Wen Jiabao

Numbers may be rigged or "smoothed out", but can't fool the regular Chinese Joe's and smart money. I believe if China stays on its current "prudent course", the real consumer inflation could hit double digit by early next year.

Markets mostly bullish this AM following the holiday weekend in the US. Friday’s CPI print seemed reflective of inflation, showing increases in core and non-core metrics, while retail sales was mixed relative to expectations. We fear the real demand rally might well be short lived. Today’s Empire Manufacturing and November TIC flows will be watched closely for forward indications in the US, while the story out of Europe continues to be the market’s focus.

After the PBoC raised the RRR for the fourth time in two months (and 6 times in 2010), and following the Christmas Day interest rate hike, Chinese stocks once again find themselves reacquainted with gravity as the SHCOMP was trading down 1.3% at last check. The hike will be effective January 20 and will bring the RRR to a record 19%. And this most ineffective of monetary interventions will certainly not be the last: according to Bloomberg, "China may boost reserve ratios by more than 200 basis points in 2011, according to HSBC Holdings Plc economist Qu Hongbin. Industrial Bank Co. economist Lu Zhengwei estimates the ratio may reach 23 percent." Unfortunately, this latest move is too little too late, as Chinese food prices are already starting to make the politburo uneasy about what the world central bank cartel's actions mean for rice prices (remember the 3Rs as predicted by ZH - as we predicted in October, the next bubbles are Rare Earths, Rice, and Rubber).

Zero Hedge is happy to announce a new collaboration with the precious metals experts at Gold Core. We look forward to posting periodic industry updates, notes, analysis and commentary in conjunction with GC on all matters of topical significance in the PM space. As an introduction, we would like to present GoldCore's review of 2010 and Outlook for 2011. A sample from the analysis: "Should the dollar and other debt laden currencies and government bonds fall sharply in value due to a panic and wholesale liquidation we could experience hyperinflation. In this scenario paper assets will be shunned and people will protect themselves by buying hard assets such as real estate, commodities and gold and silver bullion. In such a scenario, gold and silver surge would quickly reach their inflation adjusted 1980 high of $2,300/oz and $130/oz before overshooting to much higher levels as was seen in Weimar Germany and more recently in Zimbabwe."

The market ran today like Ben Bernanke was giving out free money (which um, he kind of is, as long as...

Of course we felt that last week's zero-volume move higher was fake, Fake, FAKE but, when the acting is that good, there's nothing else you can do but sit back and enjoy the ride.

Somehow the China Daily story we pointed out yesterday morning that China and Russia are expanding their trading terms and will conduct all bilateral trade exclusively in local currencies, thus dropping the dollar as an intermediary, is only today starting to make the rounds. Alas, this story is nothing but more posturing for several reasons: Bloomberg notes: "China and Russia will drop the U.S. dollar for bilateral trade and use their own currencies for settlement, China Daily reported, citing Chinese Premier Wen Jiabao and Russian Prime Minister Vladimir Putin." Oddly enough this is an identical overture from June 2009: yet very little has happened in terms of actual dollar lock out since then. Note the following story from June 17, 2009: "The leaders of Russia and China agreed to expand use of the ruble and yuan in bilateral trade to lessen dependence on the U.S. dollar a day after they took part in the first summit of the so-called BRIC countries." And judging by the market's reaction, and the dollar resurgence overnight it appears that everyone has read through this as just posturing. Furthermore, keep in mind that Russia was not even a top 10 trading counterparty of China in 2010. If China does the same with any of its top 10 partners then there may be a reason to worry. For now, China is merely testing the waters, and has absolutely no intent on isolating the US, nor making its nearly $3 trillion US FX reserves lose a double digit percentage of their value overnight.

The bubble know one wants to admit is priming to pop just in time to massage the European issues.

Kind of a drab hum drum day in the market yesterday as no new countries were close to defaulting, no new IPOs of shitty companies were being sold (and yeah Harrah's, Money McBags is looking at you), and no new news on whether Milla Jovovich will be joining her country's burgeoning Femen movement.

Bernanke is like the Sorcerer's Apprentice: Given the magic hat - he commands his broom army to fetch buckets of dollars to inflate the economy the easy way but his lazy solution quickly turns into disaster as the waters start rising and he finds he has no way to stem the rising tide

SITUATION: Defense planning efforts in East Asia have been markedly influenced by China's bellicose response to the detention of a Chinese fisherman for ramming a Japanese naval boat in disputed waters.
 
ANALYSIS: The detention generated vituperative reactions from Beijing, out of character from its traditional policy of quiet insistence on territorial claims while building naval capacity. This episode, in conjunction with China's continuing claim of primacy in the South China Sea as a 'core interest', is encouraging increased discussion among its regional neighbors regarding naval collaboration.

According to Reuters, a senate aide has confirmed that Tim Geithner has pissed his pants and seeing the sudden surge in the dollar following rumors that a bunch of hapless politicians were about to blame America's depression on China and call it a manipulator even as the US prepares to print $1.5 trillion in new paper, has delayed the currency report until after the G20 meeting in November. One wonders just what telephone conversations occurred between Geithner and Wen Jiabao in the past 20 minutes, and what the mutual assured destruction trump card (or 850 billion) used this time was.

China released its September trade balance data, which at $16.9 billion, missed expectations of $17.8 billion, and was a sizable drop from the $20 billion in recorded in August, however was a 30.5% increase from a year ago. The reason for the sequential drop in the number was due to imports which at $128.1 billion surged to an all time high. This being China, of course, it was offset by a surge in exports to its two main export markets: the US and EU. US exports, much to the protectionists' chagrin, came at the second highest on record, or $27 billion, even as imports also grow marginally to $9 billion (see charts below). The the export saving grace was Europe, which imported $28.8 billion worth of Chinese goods, for a trade surplus (from the Chinese perspective) of $14.9 billion: the highest since the Lehman collapse. And confirming that September was a very much trade driven month, the gross notional trade balance with the Rest of the World (ex US and EU), surged to a record $99.7 billion ($44.1 billion in exports and $55.6 billion in imports, both at near or fresh record levels). The ongoing trade surplus will surely lead to more calls for Yuan revaluation, which of course simply means CNY-USD unpegging, as the CNY continues to benefit mostly to the Fed's ongoing devaluation of the dollar. How this is lost on our Congress critters and Senators is beyond us. Want CNY revaluation? Stop killing the dollar. And due to to traditional pick up in the trade surplus in the month of October, we expect screams for trade war to get ever louder next month once a fresh record Chinese export number is posted.

Sure looks that way....

I'm forever blowing bubbles,
Pretty bubbles in the air,
They fly so high, nearly reach the sky,
Then like my dreams they fade and die.