China

This is why we must protect the business owners in THIS country before our own workers start getting funny ideas about being able to afford to eat the food they serve or buy the things they make... This is a great example of why China's growth is unsustainable.

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

Marc Faber was on Bloomberg TV sharing his thoughts on China's 5th RRR tightening in 2010. While the man whose on the ground perspective affords him a good sense of what is really happening, does not anticipate major adverse developments out of the recent round of tightening posturing, he does warn that unless China manages to control commodity inflation, things could get ugly, essentially reiterating what Albert Edwards said yesterday. "Inflation is a dangerous situation everywhere in the world. I think in general that Consumer Price Indices published by China and the US do not reflect the real cost of living that households in these countries have. In Emerging Economies it is worse in the sense that if you have a per capita income of $1000 per year, food accounts for 50% of our expenditures... Even if China tightened, interest rates are still far below the true rate of inflation, and I spoke to a lot of people in China - my view is that inflation in China is running at 10% per annum." On Bernanke's overnight defense of his failed policies: "All I would say is that the problem of the world is that the US overconsumed and spends too much on consumption, and as can be expected some currencies didn't want their currencies to appreciate too much. I think that China and the US are on a collision course, both economically and politically." In other words, our speculation that China and the US are playing a global game of chicken is validated, the problem is that billions of people will suffer no matter who blinks first.

As we speculated yesterday, China has picked the least impactful of all evils, and instead going thru with a rate hike (or the impossible currency revaluation which will never happen as long as the US keeps calling for it) the PBoC has again opted for a RRR hike, which as of Nov. 29 will be at 18%, and have virtually no impact on anything. But at least in a world of posturing, China now has the ability to respond to criticism that it does nothing about its liquidity situation. At this rate the RRR may hit 25% or higher, before the CNYUSD trading range is further expanded or there is any move on the interest rate. Lastly, as the disclosed inflation number comes straight from the propaganda czar at the politburo, we expect to see a below expectations print next month so that China can claim all is well again.

Futures are currently experiencing a stunning moment of weakness, something not seen unless the entire Liberty 33 trading crew is at Scores. The culprit according to the three sober traders we could track down is the recently unembargoed speech to be delivered by the Bernank tomorrow in Frankfurt. In it, not too surprisingly, the inkmaster considers revealing details of his most recent DNA sequencing result to prove once and for all, that he is not the antichrist. More relevantly, what Bernanke has done to defend his reputation is to claim that QE will work, and that everything is really mercantilist China's fault, and the Fed is just woefully misunderstood. In other words nothing that has not been said before many times, just another overture which will likely precipitate a prompt round of Chinese retaliation in the form of accelerating trade wars, to be followed by further commodity price inflation in the US, leading to another ramp in Chinese inflation, etc. China now will have no choice but to either hike rates (which will pretty much end of the tech bubble), remove even more excess liquidity (real estate bubble burst) or merely export another $20 billion of crap to the US each month, pretending nothing happened (leading to more QE in the US). As Albert Edwards summarized so well earlier, the global game of chicken will continue until either China's or America's population decides it has had enough of being treated like a experimental gerbil in the endgame of failed economic chess.

In his latest letter, in addition to again broaching the subject of the upcoming Eurozone collapse, SocGen's Albert Edwards shares his increasingly high level of conviction that the US will slip into recession and also explains why Ben Bernanke's trashing of the dollar is just a "devious ploy" to force a real exchange rate revaluation on the Chinese via rampant food price inflation. Keep in mind, in China food prices are actually important, noted and measured, and were the primary reason for the October spike in inflation which oddly caught so many by surprise, probably more for the reason that the government actually agreed to disclose it. In essence, Albert argues that the Chairman has raised the stakes on the global monetary game to such a level, that he risks social discontent either in the US or in China, or both, should China refuse to blink in what has quickly become the most important game of chicken in the history of modern economics.

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

The country which has languished in 6th position in the world, with combined gold holdings of 1,054 tonnes (just behind the GLD ETF), may have finally awoken that it needs to buy about 7,000 tonnes of gold to catch up with the US, and its 8,133 tonnes (or even France with 2,435). China daily 21st Century Business Herald has just reported that: "China is considering raising its gold reserves, a move which would push
up gold prices in the future, a person providing consulting services to
the Chinese government said." Conveniently, China can now buy gold notably cheaper courtesy of a $100 dip in gold price as recorded over the past week, precipitated by... China inflation concerns. When next month the politburo reports below consensus inflation (as the number is imaginary to begin with), look for gold to surge, but not before China manages to load up at depressed prices.

Today's $7.9 billion POMO is now history, closing at a surprisingly low 3.5x submitted to accepted ratio. What this does to stocks will be closely watched as Friday's POMO was a failure. Two red days on POMO in a row will be the wrong signal the FRBNY will want to send to the Fed frontrunners. More importantly, today's POMO in addition to last Friday's $7.2 billion monetization, adds to the Fed's total UST holdings of $853 billion as of last Wednesday, meaning the Fed has now tied China for top holder of US Treasury securities, both of which have $868 Billion in holdings. Tomorrow's POMO will make the Fed the top holder of USTs in the world, or at least until the next TIC announcement (also tomorrow) which will show that China's UST holdings as of September very likely grew by another $15-20 billion. Nonetheless, with a run rate of $7 billion in daily monetizations, the Fed will overtake that number by the end of the week as well.

The week ahead is reasonably light in terms of data. In the US the key releases to watch include retail sales, IP and the Philly Fed. As European tremors escalate the ongoing positive momentum in US data is unlikely to be EUR friendly in the near term. The Philly Fed will also give us a forward looking signal with respect to broader PMI trends in the US. More importantly, there will be a POMO every single day of the upcoming week, which will add ~$30 billion to the Fed's total UST/TIPS holdings. Traders will be nervous to confirm whether the new POMO regime will be a dud after Friday's inaugural POMO ended up being a disaster for POMO-bulls.

Unbelievable...

Yesterday we highlighted that Goldman had closed out its long China trade in anticipation of reactionary measures to what the Beijing politburo decided to telegraph as high inflation (after all there is no such thing as Chinese "economic data": it is whatever the central committee agrees on). The news sparked a fresh wave of selling in the SHCOMP resulting in the biggest two-day selloff for the index in months. Today, Goldman pours more fuel on the fire, by raising its 2011 Chinese CPI expectations from 1.3% to 4.3%, which guarantees that the State Counsil will have to hike rates as it is obvious that the CNYUSD currency peg will not be removed as long as it is being used as a political scapegoat by Washington. Furthermore, ongoing insanity by the Fed guarantees that surging commodity prices will generate even more inflation in China, which in turn will eventually lead to higher prices in the US, leading to greater margin contractions, leading to more layoffs, leading to the need for what the Chairman will see as even more QE, thereby compounding the most virtuous cycle in the global economy that nobody talks about, as more and more money sloshes around the global system, and finds packets of least resistance. However that is a topic for Q1 2011.

So here were are in 2010 and the US and China are now butting heads in a major way. The US (debtor, consumer, declining empire) wants to devalue the Dollar and export inflation to China. China (creditor, producer, rising empire) doesn’t care for this arrangement as its hurts profit margins at Chinese companies, increases food inflation (food is a higher percentage of income for the average China compared to the average American), which in turn means civil unrest.

After last night's completely unsurprising "beat" of Chinese annualized inflation of 4.4%, Goldman today has come out with a note which, however, is very surprising: Goldman's Robin Brooks and Dominic Wilson have decided to close out their "long China" recommendation, which was one of the firm's Top 2010 Trades presented previously on Zero Hedge. And while the profit on the trade of 11.3% is appealing, the reason for the unwind makes little sense. As everyone had been fully aware (see our note here) in advance, the inflation number would come out at 4.4% (and so it did). To use this as an argument for tightening expectations seems a little disingenuous. Which begs the question: why is Goldman truly no longer bullish on China? And does this mean that the firm no longer buys Jim O'Neill latest decoupling thesis? Lastly, as China has been a key dynamo for world growth, if there is little equity upside to be had in the one last capitalist country, what can we say about the less than capitalist America? This is further compounded by Jan Hatzius' suddenly rosy again outlook on the US economy (coupled with Goldman's ongoing demands for up to $2 trillion in QE, which with every passing day is becoming increasingly more improbable)...

China is decades ahead of the global curve when it comes to understanding the strategic importance of rare earths. But with demand set to double to 225,000 tons by 2015, not accounting for the burgeoning green energy industry, nobody's immune to the coming supply shortfall, including China.