Chinese labor shortages?

Connecting the dots 2-25-2010

China, Yuan, and Bubbles

China Hikes Reserve Ratios

China – a must read

This story was definitely under-reported: A must read from the Financial Times.

China reigns in monetary policy…

and the world catches a cold. We wrote about this a few weeks ago, whereby the Fed’s fear of being 1937′ers is completely misguided given that China might thwart any efforts to re-inflate. We are no longer living in a world where domestic monetary policy is sufficient. Interestingly enough, for you gold bugs out there, it is a better argument than historically for using physicals (gold being the most prominent) as the reserve currency. So China is telling banks to slow, or even halt, lending.

My main question is why now? Depending on your frame of reference…

If you believe the Chinese government is ahead of the curve, then China is reigning in inflationary pressures, making sure it’s banks are in strong shape, and this is a net benefit to China. Conversely, if you believe the Chinese command economy is not as strong as the numbers suggest, then this might be a sign that government officials are scrambling because the proverbial “stuff” is about to hit the fan, and they are scared. Guess what I think…

China needs a way to save face as it’s numbers start to come down quickly. If it’s part of a design, they might look smart. The growth stats are going to come down one way or the other, the only question is who will get blamed, which politicians will be lost along the way, and how the government squelches social unrest.

This is net positive for gold (although it doesn’t seem that way today), maybe USD (flight to safety?), and net negative at least in the short term for Asian block. Also, I think here a negative for China, might end up being a positive for India

FT.com on direct bidders for Treasuries

The FT.com ran the following story about direct bidders in the Treasury market. In essence, the article points out that there are more than double the proportion of direct bidders than usual (usual about 7-8%, current about 17%). It goes on to mention that a large bidder is trying to keep its moves out of the dealers hands. A deflationary play? Covering? Hedging some position? There are only a handful of bidders who can muster up that kind of buying power (either a government entity, like the Fed or China, or a powerhouse player like Blackstone or PIMCO), so the question is what to do with the information. As you know, I have been short treasuries through TBT for a few weeks and am staying put for now. Will keep an eye out.

The FT: Treasury bids drive speculation Auctions of US Treasury notes this week have attracted
extremely strong buying from domestic institutional investors, fuelling speculation that “one big bidder”
has decided to defy the conventional wisdom on Wall Street that US government debt is due for a fall.
The surprising demand for Treasury notes has come in the form of “direct bids”, the term used for US
institutional investors who bypass the so-called primary dealers that underwrite government bond sales.
On Wednesday, direct bids accounted for 17 per cent of the sales of $21bn in 10-year Treasury notes,
far higher than the recent average of 7.4 per cent. It was the highest percentage of direct bids in a 10-
year Treasury auction since May 2005.
On Tuesday, direct bids accounted for a record 23.4 per cent of the bidding for $40bn in three-year
notes, up from an average direct bid of 6 per cent.
Market participants say the unusually high level of direct bidding suggests that a large investor is
looking to accumulate Treasuries without alerting the primary dealers on Wall Street to its intentions.
“It appears to us that someone is trying to hide their apparent interest in owning these auctions
from the rest of the market,” said David Ader, strategist at CRT Capital.

Click here for full article.

1937′ers: We were all looking in the wrong place for them

While Bernanke & Co. continue to fear pulling liquidity to early, we might be learning that the Fed is not as in control as we would like to believe. Today’s story about China increasing reserve requirements and nudging up interest rates provides an interesting canary for our coal mine. As readers are aware, I don’t believe any numbers coming out of China, but that being said, the reported growth is truly astounding:

Data released over the weekend showed mainland China’s exports rose 17.7% in December from the year-earlier month, trouncing the 4% rise expected by economists in a Reuters survey and marking a sharp rebound from the 1.2% fall in November.

At the same time, imports vaulted 55.9% during the month, also comfortably beating the 31% jump estimated by economists. The surge helped narrow China’s December trade surplus to $18.43 billion from $19.1 billion in November.

For full story, click here.

While we can argue about fake growth, or inefficient growth, or government stimulus making the bulk of this fake demand, the real issue becomes forward-looking. If China takes liquidity out of their own market, might it cause liquidity to be lower in the US? I believe it will. It might happen through higher rates, it might happen through decreased international trade, it might happen as our exports (already lagging where you’d expect given the dollar) continue to disappoint. The truth is that I’m not really sure of how this will play out, but I think the Chinese might be realizing they are in serious trouble and can’t sustain the absurd numbers they’ve conjured up, and like any ponzi scheme they will crumble under the pressure…eventually. I think they are trying to ward that off, but if I were a Chinese national with money in the bank, I’d be looking for ways to get it out, and this might have incredibly bad ripples for the US monetary authorities as our most valuable buyer of Treasuries faces serious problems that it was able to hide for the past decade.

If I were Bernanke, I’d be very worried about the Chinese monetary and banking games being played out right now – more so than any currency manipulation of the past.

http://www.marketwatch.com/story/analysts-divided-on-pboc-tightening-2010-01-12

China: Never liked it, now like it even less

Long time readers know that I do not like the idea of investing in command and control markets, with little or no transparency, pegged currencies, and imminent social unrest; I dislike investing in these markets even more after they go up, even as their biggest consumer market is struggling.

So it is with that in mind that I encourage you to read the following:

1. Chanos is shorting China: http://www.thedailycrux.com/content/3656/Jim_Chanos
2. Mike Shedlock has a piece on the Chinese bubble: http://globaleconomicanalysis.blogspot.com/2009/12/china-faces-crash-scenario.html

And we’ll continue to present more. The only question is “so what”? I looked for ways for individual investors to play this idea, but the options are slim. For starters, there is FXP, but…be careful. This is not necessarily getting you the short exposure you need. For starters, it’s a levered ETF, which we have an inherent fear of. Then, it only shorts 25 stocks. Then it turns out it only shorts the Hong Kong listed shares, not the mainland shares (which can’t be shorted). For more details, click here.

A better way to play it, but less directly, is to short the things that went up because of (supposed or anticipated) Chinese demand. Yup, commodities are up there, such as copper, aluminum, etc.

I personally haven’t found a great way to play this theme, but I’m working on it and am happy to hear thoughts and suggestions.

The currency markets and Treasuries…

That’s where you need to keep your eye on as we come into year-end. Tonight, there’s a lot of data coming out of China:

Producer Price Index: cons -2.4% y/y
Purchasing Price Index: cons -4.0% y/y
Consumer Price Index: cons +0.4% y/y
Retail Sales: cons +16.5% y/y
Industrial Production: cons +18.2% y/y (some are saying this might disappoint, but I’m not sure what impact it will have given the other numbers.)
Trade Balance (not sure when): it is expected to show a surplus of $24.30 billion, up slightly from the October reading of +$23.99 billion.

We’ll review some of these tomorrow after they are released. Will one set of data make the difference? No. But right now we are looking to see if there are more threats on the horizon for the Treasury market. It could be very dicey for Bernanke and the Obama administration if Treasuries sell off (remember, the Fed has more impact on short term rates than long, but a lot of liabilities, such as mortgages are priced of the longer-end).

From a monetary perspective this could be another “new” development in the field. Before the 1970’s, there was a consensus that inflation came with reduced unemployment, so in order to stimulate employment, all government had to do was stimulate inflation. The 1970’s brought us “stagflation”, namely, higher inflation but no jobs. Now, we might have a new term, let’s call it: CONTRAFLATION. In a CONTRAFLATION world, everything economists think is exactly the opposite. For example, you CAN have a strong dollar with rising long term rates. We’ll continue to explore these themes later, but we maintain our short Treasury, long dollar positions. The new Bizarro world, has one thing in common with all other environments, you don’t want to be in the same trade as everyone else, and the marginal money is still short dollar long risky assets.

Andy Xie on China and USD

China bubble, USD, Chinese real estate, speculation, hot money… except not in the direction you’d expect. Xie outlines how China might go bust if the USD bottoms, and how the Chinese government has no choice but to continue inflating their own bubble – a very scary prospect. he believes it won’t happen for a few years; I’m not as confident.

http://www.businessinsider.com/andy-xie-china-is-trying-to-prolong-the-bubble-2009-12

Notes from underground – Yra Harris

Notes from underground – Yra Harris

If you can keep your head when all about you

are losing theirs and blaming it on you;

If you can trust yourself when all men doubt you

but make allowance for their doubting too;

Some additional thoughts on Dubai World

Assuming UAE has $600-$700 bilion SWF (controlled by AD b/c most of contributions are from AD).  $80 Billion total nominal, buyout at 50% = $40Billion = ~7%.

$40 billion in one position is very big and I don’t think anyone wants to make it except because of pressure from their neighbors.

I see 2 options:

Option 1: this is a big deal. That means middle eastern debt becomes cheaper, CDS spreads go through the roof for all the neighbors, including Saudis. Some hedge funds and real estate funds must be blowing up right now. Next up, European banks get hosed. Can these guys do anything right? Madoff, private equity gone awry, CDO’s, etc. Swiss banks can’t even give you privacy any more. Money starts going home and this becomes a battle of flows. Anyone who is levered on the carry trade gets “FUBAR”ed. Beneficiaries: yen, dollar, gold. Biggest losers: emerging markets, anyone levered, European banks, and more. Marginal EU players start getting kicked out, like Greece. Euro begs Turkey to come in, and Turkey blesses Alah for unanswered prayers. Geopolitics start getting dicy: watch for Greece putting the heat on Cyprus to use it as a bargaining chip in its negotiation to stay in the EU. Turkey talks bigger and stronger against northern Iraqi kurds in hopes of US concessions and no fear of repercussions from EU.

Option 2: this is not a big deal. LTCM style, some back door deals brush it under the rug, with a global concerted effort. Fed is afraid of strengthening dollar undermining their inflationary push. In 2 weeks, no one remembers it, relevering goes exponential and the final stages of an asset re-bubbling are in place. China goes in and puts in a bunch of unwanted dollars to secure oil rights from UAE and neighbors for the next 20 years at $55/b. Buffett buys a piece of the debt at 30 cents on the dollar. Equity markets shoot higher, along with commodities. This could last for another 6 months to a year, at which point, we go where we need to go anyway, but a lot more people and money gets hurt.

The strategists and game theoreticians are going nuts right now, trying to figure out how to use this to put pressure on everything from Iran nukes, China, Afghanistan/Iraq, and umpteen others.