Gang, deputy governor of the People’s Bank of China, said in a speech at last week’s annual meeting of the International Monetary Fund that he expected inflation to be about 2.7 per cent for the full year, with growth around 7.8 per cent.

But he said signs of resurgence in property prices, which the government has fought for more than two years to rein in, posed a dilemma for policymakers.

Real estate directly affects about 40 different business sectors in China and the government-induced slowdown is widely regarded by analysts as putting an extra brake on the economy.

.

traineeinvestor 12 yrs ago

@ Remmy - I didn't buy, but thanks for posting your ideas anyway. Maybe next time I should take a little more risk.

Remmy 12 yrs ago

Trainee - I thinks its still very early days yet. I invest with a 12-18m horizon, not day to day.

PS - was it you who recently asked about PRC sports clothing companies? I see last week a whole bunch of companies in this sector were upgraded. Again, its early days. Plenty of time to buy in over the next few months.

traineeinvestor 12 yrs ago

@ Remmy

I'll have another look. I'll do the occasional short term trade, but most of my investments are for the longer term.

Yes. I purchased a small holding in Xtep some time ago (at much higher prices) and kept it through the slump in share price. This was bit foolish, but it kept my attention on the sector and a purchased some more in late September at $2.79 (including costs). The balance sheet look good with lots of net cash, it generated a positive operating cash flow, has a good operating margin etc.

I looked at Peak Sport (1968), Anta (2020), Li Ning (2331), Xtep (1368) and 361 Degrees (1361) and could have made a case to buy all or any of them, but stuck to Xtep as much due to prior familiarity as anything else.

HKLEV 12 yrs ago

@Itse

I think what you are referring to is known as counterparty credit risk which holds for any derivative. I.e. when you were on the trading desk you (or the systems you were using) would regularly check for each counterparty what the loss(replacement value) would be if they would not pay future obligations. In the case of derivatives this takes into account potential future changes in markets.

In case the exposure becomes too large trading desks are asked to reduce positions, buy CDS protection in addition the counterparty must post additional collateral according to pre-agreed rules.

This is often suggested as to what blew up AIG: although AIG apparantly had the cash to come through on its collateral obligations, it was stuck in many parts of the complex organisation and could not be readily made available. I.e. AIG was apparantly still solvent, just did not have the liquidity, and appears not to have understood the business it was in and how to manage the risks involved.

Banks will typically do stress tests to ensure in case of these types of scenarios they still have sufficient liquidity available.

Am not suggesting everything banks do is right, but there is a lot of stuff out there that is not well understood and leads to a lot of people jumping to conclusions.

There are derivatives that are absolutely WMD in the wrong hands (in my vehicle analogy: Oil tankers), and derivatives that are useful, frequently used and do not typically hit the headlines if they are well used (eg. cars). Again using my vehicle analogy the problem is that when looking at preventing oiltankers from being hijacked, many people dont differentiate with cars, which also have petrol tanks, being used by Mums and Dads for the school run.

Ed 12 yrs ago

I think someone had posted some propaganda about how great things were in China...

Here's another reason that we need to read deeply and from a wide variety of sources...

Because there are a lot of misleading articles being printed which I suppose are intended to inspire CONfidence...

As we can see - the stuff about China roaring back is absolute bs...

This is ominous....

To Zhou Dewen, head of an industry lobbying group in Wenzhou, the famously entrepreneurial city in eastern China, the situation is “already worse than 2008”. “The difficulties are bigger and they are far more widespread.”

Shannon O’Callaghan, an analyst at Nomura, said: “At the start of the year most US companies were saying they thought China would get better in the second half. But by the summer, it was clear it was not getting better. If anything, it’s getting worse.”

Economists say the seemingly buoyant trade numbers released on Saturday were skewed by seasonal factors such as the rush to get Christmas shipments out before week-long national holidays in early October.

David Ou, sales manager of Mr. Big Furniture Company, an office furniture supplier in Foshan, two hours from Hong Kong, says orders from Europe were three to five times higher last year.

Shenzhen once had “factories, factories, factories as far as the eye could see”, says Brian Moore, its managing director in the Asia Pacific region. Now, many have closed.

http://www.cnbc.com/id/49410960

Remmy 12 yrs ago

LOL at the "ominous" CNBC article on Wenzhou. The reporter is somewhat late with his report.

I picked up on a slowdown in Wenzhou back in early 2010, (which is when I sold the China stocks I last had). Part of this slowdown is deliberate by the way, intended by the Govt.

I have said it before, we are close to, if not right now (and I really mean thie very month, perhaps even this week) for China stocks.

Ed 12 yrs ago

I know factory operators who say that demand has never reflated after Lehman.... their factories have been running well under capacity for 4 years now...

The China economy has for the most part been running on building bridges, towns, apartments and other things that there is no end demand for... essentially they have been building millions of 'bridges to nowhere' simply to keep GDP numbers up.

And from what I am reading they cannot repeat that magic trick because a huge proportion of these 'investments' are returning big fat 0's.

So now we have capital investment plunging - and exports plunging. I bet there is a great deal of hand wringing going on in Beijing.

Remmy 12 yrs ago

Ed, you are not the only one who knows that capital was overdeployed in some areas in some parts of China. Everyone knows this, and indeed the markets know it, and this is therefore priced into current stock prices. What is happening now is that capital and investment is being redeployed to other areas. Of course there will still be infrasructure spending in China, on a MASSIVE scale, over the next decade. But more interestingly to me are the newer "value add" industries China is trying to encourage, beyond just low cost, low quality production. You will see things pick up shortly.

PS - re my stocks selection for China, yesterday marked the start of what I hope will be a nice trend:

189 DONGYUE GROUP

317 GUANGZHOU SHIPYARD INTL

633 CHINA ALL ACCESS HOLDINGS - up 9.76%

710 VARITRONIX INTERNATIONAL LTD

904 CHINA GREEN (HOLDINGS) LTD - up 10.16%

921 HISENSE KELON ELEC HLD-H - up 17.31%

1863 SIJIA GROUP CO

3838 CHINA STARCH HOLDINGS LTD

8045 JIANGSU NANDASOFT TECHNOLOGY - up 11.76%

Remmy 12 yrs ago

A few articles from todays news:

Bernanke defends Fed's policy

http://money.cnn.com/2012/10/15/news/economy/bernanke-fed-criticism/index.html

See also the market wants QE4:

http://buzz.money.cnn.com/2012/10/02/qe4-fed/

More positive news for China:

http://money.cnn.com/galleries/2012/news/economy/1204/gallery.us-companies-in-china/

http://money.cnn.com/galleries/2012/markets/1204/gallery.china-hottest-companies/

Ed 12 yrs ago

Remmy - was this meant to disprove the fact that Chinese exports are plunging and factories collapsing

http://money.cnn.com/galleries/2012/markets/1204/gallery.china-hottest-companies/

Because it doesn't

China looks to be hard landing - big time: http://www.cnbc.com/id/49410960

A most excellent article re: Gold http://www.economist.com/node/21564566

traineeinvestor 12 yrs ago

China's exports and imports have both climbed in the first seven months of 2012: http://english.mofcom.gov.cn/aarticle/statistic/BriefStatistics/201208/20120808303131.html

US exports and imports have fallen slightly in 2012 but both are still well up since the begining of 2010: http://www.census.gov/indicator/www/ustrade.html

EU exports have recovered from the 2009 slump and may be resuming an uptrend: http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&plugin=1&language=en&pcode=tec00110

If you scroll to the bottom of the table you will also see that Japan's exports have also been growing over the last few years.

The issue isn't that international trade is slowing - unless all the data from multiple countries is fabricated international trade has well recovered from the brief 2009 slump. The issues are a combination of overcapacity in some industries, changing consumer preferences and competition.

ltse 12 yrs ago

@ HKLEV

"I think what you are referring to is known as counterparty credit risk which holds for any derivative. I.e. when you were on the trading desk you (or the systems you were using) would regularly check for each counterparty what the loss(replacement value) would be..In case the exposure becomes too large trading desks are asked to reduce positions, buy CDS protection"

Thats right, that "regular check" your referring to is called "mark to market" ie marking asset prices to market movements and therefore the P/L or profit and loss for any particular instrument.

But rather than your oil tanker analogy, I would describe derivatives as like a building structure, the surface area on the ground is pretty much constant, comparative to the finite resources and good and services in the economy. The notional derivatives amounts however, is analogous to the height of the building, now a banker can use their mathematical modelling and say to you so long as gravity remains constant, wind speeds below x/mph, no planes in the flight path, the building can be constructed ever higher for ever. But any engineer can tell you the high of the building can't scale towards the skies forever, at some point in time the base area becomes a negligible portion of the building relative to the height and a slight sway by the winds can topple the entire structure.

The bankers and their models are completely out of touch with reality, and as Raoul Paul states in his presentation "The End Game":

"The real problem is not government debt per se. The real problem is that the $70 trillion in G10 debt is the collateral for $700 trillion in derivatives..Yes that equates to 1200% of global GDP, and it rest on very very weak foundations."

This is why I am holding physical cash, I am USD bullish, would not touch stocks with a 10 foot pole, a margin call can come anytime.

As Raoul Paul states, "All that is left is the Dollar and Gold." Most ppl cannot comprehend how the dollar can be bullish given all the QE, the simple fact is that because given its a reserve currency, hence most debts of the world along with derivatives are priced in USD, thats what ppl would need when the margin call comes knocking, they will sell gold, silver, stocks and everything else to raise cash.

http://www.scribd.com/doc/95493792/The-End-Game

Ed 12 yrs ago

TI: surely you don't make your decisions based on past performance?

Surely it makes more sense to try to anticipate what is coming vs looking back...

And surely you dig deeper than the headlines before coming to conclusions...

From the Financial Times:

Economists say the seemingly buoyant trade numbers released on Saturday were skewed by seasonal factors such as the rush to get Christmas shipments out before week-long national holidays in early October.

To Zhou Dewen, head of an industry lobbying group in Wenzhou, the famously entrepreneurial city in eastern China, the situation is “already worse than 2008.” “The difficulties are bigger and they are far more widespread.”

As for the EU and Japan... both are basket cases... both are worsening... it would take a brave contrarian to bet the house on improving situations in either of those places in 2013...

China was the last growth driver - and it is clearly faltering - if this continues, the global economy is all going to hell in a hand basket.

traineeinvestor 12 yrs ago

@ Ed - I like to look at as many view points as possible before I decide how to invest my meagre resources. I specifically try very hard to find points which challenge whatever instinctive views or wishes I might hold. Looking beyond the attention seeking emotive headlines at the raw data it is pretty clear that, at least up until July this year, world trade has been growing across all the major trading blocks. That is a matter of cold hard fact (unless you want to claim that there is a global conspiracy by many countries to lie about trade data).

Looking forward is different from looking backwards. Historic data is only the starting point (with due care to be taken to avoid anchoring etc). Based on the recent US retail sales data + the jobs report + the improvements in many sectors of the US housing market, it's pretty easy to conclude that US retail spending is more likely to hold up or improve than decline on a seasonally adjusted basis in the next few months. Sure, this could be wrong, but it would be very surprising if any decline was at all significant in that time period.

Japan is a bit harder read and I didn't come to a forward looking guess for the rest of the year.

The EU is in serious trouble and I expect a noticable fall in imports (or at least a sharp falloff in the rate of growth at best) to start showing in the stats at some point in the near future. EU exports will likely fare better although I worry about about the slowdown in the all important auto sector and a few other things.

It's all guess work, but overall I don't believe that international trade will "collapse" as some people claim. I don't expect any kind of golden age either.

The point of all this is not to bet on conditions improving - I remain seriously worried about deficits, unsustainable entitlement programmes, higher taxes and a whole host of other factors - or even that we wont see a recession in parts of the world. Overall there is more to worry about than to celebrate.

The point of looking at this stuff is to form a view on whether or not assets are appropriately priced. I have believed for some time that HK/PRC share prices have been priced to reflect much worse economic and monetary conditions than I believe exist today or can be expected in the near term future, hence I have kept my properties and have been loading up on shares that I regard as "cheap". It's been a good year so far.

Ed 12 yrs ago

TI: I posted the article as a heads up to those who might have read that bogus headline over the weekend about how Chinese exports were absolutely awesome... and made investment decisions based on that...

Clearly that commentary was totally misleading - as is much of the commentary we see in the MSM... they are attempting to build CONfidence in the markets so people will spend and invest...

What I take issue with - is various attempts above to claim China exports are just rockin - when very obviously they are not... and there are huge headwinds coming this way.

There is a huge danger when media play this game - and we join by posting what are clearly misleading articles...

I recall an article in the Globe and Mail about some months ago about the crisis in Spain. Some poor fellow had poured his life savings into a bank that was pretty much insolvent and if you looked more deeply, you'd see they would need of additional bailouts.

The media printed misleading info - that he read - that said Spaniards should see this as a buying opportunity and invest in this bank.

Of course within months the bailouts came - and buddy had lost his life savings.

traineeinvestor 12 yrs ago

@ Ed - Agree completely about the headlines and media spin in general. Both good and bad - some of the links on Real Clear Markets (a good aggregator which covers a variety of view points) are quite entertaining. You can pretty much predict how different writers/publications are going to spin each piece of news.

We really have to look behind the journalistic babble at the real numbers and do our own thinking.

Not to say that there aren't a lot of good journalists and many market gurus worth listening to but it takes a while to figure out who is worth following and who should be ignored. I have a particular distrust of claims which are only suported by anecdotal stories. The links I posted above are all from official sources.

My point about China exports is not that they are "rockin'" but that claims that China's export markets are collapsing are exaggerated. Sure, I could be wrong but my general belief is that the market is being unduely pesimistic.

Lots of horror stories about people losing money. I know some people at Bear Sterns who had ridiculous proportions of their personal wealth in the company's stock. I know people who lost a big chunk of their life's savings in the Asian crisis or who bet bog on accumulators or mini-bonds before it all fell apart in 2008. I've seen enough people lose too much money to be very cautious in my investments. I may not have made as much money as I could have by being more aggressive - but I sleep well at night.

Ed 12 yrs ago

Indeed.

ltse 12 yrs ago

@ TI

Just wondering what are your thoughts on China? why are you into Chinese stocks? to get yield or real capital gain? only asking as I think China is a disaster to put it lightly.

http://www.businessinsider.com/chinas-end-gamethe-dark-side-of-a-great-deleveraging-2012-7

traineeinvestor 12 yrs ago

@ ltse

Fair question. Intellectually, I know that total real return (after expenses) and risk are what matters. I tend to have a preference for companies which either (i) have strong balance sheets or (ii) very defensive earnings. I like the sound of dividends hitting the bank account but don't insist on it.

An example of the former is Sinotrans Shipping (368) which had net cash greater than its market cap (based on latest published accounts). Shipping may be in a downturn, but when you are effectively getting the ships for free, it's a risk I was willing to take. Beijing Capital Airport (694) is an example of the latter. It does have a lot of debt but the earnings are defensive and growing. Obviously, I get some wrong. I am still sitting on a modest loss on Xtep (1368) and have lost badly on few positions (Sino Oil & Gas, China VTM, VODone and Specialty Fashion (Aust) being the worst). In a sense I have been lucky in that the losses have almost all been on relatively small positions. The larger investments have done much better. I also spread my investments around a fair bit - diversification will not make me rich but it reduces the chances of being poor.

As an aside, as I have got nearer to retirement I am begining to shy away from small cap and illiquid stocks.

On China - I really have to question any article which uses so many emotive words but, getting past that, if China is so over leveraged how come (i) so many listed PRC companies have so little debt (many have net cash) (ii) how come China's savings rate remains so high (iii) how come domestic consumption in China is still rising (bearing in mind that access to consumer credit through banks is still quite restricted so a much higher precentage of the spending is made using cash than in developed markets) and (iv) how come so many of China's rising tide of wealthy people are able to buy expensive assets outside China?

The answer is unlikely to be residential real estate given the lending restrictions in place (although I couldn't find any hard data on point so please feel free to correct me). Local/Provincial governments are still a major problem (seriously over borrowed) and anecdotally there are plenty of highly leveraged wannabe tycoons (again I couldn't find hard data) but I am struggling to find evidence to support a proposition that either the private sector (listed companies) or consumers have a leverage problem. This gives me some confidence.

In terms of leverage, China's banks have expanded their loan books at a very rapid pace for several years now. A possible indication of a credit bubble? But the numbers don't look nearly so bad when compared to GDP growth over the same time period. I expect that there will be losses that need to be provided for and between the slowdown and Basel III, more capital is probably required.

I'm also aware of the fact that China has huge capacity for further stimulus measures should it wish to and, whatever we think of QE etc, selected asset prices around the world have picked up following US and European stimulus measures.

China has issues, but it is premature to call it a "disaster". I hope I'm right. If I'm wrong, I hope my portfolio selection will prove to be at least somewhat defensive.

ltse 12 yrs ago

@ TI

I am not invested in China and have no idea about chinese stocks, so any comments I make are from an outsiders point of view. I am involved in reading about China only because I am an Australian and Australian firms are predominatey miners and commodities, so what happens in China impacts business in Australia.

Its been acknowledged for a while that the chinese driven commodities boom is over, chinese imports are falling, firms like Fortesque's metals and BHP are obvious shorts. Regarding your points on PRC firms have so little debt, again I don't know if thats true, but I can turn this argument around and ask, why then are they not investing with it? could it be there is no sufficient demand to justify taking that risk?

Same goes with domestic consumption in China increasing? again any data to confirm this would be great, but I can turn this argument around and ask, if that is true, why is the government lowering interest rates to stimulate domestic consumption? shouldn't they be raising them to tame inflation? and why are they lowering bank reserve ratios to stimulate lending?

Onto the savings rate, yes its true China has a high savings rate, just like the Japanese, we are a nation of savers. Problem is, the government is expanding its balance sheets by borrowing money from its own citizens and spending in on development of non productive capacities such as real estate, and roads and bridges, bringing the entire country further into debt.

I like to read the work by Andy Xie, former chief economist of MS, a China analyst and a contrarian whose negatives calls on China has attracted critiscism and attack from Chinese officials. He is ultra bearish on the Australian dollar, thinks it will go back to 60 cents US, and negative on Chinese economy calling it's stock market "a giant ponzi". Which is not far fetched because when you have an entire economy where the firms and banks are all state owned, which means free market principles does not apply and profit is not the main motive, its economy therefore does not rest on solid foundations. Equally important, are the lack of accounting standards for mainland firms, so what you read are likely to be rigged, I have no hesitation in believing that, if they could mess around with our food, how much easier is it for them to mess with numbers.

http://www.marketwatch.com/story/the-only-way-out-for-china-andy-xie-2012-08-13

Ed 12 yrs ago

Big fan of Andy Xie...

Ed 12 yrs ago

"This is far and away the strongest global economy I've seen in my business lifetime," U.S. Treasury Secretary Hank Paulson July 23, 2007

Ed 12 yrs ago

Hard to dispute most of this... I see the US has yet another 1 trillion+ budget deficit... imagine 5 years ago if someone would have said the US deficit would have increased by over a trillion dollars each year for multiple years... they would have said - you are insane... the can't happen...

Doomsday Cycle targets America next http://www.marketwatch.com/story/doomsday-cycle-targets-america-next-2012-10-16?link=home_carousel

OffThePeak 12 yrs ago

LTSE: You said above:

"Party A would have to put up say 10% collateral ie 10 mill HKD as insurance for any adverse move of the HSI against its long position on the HSI. Now the real exposure is 100 Mill HKD, but they've only put down 10 million ie leveraged 1:10, all its takes now is for the HSI to move 10% down for Party A to lose 100% of its capital, ie collateral."

In what sense is $100 Million "the real risk"?

I would say you need to think of risk in different buckets, and not use a misleading word like "real" which just confuses people, by making them think of that number as somehow meaningful.

Other buckets might be:

+ Maximum risk

+ Mark to market risk (which might be tiny)

+ Expected average one day price move

Things like that.

The problem with writing about derivatives is that the measure of risk IS COMPLICATED, and the main distortion is that the way it is reported in the press leaves causal readers thinking they have a handle on the risk using what they have read, but the press distorts reality rather than enlightening people.

OffThePeak 12 yrs ago

I want to pick up on HKLEV's point about Counterparty risk:

"I think what you are referring to is known as counterparty credit risk which holds for any derivative. I.e. when you were on the trading desk you (or the systems you were using) would regularly check for each counterparty what the loss(replacement value) would be if they would not pay future obligations. "

He is right.

Remember, the money that Bank A owes Bank B is mitigated to a very large extent by the money (unrealised losses) that Bank B might owe to Bank A.

The problem at AIG was that they had so badly mismanaged their risks that they owed money to almost everyone.

There's a huge problem with something like Sovereign risk. Many banks once regarded it as risk free - so most European banks are loaded up with way too much of it. If governments start defaulting, then there would be very little government assets that banks hold that they could offset against it. So sovereign defaults may hurt banks much worse than a failure of a big bank like Lehman Brothers.

OffThePeak 12 yrs ago

Some may find this interview, mostly about Gold and Gold shares to be of interest

http://commoditywatch.podbean.com/2012/10/15/michael-hampton-bullish-on-gold/

GDX could double from the July low of $40, to $80.

Remmy 12 yrs ago

Templeton Investment Fund. Bullish on China, Bullish on Europe, supportive of QE3.

http://finance.fortune.cnn.com/2012/10/16/mobius-franklin-templeton

Some select quotes:

-If you look at independent statistics as related to China -- for example, exports from the West, from Japan, from Germany to China -- you will see that the growth rates are very healthy.

-One of the reasons the stock market in China has not performed very well is because of the tremendous number of new issues, or IPOs. Last year they totaled about $250 billion in all emerging markets -- and a large portion of that was just in China. This year it will probably be about the same. When you have that kind of new paper coming in, it tends to draw money away from the secondary market, and the stock markets tend to underperform. It's not going to last forever. There will be an evening out as more money comes into these markets.

traineeinvestor 12 yrs ago

@ Remmy - thanks for posting. On that basis, there is a lot to be said for buying companies which pay decent dividends. You can sit back and collect the dividend cheques while we wait for the market to come back.

Ed 12 yrs ago

Remmy... I guess Templeton disagrees with this then http://www.cnbc.com/id/49410960

Bit of a heads up re: mutual funds... such as Templeton...

"Yes, buying any mutual fund other than index funds is pure gambling. Research proves Bogle’s point. Every year roughly 70%-80% of funds fail to beat their benchmark, and the one’s that do rarely repeat. And yet their managers still make hundreds of thousands in annual compensation."

http://www.marketwatch.com/story/mutual-fund-casinos-still-skimming-billions-2012-10-12

I look at stagnation in America - collapsing markets in the EU - basketcase Japan... and that FT article... and I don't see how a case can be made for robust china exports...

Jim Chanos the fabled short seller is in agreement: www.businessinsider.com/jim-chanos-is-finding-short-opportunities-all-over-the-place-2012-9

traineeinvestor 12 yrs ago

I wouldn't buy any fund that requires a front end load or which is actively managed. Index funds are better - John Bogle (among others) is correct when he says that "you get what you don't pay for".

I'm still finding attractive opportunities to buy but I'll conceed it's a bit harder and a bit less compelling than when the HSI was around 19,000.

Ed - US retail sales are up 3 months in a row. More people have jobs in the US now than a year ago. US households' debt service obligations continue to fall. US imports are higher than in 2010. China exports are up in the first seven months of this year.

Here's the link to US households' debt service: http://www.federalreserve.gov/releases/housedebt/

From it's peak in Q3 2007, debt servicing as a percentage of household income has fallen by about 24%.

Links to the others have been posted before - it's all hard factual data (no interpretation by me).

The EU is in much worse condition. How much worse? It looks pretty bad - in spite of which total imports into the EU rose in 2011 to an all time record and the forecasts for 2012 and 2013 are for further growth (whether such growth eventuates is another matter). If you look at the breakdown, it would appear that gains in the stronger countries are having more impact than the declines in places like Greece. Exports have been going better than imports.

Somewhat to my surprise, Japan's imports and exports have also been growing.

I'll post the tables again: http://epp.eurostat.ec.europa.eu/tgm/refreshTableAction.do;jsessionid=9ea7d07d30e6e628045ef80e4e5281d4bfd08d93ce86.e34OaN8PchaTby0Lc3aNchuMbN8Te0?tab=table&plugin=1&pcode=tec00110&language=en

What we appear to be seeing overall is slowing growth leading to overcapcity rather than contraction....so far.

Happily Jim Chanos is also opptimistic about the US economy. From the article you posted:

“Our economy and our banking system are in better shape than others,” Chanos said. “The surprises will probably be on the positive side in the U.S. market."

He's looking at specific opportunities in gas (no surprise given how many companies either overpaid for shale gas assets or had their traditional revenues hit by falling gas prices which resulted from shale gas production) and tech (specifically tech companies which have lost their edge). He is not bearish on the over all market.

Remmy 12 yrs ago

Ed - I agree re mutual funds. They are to me almost a scam to people who do not understand how they make money for managers, and the compund effect of skimming of money each year. Likewise Hedge funds. I look at what these funds invest in, but I use my own money, and I don't give my money to them.

Ed 12 yrs ago

TI: agree on index funds.

Here's a tip... whenever you see a headline that would appear to point to an improvement... go to ZH or as I just did... go to google and type in US retail sales Zero Hedge

http://www.zerohedge.com/news/2012-10-15/september-retail-sales-seasonal-vs-non-seasonal-spot-difference

ZH also points out how the US is engaging in more subprime bs giving loans to anyone with a pulse to buy a car - to make obama's GM bail out look good

ZH also details how student loans recently made their way into consumer spending... that makes consumer spending of course look better as the millions who cannot find jobs return to school jacking up the numbers

It all reminds me of http://en.wikipedia.org/wiki/Potemkin_village

And then I remember that the US just announced another trillion+ deficit... that the US is still shoveling hundreds of billions at ZIRP into the maws of the banks... that millions of foreclosed homes are being held off the market... that there are record numbers on food stamps... that real unemployment is closer to 20%... that America is not an island and requires that the EU, China and Japan thrive for it to thrive...

And I conclude - America is the best of a whole lot of basket cases.

Ed 12 yrs ago

America - already in recession?

http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2012/10/INTC%20YoY.jpg

"Why is this notable? Because the last time Intel posted two, or even one, consecutive declines in Y/Y revenue, the recession was found to have already been in place for nearly a year, starting in December 2007.

Ed 12 yrs ago

This is a defining article re: QE (money printing)... keep in mind the US is worse than the UK...

Britain will feel the pain when the QE bubble finally bursts

Economics truly is a dismal science. Take the apparently ludicrous scheme under-pinning the economy: one branch of the state (the Treasury) is borrowing money from another branch of the state (the Bank of England) and everybody in the City is cheering madly, despite the dangerous circularity of the exercise.

To the uninitiated, this will sound like blatant accounting fraud but I’ve just described quantitative easing (QE), the perfectly legitimate wonder drug that was meant to cure the economy but to which George Osborne is now hopelessly addicted.

This is not the way to be running one of the world’s great economies. QE is fine in an emergency.

But it is more than five years since Northern Rock was rescued and money creation on a massive scale has become the new normal, the only way the economy can cope, and a convenient crutch for a chancellor whose grip over the public finances remains frighteningly fragile.

More http://www.telegraph.co.uk/journalists/allister-heath/9613297/Britain-will-feel-the-pain-when-the-QE-bubble-finally-bursts.html

OffThePeak 12 yrs ago

"This is not the way to be running one of the world’s great economies. QE is fine in an emergency."

If QE is "fine in an emergency" - then why not fine all the time?

traineeinvestor 12 yrs ago

QE aka money printing aka monetary policy has been more or less consistently practiced since the Fed was created in 1913 (with occasional disruption during the time America was on the gold standard). All that has changed is that the rate at which the Fed is creating new money has accelerated.

The USD had lost about 94% of its 1913 value even before the current crisis: http://www.measuringworth.com/uscompare/relativevalue.php

And that was using the lowest deflator available on the calculator.

Ed 12 yrs ago

Governments engage in money printing all the time... however not on anywhere near the scale we are seeing now ... and not for the purpose of buying the majority of their country's debt... I believe the US is printing 61% of every dollar it spends...

traineeinvestor 12 yrs ago

Fortunately the populace knows how to solve the crisis: http://karendecoster.com/citizens-for-hyperinflation.html

Very funny - until you remember that these are the same people who get to vote in elections

OffThePeak 12 yrs ago

Those who signed the petition DESERVE the fate they have signed up for.

How do we save the rest of us from their stupidity ??

traineeinvestor 12 yrs ago

H L Hunt suggested that only those who pay taxes should have the right to vote. I'm not sure if I like that idea, but the current system isn't working too well either.

OffThePeak 12 yrs ago

Why not?

That would help to solve the problem of those reliant on the state voting for Pols who just promise more handouts

Maybe we need people who pay tax to be able to vote for Senate, and everyone can vote for congress.

But what do you do with a married couple, with a wife who stays at home, would she be able to vote for both?

traineeinvestor 12 yrs ago

"Maybe we need people who pay tax to be able to vote for Senate, and everyone can vote for congress."

A good recipie for gridlock - which is no bad thing.

Ed 12 yrs ago

TI: great video... another reason why I can't see America recovering... too busy watching Dancing with Stars...

OffThePeak 12 yrs ago

A good recipe for gridlock - which is no bad thing.

I agree

Remmy 12 yrs ago

More positive news from the US confirming the early phase of a recovery is underway, and demonstarting the positive effects of QE.

http://money.cnn.com/2012/10/17/real_estate/home-building/index.html

Ed 12 yrs ago

I wouldn't be too excited about the housing starts number... just more pre-election spin from the Obama camp ... the picture remains bleak:

http://www.zerohedge.com/news/2012-10-17/housing-starts-surge-15-higher-872000-highest-july-2008

Rule of Thumb: always check Zero Hedge to find out the real story behind the spin....

traineeinvestor 12 yrs ago

China's consumer spending continues to grow strongly: http://www.stats.gov.cn/english/statisticaldata/monthlydata/t20120917_402836291.htm

Given the high domestic savings rate, rising income levels, growing middle class, gradually improving access to credit, expanding penetration by retailers of consumer goods and servcies and the possibility of additional government stimulus, it would be surprising if we did not see continued growth in this sector over at least the near term.

This does not mean that I am buying retail stocks in general. Some of them look pretty expensive and (presumably) are priced to reflect stong growth. Others are suffering from excessive competition which is great for consumers but not so good for the companies involved. I still hold Xtep in this space.

traineeinvestor 12 yrs ago

@ Remmy - I see that China Green (904) has dropped quite a bit this morning but I can't find a reason for the fall? Any idea what caused it? I don't hold but I'm giving it a good hard look.

Ed 12 yrs ago

TI: I have seen data that consumer spending as a % of GDP has dropped significantly since 2008... what has been driving China has been capital investment i.e. building bridges to nowhere... I cannot see how the Chinese consumer can come anywhere near close to replacing what has been lost in EU - US exports...

I think the China economy is still about exports - they need the US and EU to recover...

Another good article about the state of the Chinese economy from FT reprinted on CNBC http://www.cnbc.com/id/49455830

More excellent analysis on the US housing numbers http://www.zerohedge.com/news/2012-10-17/guest-post-housing-starts-and-permits-euphoria-may-be-premature

Ed 12 yrs ago

From the comments on ZH:

I am skeptical of the housing data, just as I'm skeptical of the data and methodologies used to compile the data with respect to other economic indicators. It's just reasonable to be highly skeptical of such data given all we know and are learning regarding the deeply flawed methods used to tabulate the data.

I think my attitude is becoming far more mainstream than was the case even a year ago, let alone a decade ago. This is a very healthy development for our society.

On the topic of today's housing permit data, it should be obvious to anyone with a functioning central nervous system that this data, in particular, should be viewed even more skeptically (and scrutinized more carefully) than usual. That it was so affected by the now infamous "seasonal adjustment" methodology, coupled with how large a statistical deviation it represented are enough to warrant such skepticism, alone.

Most of us see what is now a pretty clear gameplan by the Fed for what it is; The Fed has shifted much of its ammunition towards soaking up more of the bad debts existing in the form of underwater mortgages currently being carried on the balance sheets of banks.

This is yet another example of radical interventionism by the Fed that prevents efficient market clearing mechanisms to take place, and actually constitutes another set of taxes on investors, savers and anyone else who now has to make decisions (or consequently chooses to not make a decision) in an environment whereby the stock of yet another asset class is being strongly manipulated (which affects prices dramatically).

By soaking up so much banking sector MBS, the Fed is burying what could be quickly cleared inventory of housing stock, that ordinarily would sell at far lower prices, in the black hole of its balance sheet, comprised of all sorts of other assets.

This reduces supply (since the houses secured by this stock of MBS), drives up prices of existing and new homes, drives up the prices of materials used to renovate or build new homes (or elevates prices far above where a free market would baseline them), crowds out a large % of potential buyers, has a very skewed, artificial affect on rental rates as well, and increases uncertainty on the part of everyone as it's no longer clear when the Fed's ongoing accumulation of such assets will make its way back onto the market, or at what speed. The Fed and it's supporters would argue that such a reflationary policy is a portion of their goal, and beneficial, but there are potential disastrous assumptions baked into their line of thinking (e.g. that the Fed is increasing aggregate demand [I think not]; e.g. that the Fed will be able to tamp inflation down quickly-- i.e. within 6 months or so using rate hikes-- should it get out of control [history doesn't support this claim]; that the Fed is producing results that are net-positive to the economy, even adverse consequences tallied for [I am hugely skeptical that this is the case]; that the Fed will be able to unwind its current balance sheet, never mind what its future balance sheet will be given its ongoing accumulation of a wide array of assets in concessionary and accomodative manner towards the banking sector, in a relatively orderly fashion [I highly doubt it]).

The Federal Reserve is pulling so many levers and manipulating so many elements that are far better handled by free market forces that it is literally guaranteeing that a much larger successive crash will take place, and at a point in time that's sooner rather than later.

Anyone who has any faith that the Fed will be able to thread the needle here given how radically they've intervened in every aspect of the economy and given how much they've distorted price discovery, not to mention the massive pile of assets ranging from treasuries to MBS they've accumulated, is simply delusional.

I've been in real estate and homebuilding for the majority of my career and I can say, with complete certainty, that those calling for a current bottom to this cycle haven't the first xxxxxx clue about that which they're postulating.

I second that- still seeing the same huge glut of shadow properties on the market here in Florida- no signs of any pickup in hiring construction workers, either...

But hey, when have facts ever gotten in the way of Government data?

Typical end-of-year seasonality in these numbers- couple of big builders file a bunch of starts, then pull them in Jan.

traineeinvestor 12 yrs ago

@ Ed - The PRC data I posted has now been supplemented by the most recent montly data which shows further increases in consumer spending in China.

But don't worry - here's some evidence of a slow down: http://blogs.wsj.com/chinarealtime/2012/10/17/voluntary-career-break-for-hong-kong-workers/

Personally, I'd be very happy to paid 20% of salary for not working for 6 months.

But what is bad news for those whose work relates to the IPO market is good news for investors. Fewer new listings means less competition for investor's money for shares which are already listed.

Ed 12 yrs ago

I don't dispute a pick up in consumer spending in China... my point is that it is insignificant in the bigger picture... even a major increase in consumer spending would not make up for the problems in the EU and US export markets...

What I am seeing is big drops in iron ore etc... because China is not building much in the way of bridges to nowhere these days... to me that is a canary in the coal mine...

Yes perhaps China will turn on the stimulus tap again... but then again... maybe they cannot.

Fly on wall:

- we fricken broke the speed of sound with the stimulus in 08

- ya these stupid euros and yanks were supposed to be recovered by now and buying more of our stuff to ram into their 6 car garages!

- bugger... our biggest market the EU is even worse now! some countries are in Depression

- ya what can we do - we already have millions of empty apartments, malls... whole towns

- ya... with zero return on all that mess

- can we just build more sh*t?

- I dunno - lets go to the karaoke and think on it....

- ok

I am wondering if there can/will be an encore from China. Another 64 trillion dollar question eh

Remmy 12 yrs ago

904 - Trainee re China Green - the Apple Daily (or some newspaper like that) came out with an article questioning China Greens business. China Green asked for shares to be halted in trading yesterday, and then in the evening published a memo disputing the article. I am a long term hold on this one, although in the short term any such article might cause a blip. (The reality is you could right this kind of article about almost Chinese company). Now as you pointed out, some of the companies on my buy list are not audited by the big 4. That is potentially a concern, but of course priced in to a large extent. But if you just take this company on its reported financials, to me it looks very attractive. Not also its been trading at around 1.8 since Jan, so even if there is a bit of a sell off today, it will prob close around the 2 dollar mark (who know, perhaps even up as I think there will be strengthening interest in this company over the next few years with people looking to buy in on weakness). Just my thoughts of course - I know you are a smart guy and will make your own decisions and analysis of risk etc. But to me, its a BUY :)

traineeinvestor 12 yrs ago

@ Remmy - thanks. I found the announcement which appeared very credible to me. My QEternity depreciated HK$0.02 worth is that the scandals which have exposed some frauds in mainland companies have also dragged down the prices of many legitimately well run companies which look pretty cheap. The trick is picking the right one(s).

I have modest positions in a few: China Metal Recyling (773), Tontine Wines (389) and Tibet 5100 (1115).

China Green is in the right industry with exposure to the growing middle class consumer but I'll need to do a bit more reading before I get comfortable.

Remmy 12 yrs ago

TI - re " the scandals which have exposed some frauds in mainland companies have also dragged down the prices of many legitimately well run companies which look pretty cheap. The trick is picking the right one(s)."

I agree entirely with every point in that sentence!

"

Remmy 12 yrs ago

More data for people looking for a bottom and a time to buy into China:

Chinese Premier Wen Jiabao said the country’s economic situation last quarter was “relatively good,” a signal today’s report on gross domestic product may show the country’s slowdown ebbing.

“China’s economic growth has started to stabilize,” the official Xinhua News Agency said yesterday, citing Wen’s comments in meetings he held with industry leaders, company executives and some local government officials on Oct. 12-15.

The government is confident of achieving annual targets and the economy will continue to show “positive changes,” Wen said, according to Xinhua.

Exports exceeded forecasts in September and money supply grew at the fastest pace in 15 months. Even so, economists forecast today’s data will show growth in the world’s second- biggest economy decelerated for a seventh quarter, putting pressure on the ruling Communist Party to add stimulus ahead of a once-a-decade leadership transition.

“Wen’s comments suggest that there may be signs of stabilization in the quarter-on-quarter numbers, which give a better sign of current momentum in the economy,” said Mark Williams, Asia economist at Capital Economics Ltd. in London.“GDP growth in the third quarter almost certainly slowed in year-on-year terms. Policy makers at this point want to focus on more forward-looking indicators, which indicate the economy may now be turning the corner.”

Ed 12 yrs ago

Remmy - whenever you quote Chinese leaders... or Chinese GDP.... best to remember this:

China's GDP figures are "man-made" and therefore unreliable, the man who is expected to be the country's next head of government said in 2007, according to U.S. diplomatic cables released by WikiLeaks.

Li Keqiang, head of the Communist Party in northeastern Liaoning province at the time, was unusually candid in his assessment of local economic data at a dinner with then-U.S. Ambassador to China Clark Randt, according to a confidential memo sent after the meeting and published on the WikiLeaks website.

http://www.zerohedge.com/news/2012-10-18/chinese-electricity-consumption-and-production-both-point-sub-7-gdp-reality

Ed 12 yrs ago

Another consequence of QE + ZIRP... bubbles forming everywhere...

The Mania Is Back: US Apartment Prices Cross Back Above Pre-Bubble Peak

This is due directly to the current low interest rate environment we find America in today. As the Fed continues to artificially push all rates lower with all their might, it pushes investors further and further out onto the risk curve to try an obtain any form of yield. This has more money chasing available properties, bringing back the exact same artificial environment we saw during the 2004 - 2007 years.

http://www.ftense.com/2012/10/the-mania-is-back-apartment-prices.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+ftense%2FsymR+%28The+Future+Tense%29

Ed 12 yrs ago

Does anyone find that it is getting more confusing by the minute to determine what is fact, lie or obfuscation in the MSM lately...

I am finding that, even within the same source, completely conflicting articles... take for instance this out of the FT:

Tuesday: Chinese Exporters Fear Grim Outlook

Wednesday: China slowdown could be nearing end

So within a 24 hour period.... exporters suddenly changed their minds?

Call me a cynic... but could it be that someone scolded the FT editors for being so negative on Tuesday so they ran that Wednesday story? The Wednesday story is behind a paywall... so can't get it to you... but it smacked of a writer being told to put together some gibberish to support the headline... it was not at all convincing...

Remmy 12 yrs ago

Ed - the article is correct to the extent that this is exactly what the Fed wantes to achieve. Anyone who understands this will have positioned themselved to profit from it. But do we have a bubble? No, we don't - it makes a good headling, but please consider comparing nominal value (which is not helpful as an indicator of value) vs real value.

Ed 12 yrs ago

Yes that is the point... they are attempting to reinflate the housing bubble ...

You are aware that the Fed almost collapsed the global economy by doing exactly that after the dotcom crash and 911?

They are using all sorts of trickery including leaving people who are not paying the mortgage in their houses to avoid flooding the market... and they are cutting rates to even LOWER levels than those that precipitated the 07 collapse...

This is absolute insanity.

I don't care about profiting from it - because I saw the result of the previous attempts to blow a huge property bubble in the US... most people didn't profit from that - they got wiped out...

What I want is an economy built on fundamentals... not this bullshit money printing and bubble blowing... not an economy based on bending accounting rules and bailing out reckless, corrupt crooks masquerading as bankers...

You can cheer lead this along all you want - but it is madness... and it will end badly.

Remmy 12 yrs ago

More evidence of the sprouts of a China recovery...

Retail sales rose 14.4 per cent, a small acceleration over the first half of the year, and investment in industrial assets and some other indicators also showed small improvements.

"Judging from the third quarter figures, we can see a clear sign of steady economic growth," said Sheng Laiyun, spokesman for the National Bureau of Statistics, at a news conference.

Remmy 12 yrs ago

Ed - the purpose of what the Fed is doing it not to "cause a bubble". Rather they are trying to counter the effects of the last bubble, and the stabilize the economy back onto productive growth. So far they are doing fine.

Ed 12 yrs ago

TI: I came across this absolutely superb pc that sums up pretty much what I have thought about China - and think about China now (as outlined in earlier comments)

Let's call this article: The Chinese Consumer is Bogus and a Product of Stimulus

China is supposed to be in the midst of a major economic shift toward domestic consumption. Tell it to Coca-Cola, the ne plus ultra of global consumer brands, which is seeing pop sales fizzle in the Middle Kingdom as broader economic growth slows. General Motors also sees weakness on the horizon, as do luxury brands. In general, retail sales grew more slowly during this year's Golden Week holiday period in early October—traditionally a big-spending period—than last year. Some rebalancing. Not that industries linked to investment are doing much better. Sales of Western construction equipment are slowing, too.

The hope of the last few years that a booming China would help companies make up earnings lost to anemic European and American economies always had a certain pie-in-the-sky quality to it. One had to believe an export-dependent economy would grow fast enough to pick up the global slack if its main export markets were the very places Western companies were fleeing.

The most obvious solution was government stimulus, which is what happened from 2009-11. Beijing's various stimulus efforts of the past few years, intended mainly to tamp down political dissent by revving up the appearance of growth, had the happy side effect of subsidizing foreign companies who sold to Chinese firms and consumers directly or indirectly enriched by the stimulus.

Now the pies are starting to accelerate downward. This is not necessarily because Beijing has lost its capacity to stimulate, although its fiscal wiggle room is generally overstated. Rather, Beijing has lost its capacity to usefully stimulate. With investment already at nearly 50% of output as a result of earlier Keynesian binges, the marginal utility of any additional stimulus measures is probably limited.

More http://online.wsj.com/article/SB10000872396390444734804578062070379978786.html?mod=rss_Opinion?mod=hp_opinion

punter 12 yrs ago

It's quiet today (aside from the coming barrage of earnings reports), the world's economy must be preparing for the next push upward.

traineeinvestor 12 yrs ago

Guys,

It’s taken a while, but I have finally opened my eyes to the fact that all around us is a bubble about to implode.

Hong Kong property? A bubble. An enormous bubble engineered by the pan-democrats. Objective? To make property so expensive that only the very very rich can afford it. When it gets to that level they can create a whole new class of people who can join entitlement programs for subsidized housing. Eventually Leung Kwok-hung will become chief executive of Hong Kong and the cherished dream of a one China Marxist state will be fulfilled.

China’s fake consumer boom is clearly a devious communist plot to make us believe that China has a real consumer boom. All those people you see wandering around the multitude of gleaming shopping malls in China? They’re not there to shop. This is where the communists send the political undesirables and force them to spend their days aimlessly wandering around the malls pretending to shop. Unfortunately, there are so many undesirables they keep having to build more shopping malls to accomodate them. Amnesty International should do something about this inhumane treatment of economic prisoners.

And the growing numbers of wealthy Chinese people snapping up expensive properties in places like Hong Kong, Canada and London mostly for cash? Here’s the thing: they’re not actually Chinese. They’re aliens sent here to destabilize a planet that in many thousands of years may rise to challenge the aliens’ military supremacy in this part of the universe. Pretty cunning if you ask me.

And all those companies reporting growing revenues from selling goods in China? It's an accounting fraud on such a colossal scale that they had to pull Bernie Madoff out of prison to mastermind it – let’s face it, can anyone prove that he’s still in his cell? It’s a great gig for the auditors as well – getting paid for not auditing companies. I wish I could get a job where I’m overpaid for not doing something, but joining the civil service isn’t as easy as it used to be. And all those luxury goods purportedly sold to those mythical Chinese consumers? Oh, they were made all right but never sold. The real reason Hong Kong’s rubbish dumps are nearly full is now abundantly clear. Centuries from now some archeologist will be wondering if Gucci made landfills as well as handbags.

And the international multi-government conspiracy to suppress the prices of gold and silver – the only things that constitute real money? Another cunning conspiracy. You see, the governments themselves were the ones who started the price suppression conspiracy theories so that gullible investors would spend their lives hoarding the useless stuff. By having investors hold so much gold and silver it saves the governments a fortune in storage costs and they can always confiscate it later (as a temporary measure for the greater good, of course). Even better, in the very near future the US will have finished selling its last gold bar and Fort Knox will be converted into a homeless shelter for unemployed bankers.

I’ve also finally realized that governments everywhere are debasing their currencies by simply printing more of the stuff. They fooled me for a while by cunningly describing it as “quantitative easing” in the hope that no one would notice but I’ve finally wised up.

But the cracks in the grand facade are finally beginning to show. The evidence? Hong Kong’s unemployment rate has soared, absolutely soared, to a staggering 3.3%. The bubble denialists will no doubt cling to the decline in the number of underemployed so that they can continue living in their fantasy world for a little bit longer, but the true position is undeniable: Hong Kong is a society on the verge of complete and utter collapse.

And the real clincher? Hong Kong is supposed to be a shopping paradise, isn’t it? You would think that you could find just about anything in those countless shops filled with countless shoppers, wouldn’t you? So did I but I couldn’t. I’ve spent weeks looking all over the HKSAR for tinfoil hats for the whole family (including the cat), but not a one to be found. I assume the civil service has monopolized the entire stock and challenge anyone to produce proof to the contrary.

Any recommended reading on survival skills would be appreciated.

Ed 12 yrs ago

I take you don't agree with the WSJ article?

traineeinvestor 12 yrs ago

Ed - The article confirms that China's retail sales are still growing. It only laments that the growth may not be at the same rate as last years (which contradicts other data posted on this forum). Slower growth is still growth and hardly supports a case for economic collapse - but may suggest that companies which have overexpanded in the expectation of higher growth rates will be facing a squeeze (from which consumers will benefit through lower prices).

Generally sounds like people complaining that good is not good enough.

punter 12 yrs ago

Looks to me like the world's central banks have succeeded in resolving the world's monetary problems. Question is, how do we take advantage of it? How do we protect ourselves if some unintended consequences of QE do come?

Ed 12 yrs ago

Big picture...

China has been the driver of the world since 2008...

Countries that export to China have done well - Germany, Canada, Australia, Indonesia...

They have ridden the coat tails of China's monumental stimulus programme...

But as the article points out - China is slowing dramatically... so if China does not drive the global economy who does?

The US is barely growing over 1%. Half of the EU is in Depression - France is imploding - even Germany is barely above 0.

If China slows substantially we are likely going to go into another global recession - and that will almost certainly result in a global Depression.

I have a fairly simple view of the global economy... asset prices remain strong ... we have some growth (although anemic) globally...

But this is all as a result of trillions of dollars of QE and ZIRP...

There are absolutely no fundamentals driving the economy - corporate earnings are falling? So what - Ben is printing... Trade and growth are slowing? So what - Ben is printing... The EU is falling apart? So what - Ben is printing.

Take either away and asset prices plunge... growth reverses into Depression.

Can Ben ever stop printing? He's been doing it for 4 years now and things are worsening...

We all know that there are no other options... the standard recipes for kick-starting growth have been tried big time - massive stimulus (the green shoots died)... lower interest rates (been at 0 for years)...

And the last option that governments use when desperate - turning on the printing presses.... well that' been going on for 4 years too... with no result.

Like I said... I have a very simple view of this economy.

Ed 12 yrs ago

Punter - not sure if resolved is the right word... I don't think anything has been fixed with money printing.

The main question I have is what is the trigger that topples this house of cards...

Will it be a liquidity trap whereby the market says so what - we don't care that Ben is printing...

Will it be an EU country coming apart at the seams as the people are forced to endure year after year of Depression?

Do we end up with a civil war in Spain as regions try to pull the country apart?

Perhaps some other Black Swan event comes into play?

punter 12 yrs ago

Ed, that comment was made tongue in cheek. The world has forgotten that the trigger for the great recession is not yet resolved. However, what we have now is a situation wherein people behave like it never happened.

Ed 12 yrs ago

Understood. Agree.

Good article on China here - buy?

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100020851/chinese-equities-look-awfully-cheap/

Some good comments at the bottom ... I like the one about how if you buy you assume the risk of the EU>.. because the EU is China's biggest export market...

traineeinvestor 12 yrs ago

"In the meantime, Chinese equities look awfully cheap. The Shanghai composite has dropped by two-thirds since late 2008, or by three quarters in real terms (given Chinese inflation)

This is not far short of the Wall Street crash in from 1929 to 1933 in real terms (given US deflation)."

Which was a wonderful time to buy - some people made huge fortunes by investing in the bargains available when all around them people were preaching financial armageddon. Today there are few places in the developed world which are close to resembling the 1930s depression. Bank closures, foreclosures, unemployment - not even close.

I'm happy to buy companies with decent balance sheets paying decent and growing dividends and/or selling at below book values. In the long run I can expect to be better off than leaving my money to depreciate on deposit at the bank.

Recommended reading: Russell Napier "Anatomy of the Bear". Especially his comments on Q ratios.

Ed 12 yrs ago

I read this article the other day

http://www.marketwatch.com/story/mutual-fund-casinos-still-skimming-billions-2012-10-12

"Yes, buying any mutual fund other than index funds is pure gambling. Research proves Bogle’s point. Every year roughly 70%-80% of funds fail to beat their benchmark, and the one’s that do rarely repeat. And yet their managers still make hundreds of thousands in annual compensation."

It reminded me of the apocryphal story about the guy who made stock picks by throwing darts at an index of companies... and ended up with a better record than the pros...

Makes me wonder if the whole concept of stock picking is simply a matter of luck... if the guys who spend their entire day supported by researchers can't get it right then...

Remmy 12 yrs ago

Ed - Re http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100020851/chinese-equities-look-awfully-cheap/

Thanks for posting this.

Much of what you heard form this guy you heard from me first :)

ltse 12 yrs ago

"China's shadow banking is contributing to a growing liquidity risk in the financial markets. Most WMPs carry tenures of less than a year, with many being as short as weeks or even days. Thus in some cases short-term financing has been invested in long-term projects, and in such situations there is a possibility of a liquidity crisis being triggered if the markets were to be abruptly squeezed. "

http://www.chinadaily.com.cn/opinion/2012-10/12/content_15812305.htm

China's shrinking GDP

http://www.theage.com.au/business/china/china-slows-but-relief-ahead-20121018-27tvc.html

And this article from Caixin. Sad Industry Mantra: Make Steel, Lose Money.

A reminder China's economic growth is not economically motivated, but politically motivated.

""We're under a lot of operating pressure right now," the source said. "Because it's related to employment, we cannot just cut production. We're now in a situation where we lose several hundred yuan on a ton of steel.""

http://english.caixin.com/2012-03-16/100369245_1.html

Ed 12 yrs ago

Hoisington Quarterly Review and Outlook

John Mauldin | Oct 20, 2012

The Hoisington Quarterly Review and Outlook is one of the cornerstones of my reading on where the economy is headed. Van Hoisington and Lacy Hunt do a masterful job of turning data points into cogent, well-argued themes.

This month they waste no time in dissecting the Fed’s recent move to QE3 and similar efforts in Europe, arriving at the conclusion that “While prices for risk assets have improved, governments have not been able to address underlying debt imbalances. Thus, nothing suggests that these latest actions do anything to change the extreme over-indebtedness of major global economies.”

Their expectation: global recession.

The only issue left to sort out, they say, is How deep will the downturn be?

They make the interesting observation that with each injection of liquidity by the Fed, commodity prices have surged: “During QE1 & QE2 wholesale gasoline prices jumped 30% and 37%, respectively, and the Goldman Sachs Commodity Food Index (GSCI-Food) rose 7% and 22%, respectively. From the time the press reported that the Fed was moving toward QE3, both gasoline and the GSCI Food index jumped by 19%, through the end of the 3rd quarter.”

The QE picture gets even muddier. The unintended consequence of the Fed’s actions, say Lacy and Van, has been to actually slow economic activity: “The CPI rose significantly in QE1 and QE2 (Chart 1). These price increases had a devastating effect on worker's incomes (Chart 2). Wages did not immediately respond to commodity price changes; therefore, there was an approximate 3% decline in real average hourly earnings in both instances. It is true that stock prices also rose along with commodity prices (S&P plus 36% and 24%, respectively, in QE1 and QE2).

However, median households hold a small portion of equities, and thus received minimal wealth benefit.”

They proceed to tear apart the wealth effect that the Fed is banking on to restimulate the economy, drawing on several solid studies. They also make the key point that “When the Fed actions lead to higher food and fuel prices, the shock wave reverberates around the world, with many foreign economies being hit adversely.

When prices of basic necessities rise, the greatest burden is on those with the lowest incomes since more of their budget is allocated to the basic necessities such as food and fuel.”

The next few years are not going to be pretty. We’re looking right into the teeth of a rolling global deleveraging recession—the End Game, I’ve called it.

And the decisions we make in the next couple years about how to handle our debts and budget deficits—here in the U.S., in Europe, in China and Japan, and elsewhere—are going to be absolutely crucial.

Hoisington Investment Management Company (www.hoisingtonmgt.com) is a registered investment advisor specializing in fixed-income portfolios for large institutional clients. Located in Austin, Texas, the firm has over $4 billion under management, composed of corporate and public funds, foundations, endowments, Taft-Hartley funds, and insurance companies.

traineeinvestor 12 yrs ago

Interesting report on Dow Jones wire: https://p2g.miebanking.hsbc.com.hk/News/NewsPopUp.aspx?source=DJ_CFW&news_id=CFW_c-20121022DN000041

China facing a shortage of labour and the incomes of Chinese workers continuing to rise faster than GDP.

From an investing perspective, this is both good an bad news - good in that we can expect PRC domestic consumption to keep growing and bad because revenue gains for companies (already under pressure from overstocking) may be offset by rising costs.

Remmy 12 yrs ago

Re "The QE picture gets even muddier. The unintended consequence of the Fed’s actions, say Lacy and Van, has been to actually slow economic activity: “The CPI rose significantly in QE1 and QE2 (Chart 1). These price increases had a devastating effect on worker's incomes (Chart 2). Wages did not immediately respond to commodity price changes; therefore, there was an approximate 3% decline in real average hourly earnings in both instances. It is true that stock prices also rose along with commodity prices (S&P plus 36% and 24%, respectively, in QE1 and QE2).

However, median households hold a small portion of equities, and thus received minimal wealth benefit.”

This is correct, which is why I maintain it is vital that workers and lower income people be in property and stocks. It may seem counterintuative, but actually its those who do this that will preserve and make wealth, while the rest will pay the price in terms of loss of real spending power.

traineeinvestor 12 yrs ago

" it is vital that workers and lower income people be in property and stocks. It may seem counterintuative, but actually its those who do this that will preserve and make wealth, while the rest will pay the price in terms of loss of real spending power."

I completely agree with this but caution against overpaying for any asset.

elsdon 12 yrs ago

Fact of the matter is that they won't.. The middle class got rich via salary increase and their own homes appreciating in value.. Not by investing in equities or other more complex asset classes..

And the US will never recover until the middle class recovers.. Because they're mostly stupid, that'll only occur if you spoon feed them with increases in salary or reductions in taxes.. Things that the lazy people don't have to think or do anything to achieve.

traineeinvestor 12 yrs ago

The quickest ways to help the middle classes in America are to get the costs of health care and education down to reasonable levels. Unfortunately, both are still rising.

A return to the 1950s-80s when the American middle class thrived is very unlikely without one or both of these conditions being satisfied. Even then, there would still be the question of globalisation with many millions of well educated and hard working people now competing for many of the same jobs, competition. Also, advances in robotics would be expected to act as a restraint on the return of middle class incomes for many manufacturing jobs. It is hard to see a broad resurgence in income levels accross the board. I hope I'm wrong.

elsdon 12 yrs ago

The only way I see it panning out that way would be for America to crumble in its current state.. Suck up its pride/ego.. drop their minimum wage to compete with places like China and India (which will continue to rise), abolish unions, and bring manufacturing back to America. They produce nothing at the moment.

traineeinvestor 12 yrs ago

A couple of other suggestions to make America more competitive:

tertiary education: cap the amount of each budget that can be spent on admin and require all academic staff to spend an minimum amount of their time in face to face teaching. Blow outs in the number of non-academic positions and the amount of time which academics are spending on reasearch and other non-teaching stuff are two of the major contributors to the rise of costs (and I am not saying that research is not important)

put a cap on liability of doctors, hospitals etc - personally I would remove punitive damages all together and put a cap on non-physical damages. Mistakes happen and it's a bad thing when they do (sometimes very bad) but the level of liability being imposed for human errors is disproportional. If someone should be held criminally liable, let the criminal courts deal with it as a separate matter and keep the ambulance chasers out of it.

Abolish defined benefit retirement plans - these are the number one cause of financial difficulties faced by many state and city governments in America (white elephant projects sometimes competing for the prize). Force people to make realistic promises and pay for them up front instead of unspportable promises that will end up being broken in the future.

Ed 12 yrs ago

Good luck with reforming America...

Re: Education - from what I can see it doesn't matter how much you spend - if most parents are sitting at home watching American Idol and Dancing with Starts... and guzzling super-sized coke with 2 for 1 pizza.... and burying their faces in Facebook and Tweeting about Paris Hilton... seems like there is something fundamentally wrong with the society...

Medical Care - never going to happen. The moment any type of reform is suggested the various interests including big pharma and the AMA scream 'death panels'... anything that reduces the profits of those who benefit from the system will be fought tooth and nail by lobbyists...

Recall George Bush's comment regarding Americans who were going to Canada to fill prescriptions when he said 'you don't know if they are safe' ... you know the game is rigged when...

At the end of the day if you want to fix the US you have to stop these unlimited campaign 'contributions' i.e. legal bribes... until that is done the country will remain a bastion of crony capitalism...

Shifting off the topic of Nigeria.... ah I mean the USA....

Some disturbing misses on earnings of recent... which point to a slowing global economy http://www.theglobeandmail.com/globe-investor/ups-quarterly-profit-drops-revenue-disappoints/article4630779/

Two concerns:

1. If earnings are down then the stock market goes down... this creates a snowball - individuals are less wealthy so they spend less, companies slash jobs... and eventually we get global recession....

2. All of the tools normally used to escape recession have been used and then some - interest rates were lowered to 0 a few years back... stimulus on a massive scale was tried... and the more desperate measure of money printing has been tried... yet the global economy looks to be regressing...

So what do governments do to escape this downward spiral?

Ed 12 yrs ago

Big Picture.... there is a body of opinion out there that says that the never-ending economic crisis we are experiencing is not so much a stand-alone crisis ... rather it is be beginning symptoms of the end of cheap energy...

Deep sea drilling, fracking, tar sands - yes they are ensuring we don't run out of oil... BUT the problem is the costs involved in extracting oil from these sources are enormous

Remember a decade or so ago, the Alberta Tar Sands were deemed 'economically unfeasible' unless oil was over 80 dollars a barrel....

Well now the tar sands are one of the biggest oil sources in the world ... and oil is almost always over 100 a barrel...

Expensive oil is far more damaging to growth than a tax - because arguably a tax can be used to build infrastructure... improve education etc....

Oil has been hovering at 5 to 8x more expensive than in 1970 inflation adjusted terms... and that increasing price contributes nothing to growth - it saps growth... and we have been struggling to deal with this since the 70's ...

Countries have relied on debt to overcome this and generate growth (that worked for 4 decades or so)... and now that debt levels are absurdly high we have turned to money printing to try to maintain growth ...

Here's a thought-provoking article on this topic: http://www.zerohedge.com/news/2012-10-23/eyes-wide-shut-we-are-bad-spot

traineeinvestor 12 yrs ago

HSBC Flash PMI for China for October came in at 49.1. While still below 50 (indicating a slight contraction), it's the best reading for the last few months.

Remmy 12 yrs ago

Yes, more evidence of a bottoming out. One of my stocks 300 Shenji Group Kungming Machine Tool Company jumped 10% today :) Still looks extremely cheap to me.

PS, interesting to look at gold. I would not be overly worried right now, but there are some people wondering whether we have reached a transition point with money held in gold perceived as "safe" about to flow to more "risk-on" type assets, such as equities. If so, we could see ongoing declines in gold.

traineeinvestor 12 yrs ago

@ Remmy - congrats. It's been a nice little run for the local stock market. I'm hoping it will go a lot further as investors see that China is (i) not collapsing and (ii) cheap by historical standards and that the share market currently offers better value than the property market. So far so good.

@ Ed - higher oil prices are actually a good thing - they reflect higher demand and they encourage investment in alternative fuel sources. I'd much rather see Brent at USD110+ than at USD40.

Loyd Grossman is Miss Venezuela 12 yrs ago

China COSCO (1919) hits HK$4.

elsdon 12 yrs ago

Hrm.. Not sure if higher oil prices reflect higher demand and not diminished supply.. Ultimately, scarcity is the reason.. but two very different sides of the coin.

traineeinvestor 12 yrs ago

@ elsdon - Here is data up to 2010 showing a generally rising trend in world wide oil demand: http://www.indexmundi.com/energy.aspx

Basically, what is happening is that emerging markets are growing their consumption at a faster rate than some developed markets are reducing their useage.

Edited to add more up to date data for supply and demand:http://omrpublic.iea.org/

Supply has increased by demand has increased by more.

Ed 12 yrs ago

TI: higher oil prices are not a good thing when the reason for the higher prices is related to the cost of extraction...

Take a look at that graph on the ZH article... you can also do some googling re: ratios on oil extraction costs...

The 'low hanging' fruit is gone - the stuff that returned 100x the energy that it took to extract the oil...

I saw something on this a few years ago where the ratio was 10: 1... and if that graph on ZH is to be believed it is now 3>1.

Guess what happens when it takes the equivalent energy/value of one barrel of oil to extract one barrel of oil....

That is game over.

traineeinvestor 12 yrs ago

@ Ed - exactly. We need high oil prices to provide an adequate incentive to develop alternative energy sources to the point where they are economically efficient before we reach that point. At present, oil, coal, gas and nuclear are our main options with hydro and geothermal being available in some locations. Solar and wind are getting better but need to develop more before they are genuinely viable replacements.

Biofuels is not a place we want to go in view of the impact on food prices. Unfortuntely, politicians think it's better to keep their electorates happy than keep food prices at levels where the poorest people in the world can afford to eat properly.

Ed 12 yrs ago

First off... here's something re: the cost of the 'new' oil supplies:

"Regarding production costs, the cost of producing oil or gas from any of the shale plays is high – much higher than the cost of producing oil and gas from a conventional (vertical) well. This is so for a variety of reasons." More: http://www.oilgasmonitor.com/fracking-economic-environmental-considerations/2536/

Same goes for deep sea oil... tar sands... and most other new oil finds...

Put it this way - if we found a lake of oil 5000 miles long and 5000 miles deep on the surface of the moon... we'd not run out of oil for a long time but....

As for high prices pushing us to other energy sources I don't see that happening.

1. Oil is not just energy - it is pesticides... it is fertilizer... it is plastics... it is in almost every single thing you touch today.... 50% of oil goes into 'things' we make - and most of the other 50% goes into vehicles..

2. Big Oil does not want us to wean off oil. They spend a fortune on lobbyists - and they make sure oil prices conveniently tank from time to time burning investors in alternative energies. 5 years or so back I met a close friend of a friend for drinks in Jakarta... he had just been promoted to head up the 'green initiatives' of a major oil company... he was laughing about the fact that there was essentially no 'green initiative' - this was all spin to make the company look good.

3. IF we are in fact at the end of cheap oil... (I don't think it is possible to argue anything but, when oil seems to be almost permanently at or above $100) then we are in big trouble...

Because peak cheap oil = no growth = endless depression = starvation/riots/revolution.... And this would hardly be the time when revolutionary technologies are being developed...

The fact of the matter is oil has been up to 150 a barrel - that is 8x the inflation-adjusted cost of 1970 oil...

Ed 12 yrs ago

Some good stuff from David Rosenberg ... stock markets seem to be weakening - in spite of more QE... liquidity trap imminent?

http://www.zerohedge.com/news/2012-10-23/david-rosenberg-what-wrong-market

Courier companies are sounding the alarm bells on international trade... and now we have Caterpillar...

On a day when there was little in the way of data-flow, what was key yesterday was what Caterpillar had to say about the global economic outlook and the picture painted was no Picasso — announcing that the global headwinds are even more acute than previously thought, citing that end-user demand "is not growing as fast as we were expecting it would" (full-year sales seen now at $66 billion from $67.64 billion and 2013 revenues now seen -5% instead of +5%).

Texas Instruments reported that its quarterly revenue dropped 2.3% as demand for its chips receded and the CFO (Kevin March) stated "across the board, we're seeing customers being extremely cautious, very careful about the level of inventory that they hold so giving us very low levels of visibility as to what they'll want to order for the quarter".

Now does that sound like escape-velocity to you? Freeport-McMoRan missed its EPS target for the first time in 17 quarters ... an inflection point, perhaps?

Dupont missed too this morning (cutting jobs as well) and what was that Philips Electronics said yesterday? That "the economy in the U.S. is at the moment moving a little bit sideways".

Yikes... that means stagnation. No growth.

Lot's more here http://www.zerohedge.com/news/2012-10-23/david-rosenberg-what-wrong-market

traineeinvestor 12 yrs ago

Ed I'm not sure if the results of Fedex etc are as significant as they once were because they have faced increasing competition from airlines for air deliveries. Look at the cargo numbers for the big airlines. The most recent global consolidated data I could find is a bit old now, but Cathay + Dragonair are seeing increasing volumes of air cargo right now and are adding services: http://www.joc.com/air-cargo/cargo-airlines/cathay-pacific/cathay-dragonair-volumes-september_20121017.html

You highlight earnings misses from selected US companies but it's better to look at the "beat" numbers as a whole. Only about a quarter of US listed companies have reported so far this quarter and, of those, about 40% have beaten their estimates. A 40% beat number is actually quite low but I would want to see the full picture before jumping to conclusions.

QE3 has moved the markets - just not the US market (much). It is looking increasingly like most of the QE3 money has gone to undervalued emerging markets. It's also worth remembering (i) that QE3 is not a single event - it is regular drip feeds over a period of time so one would not expect a large short term movement based on actual money hitting the system anyway and (ii) QE3 was so widely anticipated, a big reaction from the markets would have been surprising.

traineeinvestor 12 yrs ago

As a follow up, I have just seen Melian Airport's September numbers - air cargo up 6.7% year on year. Not the biggest airport in the world but still a useful indicator.

traineeinvestor 12 yrs ago

Okay, the question of air cargo made me curious so I did some rather shallow digging.

I couldn't find any sufficiently recent consolidated industry wide data so I looked at data for a handful of large airlines and a random selection of airports. The results were all over the place and I don't think I can draw a conclusion as to whether air cargo volumes are increasing or decreasing at the moment. As examples, BCIA (in which I am a very happy shareholder) continues to report increased cargo volumes while LAX (which I have had the misfortune to use on occasion) continues its long term trend of shrinking volumes. Cathay reports increased volumes of air cargo while Air China reports a decrease. And so on.

I think I'll stop here, but if anyone comes accross any recent world wide data, I would grateful if you could post a link.

Ed 12 yrs ago

TI - these are year on year comparisons - are you saying that the bottom has fallen out on the air courier market in a single year because of competition from airlines?

Can you back that up with something? Because I am seeing nothing of the sort - what I am seeing is editorial that indicates Fedex, UPS etc... falling volumes represent canaries in the coal mine - as they have historically...

Another huge player is caterpillar... they ride the wave of building projects ... and they are looking at big drops in global revenues...

Here's a little tip on 'guidance'... its bullshit... it is very common knowledge that companies underestimate so that they look good when they outperform ... when they report higher than expected numbers that gooses their share prices...

The fact that so many have missed their earnings is doubly troubling to me - because they probably had set the bar so low to begin with.

Ed 12 yrs ago

The impact of QE has been less and less as each round is released... and with the latest infusions of money printing it is having no effect on the stock markets...

http://www.forbes.com/sites/kenrapoza/2012/10/22/qe3-having-no-meaningful-impact-on-asian-markets/

http://www.telegraph.co.uk/finance/economics/9572562/QE-has-lost-its-bite-says-Bank-of-England-deputy-governor-Paul-Tucker.html

http://www.zerohedge.com/news/2012-10-23/david-rosenberg-what-wrong-market

Corporate earnings, which have held up since 2008... are now sinking... growth in the US is barely over 1%... Europe is in recession ... China's PMI has been below 50 for 12 months now... Japan exports crashed over 10% in September...

So it seems central banks are no failing to keep the Great Ponze going... earnings are falling as growth falls globally... and the stock market is reflecting this...

If the Fed cannot keep the US market inflated this will be a disaster... it will throw the US into recession...

It looks to me as if the Fed is now pushing on a string... no matter how much they print the markets not reacting...

Ed 12 yrs ago

Hmmm... which economy is China's biggest export market... oh ya... the EU... just happens to be the biggest economy in the world (perhaps not for long though)

Euro zone businesses in October suffered their worst month since the bloc emerged from its last recession more than three years ago, forcing them to cut more jobs to reduce costs, surveys showed on Wednesday.

The downturn that began in smaller periphery countries is now gripping Germany and France, dragging the euro zone as a whole deeper into the quagmire.

Markit's Composite Purchasing Managers' Index (PMI), which polls around 5,000 businesses across the 17-nation bloc and is viewed as a reliable growth indicator, fell to 45.8 this month from a September reading of 46.1.

"It's very disappointing, it's a depressing scenario as things are getting worse," said Chris Williamson, chief economist at data collator Markit.

http://www.cnbc.com/id/49530111

So how do China and the US grow - if Europe is collapsing... of course - they can print, build more bridges to nowhere... ghost towns... etc...

Ed 12 yrs ago

US results raise fresh fears for economy

US companies have warned of weaker global demand and are cutting jobs, raising fresh fears about the health of the world economy and sending shares tumbling.

DuPont, Xerox, UPS and 3M were among the companies that warned of difficult trading conditions, including faltering demand in some Asian markets and Europe’s continuing crisis.

More http://www.ft.com/intl/cms/s/0/e52148e0-1d33-11e2-abeb-00144feabdc0.html#axzz2AD9O8Ig1

Ed 12 yrs ago

King warns BoE action reaching limit

The Bank of England’s unorthodox actions to turn round the UK’s flagging economy were reaching the limits of their effectiveness, Sir Mervyn King has warned in a blunt assessment that Britain faces a prolonged economic adjustment.

“Printing money is not . . . simply manna from heaven. There are no short-cuts to the necessary adjustment in our economy.”

More http://www.ft.com/intl/cms/s/0/1249dca8-1d28-11e2-abeb-00144feabdc0.html#axzz2AD9O8Ig1

Germany, the last remaining fortress in Europe... is tumbling... PMI below 50 represents contraction:

"Weaker-than-expected German PMI data released this morning has caused the euro to drop against the dollar. German PMI Manufacturing fell to 45.7 points in October from 47.4 points in September, against expectations of a rise to 48 points." The Telegraph

France is already deep in the danger zone:

"French private sector shrinks again in October, points to recession - 44.8 PMI" Reuters

traineeinvestor 12 yrs ago

Germany should leave the Euro - why on earth should German taxpayers have to pay for the lifestyle's of people in other countries who pay less tax? They'll have to bite the bullet of stronger currency but longer they stay in the worse off they are.

Ed 12 yrs ago

I think a little more complicated than that...

German banks made many of the ill-advised loans to the PIIGS which created 'prosperity' for all... which resulted in significant volumes of German exports to these countries...

So Germany benefited from membership in the EU... but again we see the toxic side-effects of 'prosperity'... German banks would collapse if the periphery economies aren't bailed out...

And if Germany leaves the union - that does not resolve the problem of massive debts owed to its banks.

Catch 22? Damned if you Damned if you Don't?

A recession in the EU is a very dangerous situation... politically and economically ... for everyone. I cannot see how the get out of this.

traineeinvestor 12 yrs ago

Ed - they will have to face these issues at some point and the longer Germany stays in the Euro, the harder it will be to extract itself and the greater the cost of either staying in or leaving.

Ed 12 yrs ago

I agree with that. The EU will bust up...

And I think that will result in financial collapse leading to global depression as countries default.

I am not so keen on that scenario so am quite happy to see them try to kick the can as long as possible .... unfortunately with the big powers sinking... I wonder how much further they can kick this can...

traineeinvestor 12 yrs ago

If they could kick the can down the road for another 50 years or so that would be good enough for me....but not so good for my children and their children

traineeinvestor 12 yrs ago

COSCO Pacific's Q3 update gives us another data point for international trade - 9 month figures for TEU throughput are up moer than 10% YTD. Interestingly, a lot of the growth was around the Bohai Rim while Shanghai and Suez were both down.

traineeinvestor 12 yrs ago

A hundred years works for me...and that would be one impressive act of financial juggling.

OffThePeak 12 yrs ago

Ed, here's an interesting comment of yours from 7 days ago:

"I've been in real estate and homebuilding for the majority of my career and I can say, with complete certainty, that those calling for a current bottom to this cycle haven't the first xxxxxx clue about that which they're postulating."

Can you elaborate?

I assume you are speaking about the US, where supply has been withheld from the market, because banks have delayed foreclosures, and also have many people living in homes where they have stopped paying the mortgage.

Why can they not simply keep those homes in limbo, and slowly feed foreclosures into a rising market?

It does look like home prices are now low enough that it is cheaper to buy than rent, and the buyers are there, confidence is coming back and incomes are slowly rising.

Ed 12 yrs ago

That was a comment pulled from a forum on Zero Hedge... I is not me...

Incomes: where are you seeing incomes are increasing? All data points I see indicate that inflation adjusted incomes in the US have been in decline for decades.

Foreclosures: why can't they just feed them into the market? Because the number of foreclosures being held back are enormous and would take years to clear - and because there are large numbers of foreclosures in the pipe ... and as you point out there are large numbers of people who are living in properties and not paying the mortgages - banks are just leaving them there...

Check out what's really happening with the US housing market: http://www.zerohedge.com/news/2012-10-24/guest-post-new-home-sales-not-strong-headlines-suggest This is by no means a recovery...

OffThePeak 12 yrs ago

"All data points I see indicate that inflation adjusted incomes in the US"

Why adjust for inflation? Which inflation index, then? I cannot see the logic in doing that.

I think the thing you need to do is compare Nominal Home prices, with Nominal income. Both are in a rising trend now, since perhaps 1-2 years ago.

Ed 12 yrs ago

http://www.csmonitor.com/USA/2012/0912/US-incomes-fall-to-1989-levels.-How-did-that-happen

http://www.thenews-messenger.com/article/20121025/NEWS01/210250305/Survey-sees-incomes-free-fall

http://www.nytimes.com/2012/10/24/us/politics/race-for-president-leaves-income-slump-in-shadows.html?pagewanted=all

US median income lowest since 1995 http://www.ft.com/intl/cms/s/0/ed14fc70-fc51-11e1-aef9-00144feabdc0.html#axzz2AJgv6Huu

http://www.davemanuel.com/median-household-income.php

Ed 12 yrs ago

David Einhorn knocks it out of the park with his very first statement during today's Buttonwood Gathering, in a segment dedicated to one thing only: explaining how the Fed's policies are not only not helping the economy, they are now actively destroying this country.

http://www.zerohedge.com/news/2012-10-25/david-einhorn-explains-how-ben-bernanke-destroying-america

I betcha a lot of these super wealthy fund principals have their vast personal fortunes heavily invested into hard assets including gold... I know Michael Burry and John Paulson do...

They are continuing to 'dance' while the music plays with client money because they cannot time the crash and the last thing they want is to be sitting on the sidelines as the ponze builds...

When you read guys like Gross, Hendry and Einhorn making dire predictions on the economy and QE... it's surely time to get concerned.... they move markets.

Ed 12 yrs ago

This Hendry interview is MUST watch: http://www.ftense.com/2012/10/hugh-hendry-speaks-world-listens.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+ftense%2FsymR+%28The+Future+Tense%29

Remmy 12 yrs ago

Good article here on why you should buy China stocks (listed on the Hang Seng) NOW.

http://www.brw.com.au/p/sections/eco/it_time_to_buy_china_CgEKOBkFkLRKEOFrVe57bN

I havre quite a good track record picking macro trends and as value investor I find China stocks very attractive right now. (I have already stated my specific picks earlier).

badseal 12 yrs ago

Remmy: what are your top 3 picks now?

Ed 12 yrs ago

As to be expected.... the Obama admin juices the Q3 numbers with government spending to enhance re-election chances...

"The higher growth in the third quarter was due to increased government spending, which is unsustainable, he tells The Daily Ticker. Factoring that out means growth was 1.3% in the private sector, virtually unchanged from the previous quarter, says Rosenberg."

http://www.cnbc.com/id/49573024

Ed 12 yrs ago

Memo to Central Banks: You’re debasing more than our currency

http://www.ritholtz.com/blog/2012/10/memo-to-central-banks-youre-debasing-more-than-our-currency/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+TheBigPicture+%28The+Big+Picture%29

Ed 12 yrs ago

Since it would appear that QEternity has ostensibly failed in its main goal of pushing the stock market higher (and mortgage rates lower), the White House seems to be scrambling. Obama administration officials have concluded that the economy, while improved (apparently), is still fragile enough to warrant another bout of stimulus.

The same old kitchen sink is being thrown at the problem as they are now resorting to the same fiscal stimulus that has also failed time and time again (as we noted here). As WaPo strawmans reports the White House is discussing the idea of a tax cut that it believes will lift American's take-home pay and boost a still-struggling economy

http://www.zerohedge.com/news/2012-10-28/what-fiscal-cliff-obama-planning-another-tax-cut-fiscal-stimulus

badseal 12 yrs ago

softy:

"The problem is that the fiscal stimulus has worked"

you're kidding right? it's failed in the past and it's still failing. and at the end, it will continue to fail. printing money is kicking the stupid old can down the road, so your grand childern's - children will pay for it.

traineeinvestor 12 yrs ago

Whether QE has failed or not depends on what its purpose is/was:

- if the purpose was to avoid a meltdown and create a breathing space for economies to recover then it is at least a partial success with the jury still out on the final outcome

- if the purpose was to provide a solution to the world's major economic problems (unsustainable spending and overly risky financial institutions), the most that can be said is that it is a very expensive and potentially dangerous way of kicking the can down the road

Ed 12 yrs ago

Softy - unfortunately economies are not recovering ... I would suggest that QE has simply been delaying the inevitable.

The only thing that has changed is that countries are far deeper in debt...

Moving on to Andy Xie:

"Australia’s bubble is built on China’s, and with no major stimulus in the offing, it may suffer a financial crisis in 2013"

http://www.ritholtz.com/blog/2012/10/a-hard-landing-down-under/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+TheBigPicture+%28The+Big+Picture%29

punter 12 yrs ago

Softy, the world economy is not recovering. It only has avoided a meltdown due to the QE activities of central banks. There's a huge difference right there.

traineeinvestor 12 yrs ago

A rather poor article from the often very good Andy Xie. The heat has largely gone out of the mining boom with prices on most of the major resource companies (BHP, RIO, Forteque etc) well down from their highs as the prices of the underlying commodities have fallen (especially iron ore). They have staged a partial rebound in response to (i) a recovery in iron ore prices and (ii) a realisation that end user demand for the commodities they produce has not fallen - they are still selling increasing volumes in many cases.

It's also worth noting that Australia has considerable capcity to stimulate its domestic economy through interest rate cuts, spending programmes, tax cuts and other iniatives. Although not as extreme as Hong Kong, policy has leaned towards cooling measures rather than stimulus since the financial crisis began.

Not quite the most recent data, but among the countries included in this survey Australia has far and away the lowest government debt to GDP ratio: http://business.time.com/2012/05/23/which-advanced-economy-has-the-most-total-debt/slide/australia/#./?&_suid=1351563741053010673034934666087

traineeinvestor 12 yrs ago

I think the world economy is rather mixed. Most non-Eurozone countries are producing positive GDP numbers, have unemployment numbers which are (at worst) not increasing to any significant extent, improving household leverage, a stabilising banking system and housing markets which are either strong or recovering. Global trade volumes are holding up quite well.

On the negative side, in many places already high government debt is rising and degrees of austerity through spending cuts and tax increases are needed in places like the US. There is also the ticking time bombs of unsustainable entitlement programmes and undefunded pensions (with US student debt also being a significant problem but not as material as some other issues).

The real issue at the moment is the Eurozone which continues to show continued economic stress. This remains my biggest concern. To date, Eurozone exports have done well and imports have remained above pre-crisis levels. Whether they will remain so is another matter.

Ed 12 yrs ago

TI: once again... if Bernanke announced tonight 'no more QE' the global economy would collapse... stock markets would crash into pieces...

So might I suggest the fact that we are stagnant rather than crashing is a false sense of security...

There is as of yet no sustainable growth in any economy ... the only growth we have is related to QE...

And nobody seems to have the slightest idea how to grow without QE... as growth tapers each time the only answer is 'more QE'

From what I can see most of the world is emulating Japan of the past twenty years... it cannot last

traineeinvestor 12 yrs ago

@ Ed - once again, therefore Bernanke will not announce "no more" QE tonight and growing slowly (around 2% for the US) is not stagnation.

It goes without saying that spending more than a country can afford on a regular basis is not sustainable and, one way or another, will come to an end which is, at best, mildly unpleasant and, at worse, will be a Greek or Spanish style meltdown.

elsdon 12 yrs ago

@traineeinvestor,

the +2% growth is real or nominal?

traineeinvestor 12 yrs ago

Real: http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

Ed 12 yrs ago

TI - it is an election year in the US... as always the incumbent will try to juice numbers...

I posted an excellent article from Zero Hedge re: this 2% GDP - a good chunk of it is related to military expenditures - I would bet my bottom dollar that Mr Obama made sure there was a nice order from the military timed to coincide with the election...

http://www.moneynews.com/StreetTalk/Rosenberg-GDP-govt-spending/2012/10/29/id/461849

Now let's not forget the US debt was again over a trillion dollars last year and will remain so each year indefinitely...

Keep in mind with QE and TWIST the Fed is pumping 85 billion dollars a month into the patient...

To get a perspective on how much 85 billion dollars per month annualized is around TRIPLE the total profits of the 50 most profitable companies in the US http://money.cnn.com/magazines/fortune/fortune500/2012/performers/companies/profits/

Stop the QE - the US collapses - in minutes.

And since Ben simply keeps announcing more QE I have to conclude that he is out of ideas - and desperate - and that he can never stop.

TI: Look back at the past 4 years - we've seen these 'green shoots' before...

I cannot see how the US recovers from this - they are just digging themselves a deeper hole by the day

Ed 12 yrs ago

The Incredible Shrinking Half-Life Of Central Bank Action

It seems the market - or the collection of pre-programmed heuristic biases that make up the equity investing public (and machines) - is slowly but surely realizing the confidence trick that is the Fed's Quantitative Easing programs.

The following chart should clarify - to anyone placing their gambling chips on the hopes of another round of easing from the Fed - why the game is up. To wit, the reverse geometric progression of S&P 500 performance during each Fed action: QE1 +50%, QE2 +30%, Twist +18%, QE3 & Twist +8%... so QE4 +4%, QE5 +2%, and QE6 +1%...

http://www.zerohedge.com/news/2012-10-29/incredible-shrinking-half-life-central-bank-action

To put it plainly... we are about to be 'pushing on a string' with QE... it is not working

punter 12 yrs ago

Ed, to make it clear it has worked to avert a disaster (so far). But long term there's nobody who knows what the unintended effects will be.

The length of time by which the Central Banks have been successful to keep the economies of the world afloat (yes, including Greece although with great difficulty), has helped to lull people into sleep and moved a lot to dabble in risky bets. One dark unintended result therefore is a massive financial trap. Just imagine all these HK property buyers (at high prices), and if for example, prices come down hard, then many will not be able to get out unharmed. Spread that scenario (not just in property) all over the world. It's too dramatic and probably will not happen.

Ed 12 yrs ago

100% agreed on that... this unprecedented volume of money printing and low interest rates has without question prevented a collapse/depression...

However it has also without question not resulted in any sort of meaningful recovery... as I think we are all agreed, the global economy is addicted to QE... each time QE starts to run down the markets follow... (the vaunted green shoots die again and again)

And like any addict ... if you give him too many fixes... you kill him...

"the reverse geometric progression of S&P 500 performance during each Fed action: QE1 +50%, QE2 +30%, Twist +18%, QE3 & Twist +8%... so QE4 +4%, QE5 +2%, and QE6 +1%..."

Think of the chart that goes with that data as a heart monitor on our drug addict... it's getting dangerously close to flat lining...

Ed 12 yrs ago

Eurozone crisis live: Spanish recession deepens, German unemployment rises

http://www.guardian.co.uk/business/2012/oct/30/eurozone-crisis-spanish-recession-bailout-greece

Ed 12 yrs ago

Excellent article:

‘Less Than Zero Growth:’ Long decade of decline: 2013-2022

Markets now totally irrational: Read economist Gary Shilling’s Forbes warning: The “Bad-News-Is-Good-News Effect Can’t Last, Expect Markets to Nose-Dive.” The bulls can’t hear, will get caught exposed.

Listen: “There’s a ‘grand disconnect’ currently going on in global markets. Suddenly weakening economies worldwide are driving optimism in markets.” Why? Global “dependency on monetary and fiscal bailouts.” Everyone wants more stimulus, more bailouts. “Conditions are so bad, they’re good.”

Dead ahead, a nosedive into Shilling’s prediction of a long decade of “less than zero growth,” high-stress chronic unemployment, accelerating global unrest, regional conflicts, higher Pentagon budgets,” because “much of the excesses and financial leverage built up in past decades, especially in the financial sector globally and among U.S consumers, remain to be worked off.”

Whether bull or bear, optimist or pessimist, you better prepare of the coming Age of Austerity.

More http://www.marketwatch.com/story/9-scenarios-and-all-lead-to-stock-plunge-2012-10-30?link=MW_popular

traineeinvestor 12 yrs ago

US consumer debt servcing continues to decline: http://www.federalreserve.gov/releases/housedebt/

The effect is especially large among households which own their own homes

Total consumer debt (includes mortgages) is increasing but the ratio of consumer debt to household income is trending down (although very slowly): http://www.reuters.com/article/2012/09/20/us-usa-economy-households-idUSBRE88J0X520120920

(I assume it's okay to post the occasional piece of good news?)

Ed 12 yrs ago

Why not....

However the US federal debt is 1.2 trillion... I believe 61%+ of every dollar the US spends is coming off of Bernanke's presses...

Then of course there is the massive student debt crisis http://www.cnbc.com/id/40682477

For every ounce of good news... there are thousands of tonnes of bad...

Ed 12 yrs ago

Europe is recovering... really?

Reports Wednesday October 24 confirmed that the economic slowdown which has been plaguing the countries in Southern Europe is moving north. The German Manufacturing PMI (M/M) was down to 45.7 from 47.4 last month. The Services PMI slipped to 49.3 from last month's 49.7. Continuing, the German IFO Business Climate, Current Assessment, and Expectations surveys are reflected unchanged or negative expectations. (below 50 = contraction)

http://www.forexpros.com/analysis/more-evidence-of-a-european-slowdown-141521

Policy makers have soothed financial turmoil in the euro zone, but Europe’s largest economy still gave global investors cause for worry Wednesday as Germany’s Ifo index of business confidence fell to its lowest level since February 2010.

http://articles.marketwatch.com/2012-10-24/economy/34691119_1_euro-zone-german-economy-draghi

Spain's economy marches from bad to worse http://business.financialpost.com/2012/10/29/spains-economy-marches-from-bad-to-worse-but-still-no-bailout/

Spain Suffers Torture Worse Than The Inquisition http://www.forbes.com/sites/stephenpope/2012/07/22/spain-suffers-torture-worse-than-the-inquisition/

Portugal economic woes deepen http://presstv.com/detail/2012/10/31/269638/portugal-economic-woes-deepen/

France headed for recession: central bank http://www.reuters.com/article/2012/08/08/us-france-economy-contraction-idUSBRE8770F720120808

Important to keep in mind when reading the above... that the EU has already fired the bazooka in trying to prevent a recession and get their economies on track...

And thus they have no tools remaining to get out of what appears to be a region wide dip below zero...

All downhill from here I am afraid...

elsdon 12 yrs ago

hahaha Softy is such a bad troll.

Anyway, looking to Europe interested to see what they do about Spain.. I wonder how HSBC's exposure there is.. time to withdraw all my money out yet?

Remmy 12 yrs ago

China PMI out yesterday shows China is still on the road to recovery, with manufacturing picking up.

traineeinvestor 12 yrs ago

US manufacturing and retail data both heading up. Inventory to sales ratios are at the healthy end of the spectrum.

US housing market recovering.

China manufacturing back in positive territory and retail continuing to grow.

HK retail doing well.

All this good news from the real economy is really really bad - we might see an early end to QEternity and ZIRP! Hopefully Europe will continue to deteriorate so that current policies will be maintained.

Ed 12 yrs ago

Slight problem with all of this TI...

All of this growth is on the back of printed money... US is now printing 85 billion dollars per month...

China as expected is building more 'bridges to nowhere'

No money printing = no growth.

Don't worry though... the green shoots will wither and die as they have multiple times since Lehman... Central Banks will do exactly as they have said they will do and print to eternity... and interest rates will never come off of 0.

traineeinvestor 12 yrs ago

Ed

The bottom line is:

1. if no money printing = no growth, then money printing will continue - in other words it won'st stop unless and until we have growth or inflation in the US rises to politically unacceptable levels

2. if QEternity and ZIRP continue for long term while we experience inflation, then money in the bank (or under the mattress) will continue to depreciate (just as it has right through this crisis). Risk assets purchased at good prices will do very well in this sort of environment

3. real demand (consumption of goods and services) is growing. If consumers believe that the money printing will continue in an inflationary environment they will eventually wake up to the idea that it is better to spend today's dolalrs today rather than a lesser real value tomorrow - that is we will see accelerated consumption. The biggest near term danger to continued growth is the possibility of the US hitting the fiscal cliff and simultaneously increasing taxes and cutting spending

The last few years have been very good to investors willing to buy risk assets and even better for those willing to borrow at negative real interest rates.

As an aside, China's infrastructure spending is becoming much more focused on things that are really needed - like rail links and roads. Improved transportation is an excellent tool for promoting economic growth.

Ed 12 yrs ago

Is China The Biggest Malinvestment Case Of All Time?

http://seekingalpha.com/article/877121-is-china-the-biggest-malinvestment-case-of-all-time

The US will never stop QE voluntarily - 4 yrs of it and they have no result... yet they keep on printing... because there is no recovery - and without printing there would be economic collapse -

http://www.zerohedge.com/news/why-qe-not-working

Remmy 12 yrs ago

Re TI "China's infrastructure spending is becoming much more focused on things that are really needed - like rail links and roads. Improved transportation is an excellent tool for promoting economic growth".

This is spot on. Invest in transport related companies, or if you want to get a little more sophisticated, infrastructure builders and software that will be used in transportation. The next few years will be very positive for such companies in China.

ltse 12 yrs ago

Well looks like the stock market isn't responding well to QE, S&P trending towards below 1400 probably by end of next week. It was down another 1% on friday, Crude Oil despite the Sandy disruption is down to $84 and gold is below $1700.

Looks likes the USD cash under my mattress is continuing to grow in value, keep stashing cash!

Remmy 12 yrs ago

Re "Well looks like the stock market isn't responding well to QE"...

What on earth are you talking about???

Look a when US QE started and look at the US stock market performance since that time

Ed 12 yrs ago

With each round of QE the US stock market has responded more weakly... at the end of the day money printing was meant as a short term fix ... yet each time QE starts to run out the markets and the economy trend back towards recession (collapse?)... so the Fed has no choice but to keep pumping in money...

We have had nearly 4 years of this... yet there the 'green shoots' die again and again...

Eventually this will result in the phenomenon known as 'pushing on a string'... QE will have no affect whatsoever - or even worse - the toxic side effects of money printing will manifest...

And then we will see the reality of the monumental mess we are in....

As for China.... hmmmm....

China rebounded in 2009 because it blitzed the system with fiscal stimulus worth 16pc of GDP, and because credit growth running near 30pc each year had not yet run out of momentum. It was a short-term cyclical effect.

Similar claims were made about Japan a quarter century ago when it brushed off America's 1987 crash with deceptive ease. We all had to listen to lectures from the Left on the virtues of Japan's dirigiste MITI model, with its intimate cross-holdings of banks and corporate Samurai.

The contours of China's excess are by now well-known. Investment reached a world record 49pc of GDP last year, a level unseen in other Pacific tigers during their growth spurts. Consumption has fallen to 37pc of GDP, from an already very low 48pc a decade ago.

Negative real interest rates and restrictions on investing abroad forced savings into a housing bubble, pushing home to income ratios to 16 to 18 or even higher in Beijing, Shanghai, Tianjin, and Shenzhen.

As premier Wen Jiabao likes to put it, China's economy is "unstable, unbalanced, uncoordinated and ultimately unsustainable." It is why his allies in China's Development Research Centre (DRC) joined forces earlier this year with the World Bank to warn that the export-led growth model launched thirty years ago by Deng Xiaoping's is now obsolete.

More http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9654300/Chinas-economic-destiny-in-doubt-after-leadership-shock.html

Topol 12 yrs ago

It seems that the effect of QE is subject to the laws of dimishing returns - the expected stock market bounce has been less following each announcement. Bernanke noted in 2006 that monetary boost is more effective when coupled with fiscal boost (ie. QE + tax cuts) so once the election is out of the way I think we will be in for a massive fiscal stimulus (especially true if Romney gets in). The US needs to grow at about 2% a year to keep ticking over so with inflation at 2% and rising economic growth needs to be at 4% and rising to keep pace. This implies the printing presses need to print US$950n in 2013 and US$1t in 2014.

The numbers just seem to get bigger n bigger

traineeinvestor 12 yrs ago

@ Topol - reported GDP numbers are real (meaning inflation adjusted), but you are right. Given the rise in working age people, the US needs about 2% GDP growth just to stop the number of unemployed rising (or shrink workforce participation).

ltse 12 yrs ago

100% agree with you Topol, indeed, the Fed is having trouble holding the line, and QE like all things, is subjected to the law of diminishing return, common sense really, if people won't take out a loan at 1% interest rate, why would they take it out at 0? there are other reasons for them not doing so, either they are not credit worthy, not employed, or simply don't want to get any further into debt.

The idea of a "stimulus" in todays world is insane. The very first record of a "stimulus" was back in the days of Joseph in Egypt, Pharaoh had a dream. Seven fat cows were devoured by seven lean cows. Joseph advised Pharaoh to put into place a countercyclical economic policy. Pharaoh would save grain during the fat years... and give it out during the lean ones. This turned out to be a successful policy.

Today however, we saved nothing, we borrow other peoples "grains", to spend and consume on things we don't need, and cannot afford to pay back. Even this insane policy however has limits, as either lenders or more importantly borrowers dry up, this is when a purging of the system is inevitable and excesses consumes during the boom, will be purged and taken away, in the form of a major deflation or credit destruction, any surviving dollars is going to be extremely valuable.

I am bullish the US dollar and USD index, it is a very rare commodity, backed by crude oil, and the full faith of the United States military.

traineeinvestor 12 yrs ago

@ ltse - I'm not sure how you come to the conclusion that "any surviving dollars is going to be extremely valuable"?

They will keep printing until either unemployment falls to acceptable levels or inflation rises to unacceptable levels - this means that we will have inflation rather than deflation

Private sector credit contraction has been occuring over the last few years - in spite of which we have had positive inflation numbers in most countries. I'd be interested to hear why you think this will change? Especially against a backdrop where the US is showing signs of returning to credit expansion.

I'm not disagreeing with the idea that we have borrowed from the future to consume in the present/past and the bills are starting to come due, but I don't see how that gets us to a deflationary scenario in a world where cental banks can print money as long as people still place any meaningful value on it.

Ed 12 yrs ago

Gold Man Sacks:

"The rapid rise of corporate leverage to 130% of GDP in 2011 - one of the highest corporate leverage ratios in the world - is concerning. This high leverage is the result of substantial investment in the manufacturing sector since 2008, leading to over-capacity in many sectors such as solar energy, steel and ship building. It is therefore critical for the new leadership to pursue reforms that not only support the private sector, but also consumption more broadly, in order to utilize this capacity; the alternative would likely prove negative for sectors, banks, and ultimately, the economy."

http://www.zerohedge.com/news/2012-11-05/chinese-credit-bubble-full-frontal

Was on a CX flight the other day and watched this outstanding documentary...

If you think we are in a business cycle and we will recover... I don't think you will think that after watching The End of the Road:

https://youtu.be/B_-fepLZv2k?si=voGG5TV-HfF-yJpK

Ed 12 yrs ago

German Factory Orders Slump the Most in a Year: Economy

Orders, adjusted for seasonal swings and inflation, slumped 3.3 percent from August, when they dropped a revised 0.8 percent, the Economy Ministry in Berlin said today. That’s the second straight drop and the biggest since September 2011. Economists forecast a 0.4 percent decline, according to the median of 40 estimates in a Bloomberg News survey. From a year earlier, orders sank 4.7 percent when adjusted for work days.

Today’s data “are a catastrophe and very bad news,” said Thomas Harjes, senior European economist at Barclays Plc in Frankfurt. “We have a huge problem in the rest of the euro area that now seems to be reaching Germany and its labor market. For the coming quarters, the economic outlook is quite gloomy.”

http://www.businessweek.com/news/2012-11-06/german-factory-orders-slump-the-most-in-a-year-on-crisis

Ed 12 yrs ago

The Unintended and Destructive Consequences of QE

In effect, low funding costs in Japan have impeded the process that Joseph Schumpeter dubbed creative destruction because “zombie” companies have been kept afloat at high cost to the competitiveness of others. Worse, the public credit guarantees introduced to help the banking system lend to industry and commerce have had unintended consequences. The Bank of Japan fears the banks’ capacity for credit assessment is being diminished, while the restructuring of non-viable small and medium sized businesses is discouraged.

http://www.ft.com/intl/cms/s/0/012b2f68-282b-11e2-a335-00144feabdc0.html#axzz2BFJKHOvM

To read all type this into a google news search: Quantitative easing has hit Japan hard

ltse 12 yrs ago

"Well looks like the stock market isn't responding well to QE, S&P trending towards below 1400 probably by end of next week"

Now now now, what did I say last week, the DOW plunges 2.3% to 12,932 last night below the all important psychological 13,000 level, sames goes with the S&P now at 1,394 below 1400.

Even oil plunges 5%:

http://finance.yahoo.com/news/oil-falls-lowest-level-since-210541531.html

Gold is still holding up above $1700 because speculators think Obama will be good for inflation and continuing with huge deficit spending, which he will, but that will only fuel higher unemployment and therefore credit contraction as more business lose confidence, and save rather deploy capital. Gold is and silver will be rolling over too, just a matter of time.

The winner from last night? the USD Index, making a 2 month high. Cash under the mattress is the best investment in this deflationary collapse.

http://finance.yahoo.com/blogs/the-exchange/dollar-stock-dynamic-same-story-hint-change-194254484.html;_ylt=Age9Yj6O1qGlCH.hZXYnYL2iuYdG;_ylu=X3oDMTRwYzM3aXJtBG1pdANGaW5hbmNlIEZQIFRvcCBTdG9yaWVzIG1peGVkIGxpc3QEcGtnA2ZjOGJhMWRiLWY5MzItMzg5Yy1iOWEzLWQyNzBkYTc1N2M3NgRwb3MDMwRzZWMDTWVkaWFCTGlzdE1peGVkTFBDQVRlbXAEdmVyAzU1YTFmMTEwLTI5MTMtMTFlMi1hZmMxLTIzMzFhNDVmYTgzNQ--;_ylg=X3oDMTFpNzk0NjhtBGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDBHBzdGNhdANob21lBHB0A3NlY3Rpb25z;_ylv=3

traineeinvestor 12 yrs ago

A sell off in US equities is understandable - a hike in taxes on dividends is a negative for the market in general, Warren winning a seat in the senate is bad news for banks (and their customers) and the continued roll out of Obamacare is seriously bad news for suppliers of medical goods and services (as well as being damaging to the prospects for job creation).

More printing is on its way.

Ed 12 yrs ago

Note that between 1980 and 2008 it rose steadily under both republicans and democrats. Even during the supposedly fiscally responsible Clinton years (1990 – 1998), while government debt fell a bit, total debt soared. Why? Because there are two ways for a government to fund its overspending: The first is to borrow, as happened in the 1980s under Ronald Reagan. The second is to convince individuals and businesses to do the borrowing and to buy stuff with the proceeds, thus producing taxable income that helps balance the government’s books. Either way, systemic debt goes up.

In the 1990s the Clinton administration chose the second strategy, using easy money to fuel a housing boom and tech stock bubble. The result was a torrent of borrowing, spending, and IPOs, which boosted federal tax revenue and produced a few years of balanced budgets. The government – for those who were focused only on the public debt – looked well-run. But to the tiny handful of Austrian economists out there, the fact that total debt was soaring, and that the average loan was becoming more and more speculative, led to the conclusion that we were creating a debt bubble that could only end with an historic bust.

That bust came in 2000, and republican George W. Bush was forced by its magnitude to leverage both the public and private sectors, producing a housing bubble combined with record government deficits. That bubble burst in 2008, leaving incoming democrat president Obama with a traumatized private sector incapable of leveraging itself further. He saw no option but to run deficits that a generation ago would have seemed physically impossible.

The system, in short, demands ever-increasing amounts of debt and couldn’t care less whether republicans or democrats provide it.

Someday the markets will put a stop to the borrowing, but until then it really doesn’t matter who we elect or what they promise. Debt, after it reaches a certain level, is all that matters – not immigration policy or health care or marginal tax rates or short term interest rates or gay marriage. All are irrelevant compared to the institutional momentum of increasing leverage.

More http://dollarcollapse.com/the-economy/now-we-can-stop-paying-attention/

traineeinvestor 12 yrs ago

@ Ed - so the message is to buy gold and silver because the dollar will become worthless? Sounds like inflation to me.

Ed 12 yrs ago

In spite of all the money printing and ZIRP....

Is QE about to start pushing on a string... or worse... is the string about to push back?

Angst returns on German recession fears and US fiscal cliff

Stock markets skidded across the world and investors retreated to safe-haven assets on fears that Europe’s festering crisis has spread to Germany and a bitterly-divided Washington may struggle to avert a fiscal crisis.

Germany’s industrial output dropped 1.8pc in September and orders fell 3.3pc, far worse than expected. Spanish industrial output fell 7pc. Annalisa Piazza from Newedge said it was a shocking upset and implies that Germany may be in recession already.

http://www.telegraph.co.uk/finance/financialcrisis/9662791/Angst-returns-on-German-recession-fears-and-US-fiscal-cliff.html

Expect more QE... because there are no other options...

Ed 12 yrs ago

TI: I think that it is clear that central banks have no choice but to print more (see comments above)... but the problem is the printing is not working (see comments above)...

So why would more printing work?

And compounding the problem... the more printing we do the more toxic side effects we get...

So I do not think we will recover... at least until we purge the system of the poisonous rot that QE is supporting...

Now how does one trade against this scenario... I don't think anyone can be completely sure... some say buy hard assets including property, metals, etc... but then some say hold USD cash and wait for the deflation to pick up hard assets on the cheap...

Ed 12 yrs ago

Marc Faber (aka Dr Doom)

On how investors should protect their assets:

“They should buy themselves a machine gun…I need to buy a tank. Joking aside, look, we have manipulated markets. Whenever you manipulate markets, you will get unintended consequences. i think the reelection is unintended consequence of money printing, that favors the so- called 0.25%. It was easy for the Democrats to attack the wealthy fat cats of Wall Street, the elite, and the privileged people to portray them as a profiteer of the system, which to some extent, they are. Not because they wanted to but because Mr. Bernanke enabled them to be profiteers. We have a situation where you have today Mr. Obama, I doubt he will stay at the presidency for another four years. I think there will be so many scandals, but that’s another story.”

On why he believes Obama won’t make it another four years as president:

“There is so much smoke. I suppose there is some fire. That is my observation. We don't know how the world will look in five years' time. I am pretty sure central banks will continue to print money and the standards of living for people in the western world, not just in America, will continue to decline because the cost of living increases will exceed income. The cost of living will also go up because all kinds of taxes will increase. Like Proposition 30 today in California is of course negative for the Californian economy. That is the state of the world. We have worsening economic conditions, but we have money printing.”

Ed 12 yrs ago

Money printing is not working... earnings are dropping... and stock markets following... in spite of trillions of QE...

Japan tumbles into the abyss....

Gross domestic product shrank an annualized 3.4 percent in the three months through September, according to the median estimate of 17 economists surveyed by Bloomberg News. That would be the steepest decline since the earthquake-affected first quarter of 2011. The data is due Nov. 12.

The economy’s decline mirrors an aggregate 34 percent drop in net income at the 171 companies listed on the Nikkei (NKY) 225 Stock Average to report July-September earnings through yesterday, according to data compiled by Bloomberg

Japanese exports in the first 20 days of October were down 5.1 percent from a year earlier, the country’s customs authority said today.

Sharp, Panasonic and Sony Corp. (6758), which all posted record losses last fiscal year, are cutting jobs and closing production lines

http://www.bloomberg.com/news/2012-11-07/robots-to-cosmetics-profit-slump-adds-to-japan-economy-woes.html

Ed 12 yrs ago

America is recovering?

Earlier today, fast food juggernaut McDonalds reported same store sales for the month October. At -1.8%, this number was well below expectations of -1.1%, and a drop from September's 1.9%. It was driven by a 2%+ drop in comp store sales across all locations: US, Europea and APMEA, with the US performing just as bad as Europe. Most importantly, this was the first monthly drop in MCD comp sales since March 2003!

So our question is: at what point does the perpetually self-deluded US population finally admit to itself that when even 99 cent meals are no longer affordable, that this country has a problem?

http://www.zerohedge.com/news/2012-11-08/chart-day-when-099-becomes-unaffordable-we-have-problem

Ed 12 yrs ago

Excellent short debate http://video.cnbc.com/gallery/?video=3000044666

Remmy 12 yrs ago

More good news from China, again confirming my advice that people invest now in China stocks whch are poised for a big rebound next year:

China’s export growth accelerated in October in fresh evidence of a broader rebound for the world’s second-largest economy just as the Communist Party grapples with how to boost recovery from a rare slowdown.

Exports rose 11.6 per cent in October from a year earlier to US$175.6 billion, the national customs bureau said on Saturday, strengthening for a second straight month and beating economists’ expectations.

Imports, meanwhile, increased 2.4 per cent to US$143.6 billion, matching September’s gain but falling short of analyst forecasts.

The country’s trade surplus, a source of friction with countries including the United States, widened to US$32 billion for the month, up from US$27.7 billion in September.

The size of the surplus was a surprise, surpassing the median forecast of US$27 billion in a survey of economists by Dow Jones Newswires.

Those economists had also forecast a 10 per cent increase in exports and a four per cent gain in imports.

China’s economic growth has slowed for seven straight quarters and hit a more than three-year low of 7.4 per cent in the three months through September, but recent data has fuelled optimism the worst may be over.

Industrial production for October rose 9.6 per cent on year from 9.2 per cent in September, the government said on Friday. Retail sales, the main measure of consumer spending, also accelerated to a 14.5 per cent gain during the month.

Fixed-asset investment, a key gauge of infrastructure spending, also showed improvement in October, while inflation remained well under control, dipping to a nearly three-year low of 1.7 per cent in October.

Economists have seized on the recent improvement in Chinese data as a sign that economic growth will likely accelerate in the current fourth quarter through the end of December.

“Today’s trade data, together with improving domestic demand indicators released yesterday, continue to support our view that China’s growth momentum has picked up,” ANZ bank economists Liu Li-Gang and Zhou Hao wrote in a commentary.

PS - another stock pick for you guys - E-pro Ltd, which owns DX.com. This website seems to work very well, and traffic and sales seem to be picking up nicely. I'm going to buy a little on Monday morning. The stock code on the Hang Seng is 8086. Current price $.66 per share.

Ed 12 yrs ago

Actually China is simply going deeper in hock by building more 'bridges to nowhere'... they are doing exactly what the US started to do after the dotcom bust and 911... unleash massive amounts of cash into their economy... which of course resulted in a mega bubble and mega crash...

Rather important to keep this in mind when investing in China... much of the growth since 2008 has been a product of stimulus... and many of these investments (e.g. ghost towns) are returning 0... this can only go on for so long...

China absolutely needs export markets to recover - particularly the EU (her biggest trading partner)... unlikely anytime soon...

Heavy Lending Creates a Surge in Chinese Economy

The renewed growth has been fueled by rapidly mounting debt, as state-owned banks and the central bank have funneled hundreds of billions of dollars in additional lending to state-owned enterprises and government agencies to finance further investment projects.

http://www.nytimes.com/2012/11/10/business/global/heavy-lending-creates-a-surge-in-chinese-economy.html?ref=global

Is China's Spurt Sustainable?

According to data issued Friday by the China Trustee Association, an industry body, new funding provided by China's trusts—a type of wealth management company that taps private funds—for infrastructure projects was 310.86 billion yuan ($49.7 billion) in the third quarter, almost triple the 116.24 billion yuan they provided a year earlier.

The timing of a turnaround, so close to the Party Congress, is bound to raise questions of whether the numbers are being manipulated to show progress, or whether policy makers are giving the economy a one-shot dose of adrenaline that will dissipate quickly.

Some China analysts, though, doubt that's the case. The turnaround started in September, with a pickup in exports and manufacturing and has continued into October.

http://online.wsj.com/article/SB10001424127887323894704578108141057439464.html

Remmy 12 yrs ago

Now why does that reply from Ed not suprise me ... :)

Ed 12 yrs ago

The comment was from the New York times... not me...

Heavy Lending Creates a Surge in Chinese Economy

The renewed growth has been fueled by rapidly mounting debt, as state-owned banks and the central bank have funneled hundreds of billions of dollars in additional lending to state-owned enterprises and government agencies to finance further investment projects.

http://www.nytimes.com/2012/11/10/business/global/heavy-lending-creates-a-surge-in-chinese-economy.html?ref=global

Ed 12 yrs ago

Interesting take on the debt ceiling... http://www.zerohedge.com/contributed/2012-11-09/obama-wants-drive-over-cliff

Here is why Obama has no desire to settle this affair before it gets put into effect.

It will impose tax hikes on everyone who pays federal income taxes (not just the 2%)

It will cut entitlements without his having to support the actions

It will reduce defense spending without him ‘looking soft’ as Commander-in-Chief

It will end the ‘Bush Tax Cuts’ automatically

It will probably slow economic growth (GDP)

Why would our President want these things to take place?

He would get the extra tax revenues to use without being blamed

He could not be held accountable for breaking his ubiquitous pledge to never raise taxes on the bottom 98%

He would not be the one cutting entitlements, it would be ‘out of his hands’

He prefers to cut defense spending rather than social programs

He can later ‘give back’ tax cuts to the Middle Class

He can then call them the ‘Obama Tax Cuts’

He can blame those damn ‘Obstructionist Republicans’ for the next recession

Remmy 12 yrs ago

Ed - re "it was the NY times". Yes, I know - its from the NY times, but I know if there ia a "counter argument" you will find it!

Actually, the NY times article does have some basis, but let me say first of all, I look, always, more at the effect of actions, rather than whether they are long term the "right" thing to do. My motive is always to make profits, and avoid losses, based on understanding the system, rather than fighting it.

Yes, state lending did help boost a rebound in China. (Before you were doubting whether we have a rebound. Are you now accepting that its happening, but just critical of how it is being achieved? Or do you still think its not happening? Remember, I spot trends early - that's how I make my money, and so I have invested over the last few months picking what I see as the "bottom" for China a few months ago. I stated this clearly on this site a few months ago. I also provided a list of stocks that I suggest people invest in for greater than average gains as this trend takes shape providing stocks that I think will double over the next year:

189 DONGYUE GROUP

317 GUANGZHOU SHIPYARD INTL

633 CHINA ALL ACCESS HOLDINGS

710 VARITRONIX INTERNATIONAL LTD

904 CHINA GREEN (HOLDINGS) LTD

921 HISENSE KELON ELEC HLD-H

1863 SIJIA GROUP CO

3838 CHINA STARCH HOLDINGS LTD

8045 JIANGSU NANDASOFT TECHNOLOGY

Anyone who followed my advice would already have made some nice gains. These are all still strong buys - its early days yet. (I actually have a more extensive list that I can provide if anyone is interested).

The new data points to signs of faster than expected growth from China.

On top of that we have slower than expected inflation, which is a sign stimulus is more likely to come.

Yes, the Govt has encouraged banks to lead more heavily (and I am invested accordingly).

Industrial production, retail sales, fixed asset investment - all are shown by the latest data to be stronger than expected.

This is really positive data. Expect stocks in China, and HK listed China stocks to rally as we get more news confirming this trend.

traineeinvestor 12 yrs ago

Remmy -I agree that the most recent set of numbers out of China look encouraging with inflation moderating and production and consumption continuing to rise. I remain a bit concerened about government efforts to micro manage the economy and excess capacity but am looking for more opportunities.

Thanks for sharing your list (and you have some nice gains to show so far). I'd be interested in seeing the more extensive list. As mentioned in an earlier post, in the small cap space I've added a few China VTM (893) hoping to profit from the possible takeover and am quite keen on Tontine Wines (389).

Remmy 12 yrs ago

Here's my full list. I don't have time to provide the full analysis on each one.

I'll take a look at the companies you have mentioned later this evening. (At a very glance I woudl prefer 893 over 389).

74

189

300

317

354

359

464

568

633

710

746

904

921

1033

1174

1863

2600

2628

2899

3838

8045

8086

I also have some bigger, less exicting stocks in my portfolio - 13, 2388 2988, 388, 823 - all up from when I bought...

Ed 12 yrs ago

Of course if there is a counter-argument I will find it... because I seek the truth...

As for China I am on record multiple times stating that China, when faced with continued problems in export markets, would build 'more bridges to nowhere'

Or to be more precise... they would pump more borrowed money into infrastructure and other capital investments many of which are yielding zero return. i.e. empty ghost towns.

And that is exactly what they are doing.

I am not commenting on whether or not people should ride the latest wave of stimulus... And I have no dog in the fight with regard to China investing.

I am simply pointing out that this 'artificial'... that is is based debt... and that it is unsustainable.

Nothing more - nothing less.

Remmy 12 yrs ago

Ed its a little simplistic to say China is building bridges to nowhere. Actually they are trying to divert funds to infrastructure works that will proide long term economic benefit - roads, rail, ports, etc. And they are trying to divert funds to industries that they believe have high growth and margins in the years to come. So its not all bad is it? (Now compare China to your other favourite countrles in Europe - the prospects of China stand head and shoulders over Europe in terms of growth for the next decade. We will likely see 2-3% GDP pa at best from EU over the next decade. China on the other hand will be at 7-9% I would think.

traineeinvestor 12 yrs ago

@Remmy

Thanks for the list. That will give me something constructive to look at over the next few days :-)

There's a couple of stocks I've been looking into this week. If I conclude they're a buy, I'll post the details here.

Ed 12 yrs ago

Is China the Biggest Malinvestment Case of All Time?

http://www.mercenarytrader.com/2012/09/is-china-the-biggest-malinvestment-case-of-all-time/

Stimulation without edification

The danger of capital misallocation has increased, argues Mr Batson, because investment has reached such a high share of China's GDP. I agree. No country that invests 46% of its GDP in fixed assets can hope to invest well.

http://www.economist.com/blogs/freeexchange/2012/09/chinas-economy

China's ghost towns and phantom malls http://www.bbc.co.uk/news/magazine-19049254

China Confronts Mounting Piles of Unsold Goods

http://www.nytimes.com/2012/08/24/business/global/chinas-economy-besieged-by-buildup-of-unsold-goods.html?pagewanted=all

I think it is completely obvious what China has been and is doing again...

Exports have not recovered since Lehman... and with the EU in huge trouble ... and the US stagnant... GDP has been falling (PMI under 50 for nearly a year)

So just as they did post Lehman, they are again propping up GDP by running up massive debts to build stuff that is not needed...

Building infrastructure, housing etc... that generates no return - because there is no demand - is absolute madness...

China needs export markets to reignite... because you can only build so many empty apartments and towns before the whole house of cards collapses

Doesn't mean money can't be made riding the wave (although look at the Chinese stock market past 4 yrs...)... but let's not confuse things...

China is running on stimulus and not much more - it is an export driven economy... and export markets are hurting badly...

Remmy 12 yrs ago

Ed - yes, there is some validity to all the points you have made. Its an oversimplification to say this is all China is doing, but the points you made mentioned are valid. And believe me they are not missed by the Chinese leaders - they will be carefully considering how to get the balance right going forward.

TI - I would love to see your picks - do post them up (or do we need a seperate "stocks to buy" thread?

traineeinvestor 12 yrs ago

Remmy - I'd suspect that a thread on "alternatives to property investment" would help to keep the discussions focused.

Ed 12 yrs ago

Fueled by debt, recovery takes hold in China

BEIJING — With construction cranes moving again all across China, from Guangzhou to Beijing, and with steel mills and concrete factories busy once more, the Chinese economy is showing signs of a debt-fueled recovery this autumn even as the United States and the European Union continue to struggle.

Industrial production, fixed-asset investment, retail sales and electricity generation all strengthened more than expected last month, continuing a trend that began in September, while inflation slowed more than expected.

State-owned banks have released a torrent of loans to state-owned enterprises since May, producing a swift revival of investment spending this fall but also raising questions about the efficiency of those investments.

Each extra dollar of lending since 2008 has produced less than half as much extra economic growth as before the global financial crisis. State-owned enterprises have finished urgent tasks like building enough steel mills to meet domestic demand and are now investing in fewer and fewer economically viable projects to sustain economic activity.

http://www.bendbulletin.com/article/20121110/NEWS0107/211100313/

Ed 12 yrs ago

Chinese Gold Imports Surge In September, YTD Total Surpasses Official Indian Holdings

http://www.zerohedge.com/news/2012-11-11/chinese-gold-imports-surge-september-ytd-total-surpasses-official-indian-holdings

Remmy 12 yrs ago

Guys - did you check out EPRO? See just announced today below:

EPRO submitted a formal application to the Stock Exchange for the Proposed Transfer to the Main Board. http://iis.aastocks.com/20121109/001535326-0.PDF

Surely a positive sign I would think?

traineeinvestor 12 yrs ago

@ Remmy - very positive, especially when added with the buying by insiders earlier this year. Shares up 10% this morning.

Remmy 12 yrs ago

TI - I just checked EPRO - after an initial pop, its about flat mid-day.

I guess you could argue that any company can announce an intention (or hope) to move from GEM to Mainboard, and there is no certainty the application for a mainboard listing will succeed, so how do you value such an intention.

I still see this as a positive move though, but in any case, I buy on value, rather than the hope of things like a move from GEM to Mainboard. Interestingly, if you look at Nandasoft, it is nicely up since they announced a similar intention to move to mainboard. (And to me its interesting that my two top tech picks both made similar announcements less than a month apart!). I have not looked at companies historically that have made the move from GEM to Main, but I would suspect there is a positive correlation between the move and their shareprices.

Lets see how prices react if/when a mainboard listing is confirmed for either.

I wish I had more insight into how EPRO's bussinesses DX.com and MadeInChina.com are doing. I have heard that both business appear to growing very fast, which I find very attractive. Right now there is so little analyst coverage of these companies, (which again I see as positive as there is really only upside if they attract more interest and get more coverage if they really show decent growth). I have heard of suggestions that we might see YoY growth of over 1000% this year from their ecommerce business, but of course its probably of a low base so that needs to be kept in mind, (and also I am not sure if this 1000% figure is revenue or turnover, or even it its correct). Will have more clarity when results are reported which I am looking forward to reading.

And for anyone reading this (and I don't need to tell this to TI), do NOT put all your eggs in one basket. I look for companies like this to invest in, but I spread my cash around to multiple companies that look appealing. With companies like this you are going to find some perform like stars, and some, unfortunately will emerge as scammers or having hidden/mislead investors. Unless you have inside knowledge (which I don't) there is only so much you can do as due dilligence (in my case, I look at management, ownership structure, financial data, who the auditor is, track record, and finally whether I can actually understand the business and whether the overall business and business sector are attractive to me.

Remmy 12 yrs ago

Hmm - just looked at EPRO's results for the Q ended September (reported yesterday). It recorded revenue of $318,000,000 which is down 10.6% year-on-year. And its net profit receded 35% to $24.37 million. So, not the positive news I had hoped for given what I had heard (and what I still think has massive potential) about the growth of its ecommerce business. (They cited a slowdown in demand from Europe etc).

Still, I'm a long term hold on this one - lets see what happens if/when they list on the mainboard - its early days yet...

Ed 12 yrs ago

Status Report - EU - America:

http://www.zerohedge.com/contributed/2012-11-12/market-just-figured-out-two-huge-problems

Loyd Grossman is Miss Venezuela 12 yrs ago

Bought Sinotrans (368), Orient (316) and COSCO Pacific (1199) to add to my COSCO (1919) and China Shipping (2866). Probably in too early but looking for a decent return over 24 months or so. Just need China Merchants now

traineeinvestor 12 yrs ago

@ Loyd - that sounds like a fairly large concentration in one sector?

Loyd Grossman is Miss Venezuela 12 yrs ago

Ninety percent of physical world trade is moved on ships. A big chunk of this involves China. Shipping shares are bombed out (and could fall further of course with the fiscal cliff) but rates look like picking up and there are signs of things bottoming out. Shipping oversupply is slowly coming back into balance with Bangladeshi breakers' scrapyards at full capacity Oil and iron ore shipments to China have picked up. The companies probably won't go bust so more of a question of holding on and they have little in the way of competition. Long-term, I think the polar route will cut costs to Europe dramatically if the Russians don't get too greedy. I think the Chinese are aware of this (which may have been why that Chinese national was trying to buy up a big chunk of Iceland not so long ago). Would make a great depot for as would give access to East-coast US and Europe after going over the pole. I think Singapore shipping is finished for this reason (though I'm not in the shipping trade and I don't really know what I'm talking about).

traineeinvestor 12 yrs ago

Loyd - I'm pretty much on the same page as you regarding shipping - the valuations are "bombed out" and in many cases the shares are selling at well below what I understand to be the replacement cost of the underlying ships. That said, near term earnings look very weak as excess supply is still a problem. Port and logsistics companies look reasonable value (not as depressed) and are still making money - lower risk/reward.

I've also backed the sector but only with two stocks: COSCO Pacific (1199) and Sinotrans Shipping (386). While I've put a meaningful amount of money into each, they do not dominate my share portfolio.

Loyd Grossman is Miss Venezuela 12 yrs ago

Trainee. Same here. I put a big chunk of my property profits on the good ship HSBC at HK$90. Seems to be taking on water at the moment.

Loyd Grossman is Miss Venezuela 12 yrs ago

Bloomberg flash. COSCO, CSSC sign agreement to build 4 supertankers: SASAC

Okay, I'm talking my book now like Ed and his gold fetish. I'll give shipping a rest.

Ed 12 yrs ago

What is the real rate of growth in China?

Forget GDP, it doesn’t tell the whole story about a country’s economy. Focus instead on these economic indicators: electricity consumption, rail cargo and bank loans.

Chinese Vice Premier Li Keqiang attends the opening session of the 18th Communist Party Congress held at the Great Hall of the People on November 8, 2012 in Beijing, China.

This is apparently what Li Keqiang, expected to take over as premier in China’ leadership transition, said at a meeting with the U.S. ambassador in 2007, according to a Wikileaks cable.

http://www.cnbc.com/id/49653298

OffThePeak 12 yrs ago

Ed,

If the service economy was growing fast (as is likely) then those indicators may not necessarily grow much.

My concern is malinvestments, which could be big.

In the US you will see a sick economy for a long, long time - It is weighed down by decades of stupid over-investment in the suburban way of life. And it will take decades of slow growth to address that malinvestment.

Maybe China will be smarter than the US in how it spreads itself across the landscape

traineeinvestor 12 yrs ago

Right now, the PRC data that is of most interest to me is the retail sales figures (growing nicely) and trade figures (holding up but not growing as strongly as I would like) and inflation (moderating). These are the ones that will tell us how China is progressing from an emerging market to a sustainable middle class growth story (even if the growth will be slower than during earlier years).

Remmy 12 yrs ago

TI I agree entirely...

Ed - I agree, electricity consumption, rail cargo and bank loans are also important indicators to keep an eye on.

Ed 12 yrs ago

The problem I see with China is that they seem to be doing the same the US did when they had their downturn after the dotcom crash...

They are flooding their economy with easy money in attempt to maintain growth rates...

Ed 12 yrs ago

"Japan is currently selling more adult diapers than children's diapers."

“they have already passed the Rubicon…with current debt levels over 25 times its 2011 tax revenues.”

http://www.insidermonkey.com/blog/invest-for-kids-conference-kyle-bass%E2%80%99s-dismal-outlook-for-japan-28619/

Remmy 12 yrs ago

Re - "The problem I see with China is that they seem to be doing the same the US did when they had their downturn after the dotcom crash... They are flooding their economy with easy money in attempt to maintain growth rates..."

This might be a problem if they simply put money into the economy non-strategically. If on the other hand, they do it well, and create mechanisms to help make sure it stimulates the right areas and infrastrutures, then its not just "spending" but rather "investing". And if they "invest" well, that allocation of money will produce significant returns.

PS - in your post mentioning that to assess growth in China electricity consumption, rail cargo and bank loans are key indicators - data out over the last few days shows monthly, quartrley and YoY growth for all - again, confirming a recovering in China is on the way...

Ed 12 yrs ago

Yes China is on its way... probably to bankruptcy... because they are continuing to attempt to maintain growth by investing in more 'bridges to nowhere'....

The EU is China's biggest trading partner... common sense would dictate that China cannot thrive when it's biggest market is in crisis... with the US not far behind....

Here is a typical chain of events:

1) Stimulative monetary policy creates falsely optimistic market signals.

2) Private investment firms act aggressively on these false signals.

3) As a result, the private sector "malinvests," i.e. allocates badly.

4) Capacity is increased prematurely, supply ramped up excessively, etc.

5) When the stimulus wears off, the economy is in worse shape than before.

6) Overhang of excess debt, capacity, supply etc. serves as a dead weight.

7) Struggling to ignite growth, the authorities order more stimulus.

8) A speculative bubble ignites instead, furthering the malinvestment.

9) Yet more excess capacity, debt, supply etc. is accumulated.

10) The additional stimulus wears off…

11) Repeat the process until you get full-on economic collapse.

More http://seekingalpha.com/article/877121-is-china-the-biggest-malinvestment-case-of-all-time

Ed 12 yrs ago

But the line-up as the Standing Committee walked onto the dais this morning should be a cold douche for BRICs romantics and believers in Confucian perma-growth in the West. Will these men really get a grip on a credit-driven economy that has become ever more unbalanced – with investment reaching a world record 49pc of GDP, and consumption falling from a very low 48pc to just 36pc over the last twelve years?

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100021331/chinese-perma-growth-at-risk-as-leninists-tighten-politburo-grip/

Ed 12 yrs ago

So let me get this right.... China is now full steam ahead... because?

It's biggest trading partner has collapsed into another recession... with no way out since they have already used the standard tools of recovery...

http://www.guardian.co.uk/business/2012/nov/15/eurozone-double-dip-recession

And now that the election is over and all the window dressing that was making the US look better than it was is now exposed... job numbers are piling in to the downside... manufacturing indices are plummeting... food stamp recipients surged to another record last month

http://www.zerohedge.com/news/2012-11-15/election-over-and-philly-fed-plunges

http://www.zerohedge.com/news/2012-11-15/hopium-now-depleted

http://rt.com/usa/news/post-election-food-stamps-476/

Then we have the UK... headed for a triple dip

http://www.guardian.co.uk/business/2012/nov/15/retail-sales-triple-dip-recession

How about Japan? Oh right...

Japan's economic situation fails to improve. A year-on-year drop of 3.5% in the gross domestic product (GDP) is causing a headache for.... http://www.majiroxnews.com/2012/11/15/japan-economy-shrinks/

But China just keeps on chugging along building it's 'bridges to nowhere'... and ghost towns.

Loyd Grossman is Miss Venezuela 12 yrs ago

Ed. Europe hasn't collapsed. Northern Europe doing okay. US ditto. Bridges to nowhere. Capital allocation could be a lot better in China but the bridges to nowhere and ghost town argument doesn't really cut the mustard in a densely country of 1.2 billion people. Chances are someone will use the bridge.

Ed 12 yrs ago

Once again Loyd... you have wrong information:

930s medicine pushes Europe back into double-dip recession

The eurozone has relapsed into double-dip recession as the austerity shock in the Mediterranean region spreads to the core countries of the north.

The Dutch economy shrank by 1.1pc in the third quarter amid a deep housing slump, and even Austria has begun to succumb. Finland’s economy has shrunk by 1pc over the last year.

“Recession comes as no surprise and it is going to get worse next year,” said Desmond Supple from Nomura. “Europe has imposed dusted-off policies from the 1930s and they are driving peripheral countries towards depression,” he said.

“We are seeing a mix of pro-cyclical fiscal austerity, overly-tight monetary policy, and regulatory overkill under the Basel III bank rules that are forcing lenders to tighten credit. Europe is stuck in a bad equilibrium and it is not going to end until there is a change of course.”

Prof Paul de Grauwe from the London School of Economics (LSE) said austerity measures imposed on the Club Med with no offsetting stimulus by the creditors was creating a contractionary bias to the whole system and and leading to a “very dangerous situation”.

France managed to stave off recession by the skin of its teeth, but that is unlikely to last after a blizzard of grim data in recent weeks and an austerity shock of 2pc of GDP coming next year.

Howard Archer from IHS Global Insight said the entire core would soon be engulfed. “Germany looks to be in severe danger of contracting in the fourth quarter, as does France,” he said.

http://www.telegraph.co.uk/finance/financialcrisis/9681868/1930s-medicine-pushes-Europe-back-into-double-dip-recession.html

Keeping in mind ... all this 'ok' news is on the back end of trillions of dollars of stimulus/money printing/ZIRP...

They have used up all their tricks - and yet we still have no growth.

Ed 12 yrs ago

World Production Stagnates (chart)

http://www.nytimes.com/interactive/2012/11/16/business/World-Production-Stagnates.html?ref=economy

Ed 12 yrs ago

The Central Bankers' Potemkin Village

http://www.zerohedge.com/news/2012-11-17/kyle-bass-falacies-such-mmt-are-leading-sheep-slaughter-and-we-believe-war-inevitabl

Ed 12 yrs ago

The fixes are not working...

In Spain, after four austerity packages, the unemployment rate has increased from 8 percent in early 2007 to 25.8 percent today, while the country's debt ratio has doubled. In Portugal, unemployment has gone up by close to 100 percent in four years, with the debt ratio increasing from 72 to 114 percent. In Greece, after budget cuts amounting to more than 10 percent of the country's total economic output, unemployment has almost tripled and the debt ratio has risen from 113 to 160 percent.

The fresh trillions circle the world in the search for yield, but only a small part of the money flows into the real economy, where investments in new production plants produce lower returns. Instead, the trillions slosh back and forth, from one financial market to another, from the foreign currency market to the commodities market, and from the gold market to the stock market and back again.

Read More http://www.zerohedge.com/news/2012-11-18/europes-depression-japans-disaster-and-worlds-debt-prison

Loyd Grossman is Miss Venezuela 12 yrs ago

Ed. The economies of Spain, Portugal and Greece need to be massively restructured. This is what the euro is doing. People can protest as much as they like, it won't make any difference. However, I still think the euro will survive as it would be too troublesome to withdraw. I wouldn't take Spanish unemployment rates at face value. There is so much bureacracy involved in employing people.

badseal 12 yrs ago

Loyd, we all know this, but it's easier said than done. The Euro is doing more harm than good and unfortunately there are individiuals who are helping to sink the ship faster. When poop hits the fence, this will go down in history as the biggest epic fail. What we're witnessing is just the tip of the iceberg and it wont get any better as those in power don't want to do the 'right thing' and deal with heart of the problems.

Loyd Grossman is Miss Venezuela 12 yrs ago

I think it's 65/35 in favour of euro survival.

badseal 12 yrs ago

Majority do not want to deal with the mess, if Euro collapses. At least not on their watch right? It will take brave souls to do the right thing.

Remmy 12 yrs ago

More news confirming a recovery is starting in China (and supporting my view to buy China stocks):

Monday, November 19, 2012

The mainland economy has stabilized and is expected to attain a high level of growth for a long period, said Premier Wen Jiabao.

A state researcher, meanwhile, forecast an 8 percent growth rate next year.

"We will continue to be the engine of economic growth in the world and in the region," Wen told China News Service on his flight to Phnom Penh yesterday to attend the 15th summit between China and the 10-country Association of Southeast Asian Nations.

"It is the only right choice and our mutual wish to make a concerted effort to overcome the current difficulties as the recovery of the world economy is slowing down and East Asia is facing increasing pressure," Wen said.

He called for solidarity and cooperation among ASEAN members and advocated new development themes.

Senior state researcher Lu Zhongyuan expressed optimism over the mainland's growth.

"China's gross domestic product growth is highly likely to exceed 8 percent next year as the external environment improves," said Lu, vice president and senior research fellow of the State Council's development research center.

Speaking at a Beijing forum yesterday, Lu estimated GDP to be between 7.5 and 8 percent this year driven by domestic growth.

In the first three quarters, GDP rose 7.7 percent year-on-year, compared with 9.3 percent in the same period last year. The mainland has targeted 7.5 percent growth in 2012. Lu expects the 12th Five-Year Plan period, which runs from 2011 to 2015, to be around 8 to 9 percent, and around 7 percent from 2016 to 2020.

Also some signs Chinese property prices have stabilized:

Home prices in China rose 0.05 percent in October from September, calculations based on official data showed yesterday, adding to evidence of a recent, mild recovery in the country's property market and frustrating the government's efforts to temper prices.

It was the third month-on- month increase in five months following Beijing's decision to cut interest rates once each in June and July, which improved access to mortgage credit, and in the wake of policy tweaks by some cities to boost local property markets.

Average home prices in 70 major cities across China rose 0.05 percent in October from the previous month, after staying flat in September and June and increasing in August and July, according to calculations.

Ed 12 yrs ago

So I suppose China is insulated from what's happening in Europe, the US, the UK and Japan... like some sort of beacon of endless prosperity in the midst of a global economy that is sinking....

Or could it be that China is doing exactly what it did after Lehman... namely make reckless and wasteful 'investments' into more empty apartments... ghost towns... and other 'bridges to nowhere'

Remmy 12 yrs ago

China is not entirely insulated, but certainly has the size, funds and internal growth to be somewhat insulated.

Also, the global economy is not "sinking". You always seem to look at historical information and then assume that the present (and future) is as what has happened in the past. The reality is that the global economy is recovering. If anything, we are in our lifetimes likely to see unprecedented growth like never before, especially from China, India, South East Asia, Latan Americal, Middle East, and the "developing" countries in Europe such as Russia, Turkey, the CISs, etc.

Regarding the "empty apartments", Ed, do you know how many people, each year are moving to the cities in China each year? We are talking 10s of millions every year. They need to be housed somewhere, so we have real demand for the housing being built.

Further, why do you always mention "empty apartments" and "bridges to nowhere" rather then mention the factories, roads, rail, ports, airports, powerstations, Universities, hospitals, server farms, mines, farms (I could go on an and on...) all of which will help China continue to grow both internally as well as grow as the factory of almost everything to the world over the next decade.

traineeinvestor 12 yrs ago

The global economy is still growing with recession in parts of western Europe and one or two other places being more than offset by growth in America, Asia and many other places. While growth may be lower than pre-crisis levels and there is plenty to be concerned about, the bottom line is that the global economy is expanding. Selective cherry picking of the negative bits doesn't change that.

I fully agree with Remmy's comments on China. Sure there has been plenty of misallocated capital, but a lot of useful and necessary things are being done which will benefit China in the years ahead. Growth may be slower than pre-crisis levels and there is excess capacity in many industries (e.g. Steel) which will damage profitability, but it is still an economy in a state of expansion.

That's the past/present. What about the future? Stuffed if I know, but with the printing presses running flat out and ZIRP likely to be with us for some time, risk assets look a better bet than cash in the safe deposit box to me - especially if one has the discipline to ride out the inevitable volatility and one buys at attractive valuations to begin with.

Ed 12 yrs ago

China: I mention the negatives because that is all there is worth mentioning. Factories to make stuff for whom? Europe? The US? Japan? Suggest you read http://seekingalpha.com/article/877121-is-china-the-biggest-malinvestment-case-of-all-time

Europe: I am looking forward. And I see a black wall. The most successful fund manager Ray Dallio summed things up perfectly when he said earlier this year "Europe is going into recession - they have already tried massive stimulus, ZIRP, and money printing - so how do they get out of it?"

Look at this graph - nothing is recovering ... the slopes are all trending downwards or slowing http://www.nytimes.com/interactive/2012/11/16/business/World-Production-Stagnates.html?ref=economy

The EU is going to collapse. It's just a question of when....

Japan is going to collapse. It's just a question of when....

And China, the US and the rest will follow....

Trillions have been printed in futile desperation - yet there is no recovery - there will be no recovery.

Ed 12 yrs ago

TI: of course not all of China's investment is wasted... but there is massive misallocation going on as pointed out on Alpha... this is a time bomb

But that is not the point - China NEEDS export markets particularly the EU and the US to recover - these are their two biggest markets... and they are not.

As for QE and ZIRP... we have 4 years of that now in the US, UK, and EU... yet no recovery... (how many times does the Bernank have to cry 'green shoots' for the people are start saying BS...)

Japan has two decades experience with this - yet no recovery...

I will bet my bottom dollar the US and EU are not going to last 2 decades on printing and zirp... Japan has only done so because the rest of the world was not...

We are getting closer to a 'pushing on a string' scenario where the stock markets do not react to more money printing...

To clarify here... I am not making investment suggestions... I am simply stating what I see as the obvious.... there is no recovery ... there will not be a recovery... what I see coming are big defaults...

traineeinvestor 12 yrs ago

America is recovering - 2% growth, improving housing market, improving corporate earnings , improving household debt levels, increased employment - just not as fast as many would like. The question is not whether America has managed to recover somewhat from the bottom of the crisis (as a matter of cold hard fact it has),but whether it can continue to recover in the face of higher taxes, spending cuts, unsustainable deficits, excessive regulation and many other problems. I don't know.

Japan is an interesting case. National economy is contracting but per capita numbers have held up meaning no overall decline in living standards. Whether this is sustainable in the face of the national debt is the big question.

EU is still deteriorating but relatively limited impact on imports so far. If things continue to deteriorate, that would be expected to change.

A couple of random thoughts.

The US may be about to become the world's biggest oil producer - but no sign of any serious decline in oil prices. That strikes me as odd and suggests either that there is some stockpiling going on or demand is rising faster than the new supply or that other sources of supply are declining. Whatever the position, it raises theossibility that revenues for various oil exporting countries could fall significantly at some point with potential implications for the ability of the countries that depend on those exports to support the spending programmes that prevent social unrest.

There is (IMHO) a new benchmark in asymmetrical risk - banks issuing contingent convertible bonds. They pay a decent coupon, mid-high single digits, but are completely wiped out if the issuing bank's tier 1 capital falls below 5%. This strikes me as an incredibly dumb deal for the CCB investors and the shareholders alike. Has anyone taken a look at these?

Ed 12 yrs ago

America is printing 85 billion dollars per month and pumping it out at ZIRP.

Of course we are going to see some sort of bump in the numbers. Just as we have seen bumps for 4 years now when they print. And when they stop … the numbers crash. Tell me something new here…

20 billion per month is being handed to institutions who are buying properties for rental purposes (just as Bernanke promised). And Millions of properties are being held off the mark in a futile attempt to prop up prices.

Now that the election is over watch for the REAL numbers to come out. Rather distressing print on the weekly job claims last week – back up well over 400k

Let’s talk about recovery in the US when the money printing stops and we have 2% or higher growth. Then I will buy into the “green shoots” theory

Japan has 230% debt to GDP. Their economy is on track to contract 3.5%. Many of their major electronic firms (including Sharp) are on the verge of bankruptcy. I find that shocking – rather than interesting… something has to give there.

The EU is a total basket case. It will collapse because so long as the Euro remains the currency the PIIGS will remain in Depression – and they will take Germany, France and the rest of the Union down with them (and we will quickly follow). This has to break – the people will only accept so much suffering.

Fracking, like Tar Sands is something the oil industry has known about for decades (see earlier article from a geologist I posted on this)

The reason nobody has fracked is because it is VERY expensive compared to traditional oil drilling http://www.post-gazette.com/stories/business/news/study-fracking-priciest-for-wells-312514/ and because it is an environmental nightmare http://www.guardian.co.uk/commentisfree/2012/apr/17/fracking-aquifers-tap-water

When the tar sands and fracking became economically feasible… that to me indicated that we were definitely at peak CHEAP oil. You don’t engage in such expensive, polluting activities unless you are desperate.

The ratio re: the amount of energy that was used to extract oil to the energy you got out of a barrel was not long ago 100:1… it is now well under 10:1…

That is why the price of oil is not coming down. If it drops below 80 bucks the tar sands and fracking are not economically viable.

THE BIG PICTURE

As a side note to this fabulous tar sands and fracking celebration ... might I suggest that the party balloons and hats be put aside... because we are getting precariously close to a tipping point ...

Arctic ice melting at 'amazing' speed, scientists find

http://www.bbc.co.uk/news/world-europe-19508906

http://www.nytimes.com/2012/09/20/science/earth/arctic-sea-ice-stops-melting-but-new-record-low-is-set.html

Even more disconcerting is the millions of tonnes of methane trapped in the permafrost of the arctic...

Cracks in Arctic sea ice are leaking alarming levels of methane, a greenhouse gas far more potent than carbon dioxide, according to NASA scientists. http://www.cbc.ca/news/technology/story/2012/04/23/tech-arctic-methane.html

Drill baby drill!

Ho hum... what could possibly go wrong? http://hongkong.asiaxpat.com/on-location/global-warming.html

traineeinvestor 12 yrs ago

PRC retail spending continues to rise (from AA Stocks):

"China's consumption market has recently shown a moderate uptrend, said Shen Danyang, the spokesperson of the Ministry of Commerce. In October, total retail amount of consumer goods amounted to RMB1893.4 billion, up 14.5% year-on-year, hitting fresh high in seven months and posting three-month uptrend.

During January to October, total retail amount of consumer goods jumped 14.1% from a year back to RMB16835.6 billion. Excluding price factor, it moved up 11.8% in real terms, up 0.6 percentage point from a year back."

US GDP growth expected to accelerate: http://www.bloomberg.com/news/2012-11-19/gdp-accelerating-to-2-9-helping-u-s-overcome-sandy-budg.html

US exports and imports both increased in September and are now well up on a year ago: http://www.census.gov/indicator/www/ustrade.html

Euro Zone trade data shows YTD exports and imports both higher than a year ago: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/6-16112012-AP/EN/6-16112012-AP-EN.PDF

And yes - I am very worried about the Artic ice and other environmental issues.

Also, point noted on the cost of extraction of non-conventional oil and gas. Hopefully prices will remain high to give a market led incentive to keep developing cleaner technologies (of course that cuts both ways).

Ed 12 yrs ago

I am seeing the same numbers TI... and I have seen far better numbers over the last 4 years... but the problem is the moment these countries - all of these countries - start to pull back on stimulus measures....

The numbers head back down... the US just launched more QE (85 billion per month) ... China just launched another big round of stimulus...

My point being - there would be no growth without stimulus... how much longer can this charade go on?

Re Climate... I just read the Great Disruption by Paul Gilding...

I agree with his theory that we are peaking out on just about everything (particularly cheap energy) and that is putting a massive drag on the economy (and that the problems we are facing economically are a product of this)...

I also agree that a day of reckoning is coming... and that we will do nothing about it until too late (it's almost certainly already too late)...

What I disagree with is his optimism that after the famines, wars, and economic collapse that will be the result of us destroying our environment.... we will emerge as a kinder gentler society that has no interest in consumerism... that shares what it has... I think Pulitzer winner Chris Hedges vision is more likely http://www.truthdig.com/report/item/elites_will_make_gazans_of_us_all_20121119/

Anyway... you can check out Gildings TED Talk here... like he says... the math has been done... and it's not looking good:

http://www.ted.com/talks/paul_gilding_the_earth_is_full.html

Remmy 12 yrs ago

Ed - you keep speaking about the "big picture", debt, etc, and how "economies have collapsed". Lets really simplify it and look at the VERY big picture.

The world's population is at a record high and continuing to grow. Yet land on this planet is limited. We have 4/5ths of the entire world population moving from poverty, developing and poor countries to countries of rapid growth, production, urbanization, etc.

We have unbelievable efficiencies being created by computing and new energy, manufacturing technology, and globalization.

Basic human demands for food, shelter, entertainment etc will not go away. Demand for these things will not fade, and believe me, where there is a demand, people will find a way to pay. And once these basic demands are met, there will be increasing demands for non-essential, material and hedonistic goods and services.

You can talk of "economies collapsing" all you like. The reality is that the world will not dissappear, nor will the prople on it. People, capital, recources etc can flow now around the world more than ever.

HUGE opportunities lie ahead for those who can see what is happening and who can invest accordingly. Meanwhile, those who don't act accordingly, and/or those who don't understand this will be left behind, rambling on about how things are "not right", "unfair", "unsustainable", etc etc.

Ed 12 yrs ago

Remmy - can you explain to me how we continue with a system that requires growth forever... on a planet that is finite...

I am having difficulty with the math...

Ed 12 yrs ago

Thinking outside of the box......

Let’s today step out of the normal boundaries of analysis of our economic crisis and ask a radical question:

What if the crisis of 2008 represents something much more fundamental than a deep recession?

What if it’s telling us that the whole growth model we created over the last 50 years is simply unsustainable economically and ecologically and that 2008 was when we hit the wall — when Mother Nature and the market both said: “No more.”

We have created a system for growth that depended on our building more and more stores to sell more and more stuff made in more and more factories in China, powered by more and more coal that would cause more and more climate change but earn China more and more dollars to buy more and more U.S. T-bills so America would have more and more money to build more and more stores and sell more and more stuff that would employ more and more Chinese ...

We can’t do this anymore.

“We created a way of raising standards of living that we can’t possibly pass on to our children,” said Joe Romm, a physicist and climate expert who writes the indispensable blog climateprogress.org. We have been getting rich by depleting all our natural stocks — water, hydrocarbons, forests, rivers, fish and arable land — and not by generating renewable flows.

Over a billion people today suffer from water scarcity; deforestation in the tropics destroys an area the size of Greece every year — more than 25 million acres; more than half of the world’s fisheries are over-fished or fished at their limit.

“Just as a few lonely economists warned us we were living beyond our financial means and overdrawing our financial assets, scientists are warning us that we’re living beyond our ecological means and overdrawing our natural assets,” argues Glenn Prickett, senior vice president at Conservation International. But, he cautioned, as environmentalists have pointed out:

“Mother Nature doesn’t do bailouts.”

More http://www.nytimes.com/2009/03/08/opinion/08friedman.html?_r=3&

Remmy 12 yrs ago

Ed - the point in your note just above is a very intersting one - really a whole other topic, but a very interesting one. The concerns I think are very valid, but despite all the bad things happening on the planet, I think we are still far far from a point where we have hit "the wall". Further, mother nature may not do bailouts, but what mother nature does do is have an amazing way to restore balance - so cancers, diseases, inability to reproduce, "natural disasters" these will all help to restore balance if we get too out of hand.

Regarding your question "can you explain to me how we continue with a system that requires growth forever... on a planet that is finite...", my point is that even with no growth, the world will not end. Rather, economics, supply and demand, and the fact that we have basic needs ensure that there will be ALWAYS be a market for people who can provide goods or services to provide these to those who want them, and to charge a fee for doing so.

Ed 12 yrs ago

Remmy - how do you know we have not hit a wall?

Environmentally we are careening towards disaster... the arctic ice will be gone in summer within 5 years (scientists had predicted 50 yrs...). As pointed out their are millions of tonnes of methane frozen in the arctic tundra...

Mother Earth does not always heal itself - Canada stopped fishing the east coast 20+ years ago - the cod have not make a come back...

I have a friend who spent years as a marine biologist studying the destruction of fisheries... the consensus pretty much is there will be no commercial fishing within another generation - because there will be no fish.

Economically... I suggest you consider what the End of Growth means... certainly it is not the end of the world...

But throughout history economics has been based on supply and demand of limited resources... if resources become even more limited that = war, famine, extreme mass poverty...

If you are interested to dig into this check out the outstanding book by Richard Heinberg - End of Growth... it destroys plenty of myths that I previously had accepted about mankind's ability to innovate and grow eternally...

The main concern I have is that even without much growth oil still hovers around USD100 per barrel.... and in 2007 it was at 150 a barrel... so basically the moment we get back on track are we thrown back into recession because of high energy prices?

That is essentially what Friedman is suggesting in his article... and if that is indeed the case... we are doing absolutely nothing about finding a replacement for fossil fuels (obviously a herculean task given oil and not only power the world - they are also the components in most consumer goods - and they are key ingredients in food production including pesticides and fertilizer).

Food for thought.

OffThePeak 11 yrs ago

Ed, Your:

"The EU (etc) is going to collapse. It's just a question of when....

Trillions have been printed in futile desperation - yet there is no recovery - there will be no recovery."

So where do you invest in a climate like this???

A real challenge.

Thanks, BW.

It's certainly worth spending 7 minutes on Kyle Bass

"The most difficult time to invest... in the last few decades,"

"We should continue to see yield compression... Maybe negative nominal rates."

"We own subprime credit, and keep our maturities short."

Ed 11 yrs ago

Europe Is Now Sinking Fast http://www.zerohedge.com/news/2012-11-20/guest-post-europe-now-sinking-fast

OTP... great question - if Kyle Bass doesn't know then I certainly have no idea...

Here's what Soros and Paulson are doing:

http://www.bloomberg.com/news/2012-11-20/soros-buying-gold-as-record-prices-seen-on-stimulus-commodities.html

Ed 11 yrs ago

Hmmm.... Kyle Bass is way short on Japan... just as he was the US housing market pre-08.... as well as Greek bonds before they cratered...

Is he about to make yet another massive kill?

http://www.zerohedge.com/news/2012-11-20/meanwhile-land-setting-sun-and-exports

Ed 11 yrs ago

A reflection of the granular details that have been seeping from every crack of France’s picturesque veneer: relentlessly rising unemployment, declining production and orders, collapsing automobile sales....

Everything seemed to go south. Home sales through August dropped 17%, mortgage originations plummeted 30.5% through September and 45.8% in October.

OK, the “zero-rate mortgage,” a taxpayer funded program put in place by President Sarkozy’s conservative government to prop up home sales was drastically limited last November, austérité oblige.

Down-payment requirements have jumped, and young buyers without a lot of cash have lost access to the housing market.

You’d think France is in a depression. Even its neighbor is worried. Yet, third quarter GDP edged up by 0.2%, after a decline of 0.1% in the second quarter. Mere stagnation since the second quarter of 2011.

What gives?

http://www.testosteronepit.com/home/2012/11/20/stimulating-the-public-sector-suffocating-the-private-sector.html

Loyd Grossman is Miss Venezuela 11 yrs ago

Ed. Very few people buy property in France. Everyone rents as it's easier.

traineeinvestor 11 yrs ago

Loyd

Given the taxes and the tenancy laws, investing in rental properties in France strikes me as something of an exercise in financial masochism.

Ed 11 yrs ago

Loyd the article is not about French property. It is about why when the entire economy is crashing ... yet GDP is still not negative...

In summary... the French government IS essentially now an even MORE massive part of the economy i.e. they are going into an even worse debt position to ensure that nobody gets laid off... that quasi state businesses continue with business as usual - in spite of the fact that it is not business as usual.

That is why France just lost its AAA... France will follow the PIIGS into the trough... (then the gutter)

Ed 11 yrs ago

So I'm looking at the headlines come in about China exports and seeing they are back in expansionary territory... and I am wondering ... with the EU in recession... the US stagnant... and Japan closing in on death throes...

How can this be?

So apparently is this guy:

“It’s slightly surprising to see dramatic improvement in new export orders. We can’t see where this demand is coming from. If we’d seen a material improvement in the U.S. and euro zone it might make sense but there’s been no real change in global economy,” Alistair Thornton, senior China economist at IHS

China wouldn't be playing with the numbers again - would they?

traineeinvestor 11 yrs ago

Ed - please refer to the links I have posted previously showing the official trade data from the US and EU.

US imports are rising and the EU's imports are higher than a year ago (in spite of the mess they are in). With both areas importing more, China's export results should not have come as a surprise to anyone (although the EU's did suprise me).

Ed 11 yrs ago

TI: sorry but I am not buying any of this...

The US had a record number of new people apply for food stamps last month + the total number overall was another record.

Much of the EU is literally in a Depression - some of the northern countries are now in recession - France and Germany are barely registering any growth at all and trending downwards (recessions don't usually get recognized till months after they start so both are likely already negative)

Japan just recorded it's biggest trade drop in 3 decades!

Yet China's exports are roaring back upwards.

http://www.zerohedge.com/news/turns-out-china-lying-about-everything

http://www.nytimes.com/2012/06/23/business/global/chinese-data-said-to-be-manipulated-understating-its-slowdown.html?pagewanted=all&_r=0

China's GDP is "man-made," unreliable: top leader http://www.reuters.com/article/2010/12/06/us-china-economy-wikileaks-idUSTRE6B527D20101206

There are so many outright lies and twisted truths out there that I challenge every single 'fact' that comes out of the MSM...

Common sense surely has to lead one to question the China export story...

See the comment from the guy above - 'where are the orders coming from?'

Remmy 11 yrs ago

Ed - TI is entirely right. Again, you are looking at historical data, and using that to make dire predictions about the future. TI on the other hand is looking at current, actual data, which confirms without doubt a recovery is taking place.

traineeinvestor 11 yrs ago

Ed - you are basically suggesting that the EU, the US and the PRC governments are all consistently lying about their trade figures. While this is possible, that's a bigger leap than I am prepared to make at this point. (and yes, I know there are all sorts of issues with some of the PRC data)

As I said above, given that the EU is a mess I was surprised by the EU data. I was expecting to see some level of contraction or flatlining of imports. On he other hand, it would have been surprising if the US had not registered some growth in imports given that the total number of people in paid employment has been rising for some time (even when adjusted for underemployment).

In terms of looking forward, the EU is still deteriorating - some places in depression, some in recession and some at well below trend growth but it is not collapsing. The US is still improving (though with a fiscal cliff to get over). Trade in Asia is also growing which is helping and the PRC domestic economy is still expanding (although slower than many had hoped for).

I remain of the view that there is plenty to worry about and it is certainly possible that China's growth will slow more quickly than expected. However, not all the news is bad - some good things are happening.

Now, we call all join the vast chorus of permabears and see who can shout "it can't last" as loudly as we can and rave on about how economies that are going through a reecession are really "collapsing", but that won't change the fact that the economic world is not all negative and that even in recessions the vast majority of economic activity continues.

Ed 11 yrs ago

I think it is a combination of outright lying... twisting facts... and padding numbers with the same policies that got us into this crisis.

Example I: The 1.5 Trillion Dollar Lie (that was only exposed when Bloomberg sued the Fed)

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aKr.oY2YKc2g

Example 2: “When it becomes serious, you have to lie" Jean-Claude Juncker (chairman of the regular meetings of eurozone finance ministers)

Example 3: auto sales pumped up by channel stuffing

http://www.zerohedge.com/news/2012-11-01/gm-channel-stuffing-soars-record

Example 4: ROSENBERG: Subprime Auto Lending Is Bigger Today Than It Was At The Peak Of The Credit Bubble http://www.businessinsider.com/rosenberg-august-auto-sales-2012-9

Example 5: Wikileaks: China's GDP is "man-made" http://www.reuters.com/article/2010/12/06/us-china-economy-wikileaks-idUSTRE6B527D20101206

Example 6: housing recovery - really?

"The New York metropolitan area led the nation with a 69% increase in filings related to the foreclosure and repossession process" http://community.nasdaq.com/News/2012-10/why-wont-the-foreclosure-crisis-end.aspx?storyid=184894#.UK3_12dvUfc

Bernanke is specifically printing 40 billion dollars a month that is being used to attempt to fix the property market so of course there is a slight bump up as institutions line up for free money to buy foreclosed properties and rent them to people who can't afford to buy...

Must Watch from Gary Shilling: http://www.planbeconomics.com/2012/10/22/the-%E2%80%98mortal-enemy%E2%80%99-of-home-prices-excess-housing-inventory/

And we've heard this story before haven't we?

http://www.zerohedge.com/news/2012-11-21/has-home-stock-owner-recovery-run-its-course

I could go on an on... for pretty much every attempt at positive spin from the MSM I could counter it with cold hard facts that expose the b.s. we are being fed.

I've been listening to various derivatives of the 'green shoots' bs for 4 yrs now... and all I can see is more money printing... more ZIRP... and more desperate attempts to kick the dead horse and getting him going again....

It has not worked so far - I don't see how it can possibly work. Surely you cannot cure massive debt problems with more debt... and you most definitely cannot cure a massive debt problem by printing money....

At some point something is going to break here... I don't know if it will be the citizens of an EU country saying 'no mas' or perhaps Japan simply unravels...

Speaking of Japan... the grim reaper is lurking... and the hedge funds are taking big short positions....

http://www.ftense.com/2012/11/tracking-each-data-point-leading-to.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+ftense%2FsymR+%28The+Future+Tense%29

Remmy 11 yrs ago

http://money.cnn.com/2012/11/21/news/economy/china-hsbc-flash-pmi/index.html

China, the factory to the world, is recovering...

Ed 11 yrs ago

“It’s slightly surprising to see dramatic improvement in new export orders. We can’t see where this demand is coming from. If we’d seen a material improvement in the U.S. and euro zone it might make sense but there’s been no real change in global economy,” Alistair Thornton, senior China economist at IHS

TheExpat 11 yrs ago

Ed, that was exactly what I was thinking, too....that "good" news actually seems like a joke. So either it was coming from stimulated local demand or the data was somehow doctored for signal effect purposes after an economic recovery was promised at the NPC.

elsdon 11 yrs ago

Actually.. If you look at this forum as a small snapshot of larger market sentiment.. The split between bulls and bears is more or less right down the middle.. So I'm not sure I can call this a bear market seeing then number of risk takers still out there. That being said, the bulls think that they're in the minority and are trading Buffet style like they are.

I think people read too much Buffet. I know blah blah blood on the street blah blah. Honestly, if you look at the current pricing and valuations, how much more do you really think it can continue to go up? Maybe I'm just naive, but I'm a young man, I do pretty well, but I still have to be extremely calculating with my finances. I have a hard time believing that there are that many people richer than me that they can afford anything if prices continue to rise.

At this stage in my life, I'm just looking to maintain wealth, not greedy. So, given this unprecendented time in our world economy, I'm playing it as safe and withdrawn as possible.. I'm still very early in my career. That being said, kudos to you guys with the cojones to take on risks with not many working years left in you. My hat goes off to you. I really do hope that one day I'm sure enough of myself and my market knowledge to make some more Buffet-style plays.

traineeinvestor 11 yrs ago

Elsdon

That's a very well written post and one which makes a number of good points.

My perspective is not so much that of a bull or bear, but of a risk manager. We can't avoid risks completely - it's just not possible - instead we have to choose which risks to take. Inflation is a risk which I can avoid by putting more of my money into property and shares but in doing so I take on a number of other risks. It's not about taking risks instead of not taking risks - it's about choosing which risks to take.

Everybody has their own worries about the different risks out there. Mine is that I will be taking early retirement next year and the money has to last 40+ years (I hope). Inflation will do a lot of damage over that kind of time frame so leaving the money on deposit etc involves taking a risk that I would like to avoid. So most of it goes in to property and shares in the hope that the cash flows will grow over time. No guarantees of course,but I'd like to think that by being quite conservative with my stock selections and my gearing levels I can absorb the volatility and other risks I am assuming in the process.

ltse 11 yrs ago

"I'm still very early in my career. That being said, kudos to you guys with the cojones to take on risks with not many working years left in you. My hat goes off to you"

You don't speak for me bro, am only 35, I have plenty of working years within me.

elsdon 11 yrs ago

ltse,

Haha perhaps I presume too much. You've got nearly a decade on me though.

EDIT: got you mixed up with another dude.

ltse 11 yrs ago

@ Elsdon

Absolutely, I see nothing but a train wreck ahead, and its so painstakingly obviously I wonder why so many ppl don't see it, there's a booked titled "The madness of crowds", which I highly recommend, people do not see a bubble when they're in one. In fact this deflationary crash coming is going to be so crushing, the folks here who are planning on a retirement may not have one if they are wrongly invested, sad, but true.

With regards to your " I think your bet is pretty huge though", I am actually not betting on anything, I am holding the safest thing there is, actual physical cash, USD.

Here are the facts:

The Fed's balance sheet in 2008 was roughly $850 billion

http://blogs.wsj.com/economics/2008/10/22/feds-balance-sheet-keeps-growing-and-growing/

Today, it has grown to almost $3 trillion

http://www.reuters.com/article/2012/10/04/us-usa-fed-discount-idUSBRE8931J920121004

Now, had I told you in 2008, that the Fed was going to "print money", and expand its balance sheet by 350%, you would think we're going to have hyperinflation, and cash is trash. But here we are , 4 years later, all the central banks in the world are "printing", and interest rates being at zero for so long, so why are:

- US bond yields at their lowest ever?

- Iron, gold, silver, crude oil, copper, are all below their previous highs, some by as much as 30-40% lower

- Why hasn't the US dollar Index made a new low?

- Why is real estate in the US still falling?

These tell tale signs of deflation is immediately obvious already, in a high inflation environment, people would be idiotic to hold cash and bonds, but with yields being so low, that tells you they rather hold cash even at negative yields, why?

Furthermore, the collapse is not far off, ZIRP, QE1,QE2, LTRO, and now QE3 is simply fighting off this deflation, ie government increasing its debt, to offset the deleveraging in the private sector (over $20 Trillion in private debt alone), not including corporate debt, derivatives or anything like that.

I was going to type this up under my post of "Timing the Deflationary Collapse", but I don't have the time, so I'll include it here, according to the, "The Elliot Wave Theorist" issue April 2010, there is prediction of a crisis cycle, that runs every 7 years, below is a direct quote:

____________________________________

More Background: The Crisis Cycle

The March 2004 issue of EWT postulated a 7-year crisis cycle going back to 1973 and used it to predict another crisis in 2008. Here are the table and the forecast from that issue:

-1973: Arab oil embargo, with spillover into 1974 stock market low of wave IV.

-1980" peak in the inflation rate; top in gold, silver and mining stocks, interest rate spike, stock-market "massacre"

-1987: October Stock market crash

-1994: "Republican Revolution;" suspicion of government due to waco attack (1993), "black helicopters," etc; stock market breaks uptrend line at low.

- 2001: successful terrorist attack on the World Trade Centre; low of wave (3)

Seven years after 2001 is 2008, so that is the next year to look for an extreme in social fear

_______________________________________________________

With that in mind, the article postulates the next crisis, the mother of them all, ie the biggest down wave, is going to be in 2015 (7 years), the stock market is due to hit the bottom around 19 February - 9th June 2016.

If you Google any of the above dates, they are when the stock markets had hit a new low, this time won't be an exception, interesting, the Astrological cycles predicts the same thing, Uranus Square Pluto is a rare phenomenon that happens once near 100 years, last time it was during the great depression of 1932- 1934, this time its happening between 2013-2015.

All in all, I just say to the inflation simpletons to get their head out of their arse, because if they buying property, commodities, hard assets in general thinking its safe, they couldn't be further from the truth, I say this because its your financial well being at stake, unless you wish to start all over, just consider, what if the prediction is right?

Ed 11 yrs ago

TE: I agree that there is a lot of stimulated demand in China ... just as post Lehman they launched a mega stimulus which pumped things up big time - and also helped exporters like Australia, Indonesia, Germany, Canada etc...

So they are no doubt doing that again to keep GDP up... but I don't think it's anywhere near the scale of 09.... you can only build so many 'bridges to nowhere' that generate zero yield before you crash the economy...

But I can't see how that activity can be considered in the miraculous export numbers... exports are exports after all.... but then again it's china... they just make stuff up... just like America... just like the EU...

I think it comes down to common sense... how can China's exports be growing when growth is stagnant or trending downwards in all other major economies... it simple doesn't make sense.

US Housing Recovery - Ya Hoooo!!!!!

FHA gives those who defaulted on homes another chance http://touch.latimes.com/#section/-1/article/p2p-73296490/

Um... well... maybe not... More subprime loans.... and let's not forget the 40 billion per month Bernanke is printing and handing out at ZIRP to institutions who commit to buying property...

Heck if you hand out free money in this environment where almost everyone is Too Big To Fail... with the only condition being BUY PROPERTY... well... you are gonna get people willing to take that cash and buy property...

Heck... if Bernanke gave me a piece of that ... say 2 billion ... at ZIRP... I'd be on the next jet to the US to scoop up foreclosed properties tomorrow...

And if I screw up so what - Ben will BAIL ME OUT :)

I think I'd probably focus on New York which has recently had a 69% increase in foreclosures... after all it's best to have some choice.... http://community.nasdaq.com/News/2012-10/why-wont-the-foreclosure-crisis-end.aspx?storyid=184894#.UK3_12dvUfc

ltse... I am with you on the end game - Bernanke is in a futile battle against The Deflation ... however you lose me with the specific dates and the astrological cycles...

Ed 11 yrs ago

Some great charts from Marc Faber's speech at the Hyatt... deflation, the future of printing etc... discused.

I particularly like the one comparing govt spending as a % of GDP Canada vs US... ironically Canada is referred to by many as a 'socialist' nation

http://www.zerohedge.com/news/2012-11-23/marc-fabers-chart-porn

Wow - China! http://htmlimg3.scribdassets.com/6xhticluo01y5dic/images/28-7b30b7c997.jpg

ltse 11 yrs ago

The USA has been a socialist nation for decades, thats why they are in this mess.

Ed 11 yrs ago

actually there are plenty of successful 'socialist' nations - Germany, Denmark, Sweden, Finland, Australia, Germany, Canada...

The problem with the US is more along the lines of crony capitalism....

ltse 11 yrs ago

Actually, no socialist nation ever has been or ever will be successful.

The so called "socialist nations" you listed above are "successful" because of capitalism.

Germany - motor vehicle productions (capitalism)

Australia - mining (capitalism)

Norway - fishing industries (capitalism)

Canada - oil tar sands (capitalism)

The success should be credited to capitalism. Without capitalism, where would the wealth that you think should be equally distributed come from?

These countries are succeeding DESPITE socialism NOT because of it. The idea that wealth should be equally distributed is not only against the laws of economics but against common sense.

America tried that path with entitlements, social security, medicare, and its failing badly.

Ed 11 yrs ago

Depends on what you call socialism.

Is providing solid education, health care for all, and a safety that ensures the weakest in a society don't live like dogs on the street socialism?

If that is the case then I am for socialism because all of these ensure a more equal, happy and successful society.

Isn't it interesting that pretty much all of the most stable countries in the world (economically and politically) combine socialism with capitalism...

By my measure America is not socialist... it is some sort of bastardized hybrid...where corporations, individuals and special interests... get hand outs from the government.

Moving on... Europe:

The industrial sector in Italy (the euro zone’s second-biggest manufacturer, after Germany) is in near free fall. In September, Italian industrial sales fell 4.2 per cent, month on month, while orders fell 4 per cent. Orders are down almost 13 per cent, year on year.

http://www.theglobeandmail.com/report-on-business/international-business/european-business/a-rude-reality-interrupts-italys-holiday-of-denial/article5610020/

ltse 11 yrs ago

"Is providing solid education, health care for all, and a safety that ensures the weakest in a society don't live like dogs on the street socialism? If that is the case then I am for socialism"

Yep, they've tried that and look at how well they're doing? Most seniors live in poverty with a pension:

http://www.reuters.com/article/2012/08/07/us-column-miller-poverty-idUSBRE8760VW20120807

Minimum wages and retirement pensions for all, you think that helps people? the truth is what the government gives you on the one hand, it takes from you on the other. When you have these social programs, its runs up the cost of business ie cost of production. Everything from food, energy and medical goes up.

So the "weakest in a society" now becomes ever more dependent. absent these programs, more business would be available, hence more job opportunities, but with these programs because its runs up the cost of doing business, there will be less business, hence less jobs, and higher cost of living, because less competition in business always results in higher prices.

I suppose your also in favor of bankers bailouts? socializing losses by giving it to the tax payers?

Socialism is just a form of legalized theft by the government, theft is theft no matter what form it comes from, if your for pensions, then your also for bailing out the bankers in my books.

traineeinvestor 11 yrs ago

Most developed economies are a mixture of capitalisim and socialism. I can't think of any economy that is purely one or the other.

For my part, I view providing a basic safety net in the form of food, housing, education and health care as fundamental to having a decent society. But these things do not come for free. Every dollar we as a society choose to spend on these things has to come from one of five sources:

1. taxing current members of society

2. taxing future members of society

3. borrowing (which is effectively the same as #2 since the money has to be repaid with interest)

4. printing money

5. stealing from other countries

All of these involve taking from one group of people and giving to another group. We are already well past the point where the takers outnumber the contributors by a considerable margin. This explains much of the political process.

Nothing is free. The basic problem that countries like Greece, USA and Japan to name a few have is that the societal payments which are being made or which have been promised for the future now exceed the ability of the country's ability to pay for them through tax revenues. In many cases, no matter how high the tax rates on "the rich" are increased, this will remain true especially as developed countries populations age and will get worse if/when interest rates rise. It will remain true even if one believes that such higher taxation will have no impact on the economy (instead of being contractionary as it has generally been in the past).

This leave us with the stark choice of cutting entitlement programmes heavily (merely fiddling around the edges by, for example, raising eligibility ages for retirees by a couple of years does not even come close to producing a sustainable model) or carrying on and waiting for the system to collapse (aka kicking the can down the road). I am of course open to other ideas but as far as I am aware no one has articulated any credible alternatives.

The bottom line is we need to create a society where there are fewer people who rely on taxes levied on others and more people who are able to support themselves by whatever means. Government regulation and state ownership have been shown repeatedly and consistently to be the wrong way to go about this process - often with horrific humanitarian results. Ultimately it will require a strongly growing economy to provide a platform to support the less well off parts of our society and all rules and regulations that govern our economic lives should be measured against that benchmark - if it helps the economy grow it should be viewed as a positive. If it makes economic growth and job creation harder, then we have to ask if it is worth the cost in terms of reduced job creation prospects and lower taxes.

Arguements over fairness and so on are an irrelevancy which amount to nothing more than politcial rhetoric intended to avoid talking about the real issues. If we want to have the social transfers that ensure that we live in the type of society which we would like to live in, then we need a vibrant growing economy that can afford them, not one weighed down by damaging regulations that stifle businss creation and expansion, result in misallocation of capital etc.

Ed 11 yrs ago

ltse - once again... when corporations and special interests use their influence to rob the system blind (bail outs to banks, tax breaks for companies, unionized workers getting massive pensions, lazy people getting paid not to work etc...) you get unfunded pension plans... bankrupt governments etc...

When you have good government and well managed social programs... you get a stable happy society... Let's list the countries once again that have good government and social programs:

Germany, Norway, Sweden, Finland, Canada, Australia, New Zealand, Singapore.

As TI says there is no country that does not have 'social' policies... some simply have better government. The US is clearly not one of them.

If you are going to disagree perhaps you could point out the Ayn Randian/Ron Paulian utopia(s) that you are referring to... so as to demonstrate how things should be done.

traineeinvestor 11 yrs ago

@ Ed - NZ's program is not sustainable. An aging population is pushing an unfunded superanuation system and healthcare well into unaffordable territory. Immigration has helped somewhat by enhancing economic growth, employment and tax revenues but it wont be enough in the near future.

Australia is in a much better position thanks to the mandatory and flexible retirement savings regime - effectively most of the working population was moved onto a mandatory retirement defined contribution savings scheme a number of years ago (funded my employer and empoyee contributions) and it has made a world of difference.

Ed 11 yrs ago

Well... when it comes right down to it.... I think that regardless of the country... in the long run none of this is sustainable...

Because the entire basis of our economic system i.e. eternal growth ... combined with the relentless pursuit of 'more' is impossible...

Ed 11 yrs ago

Global economic woes prompt soul-searching on capitalism

While policymakers insist vigorous recovery will arrive, there is concern that deep structural problems are stalling a revival

http://www.guardian.co.uk/business/economics-blog/2012/nov/25/global-economic-woes-capitalism

Ed 11 yrs ago

In Japan, voters are turning to opposition leader Shinzo Abe's plans to unleash unlimited amounts of free cash to push inflation up to 3% and interest rates below 0%.

http://www.guardian.co.uk/business/economics-blog/2012/nov/23/japan-downward-spiral

Now why didn't they think of that 20 years ago....

ltse 11 yrs ago

If it didn't work at 0% it wouldn't work trying to go negative. Same thing the US is doing right now. If it didn't work for Japan in 2 decades, such is the power of deflation.

OffThePeak 11 yrs ago

Ed -

I think it may be time soon to Start / Part #2 of this Popular thread

What's your target on that?

Specific Advice

Regionally Shared Advice

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