2009-10-31

China's GEM market launched

ChiNext's Dazzling Debut
The average p/e for the 28 companies (diluted) is 55.7 times. Shanghai Bestway's p/e is 40 times, the lowest, while Dinghan Technology's is the highest at 82.2 times. The average P/E of 24 small and medium-sized enterprises listed on the Shenzhen Market this year is 37.68 times. Analysts believe that the high issuing P/E ratio of some companies has overdrawn the performance for the next one to two years, or even three years.

In order to prevent heavy first day speculation, the Shenzhen Exchange stipulates that if transaction prices rise or fall over 20%, trading in the stock will be temporarily suspended for 30 minutes; more than 50% fluctuation would lead to 30 minutes more trading suspension. Once prices fluctuate more than 80% , the Exchange will suspend trading the stock until 14:57, that is, three minutes before the end of the trading day.

As of the closing at noon Friday, 16 stocks had been "stir-fried" (heavily speculated) after trading resumed and suspended for the second time. Five stocks rose by more than 200%, and the rest rose by over 100%. The prices of three stocks, Ultr@power, Chase Sun, and Siasun, are over one hundred yuan, and the price of Geeya is the lowest at 35 yuan, still an increased by 211.95%.

As the marekt closed, the trading of all of 28 stocks more than doubled, ranging from 120% to 226% compared with their IPO prices.
If the Keynesians believe animal spirits are the problem with the economy, then China clearly has no problem. On the other hand, it does look a tad bubbly.

October Performance

Index

Oct. %

YTD %

S&P 500 TR

-1.86

17.05

MSCI EAFE

-1.29

23.87

上海 Shanghai

7.79

64.53

Fund



Entertain. Trends

-3.40

21.46

Green Dragon

-2.13

27.72

Best of Funds

-2.89

3.04

Pharma & Dogs

-2.08

6.83

China Fund

-4.61

8.46

Software Security

-0.26

29.90

Yield to Me

0.47

18.52

Catch a Falling Knife

11.86

-44.66



Going short and defensive has hurt the past couple of months, but if the market over the past six trading days is more indicative of the future, then the portfolios should begin to outperform. To give an idea of how fast performance can switch, the Best of Funds was down 4.70% versus a 0.98% gain in the S&P 500 Index in the month through Thursday, but Friday's move left the final number of down 2.89% versus down 1.86% for the S&P 500 Index. I was behind the S&P 500 Index by 5.86%, but finished behind 1.03%.

Short candidates via ETF include China, Russell 2000, real estate, emerging markets, Nasdaq, financials; while Catch a Falling Knife is loaded with retailers, consumer goods and services, solar, financials and REITs.

Crash Comparison Update 2009/10/31


September looks flat at the end due to one less trading day, not because it was a flat day in the market. I added the day to sync up the two series of data.

OTB Portfolio Update 2009/10/31

Obama, Turbo, Bernanke portfolio slides 5.80% on Friday as their attempt to get Americans to go deeper into debt to buy consumer goods seems to have hit a wall.

Portfolio now down 24.31% since inception.

2009-10-30

Tell the Emperor What He Wants to Hear

Especially if he's really, really stupid. Right and left are slightly off in this story, if its about the U.S. The center-right and center-left support the finance industry and bailouts, whereas the far-right and far-left oppose the bailouts. Politics makes strange bedfellows, but the financial allegories all hold:
Smooth talk and convoluted solutions magically appear when a monkey in an allegorical kingdom runs a failing banana bank.

Russia wants cash for gold

Russia considering gold sale
Finance Minister Alexei Kudrin said Wednesday that Russia is considering selling gold on world markets to cash in on high prices as the government faces its first budget deficit in a decade.

Kudrin's remarks follow a report last week that the Gokhran precious metals depository was planning to sell up to 50 metric tons, or 1.6 million ounces, of gold in London by the end of the year.

With gold prices reaching record highs of over $1,000 per ounce, the sale could bring Russia some $1.7 billion.
Why isn't Russia selling U.S. dollars? Maybe they don't want to sell low...

2009-10-29

Sing it Andy Xie

Central Banks, Arsonists and Playing with Fire
Every party ends sooner or later, and I see two scenarios for the next bust. First, every trader is borrowing dollars to buy something else. Most traders on Wall Street are Americans, British or Australians. They know the United States well. The Fed is keeping interest rates at zero, and the U.S. government is supporting a weak dollar to boost U.S. exports. You don't need to be a genius to know that the U.S. government is helping you borrow dollars for speculating in something else.

But these traders don't know much about other countries, particularly emerging economies. They go there once or twice a year, chaperoned by U.S. investment banks eager to sell something. They want to think everything other than the U.S. dollar will appreciate; Wall Street banks tell them so. Since there are so many of these traders, their predictions are self-fulfilling in the short-term. For example, since the Australian dollar has appreciated by 35 percent from the bottom, they now feel very smart while sitting on massive paper profits.


When a trade like this one becomes too crowded, a small shock is enough to trigger a hurricane. There must be massive leverage in many positions, but one just never knows where. When something happens, all these traders will run like mad for the exit, and that could lead to another crisis.

Surging oil prices could be another party crasher. This could trigger a surge in inflation expectation and crash the bond market. The resulting high bond yields might force central banks to raise interest rates to cool inflation fear. Another major downturn in asset prices would reignite fear over the balance sheets of major global financial institutions, resulting in more chaos.

Twice in recent years, oil prices surged into triple-digit territory, wreaking havoc on financial markets and the global economy. In 2006, surging oil prices toppled the U.S. property market, debunking the story that property prices never fall -- a premise upon which subprime lending was based. Oil prices fell sharply amid the subprime crisis period while the market feared collapse in demand. The Fed came to the rescue and, in summer 2007, began cutting interest rates aggressively in the name of combating the recessionary impact of the subprime crisis. Oil prices surged afterward on optimism that the Fed would rescue the economy and oil demand. It worked to offset the Fed's stimulus, accelerated the economic decline, and pulled the rug out from under the derivatives bubble. The ensuing fear of falling demand again caused oil prices to collapse.

Oil is a perfect ingredient for a bubble: Oil supplies cannot respond to a price surge quickly. It takes a long time to expand production capacity, and oil demand cannot decrease quickly due to lifestyle stickiness and production modes. Low-price sensitivities on both demand and supply sides make it an ideal product for bubble-making. When liquidity is cheap and easily obtained, oil speculators can pop up anywhere.

Oil speculators are no longer restricted to secretive hedge funds. Average Joes can buy exchange traded funds (ETFs) that let them own oil or anything else. Why not? Central banks have made clear their intentions to keep money supplies as high as possible, debasing the value of paper money to help debtors. It seems no good deed is unpunished in this world. If you speculate big, governments will offer a bailout when your bets go wrong and cut interest rates and guarantee your debts, allowing bigger bets. People who live within their means and save some for a rainy day see dreams shattered. Central banks can't wait to break their nest eggs.

It is better to be a speculator in this world. The powers that be are with you. Maybe everyone should be a hedge fund; ETFs give you this opportunity. As the masses are incentivized to avoid paper money while buying hard assets, the price of oil could surge to triple-digit territory again. Oil bubbles are easy to come and quick to go because the oxygen needed for its existence disappears after it kills other bubbles.
The boom-bust cycle, in a nut shell.

A word of caution for all would-be speculators: You'll want to run for your life as soon as the bond market takes a big fall. And the case for a double dip in 2010 is already strong. Inventory restocking and fiscal stimuli are behind the current economic recovery, and when these run out of steam next year, the odds are quite low that western consumers will take over. High unemployment rates will keep incomes too weak to support spending. And consumers are unlikely to borrow and spend again.

Many analysts argue that, as long as unemployment rates are high, more stimuli should be applied. As I have argued before, a supply-demand mismatch rather than demand weakness per se is the main reason for high unemployment. More stimuli would only trigger inflation and financial instability.

Stagflation in the 1970s discredited a generation of central bankers. They thought they could trade a bit more inflation for a lot more economic growth. Today's crisis will discredit a generation of central bankers who ignore asset inflation by sometimes trading asset inflation for a bit of economic growth. Those who play with fire often get burned, even when the arsonists don't.

Credit and deflation

Frank Shostak explains it in Does a Fall in Credit Lead to Deflation?
Note that when Joe lends his $100 to Bob via the bank, this means that Joe (via the intermediary) lends his money to Bob. On the maturity date, Bob transfers the money back to the bank and the bank in turn (after charging a fee) transfers the $100 plus interest to Joe. Observe that here money never disappears or is created; the original $100 is paid back to Joe.

Things are, however, quite different when Joe keeps the $100 in the bank warehouse or demand deposit. Remember that by keeping the money in a demand deposit, Joe is ready to employ it at any time he likes.

Now, if the bank lends Bob $50 by taking it from Joe's demand deposit, the bank will have created $50 of unbacked credit, out of "thin air." By lending $50 to Bob, the bank creates $50 of extra demand deposits. Thus, there is now $150 in demand deposits that are backed by only $100.

So in this sense, the lending here is without a lender. The intermediary, i.e., the bank, has created a mirage transaction without any proper lender. On the maturity date, when Bob repays the money to the bank, that money disappears. The money supply falls back to $100, dropping by 33%.

Hence an increase in credit out of thin air, all other things being equal, gives rise to an expansion in the money supply. A fall in credit out of thin air, all other things being equal, results in a contraction of the money supply.

So in this sense it is valid to argue that a fall in bank lending out of thin air contributes to the decline in the rate of growth of the money supply and thus to deflation.

Note that what matters here is not credit as such but credit that was created out of nothing. A fall in normal credit (i.e., credit that has an original lender) doesn't alter the money supply and hence has nothing to do with deflation. For instance, if Joe directly lent Bob his $100, when Bob repays the money we will have a fall in credit with no change in money supply.
He goes on to say that inflation of the money supply offset deflation in credit out of thin air, but that a slowing pace of money creation may lead to deflation as the decline in credit becomes the dominant factor.

Read the whole article for a good explanation of money supply.

Positive surprise for GDP

There goes that predictive model, at least based on the advance number.

2009-10-28

WaMu had two bank runs last year

Calculated Risk posts. Report: The WaMu "Bank Run" Rumors were True

Negative GDP surprise tomorrow?

Vox Day, author of the Return of the Great Depression, discusses credit fueled growth:
It is becoming increasingly obvious that equating economic growth with GDP is not a reasonable thing to do. Since 1973, nominal U.S. GDP growth has averaged 6.8 percent. So-called “real” GDP has averaged 3 percent, but this result is achieved by applying a different measure for inflation, known as the GDP deflator, than is normally used. The GDP deflator understates the changes in price levels that are reported for the rest of the economy by the Consumer Price Index. Because the CPI-U has averaged 4.6 percent growth in the last 37 years, real GDP growth has been closer to 2.2 percent than the three percent reported by the BEA. However, correcting for inflation does not account for another contributing factor which is nearly as significant, the expansion in commercial bank loans and leases. TOTLL, as this statistic tracked on a weekly basis by the Federal Reserve is known, accounts for about half of present U.S. GDP, and more significantly, accounts for more than 100 percent of GDP growth since 1973, as it has increased at an annual rate of 8.4 percent over the same period. The chart below shows this in graphic detail; all bank credit expansion (red) and GDP growth (green) that is above the blue line indicates a real increase that is not the result of a reduction in the value of the U.S. dollar.

The 2009 decline in TOTLL, which in inflation-adjusted terms now exceeds seven percent, is a strong indication that the debt-deleveraging process expected by those who anticipate large scale economic contraction has begun. The decline is unprecedented, as there has been no annual decline of more than one percent since the data was first tracked in 1947. This is why “getting the banks lending” has been the foremost priority of the monetary authorities in the USA, UK, and other countries. It should also be kept in mind that at $6.7 trillion, TOTLL only accounts for 12.7 percent of total U.S. market credit debt.
Click through to see the chart he created. It's worth checking out some other posts as well. Anyway, keeping that last sentence in the extreme forefront of my mind, I decided to plot GDP growth against TOTLL growth, for the past two years. Keep in mind that GDP is only through July, tomorrow will see the release of advance GDP for Q3. Here's the graph:
For the record, Yahoo! currently says the market expects 3.2% GDP growth and the Briefing Forecast is for 2.5% growth. And I see Goldman Sachs just cut its forecast from 3.0% to 2.7%

2009-10-27

Depew on debt crisis and deflation

Kevin Depew has another good article out today, on the debt crisis and the inflation/deflation debate. Five Things: The Debt Crisis Is Not a Conspiracy I suggest reading the whole thing, but here's number five, the conclusion:
5. Will it Work?

Federal Reserve Chairman Ben Bernanke has been even more explicit than Fisher, who was writing more than 70 years ago, in the types of policies he believes the Federal Reserve should pursue in attempting to reflate and, it is hoped, avoid a deflationary depression.

Unless we're intent on debating specific monetary transmission mechanisms and the intricacies of trying to force feed more credit into the system, we can leave the actual mechanics to the armchair central bankers. What's important from our standpoint is one thing: Will it work?

Looking at the market through the lens of complex systems theory, the problem is actually one of time. On short-term time scales, the Fed and Treasury think they are rock stars, "The Committee to Save the World"... indeed. But on longer-term time scales we know they have simply made the problem worse. The question, then, becomes: How much longer?

Going back to Fisher's Debt-Deflation Theory, the dollar is the real canary in the coalmine because during aggressive debt deflation the value of the dollar "swells," to use Fisher's term. And I suppose that's what keeps me up at night. When I look at the dollar with long-term DeMark indicator studies applied, they're pointing to a high probability of multi-scale alignment by the first quarter of 2010 and a major bottom for the US dollar. Currently, there's a weekly TD Buy Setup that has been perfected, so the next four weeks for the US dollar look higher, after which we need one more move lower, preferably below 72.509, for a major bottom.

If the dollar does bottom, then it will become quite clear that reflation attempts have failed, and then we face the heart of the debt deflation where the swelling of the dollar competes simultaneously with debt destruction and where debt levels increase in dollar terms faster than they can be paid down.

Make no mistake, debt-deflation will conclude with an inevitable sharp rise in inflation as monetary policies designed to battle deflation remain in place even as excessive debt is eventually destroyed, but the outlook for the dollar says that isn't today's business. Be careful which scenario you're preparing for because those who anticipate inflation before the debt-deflation has fully run its course will find themselves digging out of a deep and painful hole.
The scenario described is the one I see playing out, as of now. My opinion could change, and I won't remain stubborn in the face of a market moving against me, but I expect another major deflationary period and then, when the dust is settled, the Fed's policies will lead to much higher inflation, but by that time no one will believe it is possible.

OTB Portfolio Update 2009/10/27

Down 2.21% today, led by a 6% drop in AIG.
Overall, down 22.45% since inception, led to the downside by the 42% decline in Fannie Mae (FNM).

Crash Comparison Update 2009/10/27


Market fractals losing juice


Is there anything to this? It appears the energy in this rally is dissipating.

And now for the real economy

My previous post discussed the simulacra, the simulation of the real economy. Ambrose Evans-Pritchard picks up on Jim Rogers' agricultural theme and runs with it: Food will never be so cheap again
Barack Obama has not reversed the Bush policy on biofuels, despite food riots in a string of poor countries last year and calls for a moratorium. The subsidy of 45 cents per gallon remains.

The motive is strategic. America is weaning itself off imported energy at breakneck speed. It will not again be held hostage by oil demagogues, or humiliated by states that cannot feed themselves. Those Beijing students who laughed at US Treasury Secretary Tim Geithner may not enjoy the last laugh. The US is the agricultural superpower. Foes will discover why that matters.

The world population is adding "another Britain" every year. This will continue until mid-century. By then we will have an extra 2.4bn mouths to feed.
China and Southeast Asia are switching to animal-protein diets as they grow wealthy, as the Koreans did before them. It takes roughly 3-5kgs of animal feed from grains to produce 1kg of meat.

A report by Standard Chartered, The End of Cheap Food, said North Africa and the Middle East have already hit the buffers. The region imports 71pc of its rice and 58pc of its corn. It lacks water to boost output. The population is growing fast. It will have to import, and cross fingers.

The UN says global farm yields must rise 77pc, which means redoubling Norman Borlaug's "green revolution". It will not be easy. China's trend growth in crops yields has slipped from 3.1pc a year in the early 1960s to 0.9pc over the last decade

"We've all heard the stark anecdotes: precious topsoil weakened by over-farming, dust clouds darkening the Asian skies, parched land becoming desert and rivers running dry," said Mr Grice.
Later in the article, he lists some stocks:
Mr Grice remains an optimist, believing that human ingenuity will rescue us. You can trade the "Ag" rally by investing in exchange traded funds (ETFs), but this amounts to speculation on food. There are ancient taboos against this practice.

Or you can invest in the bio-tech, fertiliser, and land services companies that will both make money and help to solve the problem. Monsanto, Syngenta, and Potash are popular, but trade at high price to book values. Golden Agri-Resources, Yara, Agrium, and Bunge are at better multiples.

Kingsmill Bond at Moscow's Troika Dialog suggests the Baltic company Trigon Agri as a way to play the catch-up story in the Eurasian steppe. He likes sunflower processor Kernel, grain group Razgulay, and fertiliser firm Uralkali.
There are some agricultural stocks listed in Hong Kong that look attractive as well, and there's always the option of farmland itself.

Support for Prechter & Deflation

Check out this article by Adrian Ash: Gold's Big Secret - No One's Actually Buying
No one's actually Buying Gold right now. Not the physical metal (and not the exchange-traded trusts either), not at anything like the rate they were buying a year or six months ago. Instead, this rush differs in kind from the surge of autumn '07 or the panic of late '08. Because it's a rush almost solely in leverage.

Hedge funds and prop desks have been buying Gold Futures and options with virtually free finance. Hence the surge in stocks, bonds and commodities too, of course. Because anything traded on margin looks a safe bet when finance costs you 1% or less per year. And especially when your major funding currency – the long mighty but now tired and emotional Dollar – is universally condemned to fall further.

John Hathaway of Tocqueville Asset Management called a similar rush into gold a case of mistaken identity back in late 2006. "Perhaps hundreds of billions of new institutional money has flowed into the commodity sector," he wrote. "Gold was caught in the cross fire..."

Here in late 2009, however, the institutional money is borrowed, not cash, and the prime brokers (formerly known as investment banks) are doing the lending with government-guaranteed finance. Since the end of August, open interest in Comex gold contracts has swollen by more than one third...the fastest jump since late 2007, back when the Fed began slashing rates, oil vaulted towards $150 per barrel, and the run on the banks really got started.
There's a difference between inflation in assets and inflation in physical assets. The lack of buying signals that the inflation scenario has yet to take hold, and until it does, the threat of deflation remains. Asset inflation, as we saw in 2008, can be wiped out in a matter of months, taking the spillover inflation in real goods and services with it.

I classify cash as a physical asset as well. Note that most of the stimulus is taking place in the form of digital money, not physical money. There hasn't been a huge wave of money printing that will exist no matter what the economy and financial markets do. The money that has been created can and will be destroyed by a deflationary wave.

Kevin Depew has written insightful articles about the simulacra, such as Five Things You Need to Know: The Crisis of the Real, based on Simulacra and Simulation, by Jean Baudrillard. There are four stages in the process of simulacra:
1) Era of the Original
2) Era of the Counterfeit
3) Era of the Produced, Mechanical Copy
4) Era of the Third Order of Simulacra, where the reproduction displaces the original
In the case of money, the real is gold or precious metals. Then comes the counterfeit, the gold notes. Then comes the produced, mechanical copy, fiat currency. In the final stage, the copy displaces the original.

In the digital age, currency traders swap digital conceptions of pieces of paper that do not even exist. As Depew describes it in another article on the topic,Five Things You Need to Know: New Home Sales, (en)Durable Goods Orders, Breadth, The Price Simulacra, Socionomics of Camouflage in the final stage, the simulacra:
has no relation to any reality whatsoever; it is its own pure simulacrum, a copy without a model (perhaps this is where we find ourselves today given the decoupling of paper money and the continuous supply of liquidity and credit to market participants with no underlying attachment other than the promise of a central bank).
To bring it home to the gold article, what are the hedge funds and institutions swapping? Most futures contracts are not delivered, they are settled and new contracts are opened. The central bank pushed a button on a computer and made some 1s and 0s, and that money, which bears no relation to gold or even physical paper dollars, is then swapped between financial institutions who are placing bets on the movement of the price of gold as measured in those 1s and 0s.

People are not buying physical gold, they are buying copies of gold. They are not investing in businesses, they are trading copies of those businesses (stocks). Even GDP is itself a shadow of the real economy.
Due to the way GDP is measured, there are a variety of ways that GDP can increase and perceived economic growth can show up in the statistics without an improvement in the labor market. As I explained in a previous column, imports count against GDP, so if Americans stopped buying imported Mercedes and Nintendos for some reason, this would be reported as incredible economic growth and a vast increase in societal wealth. The reality, of course, is that a complete cessation of import buying would indicate that something has gone seriously wrong with the American economy and the American consumer's ability to purchase goods and services.
Barry Ritholtz has the figures for the second quarter of 2009:
According to Bloomberg, Decreasing Exports subtracted 0.76% from GDP. At the same time, falling Imports added 2.14%. Net contribution of the fact that Imports are free falling twice as fast as Exports are = 1.38%.

If they were both falling at the same rate — if Europe and Asia’s consumers were hurting as much as ours – GDP would have been -2.38%.

If it seems weird to you that the ratio of domestic and overseas shrinking economies and their reduced consumption somehow turned into a positive GDP contributor, well, welcome to the wonderful world of government statistics.

So, a drop in exports:

Plus a bigger drop in imports:

Leads to a smaller trade deficit:

Which equals, in terms of GDP, a growing economy.

Update: I can best sum up my thinking as follows: there is simulated inflation in the simulated economy.

Update 2: Bill Gross' November 2009 commentary is out. These words popped out, given what I wrote earlier today:
Let me start out by summarizing a long-standing PIMCO thesis: The U.S. and most other G-7 economies have been significantly and artificially influenced by asset price appreciation for decades. Stock and home prices went up – then consumers liquefied and spent the capital gains either by borrowing against them or selling outright. Growth, in other words, was influenced on the upside by leverage, securitization, and the belief that wealth creation was a function of asset appreciation as opposed to the production of goods and services. American and other similarly addicted global citizens long ago learned to focus on markets as opposed to the economic foundation behind them.[emphasis mine] How many TV shots have you seen of people on the Times Square Jumbotron applauding the announcement of the latest GDP growth numbers or job creation? None, of course, but we see daily opening and closing market crescendos of jubilant capitalists on the NYSE and NASDAQ cheering the movement of markets – either up or down. My point: Asset prices are embedded not only in our psyche, but the actual growth rate of our economy. If they don’t go up – economies don’t do well, and when they go down, the economy can be horrid.
Read the whole thing.

2009-10-26

Socionomics Watch—Mini Skirts?

The rise and hemlines are a clear socionomic signal, but this may simply be the cultural collapse of Western civilization. Women staying in mini-skirts for longer: report
British women are happy nowadays to wear mini-skirts up until the age of 40, according to research by Debenhams department store.

Just 20 years ago, few women would dare to wear a mini-skirt after the age of 33, the store said.

"It shows that women now have an increasing confidence in their bodies and are happy to dress accordingly," it added in a statement.

"If this trend continues, there's no doubt that, within the next decade, women in their mid 40s and early 50s will rightly regard a mini-skirt as an essential part of their everyday wardrobe."
There's even an age theory:
Skirts get shorter between the ages of 16 and 19, reducing in size from 46 to 36 cm before reaching their shortest, a mere 32 cm, at the age of 23.

Skirt length increases slightly between the ages of 23 and 27, rising to 37 cm, possibly due to girls being in their first stable relationship, with no desire to attract attention, the store said.

However, it found short skirts suddenly zoom in popularity between the ages of 27 and 34, as those early relationships break down, and new relationships are formed.

The move into longer skirts begins irreversibly at 40 years old, when 46-cm skirts, still slightly above the knee are the norm.

From then on, skirt length increases dramatically, falling below the knee for the very first time since school days at the age of 42

Another step to full convertibililty for the yuan

Shanghai eyes free exchange of yuan and New Taiwan dollar
Shanghai has applied to regulators to launch a free exchange between the yuan and the New Taiwan dollar to enhance financial cooperation, the head of the Shanghai Financial Service Office said Sunday.

"With growing trade between Shanghai and Taiwan in recent years, we hope that a free exchange between the yuan and the New Taiwan dollar can be conducted in Shanghai as a trial," said Fang Xinghai at the 6th China International Finance Forum.

"We have applied to the regulators and expect it will be approved soon," Fang said at the two-day forum which ended Sunday.

Shanghai has recently launched a cross-border currency clearing system and Fang expects that it will be extended to Taiwan soon.

Kremlin Wars from Stratfor

Stratfor has put out a series on Russia.
Kremlin Wars Intro
Kremlin Wars Part 2
Kremlin Wars Part 3
Kremlin Wars Part 4 (Out on October 27)
Kremlin Wars Part 5 (Out on October 28)

After reading parts one through three, you'll understand this news item: Kremlin warns against wrecking Russia with democracy
Kremlin Deputy Chief of Staff Vladislav Surkov said it was clear Russia was falling behind in many areas of economic development and that the country could not simply continue being a "resource power."

But in answer to calls from opponents for democratic reforms to liberalize the political system built under former President Vladimir Putin, Surkov warned that the resulting instability could rip Russia apart.

"Even now when power is rather consolidated and ordered, many projects are very slow and difficult," Surkov was quoted as saying by the Itogi weekly magazine.

"If we add any sort of political instability to that then our development would simply be paralyzed. There would be a lot of demagoguery, a lot of empty talk, a lot of lobbying and ripping Russia to pieces, but no development."

As the Kremlin's point man on domestic politics, Surkov rarely speaks in public.

Crash Comparison Update 2009/10/26

The comparison of 2009 and 1930 from their initial crash bottoms has broken down, but the September 2009 and October 2009 comparison remains robust. If it sticks to the model, the market will rebound tomorrow and then fall for the rest of the week. This week's wildcard data point is 3rd quarter advance GDP, out on Thursday.

Socionomics Watch—Hairy Crabs

A good indicator of social mood is the appearance of conspicuous consumption in foods, such as $100 hamburgers. In China, there's a food that doesn't need to be souped up and that fluctuates with the economy, hairy crabs (大闸蟹). (The best crabs come from Yang Cheng Lake north of Suzhou and not far from Shanghai, spawning the creation of "washed" crabs (洗澡蟹), where crabs from a different location are placed in the lake and then sold for a much higher price. To combat counterfeiting, the crabs have an ID number laser etched onto the shell.)

SCMP reports that hairy crab sales are up in Better times see diners willing to shell out on hairy crabs again
In a city obsessed with the stock market, the taste of the crabs is examined as closely as price and earnings ratios, with local folklore attributing a connection. During a market-rally year, the crab quality is generally not good, but when the market is troubled, the crabs are top-notch.

The collapse of US investment bank Lehman Brothers at the start of the crab season last year dealt a blow to consumption. Sales dropped by 20 per cent, said Cheung Wing-kai, manager of the Hong Kong Lao Shanghai Restaurant, one of the city's most popular crab restaurants. "The resulting crash in the stock market meant many customers cancelled their tables or ordered cheaper crabs."

With the economy on the mend this year, people are once again turning to crabs. Cheung says sales are back to the volumes seen in the boom year of 2007.
I see my hairy crab dinner in Shanghai last November was well timed! The story here is that social mood is positive and people are spending on status foods once again.

SMCP also has a video:

2009-10-23

Tracking the Chinese real estate bubble

A link to this site landed in my inbox: Beijing Anjuke. It has rents and apartment prices all over Beijing. Google Life is another good site which has many Chinese cities. You can check out rents or prices for new and existing apartments. Here are Google translate links for Anjuke and Google Life for you lazy illiterates out there.

One thing that pops out is that you can rent a place for very reasonable prices, but buying is very expensive—a situation that has lasted at least as long as decade.

2009-10-22

Socionomics Watch—Wolfman

On page 10 of Pioneering Studies in Socionomics, Prechter is in the midst of discussing horror movies and bear markets. After mentioning the string of hits in the early 1930s, he goes on to say:
Ironically, Hollywood tried to introduce a new monster in 1935 during a bull market, but Werewolf of London was a flop. When film makers tried again in 1941, in the depths of a bear market, The Wolf Man was a smash hit.
The Wolfman
In theaters: February 12, 2010.
Inspired by the classic Universal film that launched a legacy of horror, The Wolfman brings the myth of a cursed man back to its iconic origins. Oscar® winner Benicio Del Toro stars as Lawrence Talbot, a haunted nobleman lured back to his family estate after his brother vanishes. Reunited with his estranged father (Oscar® winner Anthony Hopkins), Talbot sets out to find his brother…and discovers a horrifying destiny for himself.

2009-10-21

Let's get contrarian

Robert Prechter is probably the most famous dollar bull. Now let's add Ambrose Evans-Pritchard to the list. He has his own arguments in: Dollar hegemony for another century
Let me stick my neck out.

The dollar will still be the world’s dominant reserve currency in 2030, sharing a degree of leadership in uneasy condominium with the Chinese yuan. It will then regain much of its hegemonic status as the 21st century unfolds. It may indeed end the century even stronger than it was at the start.

The aging crisis in Asia — and indeed the outright demographic implosion in Japan and China, not to mention China’s water crisis — will soon be obvious to everybody. Talk of Oriental supremacy will start to sound overblown at first, and then preposterous.
He cites European and Asian demographics, and the currently weak U.S. dollar. He does add the caveat that Obama and the Dems could totally destroy a strong economic recovery that may be building in the United States with their reckless spending.

One thing is that all the notes he hits are facts. When the dollar recovers, suddenly it will be obvious that Europe and Japan are in worse shape, that China's yuan is not ready to take on the U.S. dollar, etc.

For the opposite view, see Niall Ferguson's interviews.

Crash Comparison 2009/10/21


OTB Portfolio Update 2009/10/21

Fannie (FNM) and Freddie (FRE) had big rebounds and pulled the portfolio into positive territory, up 1.57% on the day. OTB Portfolio down 14.64% since inception.

The Fed's Mexican Standoff

Mish Shedlock highlights a Carolyn Baum article in Fed Sponsored Feedback Loops and the Fed Uncertainty Principle Revisited. Here's an excerpt from Baum's article, Bernanke Frets Over Sherlock Holmes’s Next Stop.
If I have this right, we’re waiting for the Fed to do or say something to help us decide whether we should hoard cash (because we expect the dollar to buy more tomorrow if prices are falling) or buy and hoard hard goods (if we expect inflation to diminish the dollar’s purchasing power).

The Fed, in turn, is waiting for us to do something so it can decide what to do: either raise the volume on its anti- inflation rhetoric with talk of exit strategies and price stability; or talk softly to allay fears of premature rate increases to keep market rates from rising.

This is hard enough for your average MBA graduate on Wall Street to understand. And the Fed expects the average Joe on the auto-assembly or unemployment line to have a well-formulated view of inflation expectations?

It’s not that people aren’t rational; they are. It’s that they lack perfect information.
Baum's main point is that the Fed creates inflation. Period. Full stop. The public cannot create inflation because the public doesn't control the money supply. (There are some who believe money creation by the Fed backfills the credit creation by private firms, which widens this debate, but I'll ignore that for now because the Fed can always refuse to print money.)

Baum focuses on the public view of inflation, who have a tenuous at best grasp of inflation and the current inflation rate. I'm more interested in the financial markets view. The smart money is watching the Fed to see if it will inflate or deflate, while the Fed is watching them to see if they hoard dollars or hoard assets. It results in a Mexican standoff with both sides waiting for the other to move.

In any event, I don't see how the Fed can pursue a "sane" policy of inflation with everyone watching, since it would drive up commodity prices and interest rates beyond their "equilibrium" as it created new bubbles, which would then lead to another crash as the Fed tried to tame "inflation expectations", or simply by the higher prices acting as a tax on consumers, as we saw with the oil bubble in 2008.

Socionomics Watch—Political Discontent

Check out the Rasmussen poll numbers:
he Rasmussen Reports daily Presidential Tracking Poll for Wednesday shows that 27% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as President. Forty percent (40%) Strongly Disapprove giving Obama a Presidential Approval Index rating of -13. That’s just a point above the lowest level ever recorded for this President. It’s also the sixth straight day in negative double digits, matching the longest such streak.

Just 31% of voters believe that Congress has a good understanding of the health care proposal.

Thirty-nine percent (39%) of Republicans have a favorable opinion of their party’s national chairman, Michael Steele.

The Presidential Approval Index is calculated by subtracting the number who Strongly Disapprove from the number who Strongly Approve.

Overall, 47% of voters say they at least somewhat approve of the President's performance. Fifty-three percent (53%) disapprove.
Neither party has attempted to tap voter anger because they do not agree with the policy implications. This suggests an outsider has a shot at the presidency in 2012. And if Prechter is right on his wave calls, these numbers will look awesomely good in a year or two.

2009-10-20

OTB Portfolio Update 2009/10/20

I should have updated the Obama-Turbo-Bernanke special in the past few days because there was some great action in Fannie (FNM) and Freddie (FRE). They're both down close to 40% now, since inception. AIG remains on top, the only fund in positive territory, with a 7% gain since inception.

Today, the portfolio lost 2.71%, and is down 15.96% since inception.

Crash Comparison Update 2009/10/20


Niall Ferguson on the American Empire & US$



Brazil joins Southeast Asia in dollar support

Two weeks ago, Southeast Asian nations stepped up their dollar support. Now Brazil is trying to stop the rise of its currency:
Forex Effect From Brazil Tax Move Could Prove Short-Lived
Monday night, Finance Minister Guido Mantega announced a 2% tax on foreign portfolio investments into fixed-income and equities accounts.

Mr. Mantega stated frankly that the purpose of the move was to support the U.S. dollar against the surging Brazilian currency, the real. A strong real, he said, was "threatening local companies."

That threat comes partly from cheap imports, which soak up market share among Brazilian consumers, and partly from exports made less competitive by a strong local currency.
These efforts will fail because the central banks cannot control the market, no matter what they believe. The real story is that for all the inevitability of a weaker dollar, there is a lot of dollar support. What are the chances of a miscalculation?

Also, with respect to currencies, please see this David Einhorn speech to the Value Investing Congress. ZeroHedge plucked out several gems, but the one below is the most important and why I believe precious metals and hard assets are the best choice for anyone concerned about a weak dollar:

The failure of Lehman meant that barring extraordinary measures, Merrill Lynch, Morgan Stanley and Goldman Sachs would have failed as the credit market realized that if the government were willing to permit failures, then the cost of financing such institutions needed to be re-priced so as to invalidate their business models.

I believe there is a real possibility that the collapse of any of the major currencies could have a similar domino effect on re-assessing the credit risk of the other fiat currencies run by countries with structural deficits and large, unfunded commitments to aging populations.

Einhorn Vic 2009 Speech

Another view of the rally

Here's the SPDR S&P 500 Index (SPY) divided by PowerShares DB U.S. Dollar Bearish (UDN)

Here's the SPY divided by CurrencyShares Australian Dollar (FXA)

Here's the SPY divided WisdomTree Emerging Market Currency (CEW). Much shorter time-frame because CEW issued in the spring.

Here's the SPY divided by SPDR Gold Shares (GLD). Notice the weak trendline.

2009-10-16

Crash Comparison Update 2009/10/16



Divergences all over.

幸运眷顾中国,但真实吗?谢国忠

Andy Xie's latest: Fortune is favouring China, but is it due for a reality check?
The United States had 1929, Japan 1989 and south-east Asia 1997. Will China face a similar moment of reckoning a few years from now?


The question is crucial, not just for those investing in Asia today but for the wider global market. For as investors around the world reel from the recent financial crisis, many have clung to the idea of a Chinese boom as the one bright spot of hope in an otherwise grim world. The trouble is that history suggests that much of this optimism may be misplaced.


Financial markets have a way of working themselves into a frenzy during rapid economic development, which ends up leading to disaster. It is the ultimate testimony to the gross inefficiency of markets. The problem is the unique mix of extreme optimism and rampant liquidity that occurs during periods of rapid economic development.


Economic development, especially in a large country such as China, generates exceptional optimism for many reasons. Nothing brings out the animal spirits in humans like watching the economic pie expanding. And it is natural to buy risk assets such as stocks to express one’s optimism over the future. The problem is that market competition tends to depress capital returns and give the fruits of economic development to workers and consumers rather than investors. High asset prices incentivize companies to over-invest, which depresses returns on capital. This is why investors tend to do poorly during periods of rapid economic growth.


A low income base and favourable demographics help promote successful economic development. Both tend to lead to excess liquidity due to a high savings rate on incremental income growth. When a population is urbanising, even though its productivity is shifting from the agricultural to the industrial level, consumption habits remain rural – that is, anything beyond necessities is viewed as luxury and is minimised. The widening gap between the labour productivity increase and the consumption preference leads to the excess liquidity that feeds bubbles.


China's one-child policy brings the ultimate demographic dividend but probably makes the country the most bubble-prone in modern times. The situation is made worse by the revenue dependency of local governments on the property market. Local government officials, who change every five years or so, have strong incentives to juice up the property market to maximise their revenues. This political incentive sows the seed for a great property bubble.


Similarly, China's stock market will remain overvalued, although it will deflate from time to time during panics and temporary liquidity shortages. The combination of low returns on capital and high share prices means businesses turn to the stock market rather than to their customers for profit.


But when businesses make profits from, rather than for, the stock market, it becomes a negative sum game. It needs continuing liquidity inflows to sustain it. This is why high growth and a high savings rate are vital.


On the other hand, such a market essentially subsidises capital formation. The capital subsidy leads to overcapacity and low returns on capital. This is why poor profitability, high asset prices and high economic growth rates can coexist. Indeed, they must exist together.


China's economic development is undoubtedly going to be the most important economic event for the next decade or two. But the semi-permanent bubble situation makes it extremely difficult for financial investors to participate in this story. “Buy and hold” simply won’t work. Value investing doesn’t work because value investors base their decisions on price/earnings ratios and price/book value ratios falling below certain levels.


Chinese stocks never get there. If you are Warren Buffett, you can create your own bubble. He recently bought a stake in BYD, an aspiring maker of electric cars. The stock has since risen eight times. If you are not Warren Buffett, I suggest “buy low, sell high”. The problem is working out what is high and what is low.


The day of reckoning will come when the high economic growth rate finally falters. This could happen either when the favourable demographic trend worsens or urbanisation ends. When either or both occurs, liquidity or savings do not grow any more. At that point, the stock market cannot be subsidised any more.


China’s final day of reckoning is probably 10 years away.


By that time, half of China’s babyboomers who were born between 1950 and 1978 will have retired. And the Chinese urbanisation rate will be OVER 70%. The good news is that China will be a developed country by then. The bad news is that there will be no cheap money for supporting overvalued asset prices any more.
The takeaway is that investors won't be able to buy and hold, but 10 years is plenty of time to make money.

2009-10-15

U.S. Recovery or Reserve Currency, Choose One

I hadn't written this out into a blogpost, but I notice Martin Wolf and apparently Fred Bergsten agree with my conclusion, which is that the United States cannot recover and maintain its reserve currency status.
The rumours of the dollar's death are much exaggerated
Most analysts assume that the US fiscal position can be determined independently of decisions taken elsewhere. But if the US private sector were to deleverage over a long period (and so spend substantially less than its income), while the rest of the world wanted to accumulate dollar-denominated assets as reserves, the US government would naturally emerge as the borrower of last resort. A corollary of the Triffin dilemma is that the international role of the dollar could make it hard for the US to manage its fiscal affairs successfully, even if it wanted to do so.

I arrive, by a somewhat different route, at the same conclusion as Mr Bergsten: the global role of the dollar is not in the interests of the US. The case for moving to a different system is very strong. This is not because the dollar's role is now endangered. It is rather because it impairs domestic and global stability. The time for alternatives is now.
U.S. reserve currency status led to the imbalances that helped create and exacerbate the financial crisis. The U.S. cannot restructure until it gives up reserve currency status, but the political implications are huge and Washington doesn't want to give up its power.

2009-10-14

Crash Comparison Update 2009/10/14


Socionomics Watch—Anger

Rage at Government for Doing Too Much and Not Enough Left and right always disagree about what the government should do, but now both of them hate government and business. Voters are still ignorant though, for instance they are angry about the deficit, but also oppose Medicare cuts or want government-run healthcare.

How about a September 2009 October 2009 Comparison


I noticed the day-by-day was repeating.

Crash Comparison Update 2009/10/13

October 13 was the initial target date. This chart is now exhausted. I'll keep updating it for comparison though.

2009-10-12

Baosteel Deflation—宝钢通货紧缩

In September, Baosteel cut October prices. (宝钢下调10月钢价)
In October, Baosteel is cutting November prices:
Baosteel Group, the parent of Baoshan Iron & Steel Co., cut its prices of steel products for November delivery by 250 to 500 yuan per ton from October, a company official told Caijing on Oct. 12.

The country's biggest steelmaker cut medium steel plate prices by 400 yuan per ton, and cut the price of cold and hot rolled steel by 400 to 500 yuan a ton, the official said.

The special 100 to 300 yuan discounts on hot and cold steel plate for October orders was extended.
宝钢11月碳钢出厂价格继续下调
10月10日,宝钢出台钢产品11月新价格政策。在10月价格基础上,中厚板价格普遍下调400元/吨;热轧品种中普碳钢价格下调400元/吨,机械用钢等品种钢价格下调500元/吨,增加优惠100元/吨;酸洗价格下调250元/吨,增加优惠300元/吨;冷轧及热镀锌的价格普遍下调400元/吨,同时分别增加优惠300元/吨和200元/吨。其中,普碳钢和酸洗的价格是继10月下调之后继续深调。
通货紧缩.

2009-10-09

Who wants the dollar to decline?

Not the Asian tigers:
The mainly south-east Asian countries have been spurred to defend the competitiveness of their currencies by China’s decision to in effect re-peg the renminbi to the dollar since July last year.

Simon Derrick, at Bank of New York Mellon in London, said: “Other Asian central banks outside China are naturally looking to aggressively defend their competitive edge against undesirable currency strength as the dollar weakens.”

2009-10-08

Sooner & larger

FHA Shortfall Seen at $54 Billion May Lead to Bailout
“It appears destined for a taxpayer bailout in the next 24 to 36 months,” consultant Edward Pinto said in testimony prepared for a House committee hearing in Washington today. Pinto was the chief credit officer from 1987 to 1989 for Fannie Mae, the mortgage-finance company that is now government-run.
My hunch is that the bailout will be needed sooner, and the final amount will be larger.

2009-10-07

OTB Portfolio Update 2009/10/07

Up 0.32% today to $975.40, down 2.46% since inception.
AIG and BAC gained over 2% today.
Since inception, AIG is up 21.78%, BAC is down 2.47%, C is up 0.22%, FNM is down 20.00% and FRE is down 11.82%.

Crash Comparison Update 2009/10/07

At this point, the chart is becoming a curiosity. There's still a chance of a dip, but it becomes increasingly unlikely each day.

The cost of reserve currency status

While the U.S. government enjoys seigniorage privileges thanks to the U.S. dollar's status of reserve currency, the American people do not derive much benefit. It is possible for Americans to benefit, but since the government's main objectives are welfare, warfare, and bailing out bankers, the people end up paying the bill for the extra power that accrues to USG through the printing press.

Andrew Sheng discusses some of the problems of reserve currency status in Prestige, Pitfalls and Perils of a Reserve Currency
There are also disadvantages. A country that allows its national currency to become a reserve currency is also letting foreigners hold large amounts, and letting the currency move freely in and out. Hence, one pre-condition for any reserve currency is the ability of an issuing central bank to control the currency's value through appropriate monetary policy. This implies a stable exchange rate as well as low level of inflation.

This is precisely the problem facing the U.S. dollar. It's called the Triffin Dilemma – a tension between national monetary policy and global monetary policy. In 1998, when the U.S. Federal Reserve realized the world was plunging into a global crisis, it lowered interest rates and reflated not only the U.S. economy, but also the global economy. The United States could do that because it was fundamentally strong and U.S. consumption was the real engine of global growth.

But constant deficits add up to excessive borrowing, which is unsustainable. The dilemma is that, in a world of freely flowing capital, any central bank that raises interest rates to control domestic borrowing will invite a ton of hot capital, creating asset bubbles. A country that maintains flexible exchange rates will not only have exchange rate appreciation that encourages imports, but also worsen a current account deficit funded by short-term capital inflows.

In other words, the Triffin Dilemma imposes high costs on a reserve currency country, which must run a deficit to increase global money supply when the world demands greater liquidity. But if a reserve country runs a deficit that's too large, a financial crisis is inevitable. There is no free lunch.

Can we resolve the problem by creating a global central bank and a global super-regulator? The answer is no. If we have global monetary policy, some regions and sectors will be winners and some will be losers. Thus, a pre-condition for a global central bank is a global fiscal mechanism that can tax winning sectors to compensate losing sectors. Without such a fiscal compensatory mechanism, no sovereign country will be willing to cede its monetary policy to a global central bank without assurance of at least some fiscal assistance. The euro can work with the European Central Bank because such a fiscal mechanism exists within the European Union.
Today, many people worry that the United States will lose its reserve currency status. This misses several crucial points:

1. No other nation wants reserve currency status. Reserve currency status benefits highly financial economies or nations that prefer political power to broad economic health. The U.S., as the world's wealthiest large nation, could afford to sacrifice some economic gains for political gains. What nation can afford political gains at the expense of their economy? What country wants their currency to appreciate against the U.S. dollar? What country wants to run large trade or capital deficits with the United States?

Think of it this way. The reason why the U.S. may lose its reserve currency status is because the value of the dollar is no longer stable. Whatever country or countries choose to become the new reserve currency, they cannot rapidly depreciate their currency against the dollar. Furthermore, if the U.S. dollar is strong, then it will once again become the reserve currency. The U.S. dollar loses reserve currency status is if it is weak and stays that way, or at least stays volatile.

2. The U.S. government wants reserve currency status. Reserve currency allows a nation to run a large deficit and aids in warfare especially. Crates of U.S. dollars are sent to Afghanistan, not crates of euros or yen. As much as the government's policy hurts average Americans, the politicians love the power it accords them.

3. The reserve currency must be fungible. At the end of the day, American dollars have value because Americans sell things people want to buy. Lately, that's mostly Treasury bonds, stocks, and real estate.

Reserve status was hurt when the Americans told the Chinese there are some companies they are not allowed to buy. Are the Europeans, Japanese, Russians or Chinese more or less open with their economy?

4. The end of reserve currency status will be decided by Americans, not foreigners. All the current plans put forth will fail, though some sort of commodity based currency may be possible. But then again, weakening currency would then mean weakening against commodities, not the U.S. dollar.

A nation either has to step up to replace the U.S., or the U.S. must choose to step down.

Therefore, I expect that until China or India get to the point where they can replace the U.S. as the number one market for goods, services, real estate, debt, stocks, etc. (or at least most of those), we are unlikely to see foreigners want the U.S. dollar to lose reserve status.

The most logical outcome is that since the U.S. dollar needs to weaken, the rest of the world will weaken more. The chart to watch is not the U.S. dollar relative to other currencies, but U.S. dollar and other currencies relative to gold.

Please see Mish Shedlock's latest post, Gold And The Watched Pot Theory, for more reasons why the dollar is unlikely to drop against foreign currencies in the near future.

2009-10-06

I beat the street

Marketocracy has redesigned their site and stepped up their advertising a bit. They compared mutual funds managed by Marketocracy analysts to the top 50 mutual funds in 5 year performance. There appears to be hundreds of funds that beat the top 50 mutual funds, though I do not know how many have the same manager.

Two of my funds are in the top 50 for five year performance: SINOX and GDF. SINOX is ranked behind the number 17 mutual fund, and GDF is ranked behind the number 28 mutual fund.

Of note, all the non-Marketocracy mutual funds ahead of mine are natural resources, energy, or utilities. GDF is a diversified portfolio and SINOX invests in Chinese and China related stocks.

2009-10-03

Janet Tavakoli on deflation



6:30—"We're having a deflationary collapse. We've had rising loan defaults, falling tax revenues, large increases in government debt and huge monetization by the Fed. All of this has been trying to stem the problem that people don't have enough money to pay off their debt, their loans."

10:50—"If I just look at the global economy the way I look at a securitization, the cash has to be there to make the payments: where's the cash coming from, how much debt load do you have, liabilities. And when I do that analysis this is what I come up with. That our meltdown risk, now, today, is greater than it was in 2007."

H/T ZeroHedge

Christmas orders down

Xmas Season Orders Don't Bode Well for Chinese Exporters
The season for Christmas orders has passed, and Chinese exporters do not yet see the slightest trace of any rebound. The export market for Chinese goods next year shows no promise and is hovering near its lows...

The instability of textile and apparel orders appeared in the first several months, and then recurred in August, when year-on-year decline of growth continued, and month-on-month growth greatly declined after two consecutive months of rise. The outlook remains low, as export decline is greatly related to sluggish demand.
Bad news for the economy, but possibly good news if retailers carry less inventory.

2009-10-02

Socionomics Watch—Instant Starbucks

12 Instant Starbucks coffees for $9.95 It's a double dose of pessimism: its a lot cheaper, and you drink it at home.

Disclosure: I have puts on Starbucks.

2009-10-01

Bears need some help

America's Collapse: Cailfornia in the Coal Mine

Take it away, Bill Gross:
What is critical to recognize is that both California and the U.S., as well as numerous global lookalikes such as the U.K., Spain, and Eastern European invalids, are in a poor position to compete in a global economy where capitalism is morphing from its decades-long emphasis on finance and levered risk taking to a more conservative, regulated, production-oriented system advantaged by countries focusing on thrift and deferred gratification. The term “capitalism” itself speaks to “capital” – the accumulation of it and the eventual efficient employment of it – for growth in profits and real wages alike.

What California once had and is losing rapidly is its “capital”: unquestionably in its ongoing double-digit billion dollar deficits, but also in its crown jewel educational system that led to Silicon Valley miracles such as Hewlett Packard, Apple, Google, and countless other new age innovators. In addition, its human capital is beginning to exit as more people move out of the state than in. While the United States as a whole has yet to suffer that emigration indignity, the same cannot be said for foreign-born and U.S.-educated scientists and engineers who now choose to return to their homelands to seek opportunity. Lady Liberty’s extended hand offering sanctuary to other nations’ “tired, poor and huddled masses” may be limited to just that. The invigorated wind up elsewhere.
Wages are driven by capital accumulation. The welfare-warfare state excels at capital depletion.

As for emigration, it hasn't shown up in the numbers, but the social trend is there. Americans are heading to Europe and especially Asia, attracted by countries that are friendly to capital accumulation, investment, hard work and savings.