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The "China Decoupling" 7th Derivative Just Turned Again
For the foaming in the mouth daytraders who think that a day's reversion is the start of a multiyear secular pattern. Like the greenshoot crowd.
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The decoupling crowd are the same ones that believe that helicopter ben lie can save them. Any system built on the need for exponential growth will fail. China really is to the world what the US was to the world in the 1920s and 1930s. What did the US do to stop what happened worldwide back then? Not a dam thing.
As soon as Big Bird Denis tells me where the new credit is going to come from to service the $53T of US total credit market debt than I will believe in green shoots. At new credit creation down to less to $1.484T and $1.8T is federal government, all I see is an end to a system.
http://www.federalreserve.gov/releases/z1/Current/
Exponential growth is great until you can't get people to service that, eventually they can't... it's impossible.
http://www.mathwarehouse.com/exponential-growth/images/formula_exponenti...
Everyone loves a good party, but all parties come to an end.
The host ran out of beer and chips, and strippers.
When China began to overheat, they had the foresight to raise bank capital requirements as the tool to dampen excessive stimulus. They look pretty smart now don't they.
btw, Soros just came out with this recommendation for us. I believe I heard him say that the laws have been changed to prevent the Federal Reserve from raising capital ratios. If this is true, I ask what "FORCE FOR GOOD" do you suppose might have had a hand in the matter?
I am a believer in decoupling (I take pride in my naivete), Lets call it an "ugly decoupling" cause it ain't gonna be pretty or clean and it will not help the USA much in direct trade with China. China implements under-the-radar stealth protectionism.
We will pick up some rebound business from the "BRIE Nations" though. (Brazil, Russia, India and other Emerging Economies) - Just made that up, quite clever, no?
Incidentally Wikipedia's description of BRIE: "It is pale in colour with a slight greyish tinge under crusty white mould; very soft and savoury with a hint of ammonia." Except for the savoury part, it sort of also describes our economic recovery, don't it?)
There is no decoupling. You think the US is a mess, wait till you see what happens over there. The people in the city in China are going back to the rural villages.
Asia>buys Treasuries>US>buys Asian crap>Asia
The US doesn't buy their crap, it's game over. The world has been fueled by the US consumer, the US consumer is gone.
There is no alternate system that kicks on like a generator.
There is no decoupling because that is not how the system operates, they are not an equal, they are a component. Take out a key component, system doesn't run.
What has fueled China and the rest of Asia has been the US consumer, the only reason Japan hasn't fallen completely off the face of the planet is the the US consumer. The US consumer is dead. There is no alternate system that just kicks in when this one fails.
Look at their numbers for domestic consumption, its up several hundred percet. Even car sales are up over 50%. And when you have 1Billion+ people, doesnt take much to replace us. They will feel the pain of the US collapse, but they will emerge the powerhouse of growth for this century.
Vegas that is not how the system is setup. You can look at the export and even the IMPORTS. Not just exports but imports as well, on a huge scale. And the word I am getting is the imports are just stacking up over there... they are not being consumed.
http://www.guardian.co.uk/business/feedarticle/8587936
The system is designed one way and you want it to run another way. There is no switch.
There people are actually leaving the city and going back to the rural villages.
If you think someone is going to give a rural villager in China $300-500k to build a house, good luck with that.
The system is missing trillions right now for what it needs, there is no alternate system. Which is why you keep hearing one China official bitching about it than another says a day later they will keep buy treasures.
There is no decoupling, it hasn't been happening and it ain't going to happen... that is not the system. Now many decades from now out of the ashes if you want to setup China to be the fuel for the engine, hey might work later.. but there is no switch. The numbers are supporting this.. if this were not true you wouldn't be seeing the China government throwing billions into the stimulus pit as well... if Chinese are what you are hinting at they shouldn't need a stimulus?
No, they are throwing money into a pit as well... spinning their tires. If you don't believe me, read below... he is 100% correct.. it's not difficult, it's impossible without a big mushroom cloud.
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http://www.bloomberg.com/apps/news?pid=20601085&sid=aMfRLA6RomUY
“The minister’s remarks are definitely supportive of the dollar,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “It’s extremely difficult to move to a new reserve currency. For China, the value of their U.S. holdings would drop.”
We hope that as the main reserve currency the exchange rate of the U.S. dollar will be stable,” China’s Vice Foreign Minister He Yafei told reporters in Beijing. “This international financial crisis has fully exposed the weaknesses and loopholes in the international monetary system.”
People now are getting paid the SAME WAGES as they did in 2000. But are prices at 2000 levels? HELL NO. So they go into debt, adding more layers tothe USA debt ponzi scheme.
Obama's policies may not be working as well as many had hoped:
1st 100 days - There are 2.9 million more people unemployed in May than there were unemployed in January. The unemployment rate went from 7.6% to 9.4%. Since May 2008, we have lost 5.5 million jobs. The biggest losers
were:
Manufacturing 1.5 million lost
Finance & Prof Serv 1.5 million lost
Construction 1.1 million lost
Retail & Leisure 1.3 million lost
good finance articles
http://www.bit.ly/12NCJR
It's an end to a system.
The US credit market system is the fuel of the world, it's $53T(see Fed's Z1 report) of the roughly $200T worldwide credit system.
The US consumer is tapped out, a tired greyhound dog at the racetrack... the operator keeps running the robot rabbit around the track but the dog is too tired and is laying down on the track. It need not matter what the robot rabbit operator does, he has a tired out dog. But in the case of the racetrack it doesn't imploded when the dog stops running.
The consumer is now generating -$400B in the US Credit system, yes, negative, the federal government step in front of the train and is generating $1.9T... that's a net gain of $1.4T. Sounds like a lot until you see the credit market was expanding at a $4.6T rate in 2007.
Now how do you service $52.9T with $1.5T, you simply don't or can't. Eventually the federal government will be flatten by the train.... welcome to FUBR city.
All the other countries are in the same boat. China is in the same boat. The US was creditor country in the 20s and 30s, so what. At the end of the day, the system must expand exponentially or it collapses.
Vegas, I agree with you re CHINA. The arguments about exports are too black and white. There is pain to come for china for sure, but pain does not spell the end, it will most likely be a growing pain.
US had wars and depressions on its way through to world dominance, I don't think china will experience any less pain than than America did through civil unrests, cival war and various depressions starting in 1873 and even before....
Shaza,
That is the problem, there is no real slowdowns in credit creation... once you slowdown for more than a quarter or two you enter the event horizon. Nothing escapes from the event horizon not even light.
I bet there was someone in England in 1930 saying man, look at the new world over there... they got manufacturing plants, agriculture, look they are producing new technology, etc.
What did it mean in the end? Squat.
Why? Because the system peaked and there wasn't anything the US could do.
I will get off the horse on this one.
There is no trigger for recovery - new technology, new markets, demographics, new ideas. Green is just a boondoggle and BRICs can only do so much. JPM and GS etc are just trying to create another bubble - it suits their ends not yours.
hat tip for the good articles:
investmintideas.blogspot.com
why cant we get one of those big selloff days? maybe -500 points on the DJIA? And no rebound either.
China will abandon us as a consumer as soon as they have new markets in place to serve as substitutes. Why do you think they were buying up commodities earlier? It was not because they had joined a white-supremacy cult in Idaho. Rather, they understand that the jig with us is up and they are intent on promoting rapid economic recoveries elsewhere to provide new consumer markets. It will take time of course, but once it is in place, watch out. They will abandon the dollar like a cheap suit (made in China of course.)
They don't have a choice, or more like no good choices.
China is fueled by the US consumers. There is nothing they are going to do with a whole bunch of commodities if they are not selling them back to the US and the rest of the world.
They have no alternate system which they can just flip a switch on.
China is on the same ship as the US whether they like it or not. They certainly could jump into the cold water on their own.
"jig with us is up"
The gig is up for the whole world, just like it up for the whole world the last time. Nothing has changed, it's the same system.
If China is going to be the demand of the world, where are they at? They could start using those millions of tons of commodities they are storing... the truth of the matter is they have real use for them. Why? Because the system is not setup that way.
Mako, Please consider this: Cost of Capital in emerging markets has historically been much higher than developed markets. Interest Rates are falling more in the EMs and will continue to do so with the $150 billion IMF action and simply over time. This will spur economic investment opportunities that previously were out of range. Also, the BRICs are making a concerted effort to create their own economic markets without the need for the USA. Again it is gonna be ugly and who knows how long it will take and for that matter how much farther they may go down before they have finally decoupled from the beast. But they will and they will leave us behind in the process. I heard last night that almost every money manager is overweight in China (and that China does not allow short sales). I think this indicates that the group think is about the same as my theories/conclusions. I suspect you and I are very on similar wavelengths, but just looking at different ends. (I'll take the head and leave you the tail..... however if she was prettier....)
"This will spur economic investment opportunities that previously were out of range"
All these other countries are dependent on the US consumer either directly or indirectly. That is the system, all those other countries might have economic investment here and there but that has been because of the US consumer at the end of the line.
It is not much different than the 30s where the United Kingdom's pound sterling was the reserve currency, UK peaked and THAT'S ALL FOLKS. The system could no longer supply what was needed.
Look at Japan, if it were truly an economic island they have been burning down to the ground by now. However, they are not an economic island... they were able to suck off the demand of the US consumers. Now that US consumer is dead they will continue their march to the fire pits.
China is no different because that is not how the system runs or is setup. Tell you what, go to your car... put oil where the gas goes, put gas where the water goes and put water where the oil goes. Let me know how long it runs.
There is no alternate system, once the US consumer goes that is it... time for collapse and liquidate, just like the last time. The only difference this time is the system is 10 times as big.
The US system is $53T, the total worldwide system somewhere around $200T if I remember correctly. You can't exponentially grow that forever, yet for the system to survive that is needs to happen. It's impossible.
What China and Russia are doing is bitching about the system, but that is the system. There is no easy way to remove your engine from your car and replace it with another.
It's called liquidation of the non-performing liabilities. The only reason to replace the system is to get rid of the non-performing liabilities.
Humans have picked an equation that is doomed to start with. I agree the rats are wanting to jump ship but the truth of the matter there is absolutely no where to jump to.... welcome to FUBR city or more like a vast FUBR ocean.
The market keeps rebounding. It needs to be much, much lower. Americans are
being scammed and nothing being done about it. rec. articles for slow news day http://www.bit.ly/12NCJR
Good comments, Mako
There is no trigger for recovery - new technology, new markets, demographics, new ideas. Green is just a boondoggle and BRICs can only do so much. JPM and GS etc are just trying to create another bubble - it suits their ends not yours.
good articles ot.com
why cant we get one of those big selloff days? maybe -500 points on the DJIA? And no rebound either.
Ah, Ned, where are your powers now?
No capital markets systems or the economies they operate within can be premised for long on the concept that the sum total of all markets and by extension, their economies can be larger than the sum total of the capacity of the output of those governed by those systems. Fact of life.
China has only depended on US consumers for their own growth since 1990s, before that, someone else (aka Japan, Korea, Taiwan, Mexico etc) were the doing what they did. Have all those other countries disappeared? No, they adapted, they gave up on the old model, and changed. Only the American cosnumers have not changed.
What's the problem with our ways, why should we change? Well, simple. The current systme of Joe sixpack (yeah, you I am talking about) needs $1000 subsidy from the world China every month (calculated on a trade deficit of roughly $30b a month). What does it buy, that $1000 in China and India? Lots of goods. Instead of subsidising 300m Joe sixpacks munching 3 half-pounders everyday, perhaps 3 times as many Indians and Chinese would derive the same improvements in living standards on half that amount for decades. BRICs would enjoy the same improvements in living standards as America has since 1945, except at a much lower cost, and for perhaps 3 times longer.
That is the new paradigm. Where does that leave the US of A? The same way America left the old Europe. America would become a provider of niche services and goods, but they would see decades of zero growth. Adaptable Americans, those with skills and knowledge like the germans and Swiss, would do well. The average Joe sixpack, and the lawyers and accountants who provide no value-add to the new world order, would all become more or less extinct.
Guy's lets get back to first principles:
The rate of exploitation (let's say corporate profitability) is equal to the total product (let's say Global GDP) divided by necessary labour (lets say the global incomes of the bottom 80% of the population - wages and transfers).
The rate of exploitation determines the ability to pay dividends (and executive bonuses for that matter) and hence is the major determinant of stock market value over time.
What happened over the last ten years? Global GDP went up and the necessary wage bill went down - thanks to the opening of the emerging markets labour markets on very favourable terms. [Indeed, this was the greatest positive shock to global profits since the slave trade got going - and in fact it was a kind of modern day slave trade - just that the work went to the slaves, rather than the slaves went to the work.]
So now where are we? Global GDP is going down faster than the necessary wage bill. It's true wages and employment are falling, but transfers are kicking in to stabilise incomes [a Fannie Mae 125% Re-Fi is nothing more than a transfer].
The net effect is the rate of exploitation is falling. No amount of subsidies, bailouts, quantitative easing, tax adjustments, stock manipulations or SPARK cores changes that.
Ergo - the stock market is going down - over time - as well. Look out for more earnings disapointments ahead.
http://www.youtube.com/watch?v=91yHqMc41Xc
David Tice interview.
He is right on some but WRONG on WHY?
The credit system is not collapsing because of excess, it is collapsing because the present is not exceeding the past. There is no going backwards David in a credit system based on the DEMAND of the system to exponentially grow. David, the US has all kinds of factories and plants and industry and it didn't matter than and it won't matter now.
The $52T he quotes is correct it's actually $52.9T of total credit market debt (see Z1 fed report). David is under the assumption I believe that this amount can be paid back. That is ridiculous, all you can do is service it. What you are seeing is the system trying to pay itself back, it's called a collapse. If you want the system to survive all you can do is keep servicing it at an exponential rate... that is what the equation DEMANDS.
http://www.mathwarehouse.com/exponential-growth/images/formula_exponenti...
Humans can't outrun that equation, eventually humans fall behind and when they do it's game over. It' the equivalent of thinking human can outrun a bullet but the bullet increases it speed by 7% every nanosecond. Good luck.
Humans are using a unsustainable equation than at the end when they see the collapse they start pointing fingers. Well, you have one choice you either grow exponentially forever or you collapse.
When this one topples over it won't be pretty, the use of exponential growth is not going to work long term unless humans have unlimited power.
It seems to me the system on a world scale is able to survive between 60+ years than it's basically game over.
Mako, you need to refine your scope when you say game is over. It may be over for the U.S., but clearly on a historical view this whole episode is going to be little more than a two year hiccup on China's industrialization path.
This debt is US debt, not Chinese debt. The US is going to absorb the vast majority of this crisis. And you might even convince us that this is the start of a secular decline in the power of the United States. Maybe indeed we are topped out here...certainly we are in a serious way for at least a decade working out this debt. Unlikely we will ever return to the kind of growth we saw in the 1982-to-2000 bull market .
But what makes you think our problems are China's problems? Yes, China has a lot of wealth in US dollars, and to the extent that the dollar is a long term declining asset, the Chinese reserves will come down in value. But that won't topple China. Those are just savings. Yes, China has most of its economic engine tied to serving the US consumer. So there is a huge one-time adjustment they need to make, because the volumes of exports are going to go down 60%. But they won't disappear.
In the meantime, the Chinese consumer is emerging. To believe that the Chinese consumer can only exist if US exports remain at the volumes they were in former years is just wrong. To believe in the Chinese consumer you only have to believe in market economics, industrialization, and in the basic desire of the Chinese population to improve itself. Sure, it may take them 10 years to make this home market a replacement for the revenues they lost from us. But there is nothing we can do to stop that inevitable industrialization of China. They won't need us to do it. And ultimately, we and the rest of the world might get some benefit from it.
At best, your point might be that the Chinese are going to have a very rough two or three years restarting their own growth.
The Chinsese are going back the villages as I write this. The current credit system is not setup in that manner, so yes they can only exist because of the US consumer. That is the system, just like it was lights out for the world in the 30s when the UK bit the dust.
Well, I tell you what, you tell them to switch over to this backup financial credit system that doesn't exist and let me know how it turns out.
There is no way they will only go through a rough patch when the global credit system implodes. Japan was lucky that they were not a true economic island like they are a physical island... unable to expand to meet the demand for the exponential rate equation, they peaked in 1989 and it's been kept alive by the US consumer that is until that consumer died now it's back to hitting all-time lows.
The chinese are more than capability of going to this fictious non-existent global financial system whenever they choose... I would advice everyone to get their flak jackets and helment, and brace for the impact boom.
They system you describe simply does not exist, it way too late to be discussing what China, India, and Russia have been talking about. There is no way humans can keep up with the demand of exponential growth forever, somewhere in the 50-75 year range seems to be the norm on a global scale.
To keep the game going on just a little longer, China is going to have to drop the value of their currency. Yeah, just have them do what you suggest which would be a revaluation upwards and let me know when they do it so I get my basement and wait for the blast.
In your scenario, what is the equilibrium state? The U.S. lives in recession for 10 years and China goes back to its status in 1990 forever?
Imagine a world with no credit system what so ever, hard to even imagine what the world will look like.
China will not fall as hard because they don't have as high to fall from it will be a matter of going from having to NOT having or NOT getting. The countries that don't have much to lose have less to lose so the impact will not be as great.
Without a major major war or some type of huge liquidation event you could be looking at a generation.
Without WW2 how long would have that continued, probably many more decades, even with WW2 it was a very slow after the war. Germany was basically in the crapper for nearly 30 years.
Who knows how bad it will be, I suspect billion+ instead of a 100 million like last time.
there is an old good Solows' model of growth. It's pretty simple. Most of the REAL growth is due to innovation. There is also certain equilibrium level between consumption & investment. This equilibrium is different for different countries, however as a country becomes more advanced & developed, that equilibrium point converges. The meaning of it is simple, you can consume only within certain level, over-consumption cannot last forever. Same goes with investment, it does not make sense to have extra machinery because its marginal output will decrease, & it will get old. That model illustrates why the US not China can continue their current behavior forever. We have to invest more, they should stop the export and production subsidies so they could consume more. Unfortunately, both governments doing everything wrong. Anyway, the real growth comes from innovation and innovation depends on condition of a free market (!!!!!), level of education and degree of freedom within any particular country.