Posted by Paul Vignaon January 24, 2011 China /
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I’ll be blunt: I expect China to come unglued one day. I’ll be honest, too: I’ve been expecting this for at least four years.
I’m not a hedge-fund manager, I’m a reporter, so I don’t put my theories into investment vehicles. But some hedge-fund managers are thinking the same thing I am, and they are putting those ideas into investment vehicles. I missed this story in last week’s Telegraph about hedge funds setting up China-fail funds, (h/t, Big Picture) but it’s something to keep an eye on.
There have been academics and analysts who have argued about the dangers of China’s economy overheating for some time. But for many, the fact that hedge funds, particularly those with track records on previous crises, are launching specific funds is the sign that the bubble is close to bursting.
One academic said: “Economists have contrarian views all the time. But these hedge funds have their shirts on the line and do their analysis carefully. The flurry of ‘distress China’ funds is a sign to sit up.”
Your zen koan of the day is this: if beef brisket costs more in Hangzhou than in Boston, whose central bank is full of bull?
I bring this pool of reflection your way after reading this food-for-thought piece (no pun intended) from The Wall Street’s China Real Time Report blog (h/t, Zero Hedge.)
The post relates the results of a study by Wang Pei, a blogger with the Beijing-based business news magazine Caixin, who teamed up with a friend in Boston to informally try and determine which city, Hangzhou or Boston, had a higher cost of living.
Wang Pei teamed up with a friend in Boston and set out on the streets with identical grocery lists, including 19 food items and two types of gasoline. The mission, to answer the question: “How expensive is China?”
While not exactly a scientific study, Wang admits, the exercise reveals that a surprising 10 of the food items, including green beans and bananas, were more expensive in China. In Hangzhou, a scenic coastal city near Shanghai, the price of beef brisket per 1.1 pound, or 500 grams, and the cost of a dozen eggs were both double the prices found in Boston. A liter of milk, meanwhile, was nearly triple.
Hangzhou’s premium gasoline was also 23% more expensive, and the overall price of the entire basket of goods purchased there was 8% higher.
The Dow Jones Industrial Average closed slightly lower as another round of interest-rate hikes in China weighed on blue-chip index.
DJIA drops 18 (0.2%) to 11555, with Procter & Gamble and Kraft leading declines. The Dow traded in another narrow range, falling as much as 55 points while rising less than a point before reaching the closing bell. The narrow range marked 16th straight day that the index had a swing range of less than 100 points. The last time such a streak occurred was in 1996.
Meanwhile, S&P 500 rises 0.1% to 1258 behind strength in financial sector. Nasdaq Comp gains 0.1% to 2667.
Holidays combine with big winter storm to cause trading volume to slow to a crawl. Monday contained the lightest volume of any fully day of trading on the New York Stock Exchange in 2010.
H&R Block drops 7% to $11.80 after disclosing HSBC Holdings is ending its long-term contract for controversial refund anticipation loans. AIG gains 9.3% to $59.38 after securing three credit facilities totaling $4.3B.
Some day China is going to crack open like Humpty Dumpty. Some day, all the games the Chinese play with their economy, with their currency, with their officials statistics, with their populace, are going to come unglued.
China’s growth model is unsustainable and the country faces a sudden slowdown unless it undergoes urgent economic and political reforms, according to a renowned Chinese academic and former member of the People’s Bank of China’s monetary policy committee.
In a scathing indictment of the country’s extraordinary growth story, Yu Yongding listed rising social tensions, choking pollution, a lack of public services and an over-reliance on exports and investment, particularly in real estate, as threats to the country’s economic future.
“China’s rapid growth has been achieved at an extremely high cost. Only future generations will know the true price,” Mr Yu wrote in an opinion piece published in the state-controlled China Daily. “[China’s] growth pattern has now almost exhausted its potential. So China has reached a crucial juncture: without painful structural adjustments the momentum of its economic growth could suddenly be lost.”
The “miracle” that is the Chinese economy is being engineered in almost the exact same manner as the recovery in the U.S. The only difference is you’ll never get U.S. officials to admit they’re central planners. Granted that’s hyperbole. U.S. officials don’t go around ordering banks to make loans, and construct entire cities that sit empty. Both both have chosen the essential path of throwing money at a problem, rather than trying to resolve it and move on.
More from the FT article:
“Some local governments are literally digging holes and then filling them in to ratchet up the GDP,” Mr Yu wrote. “Consequently, there are simply too many luxurious condominiums, magnificent government office buildings and soaring skyscrapers.”
While most of Mr Yu’s observations have been expressed before, it is unusual to see such a litany of complaints from such a senior establishment scholar published in state media.
His comments even included a call for political reform to help “break the unholy alliance” between government officials and business people.
So if, for instance, the Chinese government tells us over the weekend, as they did this weekend, that its CPI rose 5.1%, do you believe that, or not? Try not. You can bet China’s inflation is higher than it’s letting on, and you can bet GDP is lighter than it’s letting on. What might have kept the Chinese from raising rates over the weekend isn’t the inflation issue, but the hot-money issue.
If you want to know what’s going on in the Chinese economy, you have to look not at the official stats, but at secondary stats like power output. That’s what’s Veneroso’s been eyeing, and what he sees has given him pause.
Posted by Paul Vignaon December 09, 2010 China /
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I wonder if Justin Bieber even gets this bit, to say nothing of his fans. On the other hand, I don’t get Justin Bieber, so I guess it all evens out somewhere in the scheme of things.
Let’s catalog some of the gathering storm clouds, as a set-up for a must-read comment from John Hussman over at Hussman Funds. Maybe all of this adds up to just so much noise, and goes nowhere. Maybe the states work out their problems, Europe works out its problems, and China works out its problems. Or maybe these things meet, overlap, reinforce each other, overwhelm the first responders and we get another disaster. There’s no way of knowing. But it’s important to know that they’re out there, all the same.
- California had to delay by a day a bond sale, after the supply overwhelmed demand and led to a sharp pullback. Not a particularly good sign for a state facing a $26 billion budget gap (or hole, or chasm, or cliff, or whatever adjective you chose.) The muni-bond market is being roiled as investors look to cash in before the situation among the states gets worse (think, federal stimulus to the states is going to run out next year. R’ut r’oh.)
- The labor market in the U.S. — meaning the single largest engine of economic growth on the planet — remains stagnant (the most positive adjective I can think of to describe it.)
That’s just a sampling from these shores. If anybody cares to catalog the silver linings, feel free. I’m listening. But from where I sit, this much ballyhooed recovery is still, still, nothing more than the Pinocchio doll I said it was last fall, whose strings are being pulled by Uncle Sam and the Fed. It’s not a real little boy.
Bears are aiming for some follow-through to yesterday’s sell-off in US stock markets. Asian markets fell sharply overnight, with concerns about interest-rate hikes in China being cited as the catalyst, and European markets are edging lower as sovereign debt concerns — particularly in Ireland — continue to fester.
Interesting complexion premarket, with recent correlations — both positive and negative — appearing to loosen a bit . Euro recovering from big drop overnight, USD index softening, oil and gold in retreat (even as
the dollar eases) and Treasurys a shade lower.
Only data on tap is Reuters/Univ of Michigan prelim Nov consumer sentiment gauge, out at 9:55am ET. S&P futures down 9.30; 10-yr note down slightly, yield at 2.66%.
And you thought today would be all about earnings. Nope, it’s really all about the dollar (and am I nuts, or is the central bank in China coming to the rescue of the dollar, at the same time as the central bank in the U.S. is doing its best to cut it down to the size of a postage stamp. Strange days.)
- “The global financial system continues to be unsound in the same way that a Ponzi scheme is unsound,” John Hussman writes. “There are not enough cash flows to ultimately service the face value of all the existing obligations over time.”
- On an essentially flat day yesterday, CBOE’s VIX volatility index fell 8.5% to 18.96, lowest levels since April. “If there’s one point I would emphasize when VIX watching, it’s to pay the most attention when it does something unusual,” says Adam Warner, as VIX is exhibiting “clear signs of complacency.”
- Growth of Chinese and Brazilian credit-card balances from 2008 to 2009 “can be a source of either encouragement or worry — or both,” FT’s Alphaville says. “A sustained run-up in debt can be ultimately destabilizing,” blog notes. “So can a burst of capital inflows. And this is all playing out rather quickly against a background of currency wars, central bank interventions, and expected quantitative easing in the US.”
- Remember when the critics came out in droves when Apple (AAPL) released its first versions of iOS without cut-and-paste functionality? “It’s hard to imagine any company launching a new mobile OS would take a similar tack,” John Paczkowski writes. “Yet that’s exactly what Microsoft has done with Windows Phone 7, which will arrive at market next month without that feature.”
- Amazon’s (AMZN) attempting to carve a niche market for Kindle, with plan to launch “Kindle Singles” — essentially works that may be longer than a magazine article but shorter than typical books. MediaMemo blogger Peter Kafka raises some obvious questions: What will pricing look like? How will wholesale pricing work? And is this directed at conventional publishers, or self-published by the authors? AMZN didn’t immediately comment to Kafka.
- Windows Phone 7 may be Microsoft’s (MSFT) best chance at making a serious dent in the smartphone market, Ryan Kim writes at GigaOm. “They’ve done a good job creating something that looks and feels distinct,” he says. “We still need to put the phones through their paces but the basic building blocks are there.”
- Small business optimism barely nudged higher in September, but it still remains at recessionary levels. Poor sales remain the biggest hurdle for small businesses during this sluggish recovery. “Usually small business owners complain about taxes and regulations (that usually means business is good),” Calculated Risk says. “But now their self reported biggest problem is lack of demand.”
- Not only are small businesses not interested in getting more financing, but they increasingly think financing conditions will worsen from current levels, writes FT’s Alphaville, based on NFIB’s small business survey for September. “Maybe investors are front-running the Fed, but small businesses seem unconvinced that further easing will actually loosen credit.”
- Wall Street pay is on pace to break a record high for a second straight year, WSJ reports.
- So far so good. Intel earnings beat expectations. And, as MarketBeat notes, the deets beyond the headline numbers also look pretty solid.
J.P. Morgan reported some strong earnings today. But what this bloggers eye were some of the sub-numbers in the earnings report. The bank booked $1.8 billion in investment banking fees. But don’t be fooled – that wasn’t from big M&A advising. But $429 million was in advisory fees. Instead, that $1.3 billion + remaining fees […]
David Oreck, founder of a well-known maker of vacuums and air purifiers, says he’s upset his namesake company is in bankruptcy. He says Nashville, Tenn.-based Oreck Corp. was a perfectly profitable company when he sold his stake in it to a private equity firm in 2004. He blames the firm, New York-based American Securities Capital […]
