Mandarin

North Korea's daily war bluffs may be (rightfully) ignored by the market, but an unexpected and tragic development comes out of Boston, where local media reports of two explosions and numerous injuries:

AT LEAST 12 INJURED IN BOSTON MARATHON BLAST: BOSTON HERALD
BOSTON BLAST SEEM CENTERED IN `TRASH CAN': BOSTON HERALD
CNN CITES SOURCE ON REPORTS OF DEVICE AT BOSTON MANDARIN HOTEL
AT LEAST 3 DEAD AT BOSTON MARATHON, FOX NEWS CITES SOURCE
BOSTON POLICE SAY "SECONDARY DEVICES" ARE STILL BEING FOUND

There is a reason why the monthly BLS JOLTS jobs supply/demand survey - which supposedly shows an "improving" labor picture because more people are willingly leaving their (temporary) jobs, and there are more job openings - is so laughable it is not even worth reporting. The reason is the following: practical, non-massaged reality, such as this report confirming how great the demand for any real job openings is. According to Bloomberg Delta, the world’s second-largest carrier, received 22,000 applications for about 300 flight attendant jobs in the first week after posting the positions outside the company. The applications arrived at a rate of two per minute, Chief Executive Officer Richard Anderson told workers in a weekly recorded message. Applicants will be interviewed in January and those hired will begin flying in June, for the peak travel season. Said otherwise, the previous few lucky hires will have overcome an acceptance ratio of 1.3%. Putting this into perspective, the acceptance ratio at Harvard, the lowest of any university, is 5.9%. In other words, it is 4.5x easier to enter Harvard than to get a job at Delta. As an attendant. And there is your jobs supply-demand reality in one snapshot.

What few media pundits seem to grasp is that when our trade deficits transfer hundreds of billions of dollars to other nations, those dollars have to end up in dollar-denominated assets like bonds, stocks or real estate. Many people have missed the difference between dollars used to settle accounts and dollars held as a result of trade deficits. Many of those emotionally wedded to the belief that the U.S. dollar is doomed gleefully grabbed onto the news that China and Japan will swap currencies directly (yen and yuan) rather than intermediate the trade with U.S. dollars. This was mistakenly seen as a nail in the coffin of the USD. If I am in Japan and I have yuan due to trade with China, and I want to exchange those yuan for yen, I only need USD for about 10 seconds to intermediate the exchange. Cutting out the USD simply cut the exchange costs and lowered the daily trading volume of the USD. This reduction in the transactions needed to exchange yuan for yen did nothing to change the dollars held by China or Japan as a result of their trade surpluses with the U.S. This also didn't lower the amount of assets or credit (debt) denominated in USD. In other words, the effect on the value of the dollar is trivial. No matter how many exchanges the USD sitting in overseas accounts are pushed through, they still end up in dollar-denominated assets somewhere.

For years some of us have been preaching that the so-called American Dream, if it once existed, was then appearing as nothing more than a myth. Ronald Reagan, touted as the great communicator, articulated this myth quite well making most everyone feel hopeful and proud, while at the same time spreading the most perverse moral disease that can confront any modern day society: the cult of inequality – an inevitable result from the infamous trickle-down economics and the homage to greed. And, for three decades, that’s what we have been living in the United States: a morbid growth in inequality either sponsored or condoned by the leadership in the White House, all following in Reagan’s footsteps: the two Bushes, father and son; Bill Clinton; and now, our fizzle-savior, Barack Obama. The truth is that Americans have been fed by both parties the Great American Lie, while at the same time being humored with the placebo of the American Dream.

On a long enough timeline, all things come to an end. Even for such venerable venues as the London Metals Exchange, with its 130 year history, and its annual turnover of over $11 trillion in metal contracts, which also makes it the largest market for non-ferrous metals. As the English FT reminisces, "When the LME was established in 1877, Britain was one of the world’s most important manufacturing powerhouses, and the LME’s benchmark contracts for delivery in three months were designed to mirror the length of time needed to reach British ports for shipments of copper from Chile and tin from Malaysia." Furthermore, in the beginning, and all the way through 1993, the flagship copper contract was denominated in sterling, at which point it was switched to the USD following the "Black Wednesday" ERM sterling crisis, courtesy of George Soros who made about $1 billion by shorting the GBP, and formally ended the sterling's role as even an informal backup reserve currency. As of today, insult follows inury, as the LME has formally asked the members of the exchange to drop the sterling contract denomination (in addition to USD, EUR, and JPY contracts) and replace it with the Chinese renminbi. Why this sudden and dramatic, if gradual and tacit, admission that the CNY is the ascendent reserve currency? Because, as the FT reminds us, China has become the market for non-ferrous metals: it is "the dominant force in the market, accounting for more than 40 per cent of global demand for most metals and a rapidly increasing share of trading in LME futures." Add that to yesterday's news of a widening in the CNY band (which incidentally is much ado about nothing, at least for now: at best it will allow China to devalue its currency when and if it so desires much faster than before, much to Geithner's final humiliation), and to the previously reported extensive network of bilateral CNY-based trade agreements already kris-crossing Asia, and one can see why if America is not worried about the reserve status of the dollar, it damn well should be.

All you need to read.

China is leaving no shale deposit unturned in its effort to develop indigenous energy resources.  On 24 November China’s Ministry of Land and Resources geological exploration department head Peng Qiming said during a press conference that China’s combined oil and natural gas output, 280 million tons in 2010, is projected to rise to 360 million tons of oil equivalent by 2015, a 23 percent increase in four years and will rise to 450 million tons by 2030, a 62 percent increase over 2010 production, impressive rises in production by any yardstick. And Beijing authorities in their drive are embracing a controversial natural gas production technique that is coming under increasing government scrutiny in both the United States and Britain – hydraulic fracturing, or ‘fracking.” China has started drilling to meet an ambitious annual production target of 80 billion cubic meters by 2020 by which time the government is seeking to meet a target of generating 10 percent of its energy needs from natural gas and 15 percent from renewable sources and launched a national shale gas research center in August 2010.

A few days ago we brought you the delightful Chinese boat launch straight into the river bottom. Today, we observe the curious case of the JH-7 "Flying Leopard" which during an exhibition airshow decided to show just how effective gravity is at combating those pesky "highly reliable license-built Spey Mk202 engines" which as the AP reports were "considered unlikely that both would have stalled at the same time"...They stalled. "The Chinese-made JH-7 entered service in 2004 and is a mainstay of the country's air force and naval aviation, with more than 100 built." Also, how do you spell oops in Mandarin? "China rarely released information about military accidents, but the public nature of the crash and the rapid spread of images of it happening on the Internet made it impossible to keep secret." Yeah, sorry about that. Next: we can't wait to see the official launch of the first (and only) Chinese aircraft carrier.

Of all cunning linguists, Bloomberg's Jon Weil may be the cunningest. You see, the savvy news reporter has figured out that the reason there is zero policy coordination, and whenever Tim Geithner gets involved, negative, is not so much due to the fact that we have two broke ponzi continents trying to outsmart each other as to who is least broke, but, lo and behold, because we speak different languages. In Weil's cunning words, "It’s bad enough for average Americans that most European leaders speak English with heavy accents. What’s worse, even when we can make out the words they utter, it’s almost always impossible to figure out what these officials are really saying. That’s because they’re speaking in Euro-ese. Fortunately, there is an answer to their endless riddles: a Euro-to-English dictionary, excerpts of which I have included below. (Click here to read about its close linguistic cousin: the Goldman Sachs dictionary.) To truly see the meaning of the seismic events rapidly reshaping Europe, you must know what the following 10 Euro terms of art mean in plain American English:" So for the sake of the future of the great Developed Nation KomIntern, here are the ten most misinterpreted phrases...

The Treasury had to sell $66Bn worth of notes this week and there was no POMO for the Fed to bid with. The US could have been really screwed but, luckily, the market crashed and everyone panicked - INTO TREASURIES! Isn't that convenient?

Another revolution in China is impossible, you say? Please step this way into the time machine and return to 1979. The year is usually remembered for the Iranian Revolution, and many commentators are comparing the current "Arab Spring" revolts to the systemic changes unleashed in 1979. More interesting is the case of the Soviet Union in 1979, which appeared to all eyes as a permanent, stable political entity. The U.S.S.R. invaded Afghanistan on December 24, 1979, but that only seems noteworthy looking back from the present. At the time, there was still concern in the West that the U.S.S.R. would launch a blitzkrieg attack to conquer Western Europe. One-party systems lack the mechanisms for adaptation, and thus they are exquisitely ripe for revolution and implosion. Democracies and republics tend to have periods of low-amplitude instability (witness Greece right now) that enable the system to adapt and experiment ("fail fast, fail small" being the preferred process of adaptation). One-party systems, from the Liberal Democratic Party in Japan to the Communist Party in the U.S.S.R. and China, suppress the information and processes intrinsic to dissent, and thus build up intrinsically unstable systems...Both China and the U.S. may be quite different countries by 2021. It's worth recalling that nobody saw the 1989 implosion of the Soviet Union a mere ten years before in 1979, so it is not surprising no one sees the implosion of the Status Quo in China and the U.S. ten years hence.

The high-flying price of hot China internet stocks is driven largely by enormous estimated revenue growth, but if we take a closer look, the growth rates implied by stock prices are totally out of line with reality.

Inflation is “the most pressing problem” facing China, Vice Premier Wang Qishan said at the Washington talks. Hey - they should all move over here - our Fed Chairman says we don't have any inflation at all!

Two months ago we reported that the recently bailed out Unionized Carmaker, for whom China (where they apparently do not care about falling steering wheels) has become a market more important than even the US, had seen some jarring demand weakness, following a 10% drop in January sales. We now learn that GM was not only the beneficiary of last year's Cash For Clunkers program in the US, but has been the recipient of recent incentives offered in the domestic Chinese market. Alas those are now over, and as Bloomberg reports "China’s passenger-car sales grew in March at a pace that was below forecasts after incentives ended and fuel prices rose, the China Association of Automobile Manufacturers said." That's putting it mildly: for an economy in which a growth rate of 10% is considered stagnating, what happened in March was equivalent to a drubbing: "Dispatches of cars including multipurpose vehicles and sport-utility vehicles to dealerships rose 6.52 percent from a year earlier to 1.3 million units, the association said in a statement today. That pace was about one-tenth of the 63 percent sales increase reported in March of last year." Which brings us to the question of the day: how does one spell "short GM" in Mandarin? Yet the irony of the day award goes to Charlie Munger, who may or may not have been completely "open" with his purchase of BYD shares: BYD sales plunge in March by 41% (Y/Y). Suck it in, Charlie.

With all the hoopla over Egypt some have forgotten that this is merely a geopolitical event (one of those that absolutely nobody, with a few exceptions, was talking about less a month ago, so in many ways this is a mainstream media black swan which once again exposes the entire punditry for the pseudo-sophist hacks they are), and that the actual mines embedded within the financial system continue to float just below the surface. Below we present the five key fat tail concerns that keep SocGen strategist Dylan Grice up at night, which happen to be: i) long-term deflation, ii) a bond market blow-up, iii) a Chinese hard-landing, iv) an inflation pick-up, and v) an Emerging Markets bubble. Far more importantly, Grice provides the most comprehensive basket of trades to put on as a hedge against all five of these, while also pocketing a premium associated with simple market beta in a world in which the Central Banks continue to successfully defy gravity and economic cycles. For all those who continue to trade as brainless lemmings, seeking comfort in numbers, no matter how wrong the "numbers" of the groupthink herd are, we urge you to establish at least some of the recommended trades in advance of what will inevitably be a greater crash than anything the markets experienced during the depths of the 2008 near-cataclysm.