Tuesday, December 22, 2009

Top 5 China Bubbles

Louisa Lim: China's top 5 'bubble stories' of 2009

Don’t sweat the small stuff; the whole of the Chinese economy is one gigantic bubble, skeptics warn, waiting to plummet down to earth with a stomach-turning thump.

...

So far, they’ve not been right. But this one, the naysayers warn, really could be the big one.

Here's something I wrote a week after starting this blog.

September 6, 2007
Gasoline Prices and the Business Cycle

This chart is yet another reason to be concerned about a possible recession (and is therefore yet another possible nail for the subprime borrower's coffin, and yet another possible nail for the home sellers, and yet another possible nail for those who feel copper only goes up, and yet another possible nail for those who have embraced the China story at any price, and yet another possible nail for those who feel that US stocks only go up, and yet another...).

So many nails. So many coffins. In hindsight, every single nail got hammered.

It's almost enough to make me want to change my name to Deflationary Mark, but that's just not something I'd bet on long-term. Call me silly.

I really could have changed my name to Deflationary Mark. I would have done just as well and possibly a lot better. Fortunately, it did not hurt me. Being bearish was good enough to weather the second major storm (the first being the dotcom bubble).

SSE Composite Index

Value on September 6, 2007: 5,393.66
Value on December 22, 2009: 3,065.16

That's a 43% loss. It was a bubble then. I think it is still a bubble. I'm not at all convinced that it is a 43% smaller bubble either. It might actually be bigger. I know the math seems really weird when I say that but consider this. China never did stop growing even as demand for its goods fell dramatically. How's that supposed to work long-term?

China's state planning agency is warning of massive overcapacity in a half-dozen industrial sectors. - Business Week, December 10, 2009

I'm normally rather skeptical, but that is something I believe with every fiber of my being. Why would China do this? Pretend and extend? The alternative would be hundreds of millions of unemployed workers who suddenly realize that they aren't all going to be living the American lifestyle someday.

China think-tank says social unrest on the rise

BEIJING — Social unrest, driven by abuses of power and a growing wealth gap, is on the increase in China, according to one of the country's leading think tanks.

8 comments:

  1. Mark

    Couple of interesting posts from David Merkel http://alephblog.com/ on China and the record U.S. yield curve.

    Perhaps the upshot of both could well be er...um...stagflationary?

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  2. Stevie b.,

    Thanks for the link. I read quite a few interesting things. This one really caught my eye.

    "Handing Over Goods for Promises"

    "If the global economy is markedly stronger than the US economy, that could be our situation again — stagflation."

    I think that may very well happen someday, just not soon.

    "In other words, the cheap finance that the US has will eventually fail.  I don’t know when that will be, but eventually the world will tire of handing over goods for promises."

    I REALLY think that will happen someday, but not as soon as most do. That's why I've got stagflation in my name though.

    Here's my take on China and inflation.

    China gets hit much harder by it than you or me. I spend less than 10% of my budget on food. If food, and only food, doubled in price it would hurt but I could adapt (especially if my nest egg was in TIPS).

    If food prices double in China though, they have a very serious problem. In order to stop it, eventually the government must clamp down. At the point they clamp, watch out below. Like Andy Xie, I think the China story all falls apart then.

    To me, China is playing the role of the USA during our Great Depression and we're playing the role of Great Britain. China's excess manufacturing capacity will lead to a great unwind. All things being equal, we may get at least some deflation or disinflation at that point. If nothing else, industrial metals should crash hard. It's the China story keeping their prices so high.

    In the aftermath, I do think stagflation is possible. Anything is possible.

    I do know that if I had to bury something in my back yard for 30 years then I'd rather bury gold than US dollars. I'm deflationary right now, but not THAT deflationary. ;)

    And lastly, your gold is still outperforming my toilet paper. That is not lost on me.

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  3. GH said:
    "~2.5% gain in 4 months. That will suffice for me. $1600.00 will fill the propane tank and burn a few NY Strips with a little left over."

    Yes!!! It's good to hear when something goes right!

    Gives me hope.

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  4. As Watchtower noted from last thread:
    "$1600.00 will fill the propane tank and burn a few NY Strips with a little left over."
    That is a HUGE propane tank or some serious Allen Brothers strip steaks!

    Mark,
    you mentioned the dollar was the most well researched currency and that may well be right but I was always taken by this stat taken from pages 50-51 of "Gold: the Once and Future Money":
    "A staff memebr of the IMF estimated that as little as 10-15 percent of all the U.S. currency held outside of banks is used inside the United States. The rest is being used outside the country-by foreign central banks, in dollarized countries and countries where business is conducted in dollars, by travelers, smugglers, drug cartels, tax evaders, and foreign commercial banks-as the international currency of the world. Roughly TWO-THIRDS of all the dollars in the world are in the form of $100 bills, a denomination almost never seen in the United States."

    Sorry for the long excerpt, but are all these dollars accounted for by M3 or whatever your favorite money supply counter is? What if a call in was done, how many dollars are really out there, not just in the electronic sense? Can any other currency make such a claim?

    An interesting question.

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  5. GYSC,

    It is an interesting question.

    Much responsibility, reserve currency has. Yes. Turn to the dark side it may.

    In other words, there you go popping Watchtower's "hope" bubble, lol.

    In all seriousness, let's hope that cash stays in hidden safes and doesn't find its way to canned goods.

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  6. Hey, don't be popping my 'hope' bubble : )

    I believe even on Yoda's death bed he still held out hope that the dark side would not win in the end.

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  7. Mark - I know you still have full faith in t-p, and I ain't so smart as to say you're faith is misplaced. And who knows, the way gold's been going, your call on it going under $1000 could still be right, but all things being equal, I'd suggest you grab the thankful chance get back in with no harm done!

    I take your point about China and food, but I'm afraid I can't add much to the debate as I know nothing about letting the Yuan appeciate vis-a-vis perhaps on-balance hurting their exports and "phantom" factories staying idle, versus the merits of cheaper food/raw resource imports (?).

    Coincidentally, Merkel has just posted on a TIPS model on his Aleph blog. Not sure if you'll learn anything but you might want to take a peek.

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  8. Stevie b.,

    I have no interest in buying gold at these prices. If I'm wrong, I'm wrong.

    I find it interesting that he owns TIPS. His analysis is interesting, but I don't find it all that useful.

    The bond market has shown us in the 1970s that it can be blindsided.

    The stock market has shown us in the 2000s that it can be blindsided.

    ReplyDelete