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Chanos' Summary Thoughts On China: It's Bad And Will Get Much Worse

Tyler Durden's picture




 

Chanos presents the summary observations regarding China's real estate bubble, and some strategic comparisons between China and the US:

The fun fact I'll give you is there is almost 70 billion sq. feet under construction right now in high rises, commercial, residential and light manufacturing. We estimate about 30 billion sq. feet is commercial, what we would consider is office space. That's a 5x5 cubicle for every man woman and child in China. They are building high rises in cities with already 15-20% vacancy rates, and those are the government's numbers. The real vacancy rates are higher... The Chinese banking system is the problem, it is loaded with bad debt...Our geostrategic position is a lot better than China. Keep in mind China imports almost all its essential materials... They send us stuff, we send them pieces of paper, who would you rather be.

Full clip below:


h/t MaoZeBong

 

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Thu, 02/04/2010 - 12:44 | 217204 girl money
girl money's picture

in other words, China is the new Dubai.

Thu, 02/04/2010 - 12:51 | 217224 KidHorn
KidHorn's picture

Dubai x 100

Thu, 02/04/2010 - 13:19 | 217289 lovejoy
lovejoy's picture

Chanos indicated Dubai X 1,000

Thu, 02/04/2010 - 14:07 | 217397 Kissy Ass
Kissy Ass's picture

in other words, girl money is the new stupid money.

Thu, 02/04/2010 - 12:46 | 217206 Leo Kolivakis
Leo Kolivakis's picture

Please TD,

Enough with Chanos on China. Just like raving bulls, these short sellers all have an agenda. For Pete's sake, the guy is brilliant at analyzing company balance sheets, but clueless on macro themes and certainly clueless on  China. This market is rigged - BIG TIME. Tomorrow we fly up after the jobs report. Continue buying the dips (especially on Chinese solar stocks) and spare me with Chanos on China.

Thu, 02/04/2010 - 12:59 | 217238 Tommy
Tommy's picture

"This market is rigged - BIG TIME. Tomorrow we fly up after the jobs report. "

If you were right, they would be pushing the market down today so it will have room to pop on tomorrows numbers...oh right...Dow down about 200 as of now.

But seriously, I agree that it's rigged but I'll make a counter argument quoting Jeff Goldbum from Jurassic Park; "Nature finds a way".  Even if China and the US were working together they can't control the market or their citizens forever.  Add in the reality that China and the US are acting at cross purposes and surely both their attempts to fool their markets and their populaces are doomed.

Thu, 02/04/2010 - 13:07 | 217259 Ben Graham Redux
Ben Graham Redux's picture

I've been closely following the Chinese economy since 2003 and I largely put his thesis together myself by 2006 - even got some of it published in the msm.  It's a slow moving train wreck and it may not have any impact on 2010 but his entire thesis is right on the numbers. 

As a roaring bull, why would you have a problem with the Chanos stuff?  If you're right, and I'm wrong as your confidence would suggest, you should see this as an opportunity to bitch-slap my portfolio.

Getting back to Chanos, agree or disagree, his work is complex, thought-provoking and fun to contemplate.  I'd love to see a lot more from him.

Thu, 02/04/2010 - 15:24 | 217566 Anonymous
Anonymous's picture

You put this thesis together in 2006? You mean, when the Chinese economy was roughly half the size it is today?

Quite a brilliant short that must've been.

Thu, 02/04/2010 - 13:16 | 217280 SmalleyD
SmalleyD's picture

Is it me or does Leo every show his math?

Thu, 02/04/2010 - 13:26 | 217297 Leo Kolivakis
Leo Kolivakis's picture

For some time, I've been telling you that I buy Chinese solar shares every time they get whacked hard, accumulating more and sitting on them. Is Chanos telling you about how he got whacked in 2009 or where he is placing his short bets?

Thu, 02/04/2010 - 13:29 | 217311 Ben Graham Redux
Ben Graham Redux's picture

You have given some terrific trading advice over the past year - no doubt about it but please don't mistake great trading with macroeconomic calls.  You could have made the same calls trading AOL in 1999 and have looked like a genius the whole time but if you were buying the dips in 2000 you got clobbered.  You'll discover the Chinese solar companies will go the same way.

I read your stuff because you provide a thought process that adds to the total investment equation.  Are you so insecure in your own expectations that you can't handle reading someone who disagrees with you? 

Thu, 02/04/2010 - 13:37 | 217327 Leo Kolivakis
Leo Kolivakis's picture

BGR,

Not at all, in fact, I read bulls, bears, and everyone in between. I am the first to admit that Chanos is a brilliant man when it comes to analyzing company balance sheets. I would take his advice over any other analyst. Having said this, on macro themes, I think he has no track record. He is not Soros, Dalio, Moore, or Kovner. I think people on ZH get too carried away with this fluff. Step back a little, and see that the glass is now half full.

Thu, 02/04/2010 - 13:56 | 217374 Gestalt
Gestalt's picture

Half full? Leo, as a pension expert, I have a question:

What is the delta between the net present value of current levels of aggregate pre-retirement income among the 75% of Canadians without defined benefit pensions, and current aggregate non-pension retirement savings?

This may not be a formal pension crisis, but this is a liability all the same, made all the more pressing by projected increases in the proportion of retired relative to employed persons as far as the eye can see. The same calculation among most developed nations would yield similar results.

We are facing a world where the marginal person is older, poorer, requires more medical care, and supported by fewer working-age taxpayers.

At least the Japanese were savers...

Thu, 02/04/2010 - 15:46 | 217615 Anonymous
Anonymous's picture

My CPP payment from the govt increased by .4% this year. At least the govt is putting the brakes on payments because they know we are in a deflationary period.

Thu, 02/04/2010 - 14:09 | 217401 Ben Graham Redux
Ben Graham Redux's picture

Leo,

I take people by the quality of their analyses.  Like you, I've never considered Chanos as a macro guy but I am a macro guy, at least since 1997, and his work on China is better than mine, despite the fact that I started sooner.  I'd also go so far as to say that Chanos's work on China is better than any other analysis that I've seen on the Middle Kingdom, precisely because he's combined his understanding of balance sheets and microeconomics with the macroeconomic theories.  We are in an environment that nobody alive has ever experienced, mental filters that worked in 2004 won't work today.

Thu, 02/04/2010 - 16:02 | 217645 carbonmutant
carbonmutant's picture

Leo,

We work with a group of Asian bankers in China and solar has been the subject of some discussion on our part. What they are telling us is that most of the major solar manufacturers in China are bankrupt and are being subsidized by the Central government.

They can't reach grid parity with silicon based technology. On the other hand the thin film guys say they can by 2012

Thu, 02/04/2010 - 13:18 | 217287 Assetman
Assetman's picture

Hmmm...

Should I believe Kolivakis?

Or Chanos?

Markets all over the world are rigged, most likely.  To varying degrees.

While I agree with being cautious around people with agendas, my experience tells me that rigged markets eventually meet their makers.  Emphasis on "eventually".

Chanos makes a compelling case on the Chinese theme.  I don't have a lot of confidence that anyone will have the timing right on the eventual unwind, though.

Thu, 02/04/2010 - 16:25 | 217688 Anonymous
Anonymous's picture

Can we talk more about the rigging? My belief is that when whatever artificial support is out there propping up these markets is yanked, it will be 800 point drops, not 200. Somebody on here the other day said by March (which I've heard a number of times), so it improves enough in time for the 2010 elections, but I almost think fundamental support remains through 2010. I see no benefit from massive volatility before as holy shit, this guy has enough problems, and it would certainly be the Feds refunding to get it back up.... begging the question, what would be the point of dropping it now? If we are extending and pretending everywhere else, why drop the markets?

-novice

Thu, 02/04/2010 - 13:19 | 217288 ElvisDog
ElvisDog's picture

And how is that different from your ever present agenda of talking your book on solar stocks. Any surge in employment tomorrow will be due to part-time, temporary census workers. I think the market will figure out the difference between those jobs and permanent, full-time jobs.

Thu, 02/04/2010 - 13:21 | 217293 Moe Gamble
Moe Gamble's picture

Someone flagged you again, Leo.

 

Meanwhile, the civilians struggle feebly against their inevitable fleecing.

Thu, 02/04/2010 - 13:28 | 217305 Gestalt
Gestalt's picture

Sorry Leo, are you a tin-hat wearing conspiracist now? Or are you simply referring to the current game of chicken between the Fed and global credit markets? If so, then you are talking about winners and losers, and who is likely to come out on top. Given that the Fed has implemented every conceivable tool in its arsenal to rejuvenate dollar denominated credit growth, and has failed by any measure you might use, what makes you so sure they can continue to goose global markets? 

Chanos' analysis is not the first with these types of numbers. The most fundamental requirement for deflation is oversupply, something which the Chinese have in unprecedented abundance. Judging by total vacant housing units in the U.S. at the moment, and current industrial production numbers, oversupply is not a uniquely Chinese affliction. The dollar rally is deflationary, credit is shrinking, and oversupply is the 'new black'. What exactly are you looking at to goose stocks?

Does the Fed have the political capital to set forth on a new round of QE? Maybe...but that will delay the deflationary outcome, not avoid it.

 

Of course, after deflation we will have inflation. After.

Thu, 02/04/2010 - 13:29 | 217309 Master Bates
Master Bates's picture

I didn't flag your post as junk, because I don't believe in that kind of thing whenever a post has more merit than "GOLD BITCHEZ!"

With that said, I think that the solar play has large fundamental discrepancies.

For one, WHO IS BUYING SOLAR?  Not that many people.  I interviewed with a solar company to be an accountant, and they didn't even have an A/R department.
Their growth strategy going forward was to sell to large building materials producers.  (And really, who is building right now with such inventory overhangs in RE?)

The problem with solar is that there are 15 million people starting companies and hardly any buyers.  Picking the best of breed is a big issue, especially when none are really making that much money to begin with.

Plus, the dynamic of photovoltaics has changed so rapidly over the past 5 years or so that the old dogs may well get beat down.

I'd say picking stocks in the solar market right now is akin to throwing darts, especially with no buying going on by the private sector.

Thu, 02/04/2010 - 13:39 | 217338 Leo Kolivakis
Leo Kolivakis's picture

"Who is buying solar?"

Only the top funds:

http://pensionpulse.blogspot.com/2010/01/hot-hedge-fund-trades-of-2010.html

But you can wait for the end of the world.

 

Thu, 02/04/2010 - 16:42 | 217724 Anonymous
Anonymous's picture

Same folk who were buying tech stocks in 99. Got it....
Chanos is someone to listen to because he's a contrarian. Buying chinese solar stocks is another fad that will end in tears.

Thu, 02/04/2010 - 17:43 | 217867 Ripped Chunk
Ripped Chunk's picture

JDS Uniphase

All current day demand theories can and will be changed through continuous tecnological innovation.

Solar

etc.

 

Thu, 02/04/2010 - 13:38 | 217332 Anonymous
Anonymous's picture

You are so blinded by your solar theme. Get out of the sun for a moment.

Thu, 02/04/2010 - 12:46 | 217208 BobPaulson
BobPaulson's picture

It will take a while for this house of cards to fall because they have command and control over-ride until riots come. 

At least Chinese people riot.

Thu, 02/04/2010 - 12:48 | 217216 bugs_
bugs_'s picture

Any 3X riot ETF's?

Thu, 02/04/2010 - 14:37 | 217459 Anonymous
Anonymous's picture

I second this. I want iShares Global Teargas and Rubber Bullets fund!

Thu, 02/04/2010 - 12:51 | 217227 Master Bates
Master Bates's picture

Exactly, I mean, look at the USSR.  It took them 50 years of the same BS before they collapsed.

Thu, 02/04/2010 - 13:01 | 217246 Tommy
Tommy's picture

Some might posit that 1963 is when the US "Collapse Clock" was started.

Thu, 02/04/2010 - 16:06 | 217650 carbonmutant
carbonmutant's picture

It may not require riots... just the awareness that if they want to get re-elected in November thay will need to distance themselves from the White House policies.

Thu, 02/04/2010 - 12:50 | 217222 Master Bates
Master Bates's picture

I saw about an hour long presentation that he gave the other day on this very subject.  It sure opened my eyes to China's problems and how similar they are to say, the Soviet Union.

The only problem is that China can go on for years and years before SHTF.  It took the Soviet Union 50 years of this kind of activity to collapse.  China is only about 20 years in.
I'd be extremely worried about China over the long term, but I just don't see them collapsing tomorrow.

Thu, 02/04/2010 - 13:35 | 217325 Scarecrow
Scarecrow's picture

Please provide a link to this presentation.

 

Thanks.

Thu, 02/04/2010 - 14:16 | 217417 Anonymous
Anonymous's picture

He's probably talking about this one:
http://www.youtube.com/watch?v=99HNFCn5RP8
-UncleV

Thu, 02/04/2010 - 12:52 | 217226 I need more cowbell
I need more cowbell's picture

Please TD,

Enough with Leo on any topic. Just like other raving bull lunatics ( looking for a greater fool, not looking at fundamentals), these Leo's all have an agenda. For Pete's sake, the guy is brilliant at repeating his tired old mantra, daily, but clueless on macro themes and certainly clueless on  China. This market is rigged - BIG TIME ( jumped up jesus christ, Leo and I agree on something- alert the media).

"Tomorrow we fly up after the jobs report. Continue buying the dips (especially on Chinese solar stocks) and spare me with chanos on China"

We shall see won't we, eh, Leo? By the way,  what jobs report, the ministy's propoganda or the real numbers?

Thu, 02/04/2010 - 13:03 | 217251 Baron Robber
Baron Robber's picture

I'm going with Chanos on this one.

Thu, 02/04/2010 - 13:07 | 217252 Leo Kolivakis
Leo Kolivakis's picture

Yeah, I am clueless, which is why I've been right on the money with my calls on the stock market and the economy. A year from now, you'll be saying "damn, how come things were not as bad as I thought? Why didn't I buy the dips on Chinese solar stocks?". To quote one of my pension bosses after he fired me: "I should have listened to Leo". Too late.

Thu, 02/04/2010 - 18:56 | 218042 mkkby
mkkby's picture

Right on the money, Leo?  Folks, pull up charts on Leo's solar calls and see if you think he has trading skills.  All but 2 of them are either dead money, or down at least 30% from their highs.  Ever heard of stops, or money management, Leo?

"My focus remains on these solar stocks which suffered a huge haircut this past week:"

http://finance.yahoo.com/q/cq?d=v1&s=csiq,fslr,jaso,ldk,sol,solf,solr,spwra,stp,tsl,wfr,yge

Thu, 02/04/2010 - 13:11 | 217265 percolator
percolator's picture

I can't believe I'm defending Leo, but its good to see opposing viewpoints no matter how warped they may be. 

To Leo's credit he has been banging on the pension problem drum for quite some time, but most are still not even aware of this coming catastrophe.

Thu, 02/04/2010 - 17:03 | 217736 Renfield
Renfield's picture

Cowbell, seconded. As a reader from Aus, a country that has bet the farm on China and is beginning to find out what that REALLY means, I reckon the Aus MSM could hire some 'reporters' right off this site complete with pompoms.

I'm a 'long-term' China bull - as in I think they'll recover sooner, when they do recover - but it sure as hell isn't because of their solar stocks, over-production, or stockpiling of useless foreign (US) debt. The big ride down is still only beginning.

Thu, 02/04/2010 - 13:03 | 217250 percolator
percolator's picture

More hard hitting and probing questions by Carl!

Thu, 02/04/2010 - 13:12 | 217270 Anonymous
Anonymous's picture

Leo, you keep talking about tomorrow's jobs report, Why not put a number on it so tomorrow when it is released we can either praise or pan you. While your at it, explain why the ADP report didn't meet your prediction and tell us how they, not you, got it so wrong.

One more request, should you get it wrong promise to STFU going forward. If your right I'll praise you myself.

TT

Thu, 02/04/2010 - 13:30 | 217308 Leo Kolivakis
Leo Kolivakis's picture

I expect strong job growth in Q1 & Q2 2010 with big upward revisions to previous reports. I know about the ADP figures but they are not perfect at forecasting the official jobs reports.

Thu, 02/04/2010 - 14:06 | 217393 Anonymous
Anonymous's picture

I will put a number range on it. -95K to -175K. unless the government "intervenes" you can book this range. just take a look at ADP versus BLS and take a look at the negative january factor of the birth/death model. I studied this for the entire last month in order to figure it out. Unfortunately, I am only 50% allocated to the downside, was going to allocate the rest at the close.

Leo, i challenge you to put a number on it.

I will also say that the market will be down another 200-300 pts tomorrow going into the weekend. In this weak state the market is very vulnerable and a headline number like -95K to -175K is going to cause even more panic selling.

We will see the 200 day MA (~1018) or 10% correction (1035) by next week barring any government intervention.

Thu, 02/04/2010 - 14:35 | 217453 Leo Kolivakis
Leo Kolivakis's picture

Market expect 15K, so I wouldn't be surprised if it's substantially higher, like ten times this amount. But who knows? Exact figures are impossible to predict.

Thu, 02/04/2010 - 14:41 | 217467 Anonymous
Anonymous's picture

so let me make sure this is straight. market expects 10-20K from what i have seen, and you are expecting that or potentially ten times better? so your range is 15K to 150 on the positive side right?

we couldn't be more polar opposites.

Jan 2008
ADP = -522
BLS = -598

Jan 2009
ADP = +130
BLS = -17

ADP in any other month but January during this recession, has usually had more job losses than BLS. Not so in January. That is why we should expect at least -95K jobs tomorrow, but we have range up to -175K. Unless the government "intervenes".

-EH

Thu, 02/04/2010 - 14:48 | 217482 Thoreau
Thoreau's picture

+10 The census will by hiring the bulk of "door knockers" over the next three months; but the party will come crashing down come Sept/Oct.

Thu, 02/04/2010 - 15:07 | 217526 Anonymous
Anonymous's picture

ADP's 8-bucks-an-hour programmers in India can't even write the proper code to pull data on jobs numbers from their databases. That company is technologically challenged. They'd be better of going back to paper and pencil.

Thu, 02/04/2010 - 18:59 | 218049 mkkby
mkkby's picture

Wow, Leo.  Way to go out on a limb!  It's not like census hiring 2 million temps isn't priced in already.  Or were you just the last to know?

Thu, 02/04/2010 - 13:12 | 217272 RSDallas
RSDallas's picture

This video from You Tube on China's stimulus spending is truly amazing!  You will actually question weather or not Chanos's call of 15% to 20% vacancy is WAY to low. 

 

http://www.youtube.com/watch?v=0h7V3Twb-Qk

 

Thu, 02/04/2010 - 13:15 | 217277 yabs
yabs's picture

I am also with Chanos

China is like the Us was in the last great depression ie a huge surplus nation and they eventually get hit the most

Thu, 02/04/2010 - 13:16 | 217281 Anonymous
Anonymous's picture

Leo has as much right to voice his opinion as anyone. I say, "lay off Leo"!

Thu, 02/04/2010 - 13:28 | 217306 Gordon Freeman
Gordon Freeman's picture

Why even bother to consider these multi-decade macro themes?  Everybody has an opinion--don't mean squat.  Long-term, the developing world will develop.

As for Chanos, he's got a top-notch mind.  He didn't become a billionaire by waiting decades for his theses to play out, and he's not doing it with China, either: the market crash is coming, and with it the developing mkts, the developed mkts, and f*ck knows what-all mkts are heading for the shitter sometime in the reasonably near futum...

 

Thu, 02/04/2010 - 13:32 | 217317 SlorgGamma
SlorgGamma's picture

Doom, gloom, all I ever hear around here. Empty cities? Big deal -- China has 661 cities, plus a whole bunch of towns which are turning into cities.

 

The reality of the situation is that 800 million farmers living in the countryside would like nothing better than to move to the cities and enjoy an urban standard of living (three times as high, on average, than the countryside).

China will have plenty of localized bubbles, but as long as they don't slice-and-dice their mortgages or play credit-swap games, they'll do just fine.

Thu, 02/04/2010 - 13:37 | 217329 Anonymous
Anonymous's picture

The Western mind is funny. The whole deal in China is to increase the living space, or lebensarum as the German's used to call it, for the average person from 10 square meters for a family of three to 30 square meters. We view everything in terms of making a profit. What are they going to do with all that space we say? They are going to move human beings into it gratis. That's what. Now if you were invested in that and expected a profit then you will been proved to have been rather naive. To the extent that any Western facade like capitalism or private ownership helps them reach that goal they will tolerate it but that's stillthe goal my friends and they will enforce it by whatever means necessary.

Thu, 02/04/2010 - 13:38 | 217334 Anonymous
Anonymous's picture

The problem with comparing China's economy to Russia's is that China is significantly more transparent than Russia ever was. Sure the USSR didn't collapse until 1990, but do you really think that things were humming along nicely until then? Do you think that foreign investors, had they been given a peek into how the country operates, would have invested?

China shorts could make a lot of money this year even if the country keeps "growing" at an impressive pace. I haven't taken a position either way, but more and more facts about overinvestment are coming to light. It's difficult to spook a blind bull, it's not impossible. If it was, we'd still be partying like it was 2006.

Thu, 02/04/2010 - 13:44 | 217349 Anonymous
Anonymous's picture

by Leo Kolivakis
on Thu, 02/04/2010 - 12:30
#217308

I expect strong job growth in Q1 & Q2 2010 with big upward revisions to previous reports. I know about the ADP figures but they are not perfect at forecasting the official jobs reports."

Okay I guess that's a forecast. As for ADP I don't see them revising their numbers by some eight hundred thousand. I guess we differ on what "perfect" is.

Good luck either way Leo, this is what makes it a horse race.

TT

Thu, 02/04/2010 - 13:55 | 217372 Anonymous
Anonymous's picture

I'd like to see somebody address this statement:

"We estimate about 30 billion sq. feet is commercial, what we would consider is office space. That's a 5x5 cubicle for every man woman and child in China. They are building high rises in cities with already 15-20% vacancy rates, and those are the government's numbers."

When I heard that this morning I was quite shocked. If that is even close to true I would think we would all have to agree that is bubblicious.

To denigrate Chanos without addressing what he stated is just cheap rhetoric.

TT

Thu, 02/04/2010 - 15:24 | 217568 Anonymous
Anonymous's picture

i just dont see how those numbers could be right.

if the avg size was 500,000sf (a big building) that would be 140,000 towers under construction? how could that be? spread it over 100 cities and its 700 million feet per city? thats NY or LA???

sorry Jim, but someone in your shop garbled a few zeros somehwere

Thu, 02/04/2010 - 16:58 | 217749 BorisTheBlade
BorisTheBlade's picture

http://www.stats.gov.cn/was40/gjtjj_en_detail.jsp?searchword=office&chan...

there's indeed around 30 bln sq. ft under construction according to the stats, however it's most likely not an office space.

Thu, 02/04/2010 - 15:41 | 217602 BorisTheBlade
BorisTheBlade's picture

It's hard to make sense of Chinese statistics, the most relevant that I found:

In 2009, the floor spaces under construction of real estate development enterprises in the whole country stood at 3196 million square meters, a year-on-year increase of 12.8 percent; the new started floor spaces of housing stood at 1154 million square meters, up by 12.5 percent year-on-year; the floor spaces completed reached 702 million square meters, climbing up 5.5 percent year-on-year. Of which, the floor spaces completed of residential buildings hit 577 million square meters, went up 6.2 percent.

http://www.stats.gov.cn/was40/gjtjj_en_detail.jsp?searchword=office&chan...

It is therefore 3.196 billion square metres under construction, which makes it 2.4 sq.m or 25.8 sq. ft per capita. Sounds big, but first when I was listening to Chanos I got an impression that it was office space per one person, which would be indeed huge. However, if you look at the statistics themselves, they'd tell you "floor spaces under construction of real estate development enterprises", which I presume is total floor space under construction regardless of whether it is resi, office, retail or light-industrial. If the this is true, then it isn't such a big number after all.

Thu, 02/04/2010 - 14:14 | 217411 yabs
yabs's picture

slorg
the reality is that farmers cannot afford expensive condos
hence many loans will go bad , hence the banks are in big trouble

Thu, 02/04/2010 - 14:24 | 217429 geminiRX
geminiRX's picture

You can't eat solar cells. I would say a food crisis is more imminent....considering there is only enough food to feed the world for <10 days in the event of a disruption

Thu, 02/04/2010 - 14:25 | 217442 Anonymous
Anonymous's picture

I am not sure that Leo even gets the pension equation right. There are major shortfalls in both public and private US pension plans. By law these shortfalls need to be made up over time. In the private sector that means that large public companies with defined benefit pension plans will need to make large contributions. This will reduce their earnings. In turn reducing their stock prices.

The current pension crisis is also exacerbated by layoffs of older workers. Older workers will commence drawing on their pensions. This creates an immediate cash drain. It also plays havoc with the actuarial plan funding assumptions. Plans fund assuming workers will stay until 62 or later as an example. If they are terminated, retire and commence drawing on their pension there is a funding gap. Even worse are plans with lump sum features. When the employee takes the lump sum, the plan loses the future earnings on these assets.

Finally, pension plans are moving from public equity to private equity investments. These investments are less liquid, more speculative and harder to value.

The same problems pertain in the public sector with the pension shortfalls to be made up from increased taxes or trying to convince public sector unions to reduce pension benefits (good luck on that one).

This suggests a macro environment of reduced corporate earnings, reduced stock prices, greater pension plan risk, higher taxes and larger shortfalls. In essence, a negative feedback loop that suggests equities are not a great investment.

Thu, 02/04/2010 - 14:40 | 217456 BorisTheBlade
BorisTheBlade's picture

What kind of leverage do the construction sector has there? 'cause otherwise it's hard to predict what kind of an impact that'll have on a banking sector. 5*5 cubicle for every citizen would make 25 square feet per capita, which indeed sounds staggering, but in the US it is about 150 square feet per capita if I'm not mistaken (correct if i'm wrong).

Thu, 02/04/2010 - 14:52 | 217488 Anonymous
Anonymous's picture

Anyone know where someone can find the slides of his hour long china presentation? It would be really helpful

Thu, 02/04/2010 - 14:59 | 217500 uff the fluff
uff the fluff's picture

wtf

Much of the real estate in China sits empty, not because they have some master plan to move peasants in and give them all office jobs, but because the properties are the "investments" of others. This model didn't work in America or Spain, and it damn well won't work in China either.

 

Thu, 02/04/2010 - 14:58 | 217504 dan22
dan22's picture

From 50 facts about China's bubble economy:

For four decades before 2003, fine iron ore prices fluctuated between US$ 20 and US$ 30 a ton. As ore was plentiful, prices were driven by production costs. After 2003, Chinese demand drove prices out of this range. Contract prices quadrupled to nearly US$ 100 per ton, and the spot price reached nearly US$ 200 a ton in 2008.

9. China's steel production capacity has skyrocketed, even though capacity is fragmented.

10. China's local governments have been obsessed with promoting steel industry growth, which is the reason for fragmentation. Huge demand and numerous small players are a perfect setup for price increases by the Big Three miners, which often cite high spot prices as the reason for jagging up contract prices.

11. Numerous Chinese steel mills simultaneously want to buy ore to sustain production so their governments can report higher GDP rates, even if higher GDP is money-losing. China's steel industry is structured to hurt China's best interests.

12. As steel demand collapsed in the fourth quarter 2008 and first quarter 2009, steel prices fell sharply. That should have led to a collapse in ore demand. But the bank lending surge armed Chinese ore distributors, giving them money for speculating and stocking up.

13. Even though China is the biggest buyer of iron ore by far, it has had no power in price setting. The global recession should have benefited China. Instead, the lending surge worsened China's position by financing Chinese speculative demand.

http://israelfinancialexpert.blogspot.com/2010/01/50-facts-about-chinas-bubble-economy.html

Thu, 02/04/2010 - 15:04 | 217518 Anonymous
Anonymous's picture

Boris, Chanos stated: "We estimate about 30 billion sq. feet is commercial, what we would consider is office space"

He was talking office space alone.

Maybe they are all learning english and about to take over the worlds call centers.

TT

Thu, 02/04/2010 - 15:14 | 217548 jefftheshark
jefftheshark's picture

Perhaps the Chinese learned a lesson from their last major earthquake in 2008, and instead of just demolishing their old and dangerous structures and sitting around doing business out of cardboard boxes, they are building newer and better structures to occupy first and then moving.

This is what I would do if I had my own state controlled economy and could channel resources into assets that I knew would make me more productive in the future, while potentially saving a lot of my citizens lives down the road to boot.

But that's just me.

JTS

 

Thu, 02/04/2010 - 15:28 | 217577 Grand Supercycle
Grand Supercycle's picture

 

DOW / SP500 downtrend on the daily chart continues.

The recent equities counter trend rally has finished and the March 2009 bear market rally is over.

The dollar, crude oil and copper charts have been giving bearish warnings for stocks for months.

DOW / SP500 downtrend commenced as forecast and the USD rally I forecast several months ago is just getting going.

My indicators can identify trend changes before they occur.

They warned me of an impending market crash back in early *2007*

The uptrend since March 2009 has been a bear market rally contained within a much larger bear cycle that started in 2000.

http://www.zerohedge.com/forum/market-outlook-0

Thu, 02/04/2010 - 19:24 | 218086 mkkby
mkkby's picture

Flagged because you keep repeating this obvious ad:

"My indicators can identify trend changes before they occur.

They warned me of an impending market crash back in early *2007*"

Thu, 02/04/2010 - 15:38 | 217597 Anonymous
Anonymous's picture

The USA needs a one dollar coin. Why not have China stamp them out of copper. That's a win win.

Thu, 02/04/2010 - 16:23 | 217682 Anonymous
Anonymous's picture

30,000,000,000 sq ft/43,264 (size of one acre)= 693,417 acres/640 (no. of acres per sq mi.)= 1,083 sq. miles which is about a 33 mile square. Preposterous. Where does he get his stats?

Thu, 02/04/2010 - 16:28 | 217695 Anonymous
Anonymous's picture

China ETFs led the way on the current US downleg, under performing for the last couple months. If China isn't a bubble while we still are something's wrong with that picture...either we're entering the Great Moderation II or our barrel is getting awfully close to the falls.

Thu, 02/04/2010 - 16:33 | 217705 JimboJammer
JimboJammer's picture

China  is  building  a  big  War  Machine  too.  I  hope  they  don't  try  to  take  Alaska  or  Mexico >>>  then  push  north...  I  might  have  to  grab  my  30 - 30  Winchester  and  drive  out  there...

Thu, 02/04/2010 - 16:42 | 217723 Anonymous
Anonymous's picture

I don't like this guy, he owns a short fund so he's going to be short all the time, he's in salesman mode. I don't think the fact that China CRE being in a bubble is in doubt. For a more interesting perspective I suggest this article

http://www.cibmagazine.com.cn/Features/Face_To_Face.asp?id=1190&zhang_xi...

Thu, 02/04/2010 - 16:50 | 217735 Gimp
Gimp's picture

I thought the leaders of China would  not copy our Western Debt model but it looks like they have been sold the dream by clever squids on banksta street. They may end up down  the rabbit hole sooner they they think.

Thu, 02/04/2010 - 17:42 | 217868 gator gatlin
gator gatlin's picture

If the Chinese bank loans are bad due to overbuilding what they have in effect done is invest their surplus in that hard asset development...the formal step of moving it (the surplus) onto bank balance sheets via state equity injections is not really necessary since the state owns/conrols the banks and can dictate their reporting (just don't buy their bank shares)...so what if their banks are technically broke so are ours in the aggregate on a real value basis and the state is encouraging/allowing them to prop up their balance sheets with BS asset valuations..what's the difference...they have a cost based competitive advantage over us that has and will continue to devastate the productive segment of the U.S. economy, on balance.

Thu, 02/04/2010 - 18:42 | 218006 Renfield
Renfield's picture

so what if their banks are technically broke so are ours in the aggregate on a real value basis and the state is encouraging/allowing them to prop up their balance sheets with BS asset valuations..what's the difference...they have a cost based competitive advantage over us that has and will continue to devastate the productive segment of the U.S. economy, on balance.

I would say so...their manufacturing sectors and their quiet build-up of resources, using their junk reserves to buy REAL resources, this is why the Chinese will be among the first to recover. Eventually there will be a market for production again, and in the meantime the world will always need a certain amount of resources. Where the resources are, that's where real recovery will start I think.

Any nation depending on its FIRE for recovery is doomed. The whole world is propping up its FIRE sector, but some nations are relying completely on that. I don't see China as among those nations. While we're not hearing very much about China's 'Plan B', I believe it is in full operation behind the scenes.

Fri, 02/05/2010 - 00:07 | 218461 gator gatlin
gator gatlin's picture

Agreed.  Comparing China to USSR is not valid bec China has much more of a valid market based business base...USSR was a nonmarket based, state planned and controlled economy...plus the US is in a better geostrategic position than China...based on what?...cause we give them paper for real stuff??...this just in, the rest of the world is still taking  our paper and the Chinese are busy taking it and trading it for real assets or for equity interests in real assets that they need for future development...I'm sure they will have their speed bumps and major league hiccups but so did we back in the day..net, net they are gonna whip our deficit, debt ridden, politically bankrupt asses in the long run...not because of some state run system but because of simple market based business fundamentals..

Fri, 02/05/2010 - 02:31 | 218568 vainamoinen
vainamoinen's picture

"Organic Demand"

During the post WWII economic expansion in the USA there has been some structural relationship between credit expansion and economic development. The process was proceding at a pace where credit derived development did not get too far ahead of or behind of credit expansion so there was an existing superstructure at all points in development upon which further credit expansion could act to produce a "beneficial" effect. That is, for the most part, an equilibrium was maintained between credit expansion and infrastructure/economic development to maintain an ongoing "organic demand".

But, since credit always expands faster than the economy that develops as a result of the stimulus provided by credit eventually the economic structure becomes credit saturated and it takes even greater amounts of credit to produce a given unit of economic development. In the final stage "old debt" has such a smothering effect on the economy that the issuance of new debt has no effect. All the economic development of the past decades carries a debt load with it and that development and its associated debt is larger, by orders of magnitude, than the amount of new debt and the anemic economic activity that it might stimulate that can be possibly created in a given time period. "Cash for Clunkers" fixed nothing.

 

At this point, in a slowing and debt saturated economy organic demand begins to crack, break and collapse. That is where we are now. Next is the 2nd iteration of the deflationary cycle where, as a result of the unemployment generated in the 1st cycle, consumers have less money to spend, less access to credit and economic demand decreases again. And so on to the "natural" bottom of the larger cycle after several iterations of a collapse in organic demand.

 

In the case of China, as a result of its command economy,  there has been a monumental expansion of credit over a relatively short period of time which has resulted in a disconnect in credit expansion and infrastructure development and organic demand in the economy. They do have shopping malls, 80 story office buildings and, at least, 1 entire city that stand completely empty. The rapid expansion of credit and infrastructure has lost its rational relationship to a real economy based on organic demand.

The post war experience of the USA and much of the West cannot be duplicated in China simply because "they weren't there then". I call it "Rain Dance" economics. Primitive people believed that, in order to make it rain, all you had to do was ritualistically imitate the activity of rain and it would, in fact rain. The Chinese seem to believe that all they have to do is create the facade of a prosperous Western economy and they will have a prosperous Western economy. They give no consideration of the history of the phenomenon as it occured in the West nor the time period required for its development. Being all powerful, they believe they can command this phenomenon into existence. Personally, I don't believe in Rain Dances as an effective means of making it rain and I don't think the Chinese "Rain Dance" will have its desired outcome - atleast not for a long while.

Both the USA and the Chinese are currently on a deflationary path because, in both cases, there is a lack of organic demand in their economies and it is organic demand that keeps the machine "humming" over long periods of time. However, it is interesting to note that they have come to this lack of organic demand by two different paths - although both are credit related.

 

In 1575 Spain was bankrupt. They had discovered the New World less than a century before. The amount of gold and silver (i.e. wealth) they "stripped" from that new world was beyond measure. Still, in the long run, it did them no good. It is interesting to note that today Spain has an unemployment rate of 20%, one of the highest in the world. They, apparently, never, in four centuries, have figured out how to run a viable capitalistic economy. (IMO)

Can the Chinese Communists do it in 15 years?

I am with Chanos on this one and, yes, I'm betting real money on the outcome. 

Time will tell.

 

Fri, 02/05/2010 - 04:01 | 218612 Anonymous
Anonymous's picture

Let see:

China is trading real wealth against the US debt, meaning that the US debt is by the day becoming more and more China's problem and less and less the US issue. Okay, checked.

China has not 700 military bases around the world to help farm the poorer countries and force them to yield the necessary resources to support in a human society at a discount. Okay, checked.

If those basic observations are what it takes to be a brilliant mind, dont look for a collapse elsewhere, you've got your dream here: collapse in intellectual standards.

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