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Some Weekend Thoughts By John Mauldin
Some interesting stuff in John Mauldin's latest piece. We'll include some pertinent quotes along with our thoughts.
China is growing by about 8% a year, which is amazing on the surface of it, as their exports are down about 20% (more in some sectors). How can that be? I continually read about how China is going to lead the world out of its global funk. And 8% growth in GDP does seem pretty strong. But we need to look a little deeper.
If I told you that the next US stimulus package would be $4.5 trillion dollars, mostly given to banks that would be forced to loan out the money quickly, do you think that might jump spending and GDP in the short term? Would you start looking for a few bubbles to be created? What about the dollar?
That is the equivalent of what China is now doing. The volume of credit that is flowing into China is equivalent to one-third of their GDP. Banks that already have large problem-loan portfolios are now lending even more, in a very short time frame. China has severe capacity-utilization problems, as trade has sharply fallen; and the US consumer is unlikely to return to anywhere near the level of consumption that was the case in 2006.
The Chinese stock market is up 85% this year, and commodity and real estate prices are rising. And no wonder: the money supply shot up 28.5% in June alone. That money is looking for a home. My friend Vitaliy Katsenelson has written a very perceptive essay for Foreign Policy magazine, talking about the nature of the current growth in China.
"But don't confuse fast growth with sustainable growth. Much of China's growth over the past decade has come from lending to the United States. The country suffers from real overcapacity. And now growth comes from borrowing -- and hundreds of billion-dollar decisions made on the fly don't inspire a lot of confidence. For example, a nearly completed, 13-story building in Shanghai collapsed in June due to the poor quality of its construction.
"This growth will result in a huge pile of bad debt -- as forced lending is bad lending. The list of negative consequences is very long, but the bottom line is simple: There is no miracle in the Chinese miracle growth, and China will pay a price. The only question is when and how much."
This is very much in line with our theme of the recent China bubble. John has done a much better job in attaching specific numbers and analogies to the situation but the fundamental picture aligns with many of our posts going back to April. The larger view has not changed and the question becomes if China can complete this transition before the legs give out. The US can not be expected to provide the bubble year levels of aggregate demand that has created and supported the existing Chinese manufacturing and employment infrastructure.
I am going to quote at some length from Simon Hunt's latest note. He travels very frequently to China and is one of the world's true experts on the copper market. If you want to know something about copper, ask Simon. Copper, we are told, is the metal with a PhD in economics. If copper prices are rising, then the economy is booming. And historically, that has more or less been the case. But there may be reason to believe that PhD may be no more useful this time around than a regular Ivy League degree.
"There is no better example of this speculative activity than what is being seen in the copper market. It is easy for global merchants, hedge funds etc to ship cathode into China and warehouse it outside the reporting system, so fuelling investors' sentiments that copper demand in China is soaring and at the same time draining copper from the rest of the market.
"It is not so much industry which is doing this buying in China, but individuals, financial institutions and even small companies divorced from the copper industry who are buying and holding the metal because copper is a store of value and prices will go up is the common response. We updated our numbers for the first half of this year. They are truly staggering. Over 1 million tonnes of cathode is sitting in China mostly outside the reporting system as a punt on rising prices." (Emphasis mine)
If it is happening in copper it is likely to be happening in other commodity markets as well. If you are trading the metals, you should be aware that a quick drop could happen if demand falls off due to there being a glut of supply coming back onto the market.
This is another long-term theme that we have been exploring. Again, John does a much better job of providing specifics to back up our original assertions. We don't know who Simon Hunt is but if John asserts that he is a "true expert", we'll take his word for it. This piece we put up covers most of our thoughts on the subject, so we won't rehash but it is an ongoing story with the potential to have some serious impacts across global markets.
This is a very big deal, and from the Chinese point of view, quite smart. Right now they are stuck with $2 trillion in US Treasuries, agency paper, etc. They can't sell their dollars without really hurting the dollar, thereby forcing the renminbi to rise and hurting their own exports. But they, and much of the world, feel that the US is pursuing policies that are going to be harmful to the value of the dollar and therefore to China's largest reserve exposure.
What to do? Take those dollars and buy physical assets. Companies, natural resources, maybe a few small countries. (To my Chinese readers: that's a joke, although some in the West worry about that.)
In the card game called Old Maid we played as kids, the loser was the one who ended up with the "Old Maid" at the end of the game. For the past decade, the Chinese sent us "stuff" and we sent them dollars in the form of electrons. They in turn invested those dollars in our debt so we could buy more stuff. It was a form of vendor financing.
And now the Chinese have apparently decided to pass the Old Maid of the dollar on to other parties, who will sell them their assets for dollars. Seriously, did anyone not think they would do this? Massively selling the dollar, which so many conspiracy-theory types keep saying they will, was never really a rational option. But using those dollars to acquire productive assets? Very smart, very rational. If you figure out what they want to buy and get there first, there are profits to be had. Attention should be paid.
This is an interesting point. Many have picked up on this point previously but most have assumed those asset flows are going to be into commodities. We disagree mostly because of the numbers involved ($2.2T is a hell of a lot of commodities) but John explicitly defines the agenda of overseas acquisition, including commodities, equities and any other real assets China can get its hands on. On a quick tangent, the implications for inflation-protected or -hedged assets are huge. Specific equity sectors are likely to see flows go through the roof - we'll leave it to our readers to discuss in the comments.
Notice in the chart below that unemployment continued to rise until the first quarter of 2003. And that is also when the stock market took off. Those who see green shoots need to think about that. Meanwhile, the market is clearly telling us that it sees nothing but blue skies in the future. I truly marvel at this rally, but I continue to think it is a bear-market rally. The weakest, high-beta names are rallying the most. This rally does not seem to be the basis for a sustained bull market. That being said, Richard Russell has removed the bear from his letter and put in a bull. I may be the last bear standing.
Nothing new here for regular ZH readers but it's almost comical in the simplicity of the argument. People aren't employed. Unemployed people don't spend money. Not spending money means no green shoots. Forget second derivatives, revised seasonally adjusted housing numbers or Dennis Kneale's belief in the power of the smiley face.
This is going to be a long, jobless recovery. Hours worked per week are at an all-time low. As noted above, part-time work is very high. Employers, when things actually start to turn around, and they will, will first give current employees more hours and then expand the hours of part-time workers. There will be few new jobs for a long time.
Because our population is growing, between 130-150,000 new jobs are required each month to keep unemployment from rising. Initial and continuing claims suggest we are currently losing at least 300,000 a month.
(As an aside, the media talks about initial unemployment claims falling. That is actually not true. Unemployment claims are in fact quite high and rising, but the seasonal adjustments make them look smaller. Normally, this would not be a big deal. But the summer seasonal adjustment assumes a normal automobile manufacturing market, with layoffs in July. The layoffs came much earlier this year, distorting seasonal adjustments.)
Higher and persistent unemployment, lower incomes and wages, higher savings rates, capacity utilization at 50-year lows and still falling, rising home foreclosures, a deleveraging financial system, etc. are not the stuff of "V-shaped" recoveries. Throw in that Moody's estimates that US banks will have to write off $400 billion in 2010, and it's a very weak recovery indeed that shapes up for next year.
Not to rehash, but John again does a great job of tacking on numbers to a scenario we have been covering for a while. Investors hoping to recoup their losses from the bubble burst in short order are in for a surprise. Overall, a good reading piece to ruminate on over the weekend.
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Overcapacity. And soon, large moves in commodities to China, where it will all do what? Sit and contribute to more overcapacity? I understand what they're doing (the point being well made in the post), but with a jobless lingering recovery in their prime markets, where any of this looks like anything but deflationary is beyond me.
Your post doesn't make sense i) you're asserting the Chinese are buying large amounts of commodities ii) you claim the situation is deflationary. From the standpoint of someone with a lot of cash to buy/sell goods if you assume deflation, then buying resources doesn't make sense because asset prices fall which increases purchasing power of currencies. We have a climate where certain assets (copper, crude, wti, rbob, rice etc.) are outperforming without regard to policy actions, perhaps it's best to rethink your claim.
Agreed, OJ. What this article describes is a run on the currency, done carefully, as one would expect from a single large holder of the currency.
Basically what the Chinese are doing is creating their own metals-backed currency - they get dollars, and exchange them for commodities.
For USD holders, this will become hyperinflationary.
The chinese have a propensity to save and it is not for this generation. Copper at present is the poor mans gold.
The Government will continue stoking the fire and that in the short term will benefit the commodity suppliers.
Will the bubble bust?
Personally I think that the Government will allow it to continue as they have too much to lose and insulated from the rest of the world. They still have a lot of infrastructure works in the pipeline.
a good companion to this is recent comments (July 24) by Pettis (whom Roubini defers to on all things China)
http://mpettis.com/2009/07/more-public-worrying-about-the-chinese-stimulus/
"Although I am often surprised by how eagerly foreign commentators have embraced the Chinese fiscal stimulus story and see it as a great, shining success, I am happy to say, mercifully, that in China there is a lot more skepticism. There seems to be a serious debate among Chinese policymakers over the stimulus package. ..."
CAPTCHA was obviously not created by a dysexLic sensitive individual
Has anyone bothered to posit that China may be deceiving the world as the country's intentions may actually be to prepare for a World War? I mean, look at what Russia is doing militarily. Am I way off base on this? That's exactly what I would be doing right now if I was a country, considering the worldwide economic circumstances.
World war to what end? Who would they be fighting and why? Fight the US and destroy their main market and pile of paper that it backs? And anyway, China lacks some of the main ingredients for waging a world war. Like a Navy for one. You can have millions in your PLA, but if you've no capacity to move them en masse, what of it? If you want to stay abreast of modern naval ops and wartrending, go to informationdissemination.blogspot.com and their blogroll. As to the larger point of sitting on commodities to weather a global conflagration, sure that makes sense, but I think more likely hunkering down than going on a march.
I don't believe this is necessarily the case... but perhaps they believe someone else will start it.
Absolutely correct. If you want to get up to speed on geopolitics, read anything by George Friedman. US has an unrivalled navy; takes decades to get a navy up and running. US military is still strongest in world ( surprisingly N. Korfea is #2 ).
No, no one wants to go to real war with us. If we ever did something besides our normal "measured respose" it would be beyond shock and awe.
and from conspiracy corner there is this:
http://www.youtube.com/watch?v=7sU5hzx5gkI
Forget conspiracy. Beware the source and the man, in this case Maudlin. Good:
...father of seven children, ranging from ages 13 through 30, five of whom are adopted.
Bad:
...is a registered representative of Millennium Wave Securities, LLC, (MWS), a FINRA registered broker-dealer.
Worse:
…is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB).
Further fee-sharing described in his bio fine print only get worse, and is the very sort of thing that ZH seeks to shine light on (Wall Street's broken model). Product pitching disguised as economic forecasting does not often work out well. Might as well read Cramer.
The thing is . . . all these guys, every one of them, doom and gloomy though they may be, all talk about the long run and how it will all work out. Not a one of them, not a single one of them, takes the time to doubt the Middle East's unaudited oil reserves numbers. You think the global economy is bad now? What does it look like if Saudi Arabia . . . in say . . . May, contacts all its customers and informs them they are going out of business and thanks for 60 great years. What does your life look like at $200/gallon gas?
At 200$ a gallon, my life looks like a bicycle hundreds of miles from metro areas.
When (not if) oil supply begins to get tight things will definitely get interesting, and judging by all of the evidence I have seen (it's all there buried in the usual sources) it could be quite soon.
Things will work themselves out, but it must be noted that sometimes workouts come in the form of war, famine, and total economic collapse. When history going back further than a century, or outside of the US, is examined it becomes clear that the Great Depression wasn't really all that great in terms of a left tail scenario.
However, like buying a really out of the money option, it is cheap to hedge. Calculate the cost of a year's supply of food and a shotgun compared to the amount of the last trade you placed and you'll see what I mean.
@Anon: "When (not if) oil supply begins to get tight"
I don't get it. Once oil goes to $60 or $90 per bbl, it becomes competitive to extract from shale and tar sands. Boom, right there you have more decades.
The only thing keeping oil at a high price is politics. It's not supply or technology or ....
Or am I wrong about that?
Well before $200/gallon gas over a trillion cu.ft of shale gas will be unleashed here in the US.
The real issue is the serial bubble blowing. This time here in the US its manifested in treasury and agency securities and in China in bank lending.
Mauldin is off base with the copper. The real point is that China is diverting excess currency into copper, not dollars. It used to be in third world countries, people would stockpile dollars. China today is stockpiling copper.
Don't care about a copper glut, may or may not happen. We do know that there is and will be a dollar glut. Which would you rather have?
Besides with that much copper, China could threaten any copper producer into capitulation and force them to sell out, thereby cornering the market.
What would you rather have a corner on? Dollars? Gold? Silver? Copper?
China is also working to corner another market: Carbon in the form of oil and coal. Oil by doing infrastructure in Sudan and Iraq, and Iran, among other places.
As for the China economy, inevitable that they stimulate internal demand. Has to happen. Now with the US in tatters, internal demand will happen sooner.
And as for a muddle through economy with 20% unemployment. The muddle through economy, like the thirties were a muddle through economy in the USA. No matter what anyone cites, this is not Japan in the 90s. Think Japan without exports, jobs, or products.
And don't forget iron ore (note the ongoing price 'negotiations' with RTP-BHP); and with oil & NG, that's a no-brainer - a pipeline from the Kashagan field in the Caspian and numerous other acquisitions/projects
My sentiments exactly, Printfaster. See my comment below.
Very well said. If you had trillions of USD you want to get rid of, would you really worry about the price of copper, as priced in USD?
The Chinese financed the US consumer consumption bubble and received USD in return. Now they want to exchange those USD for something tangible.
Those receiving the USD are happy, for now, that they get more USD for their goods, until they figure out those USD buy them less of what they need, so they try to unload their USD.
The USD becomes a hot potato that no one wants to hold for too long.
Result: hyperinflation as people are willing to accept less and less of a rapidly deteriorating currency.
From my experience, the best indicator that you are correct is that your opinion produces an immediate reaction of anger in the person you tell it to. I have noticed this lately in the "green shoots" believers I know. When I explain that everything is not going to be alright. They have an almost religious devotion to the belief that the economy and markets have turned around, and when irritated by any factual evidence to the contrary resort to anger rather than intelligent counterargument (similar in relative quality to a ZH vs. CNBC dispute).
This is why I think the bubble can be inflated further, and the government (China or US, though I have more faith in the intelligence of the former) will support it. Probably some of these religiously devoted believers in the government as well. Too scared of what being wrong would mean to give a serious look at the evidence. They will continue to believe and act accordingly, until it is so obvious that it can't be hidden. Then we're really screwed.
(On a side note, I have noticed that green shoots believers are all equity people, no one who works with debt believes a word of it. Interesting divide.)
Mr. Bond Market is always smarter (and more rational) than Mr. Equities.
Are you saying that you choose your investment positions based on the emotional reactions you receive from others when you discuss those positions with them? How's that been working for you?
Not particularly savy. We return to the same arguement we have had on this board. Deflation or inflation? I still believe in deflation (as all evidence continues to point to)
Nothing is ever that black & white!
Today we have US wages and working hours and incomes deflating. Along with asset markets like real estate and the dollar.
On the other hand - US taxes, health care premiums, tuition fees are inflating. And asset markets like corporate bonds, equities and certain commodities.
Jim Rogers (China's biggest cheerleader) said there is NO WAY that china (who is 1/10 of both the US and European economy can lift the US out of recession. (Video on Bloomberg)
If the 'Bull in China' is not buying (who has actually been there and lives in the region) why would anyone not believe him? He actually owns alot of stock to so he is hurting his book by saying that but at least he is honest.
Apocalypse Now- Great point.
From http://edupreneursvkleptobankers.wordpress.com/
"Canonical research findings suggest that American entrepreneurs who establish popular online markets for customized education will catalyze the creation of many good jobs in America, and will end the reign of America’s kleptobankers. Some of the researchers: Clayton Christensen, Paul Romer and Paul Krugman."
"$2.2T is a hell of a lot of commodities"
Well, actually $2.2T is a hell of a lot of currency, not commodities; commodities are limited in supply in nature - which is why they will get bid up to the stratosphere even if the general equity market crashes or keeps on moving sideways. As I remember reading somewhere recently (I forget where) - "one way to be short stocks is to be long stuff". As for the "specific equity sectors [that] are likely to see flows go through the roof", my bet is on PM, Oil and other commodity related stocks. And I am not sure why everyone keeps assuming that if China (or any other major dollar holders) buys commodities they'll be forced to "use" them somehow (for e.g. in producing goods for export or internal consumption) or they'll stop buying. Doesn't it make more sense to sit on a huge stash of real wealth (commodities) instead of (toilet) paper "wealth"? To wit, China KNOWS that the dollar is in a death spiral and its commodity buying should be seen as more of hedging (or eliminating) its dollar exposure than any "growth" play.
Are they preparing their stockpiles?
The "Password" is ***
Betty White: "Civil"
Goofy contestant answers?
Exactly. What if, in a year from now, China was sitting on zero USD and a stockpile of commodities "worth" $2.2T USD? Would they be more or less "wealthy"?
As for being short stocks by being long stuff, I note that David Tice mentioned a few weeks ago on Bloomberg that he was hedging his short stocks by being long commodities.
Within a few months the Fed will have exhausted their purchases of MBS, and will face a decision: stop buying MBS at $1.25T and crash the MBS market, or continue buying beyond $1.25T and further debase the currency.
I am betting on the latter, and it appears the Chinese are betting on it as well.
Overcapacity is a good thing. Money is the problem. Technical reasons to restrict the human condition are stupid.
BTW your CAPTCHA is screwy
Overcapacity is inefficient investment. And yes money is the problem: Poorly invested money results in overcapacity, waste, and resource stripping. Maybe its a good thing in the blindered view of the Manifest Destiny crowd, but not for the long term.
And yes the captcha is screwy.
Well, I understand your point. In fact, I've read loads of Ludwig Von Mises and he and his crowd are very big on efficient use of capital and I agree. I think, that is how an economy should work. However, capital should not explicitly be money... as human development becomes subservient to an economy that then becomes subservient to technical issues rather the real target of improving our life. And, I don't think my point there is in conflict with Von Mises and the efficient use of capital. But also, people make mistakes and a lot of experience can be gained in wasteful endeavours that in the long run cause great benefit. I'm not talking about building bridges to nowhere and making sure everyone has a job... I mean... how many to work just so they can't even pay their bills (which is like... what... 90% of the developed economies). Money is the problem.
Why miss out. Stay long indexes above 4 mth ema till Ben and GS run out of pump money
If I were China, I would do the same thing and buy hard assets.
Stockpiling commodities and the hot- money race into China means that the government/finance is expecting the US will win its battle against deflation. (Desperately hoping/praying ...)
Despite the noises to the contrary, China has the welcome mat out for dollars:
http://www.bloomberg.com/apps/news?pid=20601087&sid=alZgI4B1lt3s
Why not? Dollar flows allow China to leverage them into cheap yuan it can then lend. The assumption is that China's monetary policy is somehow different from Helicopter Boy's. It's not.
BTW, all that metal is useless if there are no customers for it willing to pay a price higher than that originally paid. That means that the Chinese cannot afford to (ever) sell it to themselves. Think about it.
The Chinese have two advantages; cheap coal and cheap labor. Everything else is fluff. What they cannot leverage with these is useless to them. This goes back to dollars; what matters is not just quantity of issue but what can be bought with them. Dollars buy the American Dream (what's left of it). What can yuan - or ADR's - buy?
Apocalypse Now- Great article and summary of points to counter the - everything's OK, nothing to see here green shoot crowd. It is possible that the green shoot crowd knows how bad it is but wants to prolong our current status quo as long as possible (buying time, selling into the stock pump, and keep spending people). I agree with GG on China stockpiling to diversify out of the dollar and/or building up resource assets in the event of a war. Also note that iron ore prices are being negotiated down by roughly 40% (deflationary for those paying attention). China recently held 4 Australians from an Iron company on espionage charges related to evidence that they "obtained confidential state documents during negotiations with Chinese steel makers over iron ore prices". Either hard negotiating tactics or China doesn't want anyone to know what they are doing with the iron ore.
I broadly agree with most of the comments on China, though I think too many people are still viewing the world as an entirely US-centric place. Sorry, but it isn't anymore. It may suprise some people but Chinas biggest trading partner is the Eurozone.
In Guatamala, Iceland and Australia, a lot of the things people buy have "Made in China" printed on the back.
I think it is wrong to think that people, the Chinese in particular, don't see their stock market as inflated and "bubble like" it's just that they preceive the potential profits of being long are greater that trying to time a bursting and being short .... actually maybe I am talking about the S&P ??
..ultimately all of this bullish posturing in commodities is terribly BEARISH.. at least in the short term!
Long Term.. a great strategy by the Chinese, if at all true, is to buy up assets to clear out that dependency on the $US.. it is at least backed by something REAL.. something solid..
Watch out B E L o w ..
the only way the chinese government will survive is through war.
"Furthermore, Zero Intelligence is not an investment advisor, nor does it promote any securities. If we did, we would disclose it."
For great stuff on China check out: http://mpettis.com/
My favorite piece from last week:
"I don’t know how much you travel around China. T and I do a fair bit, and most recently we were in Guiyang. I thought I’d seen insane excess in the past – 200 thousand square meter malls completely empty next to apartment complexes with 40 thousand units and 30% occupancy rates, etc. etc. But what we saw over there is rather hard to fathom. It seems the Guiyang city mayor had the same idea as the Shenzhen mayor – to move the old downtown to a piece of undeveloped land.
Of course Guiyang has a quarter the population and probably a quarter the per capita income of Shenzhen. They built sprawling new government buildings about a 20-minute drive north of town. And then the residential high rise projects started going up. From driving around the area, we figured well over 100 20+ storey buildings.
What was most distressing was that the development has been totally uncoordinated – a project with 15 buildings here, in another field two miles away a project with one building, another mile in another direction three buildings, sprawled over what was easily over 30 square kms. of farmland well north of town. Every building we got close enough to see was either incomplete/under construction, or empty. Our tone gradually went from “Haha, another one!” to “Oh my God, another one.” We conservatively guesstimated that we saw US$10bn of NPLs in one afternoon. The only buildings that were occupied were six-storey towers built to accommodate the peasants who had been displaced by the construction. "
Mauldin is a long time GOP hack who spent 2001-2008 singing the praises of the foreign and economic policies of George W. Bush.
Articles by this clown should be ignored.
Mauldin's newsletter has been full of highly relevant and timely macro info for many, many, years. He often has guest authors from the bull and bear sides (Grant, Roubini, Russel). Anyone who rejects information due to political ideology or due to the author having a certain title after his name is being rather foolish. Last time I checked the market was neither red or blue, but green...
So Mr Petis is vacationing in Guiyang country side and discovered to his belated surprise that the chinese are have been building empty high rise and huge malls which would result in chinese banks losing tens of billions!
But how does that compare with the trillions of american and european real estate orgy over the last 10 years which is now screwing the whole world? Even today with over 9 months of housing stupid american home builders are still building half a million homes a year! Talk about american capitalism and capital efficiency!@
ZH and Mauldin bashes China for switching their USD electrons into copper - but I think the chinese' view of the US dollar and the US government are exactly in sync with ZH and Mauldin's - ie that holders of USD electrons are fucked, the american taxpayers are fucked, and the rest of the world are following ZH and Mauldin's advice to move their store of wealth to things tangible that is useful in the future. So mauldin's friends and the funds he represents have missed the commodities and equities boom yet again, but others who have real money invested like Peter Schiff certainly has not!
And NO, americans cannot prosecute another war nor with the Chinese russians or even puny north korea. Obama is talking peace with Iran and Syria and surprisingly, even "evil" North Korea, you guys seriously think americans can win a war with Russia or China today or anytime in the future?
Dream on folks!