China

Two years ago we first covered the flip side of the Chinese real estate "boom" story by presenting the ghost city of Ordos. Today, on the two year anniversary of China's Keynesian miracle being exposed for the whole world to see, Al Jazeera goes back to Ordos to see if anything has changed. And while Paul Krugman may be shocked, shocked, that the Keynesian approach of building for the sake of building does not work not only in the US but pretty much everywhere, it will be no surprise to anyone, that as Al Jazeera concludes, "it's still pretty quiet, but here's the remarkable thing - the building has't stopped, somehow people are convinced that if you keep building, people will come. If not in a few years, then... eventually." And somehow we keep bashing the Fed as the only source of Einsteinian insanity, when it is the same cretins from the Princeton economics department in both the monetary and fiscal arena, who know one thing and one thing only - do whatever ultimately fails, just keep on doing it.

So, will this jobs bill do much? I don't see how. Employers get a tax break, but that will likely be used to increase profits, because they remain uncertain of what happens when the breaks end. No new jobs, and limited new spending. For the employees - he said an average of $1,500 next year extra in their pocket. Interesting but when he talks about cutting medicare and social security in the same speech, how much of that will be spent? I think a lot of that will go into savings to offset future needs. People making 50k a year aren't so dumb to just take this money and spend it, when they see future benefits getting stripped away. The $4,000 tax credit for hiring new employees covers about 14 weeks at minimum wage (the sort of job this economy has been able to generate). Maybe we will see a spike in layoffs ahead of that since it might be a good time to get rid of employees on the fringe, when you can get a free look at his replacement, courtesy of the government.

Gold’s London AM fix this morning was USD 1,896.50, EUR 1,341.13, and GBP 1,174.67 per ounce. The gold fix was higher than Friday’s in all currencies (USD 1,854.00, EUR 1,301.23, and GBP 1,143.81 per ounce). Despite continuing denial, a recession in the U.S. is inevitable; the question is only with regard to how deep the recession is and to the nature of the recession – inflationary, stagflationary, hyperinflationary or deflationary. The consensus, especially amongst Keynesians, is that deflation is most likely. However, given the degree of currency debasement being seen internationally stagflation is also a risk. Hyperinflation, as being experienced in Belarus today, is the macroeconomic and monetary ‘black swan’. There are growing concerns that the Eurozone crisis might degenerate again soon due to the Greek debt crisis and risk of default. Over the weekend talks between Greece, the IMF and ECB representatives over new bailout funds broke down. The euro has fallen and the German local elections have added to concerns over Greece.

Wondering why gold at $1850 is cheap, or why gold at double that price will also be cheap, or frankly at any price? Because, as the following leaked cable explains, gold is, to China at least, nothing but the opportunity cost of destroying the dollar's reserve status. Putting that into dollar terms is, therefore, impractical at best, and illogical at worst. We have a suspicion that the following cable from the US embassy in China is about to go not viral but very much global, and prompt all those mutual fund managers who are on the golden sidelines to dip a toe in the 24 karat pool. The only thing that matters from China's perspective is that "suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar's role as the international reserve currency. China's increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB." Now, what would happen if mutual and pension funds finally comprehend they are massively underinvested in the one asset which China is without a trace of doubt massively accumulating behind the scenes is nothing short of a worldwide scramble, not so much for paper, but every last ounce of physical gold...

Even a broken clock could be right at least twice a day....    

China’s voracious appetite for energy from anywhere has led most oil-producing nations to attempt to feed the dragon, including Russia. But a curious situation has developed as regards Russian oil exports to the Celestial Kingdom, underlining that the two nations, which fought for global supremacy over the Communist movement for four decades, remain at best, “frenemies.” According to Chinese customs reports, last month oil imports from Russia fell by nearly half. Not so, Rosneft says, stating that deliveries are proceeding through the Eastern Siberia-Pacific Ocean (ESPO) oil pipeline at their normal levels. Russia is now China’s ninth largest source of oil imports, with Saudi Arabia first, Iran second and Angola third. In trying to read the tea leaves in the contradictory statements emanating from Beijing and Rosneft, Russian analysts believe that China is sending Moscow a not so subtle signal that it can do without Russian imports.

Bank Of America continues to desperately raise firesale capital (which it most certainly does not need).

• BANK OF AMERICA AGREES TO SELL 13.1B SHRS OF CHINA CONSTRUCTION
• BANK OF AMERICA SEES SALE GENERATING $8.3B PROCEEDS
• BANK OF AMERICA KEEPS 5% STAKE IN CCB
• BOFA SEES CUTTING RISK-WEIGHTED ASSETS BY ABOUT $16.1B BASEL
• BOFA SEES SALE GENERATING ABOUT $3.5B ADDED TIER 1 CAPITAL
• BOFA SEES GAIN $3.3B ON SALE

In summary: That's $13.3 billion in new capital in the past week that BofA promises it does not need. At all. As for the buyers: the same sovereign wealth funds that just bailed out the Greek banking sector for a few more days.

We are not sure how this is news, since it was announced weeks ago, but according to CNBC the bank that did not need capital, is following up yesterday's $5 billion capital raise with another $10 or so billion by selling "at least half of its 10% stake in CCB." That said, back on August 11, the FT came out with a report titled, "BofA faces struggle to sell CCB stake" in which we learn that "Bank of America is facing difficulties in selling its 10 per cent stake in China Construction Bank, partly because potential investors are expecting a deluge of rights issues, share sales and new listings from Chinese banks. But it might now raise less than than it had hoped. The BofA stake, once valued at $20bn, is now believed to be worth several billion dollars less, according to bankers. The US bank has approached sovereign wealth funds and other investors in the Middle East and in Asia, according to people familiar with the matter. The Kuwait Investment Authority was one potential buyer BofA approached, these people add, but the sovereign wealth fund already holds large stakes in ICBC and Agricultural Bank of China. “Right now, the KIA does not want to do anything more,” says one person with knowledge of the matter. “They think they have enough exposure to Chinese banks.” The KIA expects the two banks in which it already has shares to launch rights offers and the KIA intends to support those banks. "They will only look at CCB if the discount is high enough,” the person added...Potential buyers say the timing for BofA is particularly sensitive because, if CCB does launch a rights offer – as is widely expected – and BofA is still a main shareholder, it will be obliged to participate, using capital it can ill afford to part with." Stated otherwise, this must be one of those, "this time it's different" occasions. Next up: Bank of America does not, repeat NOT, need to sell its employee's blackberrys, but it will. Just because.

Proving once again that when it comes to the definition of Banana Republic, America really has no equal, we first read in China Business News that according to PBOC adviser Li Daokui, China will "basically" maintain its existing monetary policy direction, and won't likely introduce stimulus measures as it did in 2008. Sorry "Rest of the World", you are on your own: China will no longer act as the last recourse economic (confidence) dynamo (because who the hell knows just what is going on in the mainland aside from building empty cities and grounding its entire monorail fleet, an action that was accompanied by so-called objective rating agency Dagong giving the rail ministry a rating higher than that of China itself!... once a rating agency...). However, this action of glaring sobriety does not stop our own fiscal monkeys from throwing feces at the stimulus wall in hopes something sticks. Just as last year the payroll tax was supposed to be the $100 billion gift that keeps on giving, yet crashed and burned miserable within months if not weeks, so this year we find that Obama is once again "recommending that the congressional deficit supercommittee back new measures to stimulate the lagging economy, people familiar with White House discussions said Tuesday." But that's not the funny part! No, the funny part is that even as he demands more alms, our munificent president would also "recommend the committee come up with a package that reduces the federal budget deficit by much more that its mandate of $1.5 trillion over the next decade, a senior administration official said, through changes in the tax code and social safety-net programs." So let us get this straight: more stimulus in the short-term, offset by quadrillions...nay... sextillions of savings at some point in the far future, long after the current administration is at the very bottom of the history books. Brilliant! But an even better idea: Obama should pull a Bryan Gardner and forge a money order from Hank Paulson, making Citi hand out a +/-$1 million check to every American, paid out of petty unaccounted for cash, as was the case before. Obviously, nobody noticed then; it is only Banana Republican that nobody will notice now.

The new double AA credit status assigned by S&P has put the U.S. in the same category as China.  But one consolation for the United States is that the country's high socio-economic resilience has placed the U.S. at a more favorable investment risk position than major emerging economies like China and India. 

There were some who speculated that the east China July 23 bullet train crash was indicative of bigger problems with China's breakneck spree to build infrastructure for the sake of building infrastructure. Sure enough, Xinhua reports that not one, not two, but 54 high speed trains have been recalled over safety concerns. What next: someone inquires into China's GDP numbers and discovers that everything is a complete and utter fabrication? Oh wait, China is the BRIC that will pull the world out of the next recession. We keep forgetting.

As I promised earlier this week, today, I am presenting the darker side of a centrally planned economy: The building of total chaos. 

Bank of America is doing all it can to delay the inevitable equity issuance. Reuters has just broken the news that the bank is in active negotiations with Kuwait and Qatar sovereign wealth funds to sell its $17 billion China Construction Bank stake. There are several problems with this approach: first, the petrodollar sovereign wealth funds just lost over 20% of their AUM courtesy of the global equity rout and of the plunge in oil by more than 20% in less than 2 weeks; Second: everyone recalls what happened to Alwaleed when he bought his "Blue Light" citi stake; third: if BAC does indeed sell its CCB stake, it will leave it with zero disposable assets and will have no choice but to approach the equity market. Fourth, the fact that it needs this cash is validation of all the rumors that the bank's capitalization may be urgently strapped very soon, and that today's Berkowitz call was nothing but lies (in typical BAC style); last, since the final cash need when all is said and done, when all the litigation is over and when the NY AG is done with the bank, BAC will need far, far more cash than $17 billion. Which is why any BAC bounce in the AH session should be viewed very skeptically.

Just in case there was any concern which way China is leaning ahead of today's meeting, here is the missing clue:

• China's NDRC official says likelihood of US QE3 appears highs
  
• China's NDRC official says US QE3 will push up commodity prices and will intensify hot money flows
  
• China's NDRC official says QE3 will threaten Chinese price stability

Of course, China is quite adept at saying one thing and meaning another. And with inflation there continuing to surge, and no chance of a loose monetary policy any time soon, China will be very delighted to see the Fed to another round of easing. After all by the time, exported inflation hits China it will be at least 3-6 months down the line, by which point China should have its inflation problem under control. So with Goldman and China both egging Bernanke on, we doubt there is much surprise left in today's 2:15pm announcement.