From Mike Krieger of KAM LP
When Central Banking Dies: China and Oil
China is a topic on which I have differed greatly from many analysts and macro commentators with whom I generally share a similar economic philosophy. What I have heard from many in this camp is this story about how China was the next great power and that they are going to revalue the yuan higher. In that process, they would be able to shift their economy away from a dangerous overemphasis on fixed asset investment and toward consumption. There was this notion that China had its house in order and was about to totally shift the balance of economic power in the world as the West melted away. In the middle part of the last decade I heard this argument yet it always seemed a little preposterous. In 2007/2008 as the Western housing markets and banking systems came apart this view was expressed in the now much maligned (and rightfully so) “decoupling thesis” which turned out to be nothing but a fantasy. Nevertheless, in the aftermath of the implosion in the West there was still this notion that China was ok. That they had figured it out and were about to take over the world. This concept was furthered by the very robust bounce back that they had compared to the weak recoveries in the Western world. Nevertheless, I was extremely disturbed from day one by the manner in which they were going about achieving this recovery. First of all, almost none of it was related to a sudden preeminence of currency strength based consumption that would have potentially allowed the economy to actually restructure. In fact, the yuan stopped appreciating relative to the dollar in July 2008 and didn’t begin strengthening again until June, 2010. the interim, the Chinese did absolutely nothing to restructure and instead went on a Keynesian orgy of stimulus packages and fixed asset investment. Million person cities with no one living in them were built seemingly overnight. The biggest mall in the world was built and there was no one shopping in it. I saw all of these things and immediately called them out on it. I was writing about how China’s recovery was a total sham by the first half of 2009, yet there were all these China bulls talking about how they are “the best capitalists in the world.” What a ridiculous statement. That economy is total command and control at the top, just like EVERY single major economy on earth today. To say China isn’t is total delusion and their response to the crisis proved it to me 100%. They didn’t allow market forces to take over, the flooded the system with liquidity and tried to direct it as well.
In light of that, there was always going to come a time where China suffered the affects of it absurd policies and that time seems to be now. Anyone that watches markets and pays attention to economic statistics understands that China’s economy is in the midst of a serious slowdown. In fact, I wouldn’t be surprised if they are already experiencing close to negative real growth if you strip out true inflation. The bottom line is nobody knows because the data is so clouded in a centrally planned haze. The more interesting question is what are they going to do about it? So far not that much. So why is that? Well, they are in a similar predicament to the Western world (no surprise there as this is what happens in centrally planned ponzi economies). Do they triple down on the prior policies or do they try something different? That question has yet to be answered and the reason I think they haven’t responded is they hope inflation can come down enough to triple down on prior policies. This of course is very dangerous because with each passing day the economy will get worse and worse and they risk things getting totally out of control. The main point I am trying to make here is that no major country ever restructures because if any of them tried the entire global ponzi that has benefited all these “leaders” would rapidly unravel in their faces. This is why the U.S. never does the right thing and it is also why China never does the right thing. This ponzi is global and it will not be dismantled from the top. Rather it’s dismantling will be fought by TPTB all the way and to the end because they know when it unravels everyone will see they were just little greedy central planning bureaucrats who brought death and destruction to the world as they played out their fantasies with our lives hanging in the balance.
Recently there were rumors of a coup in China that turned out to be unfounded. This story got me thinking and although this turned out to be untrue I think that with each passing day the odds of a genuine coup or outright revolution in China increases exponentially. Here is why. The people that are actually pulling the strings in China at the moment are clearly in bed with the Western PTB. The elites in China benefitted greatly by agreeing to use their citizens as slave labor to fatten up Western multinational profits. That said, you can be sure there is a growing faction of powerful people in China that see these characters as traitors and the longer they do nothing and the economy slumps lower the more the person on the street will become enraged and the more vocal and powerful those that oppose these Western Keynesian lapdogs will become in Chinese society. With each passing day that the leadership does nothing with the economy, the greater the threat of a political and social change of massive proportions becomes in China. I expect historic political and social change to come to every country including the United States I just think China’s power structure may fall before ours does. This is something everyone should keep a very close eye on.
Besides gold and silver, there is nothing that scares Central Planners (Bankers) more that oil. In their delusional world where they play god with our futures, they think they can make the sheeple do whatever they want by adjusting the settings on a printing press and can thus determine the fate of the global economy and humanity itself. What they hate more than anything else is when all of their money printing causes things like oil to rise because it exposes them for the charlatans that they are. This is why Obama is constantly attacking speculators and oil companies. It is all an attempt to scapegoat someone else for the financial nightmare that is hitting everyone’s wallet. This is why they floated the absurd idea of releasing more oil from the U.S. Strategic Petroleum Reserve and then denied it once the market failed to react vigorously enough to the rumor. This is also why Obama surely has called the Saudis up repeatedly as of later to remind them that they might see regime change unless they ramp up oil production to help his reelection.
This brings us to one of the most important aspects of the entire global economy at the moment. Saudi oil production is hitting record highs at the moment. In fact if you look at the chart below you will see that the Saudis have never consistently pumped more oil than they are right now.
Saudi Oil Production 1980-Present
Now this chart has been going around the street for weeks now, but I am not convinced people really understand the significance of it. There has been a tremendous amount of debate in the oil world over the past decade about what the Saudis can actually pump. Many such as the late Matt Simmons repeatedly claimed that the situation on the ground there was much worse than people understood and that the Kingdom might be on the verge of experiencing a major peak in production. Others, such as the Saudis themselves claim they have plenty of room to grow and indeed claim to have the ability to ramp production to 12-12.5 million barrels per day relatively quickly. Well if I am right we are about to find out. The Bernank knows he needs to launch QE3 because without it interest rates could rise and officially bankrupt the government. He also knows that QE3 will be seen by the market as proof that the economy still sucks and they were just lying and that it will just prop up more mal-investment. Mal-investment will support unproductive consumption and of course result in flying oil prices. The Bernank and Obama will want to make sure the Saudis come in and raise production further along with the commencement of QE3 so that the rise in gasoline prices is not as severe as it otherwise would be. Check out the chart of wholesale gasoline prices below.
Gasoline Prices 2002-Present
As you can see from the chart above, gasoline prices are already at last year’s highs (right before the stock market experienced a correction) and also back very close to the 2008 highs when the whole system imploded. So what I take away from this is that we may be about to see what the Saudis really have. In order to print the massive amounts of new money the Central Planners want (need actually) to save their delusional little system they will need Saudi Arabia to pump more oil. If the Saudis cannot do so, it will create a total panic attack in the markets everywhere. Why? Because this will mean that the Central Planners have finally hit the brick wall. It will mean that any more money printing will result in nothing less than exploding gasoline prices and ultimately judgment day when we finally find out if the world will spiral into uncontrollable inflation or deflationary collapse. Saudi oil is a major key to this equation.
The Most Ominous Chart in the World
The Chinese Yuan 2005-Present
Take a look at the chart of the Chinese currency above. When it is declining it represents appreciation versus the U.S dollar. What you can see is that the appreciation trend from June 2010 has stopped. It has been flat since the end of 2011. Recently, such behavior has foreshadowed major negative events. I think the reason is because it signals a resource wall has been hit that therefore constrains central planning printing and liquidity expansion. The last time it stopped appreciating was in early July of 2008. This coincided perfectly with the collapse of the commodity bubble. Three months later the entire financial system imploded. We don’t have a commodity bubble this time but we have other ones. We have a luxury goods bubble. A retail sector bubble. A treasury bubble and then the biggest bubble of all the fiat money bubble. Which of them will collapse this time?
Good luck out there.
Peace and wisdom,