January Performance


Jan %


S&P 500 TR






上海 Shanghai




Entertain. Trends



Green Dragon



Best of Funds



Pharma & Dogs



China Fund



Software Security



Yield to Me



Catch a Falling Knife



It's been awhile since I hit some outperformance. Large cash and bond positions, plus long U.S. dollar, short euro, and inverse ETFs helped deliver a good month. Greece and China dominated the news in the second half of January and they may be the key to what the market does in February.

Crash Comparison 2010/01/29


PIGS get slaughtered

Greece is doing a number on the euro and that, plus a general decline in markets, has the eurozone ETF sinking below its 200-day moving average.

Here's the Athens composite index. Notice the 50-day has crossed the 200-day.

Here's iShares Spain (EWP) crashing through its 200-day. Spain is a bigger threat to Europe and the euro because it is a much larger economy than Greece and still has a housing bubble.

I have no idea what will happen next week, but it seems Greece is coming to a head. Once bailout rumors begin, they can only be stopped by very forceful action. Words will no longer satisfy the markets.

S&P 500 versus dollar index, euro and gold


OTB Portfolio Update 2010/01/28

It's been awhile since an update. The Obama-Turbo-Bernanke portfolio is down 33.5% since inception, with the bad performance led by 40% plus losses in Fannie (FNM) and Freddie (FRE). Bank of America (BAC) has the smallest loss, at 13%. AIG and Citigroup (C) have losses of 36% and 30%.


Claymore/AlphaShares China Small Cap (HAO) is oversold

We're either due for a bounce here, or things are about to get uglier.


U.S. Dollar Index breaks 200-day moving average

The dollar strengthened versus the euro and yen today, which helped the dollar index push through the 200-day moving average. Before that, the weaker euro was mostly supporting the index and the yen was a headwind.

The PowerShares DB USD Bearish Fund (UDN) broke below its 200-day, but UUP still has a way to go to break through its 200-day moving average on the upside. This move in the USD has also been "quiet", unlike the December move, with not a lot of media coverage or money flows into UUP. That suggests that it may reverse easily, or it may have much farther to go if money moves from the sidelines or shorts are forced to cover.

Andy Xie's Latest—Stagflation

Veering Towards Stagflation
The market psychology that the Chinese government is capping the downside for speculators has emboldened them to speculate in any asset class with a China angle. The assumption is not tested because the low Fed's interest rate continues to drive money out of dollars into China-related assets. In the speculative game around China today, the force is the Fed's zero interest rate. China is a story that the speculators can agree on and act upon. When inflation forces the Fed to raise the interest rate quickly, probably in 2012, this assumption will be tested. I suspect not many speculators will wait for the result.
Another good one from Andy. Central banks have to drain liquidity at some point, and if it happens due to high inflation, the drop will be severe.


Chinese buying gold

Chinese dig deep to join the gold rush
China is hardly the only culture to prize gold. But the council, which is funded by mining companies, has spotted something distinctive about its consumers. In India, Turkey and the Middle East, buyers have been deterred by the soaring cost of the metal. In China, however, it noted in a recent report, "the rising gold price is seen as a positive factor – consumers like to buy into a rising price".

That is why, even on a weekday morning, the shop floor at Caibai is rammed. On busy days, 10,000 people pass through its doors. This store is to gold what Marks & Spencer is to underwear in Britain: not the most glamorous source, nor the cheapest, but the tried and trusted favourite. In 2008, the company sold gold worth 3.5bn yuan (£316m). In the first 11 months of 2009, it sold 4.1bn yuan, and the lead up to the Chinese new year – which falls next month – is always a busy period.

Customers are picking over delicately wrought earrings and gazing covetously at huge, embellished collars. Increasing prosperity is enabling middle-class consumers to treat themselves; Liu Hongxia, leaving the store with a newly acquired bangle, recalls splashing her first pay packet on a ring for herself and earrings for her mother. No wonder she feels nostalgic – that was more than a decade ago. "Now the price is three times higher," she said ruefully.
No mention of what price the Chinese shoppers are paying for gold. I recall there being a considerable (double-digit) premium on gold bullion at the shops in China, whereas its possible to buy at low single-digit markups in the U.S.


Is this a correction or has sentiment shifted?

The markets may be undergoing a fundamental shift and it seems this move will be more than just a few days in the making.

First, there was the rally in the U.S. dollar in December, which was big, fast, and attracted a lot of assets as measured by PowerShares DB U.S. Dollar Bullish Fund (UUP). Although it didn’t signal a breakout for the greenback, it had the hallmarks of an initial move that needed confirmation.

Second, was the fact that the S&P 500 Index gained 0.8% during UUP’s 4.9% rally from December 1 to December 22. U.S. dollar up, U.S. stocks up, while iShares MSCI EAFE (EFA) fell 2.7% and iShares MSCI Emerging Markets (EEM) lost 2.3%. This was a reversal of the U.S. stock up, U.S. dollar down trend that was seen over the past few years.

In sum, U.S. dollar assets moved higher, especially for foreign investors. U.S. assets looked less attractive to Americans, but relatively superior to foreign assets.

The pattern is plain and partially repeated itself yesterday and today, as the U.S. dollar rallied sharply against the euro. U.S markets fell, but foreign markets fell harder due to the currency effects.

However, this isn’t an investable trend unless it has legs. It needs a sense of permanence, or at least a cyclical support. Say, a monetary tightening cycle in China and a Republican Senator from Massachusetts.

In addition to monetary tightening in China, the Chinese need a stronger yuan. And in case you missed it, the yuan was upwardly revalued against many currencies in the past two months—only you missed it if you were watching the U.S. dollar-Chinese yuan cross. A stronger U.S. dollar versus most currencies means China gets the benefit of a stronger currency without needing to revalue.

The effects of Scott Brown’s election are only beginning to be felt. The U.S. dollar popped versus the euro following his election and now President Obama is suddenly proposing tougher legislation on the banks. It also appears that instead of ramming through a huge increase in the U.S. government’s debt ceiling, President Obama will first appoint a “deficit reduction commission.”

The perception of the U.S. has been very, very negative for about a decade. Emerging markets, Europe and even Japan, were all viewed more positively. Now, the U.S. government is unexpectedly fighting deficits and getting tough on the banks. Europe and Japan, with worse demographics and similar or worse financial positions, are getting a fresh look and aren't as appealing. Emerging markets dependent on Chinese demand are suddenly in trouble because that country's debt binge may finally be ending.

I'm not 100% convinced that the U.S. dollar is in full on rally mode and the trends of 2009 are over, but a good case for that is building.


Is China's economy the world's biggest bubble?

Gerard Jackson lays out the evidence.
We are getting numerous reports of massive "over-investment" with factories still being built, steel production increasing and the continual expansion of capital goods even though there appears to be little "final demand". This view appears to be supported by largely vacant office blocks and rising vacancy rates in new shopping centres.

There is absolutely no such thing as general "over-investment". Although this fallacy was effectively dealt with nearly 200 years it still keeps being resurrected by people who simply have not done their homework. You cannot invest without saving*. It is that simple. The problem is that monetary expansion discoordinates production, causing too much investment in the higher stages of production at the expense of the lower stages. One symptom of discoordination is the emergence of bottlenecks. An inevitable event because of the heterogeneous nature of capital.

Another phenomenon frequently encountered but only explained by the Austrian school of economics is the apparent disappearance of investment opportunities. This now seems to be happening in China. But do they really dry up? No, is the answer. Monetary expansion distorts the pattern of production by raising the rate of return in some lines of production at the expense of others which then makes them unprofitable. This gives the false impression that the range of profitable opportunities are narrowing. (F. A. Hayek, in Profits, Interest and Investment, Augustus M. Kelley Publishers, 1975, pp. 34-35).

As a rule this will not present a problem if the monetary authorities terminate the boom in time. If it is allowed to continue then the only way to prevent these 'unprofitable' sectors from going under is to accelerate the money supply. Naturally, more and more credit will have to be injected into the economy to obtain the same level of output. In the meantime this easy money policy will be fuelling more and more speculation. This certainly seems to be the case in China. I was given figures showing that from 2008-2009 it took $1.5 of debt to produce $1 of GDP. A ratio of 1.5:1. The ratio is now $7 debt to yield $1 of GDP. This is definitely not good.
If those figures are true, then they are even worse than the U.S. figures before the bubble began bursting in 2007.

The impact of the Massachusetts special election

U.S. dollar rally has recommenced. Imagine if the Congress or Obama actually follow through and implement a sane fiscal policy, the upside could be incredible.

In other news, the RMB appreciated along with the U.S. dollar. This move lessens the probability of an appreciation of the RMB versus the USD.


谢国忠:2012泡沫破裂 目前维持区间波动

Here's an Andy Xie interview in Chinese. It contains a great comment on the Chinese real estate market worth considering: the market is at a stage where "the flour costs more than the bread" and real estate companies are relying on the stock market, not the property market.

2012泡沫破裂 目前维持区间波动






























Is China Trapped Inside A Property Bubble?

There's lots of great English language articles at Caixin, Hu Shuli's new venture. A lot of good truisms about China that one doesn't hear much in most coverage of the country. In this article, for instance, Andy Xie repeats a point also made by Xu Xiaonian about why land prices are high in China. Trapped Inside A Property Bubble
The biggest risk to China's economy is the desire to maintain past economic growth rates by maximizing investments in property -- an unproductive asset. It supports short-term growth by sacrificing long-term growth as capital's average productivity declines over time.

Local government performance in China is measured according to GDP and fiscal revenue. Property development can achieve high numbers for both quickly. This is why property's share in China's capital allocation is rapidly rising as prices appreciate and volumes increase. This is a politically driven bubble -- and it's already massive. Unless the trend is reversed by reforming incentives for local governments, China's property bubble could mushroom in two years from what's now a dangerous level. The burst could happen in 2012, endangering social and political stability.
Andy Xie also comments on Chinese consumption:
China has been trying to promote consumption for a decade. However, consumption's share of GDP has declined annually. The reason is the policy environment has been squeezing China's nascent middle class through high property and auto prices along with high income tax rates. China's disproportionate dependency on exports and withering consumption components are results of national policies, not the peculiar characteristics of Chinese households.
Although this article and the two linked to in my two previous posts contain some contradictions, the underlying themes of government interference in the economy are consistent. Intervention can be successful for a time, but eventually even the most intelligent and nimble central planner runs into problems.


Keynesianism doesn't work: China edition

Privatization Imperiled
Five years ago, I studied the GDPs in each province, municipality and administrative region using regression analysis. The goal was to find China's economic growth drivers. Results show provincial expenditures are not significantly related to GDP growth; that is, government spending cannot propel growth.

I took this as an empirical rejection of the effectiveness of Keynesian policies. The three drivers I found were: privatization of GDP growth (private sector output divided by total output); urbanization (urban population divided by total population); and globalization (exports divided by GDP). I refer to these as the "three-izations." As a general statistical rule, the higher these indicators, the higher a province's GDP growth rate.

The relationship between three-izations and China's GDP growth is not only statistically significant. There is also an inherently logical relationship that can be illustrated with a brief, historical overview.

Privatization began in 1978 with the Chinese peasants' household production contract system, which improved farm efficiency and laid a foundation for urbanization. In the 1980s, the privatization of town and village economies broke the shackles of the planned economy. Through entrepreneurship, new production organizations, improved management, research, and better labor distribution, private wealth expanded rapidly.

The private economy attracted rural labor, propelling urbanization. An urban economy is more efficient than agriculture, so urban workers earn more than rural counterparts. Higher incomes enlarged markets, attracting more peasants to cities.

China joined the World Trade Organization in 2001, extending optimization of resource allocation beyond national boundaries. As supply capacities increased and domestic markets became saturated, international markets opened at the right time to delay adjustment due to overcapacity. Globalization did more for China than provide a huge market: Foreign capital and special economic zones opened a window through which Chinese people and the government could experience the market economy and learn how markets can replace governments in resource allocation.

The three-izations made for rapid progress; the private economy's output went from basically zero to nearly half of overall GDP in 30 years. Urbanization rose to 46 percent from 18 percent, while imports and exports climbed to 60 percent from 10 percent of GDP.
The author is Xu Xiaonian, professor at the China Europe International Business School of Management. As the title suggests, there are potential pitfalls to China's economy due to the slowdown and even reversal of privatization and urbanization, the latter because the government keeps land prices high as a funding mechanism. Read the whole thing...and note the similarities to current United States economic policies.

Here come the Chinese consumers

Ha Jiming of chief economist for China International Capital Corp writes in:Wait -- Don't Tell Me Chinese Don't Consume
China's 20- to 30-year-olds currently make up more than one-sixth of the population, meaning China is entering a golden decade for weddings. This demographic characteristic will drive demand for real estate and wedding-related consumption, as well as consumption related to travel, food, beverages, clothing, automobiles and entertainment.

The propensity to consume among young adults in China is considerably higher than their parents. Moreover, parents often “subsidize” consumption during their children's marriage and early employment phases. Currently, the group with the highest propensity to save (those born before 1970) is transferring life savings to the generation with the highest propensity to consume. This inter-generational transfer of income will speed China's consumption growth over the next few years.
There several more points, but as the saying goes, demographics is destiny. He also writes what I've said about a stronger RMB:
Finally, exchange-rate appreciation would benefit consumers. This is not only because yuan appreciation would stimulate demand for imported consumer goods, but more importantly because it would force more enterprises to move from coastal to inland areas, promoting urbanization and increasing employment. People in the inland generally have lower incomes but high marginal propensity of consume.
China's propensity to save is due to policies which favor saving over consumption, namely an undervalued currency. The opposite effect was seen in the U.S., where an overvalued currency favored consumption.

Now the question is, which companies are best positioned to benefit from higher consumption?

Japan's debt burden

Ambrose Evans-Pritchard is looking for a psychic shift in Japan as the massive debt load goes from deflationary to inflationary. Psychologically speaking, the Japanese and the rest of the world expect low rates and continued deflation because that trend has existed for 20 years. Socionomically speaking, Japan's social mood is very low, with the Nikkei, as one signal, trading at early 1980s levels. GDP is, nominally, at early 1990s levels.

The Titanic debt burden of Japan, however, becomes inflationary at the limit because the government will reach the point at which it can never hope to repay the debt. There's a limit to how much debt the island can take on and once the general public, foreign and domestic, becomes cognizant of this fact, the yen will tumble, yields will soar, and inflation will take off. Just like the Titanic, the passengers on the good ship Japan debt will realize there is no missing the iceberg and they will jump ship.

A global fiasco is brewing in Japan
The Bernholz range for the five hyperinflations of France, Germany, Poland, Brazil, and Bolivia over the centuries is surprisingly wide, from 33pc to 91pc. Japan has been in the that range almost continuously for the last eight years. The US joined the party in 2009. Japan’s Bernholz index will rise above 50pc this year for the first time, meaning that it will have to borrow more from the bond markets than raises in tax revenue. You see the problem.

We all know that Japan has been racking up debt for Two Lost Decades, yet the sky has refused to fall. Borrowing costs have slithered down to 1.36pc on 10-year JGBs and under 1pc on shorter debt, though they are not as low as they were .. nota bene. This seeming defiance of gravity has emboldened the Krugmanites and Keynesian prime-pumpers to call for a repeat in the US, UK, and Europe. There lies a great danger.

Mr Grice said Japan was able to pull off this feat only because its captive saving pool was large enough to cover the short-fall, and because the Japanese people continued to be reassured by the conjurer’s illusion that all was well. This cannot continue.

The country tipped into outright demographic decline in 2005. Households have already stopped adding to their stock of JGBs. As the aging crisis accelerates, the elderly are running down their assets. The savings rate will soon crash below zero.

Japan can turn to foreign investors to plug the gap, or course, but at what price? If yields reached UK or US levels of 4pc, debt costs would soak up nearly all the budget, leaving nothing for schools, roads, the police, or salaries for the Ministry of Finance. “I doubt there is any yield that international capital markets can find acceptable that will not bankrupt the Japanese state,” he said.

Note too that the Japanese will also have to run down their holdings of US Treasuries, currently $750bn or 10pc of the entire stock of US Treasury debt, as well as selling a lot of Gilts and Belgian bonds.
For more information on Japan from Societe General's Dylan Grice, see this post at zero hedge:Upcoming Government Funding Crises: Japan Edition

The bubble metal of 2010...platinum?

Platinum to beat gold, says Goldman Sachs
This could put downward pressure on the gold price but could have the opposite effect on platinum and palladium, it added. "While these new physical-backed ETFs present a downside risk to gold ETF demand and gold prices, they represent an upside risk to platinum prices. We continue to recommend a long position in platinum as a 'gold-plus' trade."
The bank described demand for gold EFTs as "rather muted", adding: "The holdings of gold EFTs have been essentially flat over the past six months at around 47m ounces. Should the investor demand for gold not return to the market this year, upside for gold prices would be further limited."
ETF Securities launched a platinum ETF just in time, symbol PPLT. The also created a palladium ETF, symbol PALL.


Of course, the yuan might go down

The deflationary scenario that has the U.S. dollar gaining a lot of ground against other currencies would put China in a position to possibly weaken the RMB. The yuan would follow the dollar higher against other currencies and the economic situation would likely be bad for exports, meaning China would be suffering from a weak global economy and a strong currency.

China could then weaken against the U.S. dollar, but it may or may not end up weaker versus other currencies, such as the euro and yen.

Below is a report from Corriente Advisors making the case for a weaker yuan.

For myself, I prefer to see what unfolds in the markets. If I have to make a choice, right now, I would pick no change in the yuan because the U.S. dollar will appreciate, but not enough to badly damage Chinese exports. However, events change daily and anything could happen. RMB appreciation is more likely as of today, but if the markets go haywire a la 2008, then RMB depreciation becomes quite possible.

Corriente has a great presentation. To summarize it in one sentence: The People's Bank of China has inflated the RMB much more than the Federal Reserve has inflated the U.S. Dollar and the greater supply of RMB versus USD will be balanced by a decline in the value of the RMB.

H/T Zero Hedge.


Yuan revaluation will be inflationary for the world

It looks as though the talk of RMB revaluation is heating up, thanks to recent tightening efforts by the Chinese central bank. Maybe the Google situation is another factor though, as the situation is ugly politically. Nothing soothes an ornery Schumer or Graham like RMB appreciation.

Hugh Hendry made the case last year for the yuan-oil connection, arguing that RMB appreciation led to oil appreciation. I'm not sure whether oil will be the commodity of choice (or even whether commodities will be the asset class of choice), but I believe yuan appreciation will be inflationary* for global markets.

I reproduced an RMB-crude oil chart to track changes myself. Last time it took six months for faster appreciation to translate into faster oil price increases.

*Update: I should clarify the use of the word inflationary. Inflation is the increase in the money supply of the currency. Only the Federal Reserve can inflate dollars, only the Russian central bank can inflate rubles, only the Bank of Japan can inflate yen (assuming no major counterfeiting operations are going on).

However, the raising of the RMB will be inflationary because RMB is undervalued. The inflation or devaluation of other currencies, especially U.S. dollars, has been hidden by the currency peg. When RMB is revalued, therefore, U.S. dollars come closer to their true lower value. Other countries have inflated as well, though, so what will happen is that China will strengthen versus the world and whatever the Chinese buy most will go up in price for everyone else. In 2008, that was oil.

Now, everyone else is also inflating like crazy, some worse than the Federal Reserve. In the U.S., for one, much of the inflated money is sitting in bank reserves because banks are financially weak and borrowers do not want more debt. There's a big inflation/deflation debate going on and the deflationists are winning right now, because the reserves lack a transmission mechanism to move out from beyond the bank reserves.

Revaluation of the RMB will lead to higher commodity prices, is my best guess. After that, one of two things will happen. One possibility is that it switches the world to high inflation. I don't see a direct link here, but I can't rule it out. More likely, it acts to repeat the 2008 crash, as high commodity prices sap the nascent recovery.


May I have your attention

I present this post from Tim Knight's Slope of Hope. There's no analysis here, perhaps just the dying hopes of the bears, but nonetheless, here's the opinion of a trader using the handle Salt, who called the bottom in March 2009 and went very, very long. He's now turned bearish:
The Triumphant Return of Salt
As sure as I was with that earlier call, I am now almost as sure that we are entering a whipsaw bear market that will last at least 18 months and end with the S&P under 500. This will include gold and related mining stocks. I will post here "near" the next bottom, this next bear market rally is where I think gold will really shine.


Revised GDP and Total Loan growth—Updated 1/4/10

Originally posted 11/25/2009

Last month, I posted a chart comparing the growth of Total Loans and Leases of Commercial Banks to GDP growth. With revised 3Q GDP out, I decided to update it. I noticed that the Fed reports the data slightly differently than the BEA, so I also adjusted the periods to match up. Growth rates are for quarter-over-quarter and therefore do not match reported figures.
Originally posted 11/25/2009
Update on 1/4/10: I was late in updating this, but GDP growth was reduced to 2.2% annualized in the third quarter. I didn't update the above chart, but GDP growth dropped from about 0.8% to 0.6% due to the revision. Cash for clunkers was two-thirds of the growth, minus that, GDP would have been very close to about 0.2% growth quarter over quarter, and less than 1% annualized. Importantly, cash for clunkers was only revised slightly from the first number, as it was originally less than 50% of total GDP growth in the quarter.

Go back and see the original post and follow through to Vox's original, as these revisions and make-up of the GDP report (government fueled consumption) suggest this may still be a valid predictive model.

China Rare Earth takes off

China Rare Earth (0769.HK)popped almost 40% today. Volume was almost 280 million compared to the usual 10 million per day. Thus far the only explanation I can find is China to tax more on two minerals
China has begun to restrict the mining and production of refractory clay and fluorite over concerns about reserve decrease and environmental pollution, according to a notice posted on the central government's website Sunday.

The government would implement comprehensive measures, which involve taxation, production planning management, industry entry standards and export policies, for the restriction, says the notice posted on www.gov.cn.

Land and resources authorities would enhance efforts to address problems in refractory clay and fluorite mining, and would not accept applications for new prospecting and mining projects starting from Jan 2.

The central government ordered authorities to promote industrial restructuring, close down backward production facilities, and implement strict industry entry regulations to avoid blind investments.

The notice says the industry entry standards for refractory clay and fluorite enterprises would be published on March 1 this year with immediate effect.
The notice also calls for intensified customs efforts to crack down on smuggling and supervision on refuse ore treatment.

The government plans to raise the rate of resource tax on the two minerals.


December Performance


Dec. %


S&P 500 TR






上海 Shanghai




Entertain. Trends



Green Dragon



Best of Funds



Pharma & Dogs



China Fund



Software Security



Yield to Me



Catch a Falling Knife



graph of fund vs. market indexes
SINOX m100 S&P 500 DJIA Nasdaq

Above is a 1 year chart of my China fund. Below is the two year chart.
graph of fund vs. market indexes
SINOX m100 S&P 500 DJIA Nasdaq

Bearishness didn't pay off this year, and the fund is about level with the U.S. market and missed the huge rebound in Chinese stocks this year. Below is the steady under performance of the Best of Funds since about June. Of course, bearishness paid off in the previous year and the two year chart shows it.
graph of fund vs. market indexes
MRC m100 S&P 500 DJIA Nasdaq

graph of fund vs. market indexes
MRC m100 S&P 500 DJIA Nasdaq

Finally, here's a two year chart of the Green Dragon fund, clearly showing when I turned bearish on this year's rally around the time of August-September of this year. I had been invested in some mining shares such as Teck (TCK), among others, which went on to higher ground as my fund flat-lined and lost some value.
graph of fund vs. market indexes
GDF m100 S&P 500 DJIA Nasdaq

This year is going to be just as challenging, with a potential dollar rally already in the works and a new $4 trillion bailout for the banks courtesy of Barney Frank. They'll need it, since the government's actions of the past year have only postponed the inevitable. The question is whether this year sees a setback, or whether, as with the housing bubble, the government and Federal Reserve manage to delay it for several years.