Sunday, June 26, 2011

notes of 'another leg to the Chinese story laid bare!!!'

Andrew Lee from UBS wrote an excellent article last month and made a number of key points explaining why he thinks China's growth story is fundamentally unsustainable.And here is some of my notes.

1.China are encountering a number of vital resource depletions right now. Fuel, oil and Top soil are all critical concerns to the stability of Chinese economy.

Remembering Exactly How The Japanese Economy Collapsed

By Also Sprach Analyst via Businessinsider

The wonderful things internet and Google are. We can search through some really old news date back more than 20 years ago, even though there were no people reading news online (sure, did anyone use internet?).
Out of curiosity, I found some really old news from Western media about Japan. Specifically, what’s happened in Japan over 20 years ago.
Note: the following quotes are all from New York Times, and it is merely a coincident.
7 September 1988, New York Times
Japanese investors have become major players in key real estate markets in the United States, snapping up hotels at Waikiki and stepping over each other to grab skyscrapers from Los Angeles to New York City.
 Does it ring a bell?
7 September 1988, New York Times
The real estate boom here has been long been out of control, but many people were still shocked when a Government-affiliated research group calculated a few months ago that the book value of all the land in Japan – $13.47 trillion and change at current exchange rates -easily exceeded the value of all the land in the United States.
22 August 1989, New York Times
Japan became the world’s richest nation on paper in 1987, surpassing the United States in national assets for the first time with $43.7 trillion worth of land, factories, stocks and other wealth, a leading Japanese newspaper said today.
The value of Japan’s assets in 1987 jumped sharply from $28.3 trillion in 1986, said Nihon Keizai Shimbun, the country’s top economic daily, quoting figures from the United States Federal Reserve Board and Japan’s Economic Planning Agency.

According to Federal Reserve figures, the United States had $30.6 trillion in assets at the end of 1985, $34 trillion worth in 1986 and $36.2 trillion in 1987, the newspaper said.
Remember this rubbish statistics that Beijing total land value equals to one year of GDP of the United States? Although totally incomparable quantities, that scared quite a bit of people.

It didn’t end well, of course. As reported here:

14 September 1991, New York Times
Japanese company bankruptcies jumped 74.3 percent in August, compared with a year earlier, a private research company reported Friday, the latest indication of how far Japan’s economic bubble has deflated.
We know the rest of the story: the Japanese economy experienced two lost decades.
I will have more to say on that later.


Is the Chinese Economy Sputtering for the Same Reasons as the American Economy?

It was tempting to believe that China was different.

With its command and control economy with some of the trappings of free market capitalism, trillions in reserves, and abundant natural resources, many thought that China would "decouple" from the Western world's problems and sail into a prosperous future.

However, despite its long history, exotic names and seemingly strong position, China cannot avoid the rules of economics which have applied to all countries throughout history.

Corruption and Phony Bookkeeping

Corruption and the failure to follow the rule of law is one of the main factors which has dragged down the American economy.

The fact that - according to the Chinese central bank - Chinese officials stole $120 billion and fled the country does not auger well for China.

Scandals among various Chinese companies are not helping, either.

And then there are the made up statistics. As Warren Hatch of Catalpa Capital Advisors notes:
As Li Keqiang, the vice premier and heir-apparent to Wen Jiabao, laconically remarked to the US ambassador a few years ago, most of the statistics in China are “for reference only.” 
And Charles Hugh Smith argues:
Despite their many differences, the economies of China and the U.S. share a number of key traits: both are corrupt, rigged, crony-Capitalist, rely on phony statistics and propaganda and operate with two sets of rules: one for the Elites, and another for the masses.
Despite their many differences, the economies of China and the U.S. share a number of key traits: both are corrupt, rigged, crony-Capitalist, rely on phony statistics and propaganda and operate with two sets of rules: one for the Elites, and another for the masses.

Can We Trust You?

The credit crisis hit in 2008 largely because American banks lost trust in one another. Specifically, top economists say that each bank had so much bad debt on its books (in the form of mortgage backed securities and derivatives which worth the paper they were written on) which made them essentially insolvent that they assumed that all of the other banks must be in a similar situation ... so they stopped lending to each other.

This drove the price which banks charged each other for loans (libor) skyrocket, and the whole credit market froze up.

The same thing is now happening in China. As ZeroHedge reports, Chinese interbank lending is freezing up and "shibor" - the prize which Chinese banks charge each other for loans - is skyrocketing.

More on this subject:

Wednesday, June 22, 2011

Dr. Copper, the housing bubble edition

The mighty Dr. Copper; the only metal has a suffix attached to his name, for his accuracy predating equity prices for years. In the past 30 months or so, copper had a fantastic performance, almost quadrupled its price from December 2008 lows. But recently, this is becoming more of a story about emerging market infrastructure spree than acclaimed shortages.
An article in daily mail about a Chinese ghost city Kangbashi may give us some idea about the scale of the spree.

One approach road leads past what was until recently a 30,000-seater stadium, costing £100 million and rushed to completion in nine months for last year's Mongolian Games - horse-racing, archery and wrestling. When it was opened, it looked rather like Concorde about to take off. But soon after New Year's Day, a whole white wing, plus the central peak, collapsed during the night.
Refined copper imports by country in 2010

As the ancient Chinese saying goes:” one shall invest in art in heyday and own gold in troubled times:” With some Chinese art prices soaring to unprecedented levels, not doubt we are in a boom time. However, anybody who studied some history may ponder the question whether this time is different. Looking at the media flooded with articles about how superior a state-driven fixed asset investment economy is, I couldn’t help but wonder if anyone experiences the same déjà vu as I do.
Sotheby Indicator

Supply wise, for all the Malthusians I’ve got bad news for you. BBC just discovered new source of copper supply! They are in Goldman’s warehouse! Several prominent website has already covered this story in detail:

BBC bubble trouble interview via
MR: In fact it turned out that only about 40% of the copper was on the LME’s official stocks, and therefore visible to the market. 

The primary driver of this anti-competitive behavior is the fact that GS, JPM and Glencore now control virtually the entire inventory bottlenecking pathways: "In recent years, major investment banks like Goldman and J.P. Morgan and commodities houses like Glencore have been snapping up warehouses around the world, turning the industry from a disperse grouping of independent operators into another arm of Wall Street. The LME has licensed about 600 warehouses around the world.

Copper guru Simon Hunt explained:
The real story about copper is the size of the financial sector’s involvement in buying surplus copper and warehousing it outside the reporting system both in your country and elsewhere, which probably started in 2006. This is what creates robust demand, which is quite different to consumption.

I’m also a big believer in seasonality; the chance of a market collapse in autumn is just too high for me to discredit markets seasonal traits. So I examined three major housing bubble in the past 20 years or so, the Japan asset bubble, Asian tiger, and US housing bubble and put them into a seasonal perspective, presidential cycle in this case. These three housing bubbles are each characterized by the same stated-induced cheap credit, reckless speculation, and debt fueled asset inflation. And here is the result:
Seasonal copper price during major housing bubble
If the Chinese housing bubble talk is validated, with inflation pressure mounting up and further tightening measures in emerging market, Simon hunt’s prediction of copper price plunging to 7500 level surely could be realized by year end. After that, copper price tend to rally at the beginning of election year, and an even lower copper price in second half of 2012 is not avoided.

I will continue to monitor closely the market developments, feel free to visit my website:

Monday, June 20, 2011

3rd presidential cycle and emerging market equity

Normally, the first half of pre-election years is good for equities. The logic is this, in the pre-election year, government tend to expand public credit because this is when the majority of economic policies are put into effect. As long as government credit expansion succeeds private credit contraction, asset price appreciates.

However, chances are these governments driven policies (cheap credit) causing economy overheating and pushing interest rate higher. Had private credit contraction succeeded government credit expansion, market crashes.

When we entering the second half of year 3, given today’s equity markets’ highly correlation, high volatility and downside risks for emerging markets are anticipated.

Hedge fund manager Jeremy Grantham wrote in his Q1 2011 letter:
To make money in emerging markets from this point, animal spirits have to stay strong and not much can go wrong. This is possibly the last chapter in a 12-year love affair…from now on, we must be more careful.

Shanghai Composite Presidential Cycle
As far as I’m concerned, if we encounter say any type of weather disruption which triggers soaring food prices, or 1970s style oil embargo in Arab world, emerging market would be brought down to stagnation immediately. With today’s euphoria about emerging markets, this one tail risk should be bet against.

Friday, June 17, 2011

Why soybean price could double from this level.

Why soybean price could double from this level.
While for the past 12 months, corn and wheat prices have nearly doubled with corn price rising 88% by percent and wheat price by 95%, soybean price has been lagging the performance. However several key factors suggest that risk of soybean price is still dramatically skewed upwards.

Societe General’s Dylan Grice made a neat comparison in the 1970s and what will happen to grain in the future. In 1972, Soviets secretly bought grain on the global markets to make up for a shortfall. That led to the“Great Grain Robbery” of 1972. In 1972, Russia’s wheat crop failed. Russia had to dip into the global grain markets to meet demand. Russia’s purchases sent grain prices soaring around the world.

China now faces similar scenarios. With government artificially suppressing edible oil prices by pouring reserves, farmers are expected to plant 20% fewer soybean acres this year. China's overall soybean area, on a harvested basis, was pegged at 8.5m hectares, 200,000 hectares lower than the current USDA estimate and the lowest since 1999. With soybean/corn ratio as unprecedented low level, more farmers tend to switch soybean to higher value crops.

Not only the tight supply balance resembles 1972, technical parallel is equally compelling as well. I overlaid the current 2011 soybean contracts on 1972 and get these.

I remember how Paul Tudor Jones predicted the 1987 crash by looking at a 1920s chart (the famous document ‘trader’). If one believes markets self-resemble, these two charts may give us a clue what’s going to happen. And from a supply and demand side perspective, this makes sense as well. Both the government of China and 1972 Soviet Union interfere with the market, trying to temporarily suppress the grain prices. For a while, they succeeded, led to near-term market prices trending downwards, but later backfire is also expected. Grain prices tend to suffer seasonal weakness in summer, however, with the decades low stock-to-use ratio, any type of supply disruption could trigger the dramatically upward.

The Myth of Asia's Miracle

An excellent essay by Paul Krugman in 1994 cited by Jim Chanos about the underlying instability of state-driven economic model.

ONCE UPON a time, Western opinion leaders found themselves both impressed and frightened by the extraordinary growth rates achieved by a set of Eastern economies. Although those economies were still substantially poorer and smaller than those of the West, the speed with which they had transformed themselves from peasant societies into industrial powerhouses, their continuing ability to achieve growth rates several times higher than the advanced nations, and their increasing ability to challenge or even surpass American and European technology in certain areas seemed to call into question the dominance not only of Western power but of Western ideology. The leaders of those nations did not share our faith in free markets or unlimited civil liberties. They asserted with increasing self confidence that their system was superior: societies that accepted strong, even authoritarian governments and were willing to limit individual liberties in the interest of the common good, take charge of their economics, and sacrifice short-run consumer interests for the sake of long-run growth would eventually outperform the increasingly chaotic societies of the West. And a growing minority of Western intellectuals agreed.

Thursday, June 16, 2011

Lessons from the Asian Financial Crisis

Charles W.L.Hill
University of Washington
(China parallel highlights )
Asian Contagion
Between June 1997 and January 1998 a financial crisis swept like a brush fire through the "tiger economies" of SE Asian. Over the previous decade the SE Asian states of Thailand, Malaysia, Singapore, Indonesia, Hong Kong, and South Korea, had registered some of the most impressive economic growth rates in the world. Their economies had expanded by 6% to 9% per annum compounded, as measured by Gross Domestic Product. This Asian miracle, however, appeared to come to an abrupt end in late 1997 when in one country after another, local stock markets and currency markets imploded. When the dust started to settle in January 1998 the stock markets in many of these states had lost over 70% of their value, their currencies had depreciated against the US dollar by a similar amount, and the once proud leaders of these nations had been forced to go cap in hand to the International Monetary Fund (IMF) to beg for a massive financial assistance. This section explains why this happen, and explores the possible consequences, both for the world economy, and for international businesses?

The Universa approach to hedging tail risk

Elevated concern about extreme events has boosted interest in hedging tail risk, but this means turning conventional fund management on its head. Mark Pengelly talks to Mark Spitznagel, founder of hedge fund Universa Investments

Oscar Wilde once said expecting the unexpected shows a thoroughly modern intellect. After the biggest financial meltdown since the Great Depression, this is perhaps more true than ever. Having been caught out by the ferocity of the crisis, investors are now much more aware of the risks of extreme events – and the fact they seem to occur a little more frequently than many had thought.