I have a tough time being positive about the prospects of a command economy, and I have a tough time relying on a communist system for world economic improvement, so it might come as a surprise to some that I'm asking the question of whether Shanghai or New York are leading the markets.
I randomly chose a 10 year comparison between the Shanghai stock exchange and the S&P 500.
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As the Swiss peg their currency, the question for money flows is where is the next safe haven? For now, gold seems to be the only answer, but certainly long term, gold will go back to being a currency rather than a wealth creator.
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Tags: China, currency trading, energy, Euro, Middle East, oil, USD, Yuan
Commodities/Futures, Currency, Politics | | 
March 4, 2011 12:58 pm | 
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I have been hearing about intermittent shutoffs in Twitter for a while, but now it looks as if LinkedIn is being blocked in China.
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Here's an idea: the real trigger for the correction won't be the Middle East. As Libya, Bahrain, and maybe soon Saudi Arabia take center stage, pundits and analysts the world over are focused on oil, commodities, inflation, and Wisconsin unions. But the Middle East wasn't the marginal buyer.
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What are the implications of de-pegging the yuan? I can envision a two-tiered market at home and abroad, but what if the consequences are exactly the opposite of those intended. What if by allowing individuals to convert 4K each, Beijing will have a billion people trying to convert out of the yuan and drive inflation higher? What will they convert to? Precious metals. US Dollar. Not much else.
http://www.marketwatch.com/story/yuan-trade-in-us-is-step-to-internationalization-2011-01-12
Long term, free trade and free floating currencies will make the Chinese economy stronger, but I don’t think the Party is thinking long term these days. They’re thinking how do we ensure we don’t have food riots like in Bangladesh. Which means that any hint of increased inflation might see the Party backtrack and close up.
Will the euro break 1.29 today? Well, if not today, then soon. Spreads are unsustainable for rolling over maturing debt, and Italy is the next to fall. I anticipate growing anger from Germany that will make each future bailout more expensive both for the offending countries and the holders of existing debt. A couple of beneficiaries in my mind…
Turkey is sitting pretty. The xenophobic Europeans shunned the country, but it’s having the last laugh. Its demographics are good, growth is OK, internal demand is growing, etc. They’ll have to figure out how to compete with a weaker euro, but at least they won’t be saddled with the same cross holdings of bad debt.
Russia and China are chomping at the bit. If Germany backs off bailouts, and the US hands are limited anyway, Russia and China can demand large concessions in return for bailout money. I’m anticipating some port access, military concessions, favorable trade agreements, etc. to be handed out. At the same time, the US will voice anger, but our own mismanagement will limit our dissent.
Why won’t Europe benefit from a declining euro? Because the wealth destruction will be faster than the increase in monetary competitiveness. Given the continuing employment deterioration and increasing local inflation, which in Europe actually leads to quicker social unrest than would be anticipated from well-functioning democracies, the lower euro will more likely lead to less faith in government policies, not more.
I guess it all depends on what side you’re on, since this is not contrarian to my view. Mark Hart of Corriente Advisors presents an analysis of China and specifically looks at the currency peg. The full presentation is worth reviewing, but here are the summary points:
- Over the past decade, China has accumulated a massive sum of total FX assets – approximately $2.7 trillion, by our calculations.
- Conventional wisdom suggests that China’s accumulation of FX assets is an indication of strength and high savings, and that the RMB will only move higher vs. the USD.
- Our work suggests otherwise. Based on our analysis, we conclude that:
- Because of the peg and the common perception that the RMB is undervalued, the RMB has been in a bubble for several years.
- China’s accumulation of FX reserves is the result of extensive monetary expansion.
- A significant and underappreciated source for China’s FX reserves has been speculative capital inflows.
- Massive monetary expansion and speculative foreign capital inflows have fueled asset bubbles within China that inevitably will burst.
- The next significant move for the RMB vs. the USD is most likely LOWER.
(H.T. ZeroHedge)
Did North Korea just hand you a game changer on a silver platter? Here’s a thought: North Korea is sending out a feeler – will Obama OK a retaliation by South Korea? China is in on the talks and while it wants to back North Korea, might let the retaliation happen, just so it can get some concessions from the US. Yup, it’s a Prisoner’s Dilemma on drugs. In the meantime, the person glued to the TV is Ahmadinejad. If the US let’s North Korea’s moves go unanswered, he knows he’s in the clear. Otherwise, he’s finding a hole in the desert to hide for a while. I expect the former, but hope for the latter.
This is an opportunity during a difficult period for the world. Obama has a chance to bring different countries together around a common enemy, and to rally against extremism, global nuclear proliferation, etc. and to use it as an opportunity to calm talks over economic and currency wars. I hope he uses it wisely.
Just when you think you’re out…
North and South Korea exchange artillery fire - and money has to choose sides. Obviously the Korean won is the first to feel it (down about 3%), but let’s look at the second degree. If there’s tension in the peninsula, the Chinese will side with North Korea for ideological reasons and national (political?) pride. Fine, except that investors know that the US will choose South Korea. Which means that the big investor money (US invests more than North Korea) might leave China. That will in turn exacerbate Chinese inflation, already a big concern for the Party. Where that leads? Hopefully, to some strong words that leave a lot of room to maneuver around for all sides. The alternative is for Chinese protectionism/nationalism to drive politicians into a corner where rare earths shipments are again halted, food is hoarded, etc.
In the meantime, the euro continues to head lower (down 1.3% as of this writing). They’ve got their own problems to deal with without worrying about the Korean peninsula today.
It turns out that valuation metrics and accounting are universal truths so they work in China as well.
60-70% more and China might finally be a buy, but for now, I’m not buying the dips:
Chinese stocks suffered sharp declines Tuesday, with property developers tumbling on further tightening measures that target the sector, while coal and metal shares fell on concerns about price curbs.China’s Shanghai Composite /quotes/comstock/16k!i:000001 (CN:SHCOMP 2,895, -119.88, -3.98%) skidded 4% lower to end at 2,894.54, its second severe selloff in three days, after the benchmark fell 5.2% Friday.
The drop in Shanghai triggered an afternoon selloff in other Asian markets, with Hong Kong and Indian stocks posting big losses.
In South Korea, Seoul-listed shares were weighed down by a rate increase from the Bank of Korea.
From CBSMarketWatch.com.
The Fed cam out with QEII and the essence is that there will be $600B pumped into the market for the next 8 months in the hopes of stimulating economic growth. I won’t go into the differing opinions of whether QEII will actually work, but simply state mine: if QEI didn’t work, why would QEII? We don’t have a liquidity problem that can be solved with more POMO activities. We have credit/faith problem, which isn’t solved with free money; quite the contrary, something that is free isn’t worth anything.
When the dust settles, I don’t think this round of QE will make much of any difference. The focus now is the turning point in the yen, the turning of Chinese growth numbers which I believe will come in over the next few months, and the breakdown of the euro (Ireland and Greece are only the beginning). The dollar will look like a superstar compared to the alternative, and will squeeze nay-sayers.
New post from Vitaliy Katsenelson on China and Japan. The short version is that China is COMMUNIST! and the numbers can’t be trusted, while Japan is past the point of no return.
On China: I already mentioned that Russia used to do the same thing with numbers and ghost towns that looked great to observers, but were shams.
On Japan: The government won’t have an internal market due to demographics, and as the savings rate decreases, the international community will not continue funding JGB’s at 0% rates.
http://contrarianedge.com/2010/10/30/china-the-mother-of-all-grey-swans/
Look at the presentation. Understand the dynamics of overcapacity in China. Understand that demographics doom Japan’s currency.
Invest accordingly.
Let’s start with the GDP report:
The Bureau of Economic Analysis reported today that U.S. real GDP grew at an annual rate of 2.0% during the third quarter.
Read the breakdown at Econbrowser.com.
But quite honestly, the market doesn’t care and neither should you. Why? Because this market is being kept in tact until after the election: POMO, China talks, whatever can keep the market from going where it will eventually go.
And then, there’s the geopolitical. As I write this, I see the headline flash on CNN that a bomb was found on a UPS flight from Yemen. Additionally, the TSA is investigating other cargo planes. No news on it yet, just a headline, but certainly more important than the unexciting GDP numbers.