China Riverboat Gambler - Part II

Seems that rational people are arriving at a similar conclusion about China:

“China has embarked on a capital-spending bubble the likes of which the world has never seen,” famed short seller Jim Chanos claimed recently. “Buildings are going up with no tenants, roads are built with no traffic, shopping centers are built with no tenants or customers, yet they continue to be built and they continue to be planned.”
Heh, here comes the money shot:“China is Dubai times 1,000, if not a million,” he said. “At some point, all of this (ill-advised) investment will come home to roost.”

Hey Floridians, Las Vegans, Californians.... Sound Familiar?

It is not my intent to bring back past wounds or pour salt on them, but you have to read this to believe it...

Surging demand for residential units has in recent months seen potential buyers queue for hours before new house openings and anecdotally many have left blank checks with their property agents to fill out to secure their spots in new projects.

Private sector developers in July launched an all-time high of 2,878 new flats and an astounding 2,767 of those units were sold out within a month. That sales figure smashed by 52% the record of 1,825 units sold set the previous month

In case you haven't figured out where, this is Now, in Singapore
New heights for Singapore property 

http://www.atimes.com/atimes/Southeast_Asia/KK04Ae01.html

China : When the Driver of the World Economy Is A Speculative, Drunk, Riverboat Gambler

It is our opinion that China today is circa Japan in the late 1980s when it was a manufacturing powerhouse and seemed poise to continue its rise to superpower and world domination.

Jim Grant, Grants Interest Rate Observer: 

“China today is where Japan was in the late ’80s, except with the greater political instability that comes with a semi-controlled economy and the lack of a social safety net (read: jobless, hungry people don’t write angry letters, they riot)…Today China projects to the world a similar image as Japan did in the 1980s… “

Richard Bernstein, former chief investment strategist at Merrill Lynch, says China’s economy is overheating and that investors should avoid its stock market. “China is an immense credit bubble that's going on right now,” he tells CNBC.   "They have massive overcapacity and their solution to that problem was to build more capacity over that," says Bernstein, now CEO of Bernstein Capital Management.

 “A superb primer on the risks of China’s go-for-broke lending drive was published by Fitch Ratings on May 20. Is it not passing strange, the agency asks, that Chinese lending is accelerating even as Chinese corporate profits are shrinking? ‘Ordinarily, falling corporate earnings are met with tightened lending, but in China, precisely the reverse is evident. . . .’ You would expect—and Fitch does anticipate—that the borrowers of these trillions of renminbi are not so profitable as they were in the boom, and some will therefore struggle to service their debts.”


Lately, the Chinese economy has been impressing us with its growth…But Chinese economic structure is not is not superior to the West’s; the Chinese can just cook GDP numbers better and control their economy more effectively through forced lending and spending.
However, these short-term advantages come with long-term consequences – there will be a steep price to pay for them; there always is. 




“Examining, first, the track of Chinese bank lending and, second, the trend in Chinese nonperforming loans, the seasoned reader will remember … Drexel Burnham Lambert. In the mid-to-late 1980s, the American junk bond market combined breakneck growth with muted default rates. The secret, fully revealed during the subsequent bear market, was that the default rates were a direct product of the issuance rates. Borrowers didn’t default because of—to adapt the Fitch formulation to that earlier time—the ‘pervasive rolling over and maturity extension of bonds as they fell due.’ Drexel failed when the junk market did.

“Since 2005, China has generated 73% of the global growth in oil consumption and 77% of the global growth in coal consumption.”

Today, Chinese economic growth is the force pushing the global economy and stock markets. The quality of this growth, however, is low as it is predicated on massive (forced) lending and is unsustainable. As and when Chinese growth finally slows, the impact will be felt in many, often unsuspected places.

We believe that China’s pulling in the reins will impact commodity markets, commodity producers and commodity exporting nations. Combined with our expectation of deflation in the intermediate term, this will severely impact commodities.  Let’s take oil, for instance. As incremental demand from China slows, oil prices will suffer and impact the Russian economy in particular.  China accounts for 15% of Brazil’s exports (up from 1.5% a decade ago), significantly impacting the economy of that South American nation.


Finally, we are bearish on China because of the enormous amount of overcapacity that currently exists in the country.  China’s manufacturing capacity was structured for a leveraged U.S. consumer and a leveraged world.  As the world delevers, China as the exporting nation faces a difficult transition given it’s excess capacity.  Like the U.S., it is desperately attempting to reflate its economy and continue growth is because it sees the difficult adjustment that lies ahead.   

Gold & Treasury Bubbles

We are in the midst of yet another bubble yet it's very difficult to recognize bubbles until they burst.  No, the bubble isn't Gold, it's U.S. Treasuries.

John Paulson presented a simple, but compelling case for Gold. First, the monetary base has exploded in a way we've never seen before. The monetary base is essentially the Federal Reserve Bank's currency and reserves. The Fed, by buying up securities in this crisis, has pumped a lot of money into the economy.

As Paulson explained, that's because this base money has not yet been lent out and multiplied throughout the economy. Yet the monetary base and money supply are highly correlated, "almost 1-to-1 between the two," Paulson said.

That means that as the monetary base expands, the money supply surely follows, though there is a lag. (Money supply is a broader measure of money than just the monetary base, as it includes personal deposits and more. The monetary base is like a kind of monetary yeast. It makes money supply rise.)

If money supply grows faster than the economy, that will create inflation, says Paulson. As it is impossible for the economy to grow anywhere near that vertical spike in the monetary base, Paulson contends inflation is coming.

The U.S. is not alone in its money-printing exercise. The supply of most currencies is expanding rapidly – even the normally tame Swiss franc. In the race of paper currencies, they are all dogs. Hence Paulson's interest in gold, which no government can make on a whim.

Therefore, in the context of the exploding monetary base, gold seems relatively cheap. In other words, as the money supply rises, so does the price of gold, eventually. As a result, says Paulson, "gold has been a perfect hedge against inflation."

There is some slippage over time. The gold price can change faster or slower than the money supply. But when the market gets worried about inflation, the gold price usually changes much faster – as happened in the 1970s. In 1973 – to pick a typical year – inflation was 9% and gold rose 67%. That was a pattern common in the 1970s.

The potential for inflation this time around is greater than it was in the 1970s, given that the growth in the monetary base is so much greater than it was in the 1970s. Gold could do much better this time around, reaching "$3,000 or $4,000, or $5,000 per ounce" as Paulson said.

Future historians will look back at the present day and see clearly how this unfolded. They will see the litany of news items that pointed to the dollar losing its top perch: China and Brazil are settling up trade in their own currencies. The Russians and others are openly calling for a new monetary standard. Even mainstream outlets are discussing alternatives to a dollar-based standard, a province once solely occupied by cranks and gold bugs. Not a week goes by without these kinds of stories.

The gold supply, too, is limited against the vast pool of dollars. As Paulson points out, global money supply is 72 times the value of gold. I'm betting that gap will narrow. It only has to narrow a smidgen and the gold price flies.

As Grant eloquently put it: "Gold is a speculation. But it is a speculation on a certainty: the debasement of the currency." Gold stocks, too, are a speculation. But they are a speculation on an inevitably higher gold price.

A leveraged play on Gold are the small cap Gold Miners.  Miners benefit from the inflationary pricing trends in the price of Gold while also benefiting from the deflationary trends in the production and mining of Gold.

Currently I'm Long New Gold NGD, Aurizon Mines & Newmont Mining, as well as the GDX.