Speculators stayed short into the Euro deal

This was certainly enough fuel for the rally that came on Thursday, but we'll have to wait a week to find out if these traders were blown out or if they're in for the long-haul.

Hugh Hendry interview

One of the smartest and most contrarian hedge fund managers out there.

Chinese loan sharks switch gears

Pyramid Schemers Move On To Private Equity

Tax protest in China turns violent

Tax dispute sparks east China street protests
Protests began Wednesday when a children's clothing store owner from Anhui refused to make tax payments to local officials and then mustered other shop keepers to rally in support and attack the officials, state-run news site Zhejiang Online reported.
That dispute spilled on to the street and drew more than 600 people, the report said, with protesters hurling rocks, smashing traffic lights, billboards and cars, and injuring several public security personnel before police dispersed the crowds.
I noticed the story on Weibo. I searched for photos, but the first result was a revolutionary poster, with the comment: "Protest taxes, kill the corrupt officials, revolution!"
That's an extreme sentiment, but in general the people seem to feel they are overtaxed. It's also the case that with so much official corruption, even those who might believe the tax level to be fair do not believe it is being spent wisely.
All in all it ended up a victory for the taxpayers: Protest in east China subsides as gov't suspends taxes


Social mood in Europe

Indexes are way up on the bailout/haircuts/leverage deals, but is it a temporary pop?

Italian deputies in fist fight over reforms
The fight was caused by one politician saying that another's wife had retired early. Not the stuff of fist fights in normal times...

China to accelerate implementation of property tax

中国财政部:将加快推进房产税的实施 The article doesn't give a timeline, and there will be exceptions for low income housing. The main point, not mentioned in the article, is that Chinese local governments rely heavily on land sales and real estate development. If the real estate economy slows down, these governments will see revenues plunge. You can read between the lines as to why the government wants to accelerate the implementation of a more stable tax system.

Chinese bankers fear real estate market

Chinese bankers see pressure coming from real estate (38.4%), even though it is third on their list of concerns after macroeconomic policy (52.2%) and regulatory changes (50.2%). However, the real estate market is their top concern, with two-thirds concerned about falling prices. The greatest area of competition is over deposits, with 80% of banks trying various all types of methods to attract and retain depositors. Bankers are also becoming more prudent, looking to scale back some of their lending in real estate, and the number of bankers who said they wouldn't pull back their lending declined 14.6% from 2010.

近七成银行家担忧房价下调风险 最大挑战是揽储

Chinese fund companies see massive losses

Chinese funds had losses of 241 billion yuan in the third quarter. Assets declined 225 billion to just over 2 trillion yuan. Article is in Chinese.


Here's an English article, much shorter and with some different numbers. China's Funds Sector Hit with Losses


Home buyers in Shanghai angry at massive price drops, smash offices

Dropping Real Estate Prices Draw Protests
"My house's value has dropped by as much as one-third, and we have lost some 10,000yuan," a homeowner surnamed Yang told Shanghai Daily.
The price drop occurred for advance sales, not existing apartments. People demanded refunds or rebates. When they didn't receive any, they smashed up the office of China Overseas (0688.HK). Prices for similar apartments in Shanghai are off 25 to 30%, based on the examples in the article.

Capital flight from Ordos?

Closer Look: High-tailing Out of Ordos
"My clients always find me. When I bring in a higher return on an investment, then my reputation spreads and more come to me." However, lenders like Mrs. Li often have little formal knowledge or experience in investment. Typically, lenders like Mrs. Li live in luxurious apartments and own expensive cars. According to Mrs. Li, "People who want to invest their money with me often give me a range of gifts, and of course, they also bring money with them." But now, depositors go to Mrs. Li's house for something else – to ask for their money back.
Perfectly encapsulates economic activity at the peak of the bubble.


Europe coming apart

I have been busy for the past few days and haven't paid close attention to Europe. The euro had been holding up, but it's starting to weaken. What is going on in Europe? Hard to say with conflicting information coming out almost hourly. Here's Mish's take: Merkel Cancels Speech to Parliament; "Merkozy Marbles"
Merkel is feuding with the German Parliament
Sarkozy is feuding with Merkel
Sarkozy is feuding with the ECB
The IMF is feuding with the EU


PBOC vs FRB:A tale of two money supplies

Notice the ramp in the Federal Reserve's M2 at the end of this chart. This has been explained, not as a burst in money supply that's is about to cause inflation, but as European money leaving the banking system and entering U.S. banks. Remember that only recently, some U.S. banks announced slightly negative interest rates, to deal with all the capital flowing in.

China money supply and stock market


Social mood in China

This video is not suitable for children or those easily disturbed by violent or graphic images. Little girl crushed by two cars, passerby's ignore her.

I haven't covered these types of stories before and they are not rare in China. It's a big issue that opens up a lot of questions, but for now, the narrow social mood implication is that these stories are gaining a lot more coverage in the media. They are also being spread rapidly by services such as Sina's Weibo, which is where I saw this story. The man is speaking Cantonese and there are no subtitles, so I can't understand the audio, nor can most of the Chinese who are sending it around, but you can understand from the video. Camera footage begins around 1 minute.

Socionomic theory states that sad people don't choose to listen to happy music, as one might think, instead people choose what reflects their mood. Some social networking studies have shown mood to be assortative: happy people seek out others who are happy. Thus, as the amount of depressing or angering videos and stories spread on Weibo and outnumber the happy, cute or funny videos, one can get the sense of a declining social mood. As for whether I'm viewing a negative slice of the social mood due to who I follow, I am dealing with a limited sample size on weibo, but my friends are more likely to send jokes than these types of stories and I usually skip these stories when I see them in my weibo feed. This one comes via a mainstream economic writer's weibo and most of my friends don't forward these types of videos, so I'm going based on popular and mainstream weibo accounts. Adding one anecdotal point, my friend who forwards lots of funny items also sees an increase in negative news stories, but she doesn't forward them. A more detailed investigation would be necessary to quantify the impact, but I'm confident in saying that social mood is darkening here in China.

Shenzhen Junduoli boss flees with whole family; leaves behind millions in debt

Earlier this week, what the Chinese have dubbed "China's subprime crisis" spread to Ordos, the empty city built in Inner Mongolia, when a real estate developer deep in debt committed suicide and his partner fled. This is not a surprise, since this development has been covered many times over in the press. However, Shenzhen is the heart of Chinese manufacturing. This crisis has now spread into the industrial center of China and while one story does not a trend make, this could be the sign that things are about to get out of control.

Shenzhen LED factory owner defaults and flees, entire family missing 欠钱“跑路” 深圳LED企业老板举家失踪 Here's a rough summary: a factory with over 100 million yuan in annual sales, Shenzhen Junduoli, is in arrears for tens of millions of yuan. The court has seized the firm and begun to liquidate assets. Some firms on the hook: China Construction Bank, 30 million yuan; Sinochem International Far Eastern Leasing Company, 17 million yuan; various suppliers more than 12 million yuan; a guarantee company more than 33 million yuan; and some unnamed loan sharks, amounts yet to be published.

Junduoli had sales of 80 million yuan in 2009 and broke through the 100 million level in 2010. A company employee said not only were sales plummeted to levels below that of 2008. At the same time, the firm was rapidly expanding, including a new factory in Sichuan. Doing a quick search I was able to find a bit of information about this company. Shenzhen Junduoli Enterprise Group


Euro bounce

Not much short covering led to a healthy rebound, but you can bet that the short covering continued on Wednesday, Thursday and Friday this week.

China's most famous ghost city adds real ghost

People have been talking about Ordos for years, the massive ghost city built in Inner Mongolia. Things may be headed south now.

Ordos Property Developer Commits Suicide
The owner of a property firm in the affluent Inner Mongolian city Ordos reportedly committed suicide after defaulting on private loans from individual lenders.
In late September, Wang Fujin of Zhongfu Real Estate Development Co. took his life and another co-owner of the property development firm Hao Xiaojun is now on the run, China Business News reported on October 13, citing an anonymous source.
This situation is on the verge of going from curiosity to full blown crisis.

Republican party headed for civil war; Democrats to follow?

The decline in social mood has led to the first genuine political shift in a generation. Establishment Republicans are worried about the Tea Party because members of Congress in Washington are not turning into typical politicians. They have spent time in DC and unlike previous Republicans, such as the 1994 freshman, they remain opposed to the way DC operates. The war within the GOP is about controlling the direction of the party and it is an expression of social mood. People are in a mood to fight and fights are always in need of drawing a territorial boundary. At the peak of social mood, this boundary is at it's most inclusive; during the decline in social mood this boundary becomes smaller and smaller. Whether this results in a positive development or not depends on how it plays out and your perspective. As someone who believes Washington must change course, I view this as a positive and healthy trend within the declining social mood, a positive outlet to turn public anger into meaningful reform. I anticipate the Democrats may be next, with a challenger to Obama arising soon. Or, the rebellion will take place later, after a political defeat or, should Obama win, after necessary spending cuts destroy the Democrat's base, which is heavily reliant on government programs (and I'm not thinking of welfare here, but government support for industries such as education, healthcare).

Below are random quotes pulled from a very long article that is worth reading to understand the coming political maelstrom in 2012.
Does Anyone Have a Grip on the G.O.P.?

“I can just tell you, when I came to Congress, we were rabble-rousers, but, boy, if you’d asked any of us six months into it how we were enjoying it, we’d have said this was the greatest opportunity of a lifetime,” Weber said. “It just struck me. And it’s part and parcel of this anti-government mind-set.” I wondered if maybe the Tea Partiers’ contempt for Washington was just a kind of outsider’s shtick. “I’d feel better about it if I thought it was,” Weber said glumly.
This is just one of several quotes along these lines, showing the GOP leadership's dismay with the upstart Tea Party.
“The other things they could do,” Kibbe said, “is split off and go third party. If you end up with the wrong guy as the challenger to Obama, it potentially creates a real dilemma for Tea Partiers. And they’re going to have to make one of those decisions.” One of FreedomWorks’s vice presidents, Adam Brandon, jumped in to remind me that Tea Party activists well remember last year’s elections in Florida and Alaska, where establishment candidates for governor and Senate, jilted by primary voters, turned around and ran anyway. The insiders won’t have a lot of credibility now if they argue that bolting the party is a treacherous act.
I do not believe a third party necessarily hands the party to Obama. If the third party candidate is Tea Party, then the GOP splits and loses. If the third party candidate is Ron Paul, then he will pull Tea Party support plus Democrats upset over the war and the bailout, two major issues that Obama not only failed to address, but actually escalated above and beyond Bush Administration policies.
The following is a long bit that gets at the driving force of this trend without naming it: social mood:
“I think we’re going to have to have at least one more election cycle before people get that this isn’t just a typical wave in the business cycle of politics, if you will,” Kibbe told me. “We’ve described the Tea Party movement as a hostile takeover of the Republican Party. And we mean that in the technical-economic term. You have tired leadership, and you have bad ideas and just an inability to serve customers well. And that’s when someone comes in with new management and cleans house and either restores the company or breaks it up.”
Kibbe’s metaphor sounded jarringly familiar to me, because it was exactly the kind of language I heard from liberal venture capitalists in Silicon Valley back in 2004, when they were busy fomenting insurrection inside the ranks of the Democratic Party. In fact, a lot of Kibbe’s rhetoric — about hostile takeovers and the “democratization of politics,” for instance — could have come directly from the left-leaning activists and donors who gained influence through forums like Moveon.org and Democracy for America in the latter part of the Bush era. It was this same process of “democratization,” the breakup of the party’s monopoly on money and manpower, that ultimately enabled a black first-term senator to topple his party’s presumed nominee on the way to winning the White House.
There are practical explanations for why both party establishments have undergone some version of this same devolution. The most important, and most obvious, is the proliferation of broadband Internet and the way it has redefined, within the space of just a few years, the very concept of a political movement. Another is the change in campaign-finance rules, which incentivizes ideological contributors to send their checks to outside groups or set up their own, thus creating a network of parallel parties whose influence grows with every election cycle.
But of course, what’s really going on here is a broader cultural assault on the very idea of establishments, which has affected virtually ever other industry in American life in the last 20 years or so, from television networks and music labels to carmakers and local banks. The Tea Party may fade into history, but there will almost certainly be other Tea Parties, and more of them, affecting both parties and arising in ever quicker succession. To believe yourself now to be, literally, an establishment — that is, the one legitimate arbiter of just about anything in American life — is to be tragically misguided.
And finally, the real sore spot for the party, the Ron Paul supporters.
You can imagine how this irritates longtime Republicans in Washington. “The thing I get a kick out of is these Tea Party folks calling me a RINO,” John Feehery, a lobbyist who was once a senior House aide, recently told me. “No, guys, I’ve been a Republican all along. You go off into your own little world and then come back and say it’s your party. This ain’t your party.” Feehery said that Republicans had yet to sort out their “Ron Paul problem,” by which he meant the proliferation of a kind of conspiratorial, anti-Washington rhetoric. “There’s that element of paranoia,” Feehery said. “Establishment Republicans look at these guys and say, ‘You’re nuts.’ ”


Pat Buchanan on social mood

Why is the New World Order suddenly going in reverse?
A primary reason is the resurgence of nationalism. Nations are putting national interests ahead of any perceived global interests.
A second reason is the decline of a West whose project this was. We no longer dictate to the world, and the world no longer marches to our tune. The deficits and indebtedness of Western nations preclude more of the big wealth transfers in foreign aid that once bought us influence.
A third reason is demography. Not one European nation has a birth rate sufficient to replace its population. Europe's nations are aging, shrinking, dying. A depopulating Germany cannot carry forever the deficit-debtor nations of Club Med. The oldest nation, Japan, is on schedule to lose 25 million people by 2050, as is neighbor Russia.

Is the New World Order unraveling?

Wenzhou asks central bank for 60 billion yuan loan

Assuming the rule of "never believe a rumor until it's been officially denied" is true in China as well.

Wenzhou officials deny seeking loans from the central bank
Wenzhou City Banking Secretary Zhang Yourong denied seeking a 600 billion renminbi loan from the central bank, in order to prevent the collapse of private lending market. He lashed out at "unfounded" rumors and stressed that the foundation of Wenzhou banking is stable and private lending problems will not shake the entire financial system.


Chinese silver futures market is three times the size of CME; does this sound like a bubble?

And 4 times the size of its gold market. From Song Hongbing's weibo (author of Currency Wars).
The price is still controlled by regulators and it is an internal market only. But as Song Hongbing asks, imagine the impact when this market is opened!

The market has grown so large that the exchange is moving to kick out retail (small investor) traders.
The silver market is on pace to grow from 200,000 tons to 360,000 tons next year if nothing is done. Right now they are getting rid of customers with assets below 100,000 yuan ($15,000) and over the age of 50. In 2008, all of the risk was in the 5kg and under retail customers, customers above that amount had adequate capital.

Those looking for a bubble in precious metals need to be looking at China.


228 bosses have fled

The official count from a government report. 200 bosses flee their creditors in Zhejiang
The 228 companies, mostly small and medium-sized enterprises (SMEs), were found to owe about 76 million yuan (HK$93 million) in wages to nearly 15,000 workers, the Oriental Morning Post reported yesterday, citing a report by Zhejiang authorities.
By comparison, the number of workers who failed to get their wages because their bosses fled during the 2008 financial crisis was just 5,000 to 6,000, an unnamed official from the province was quoted as saying.


Another pro-euro take

Trichet Throws Away Script Reminding American Skeptics Euro Built to Last Read the whole article. I do believe Anglo-Saxons underestimate the political will of the European leadership, but as I also said in earlier today, the Europeans also mistake the situation. Those who are in power or close to power always overestimate their ability to direct human affairs.

Can Europe find a political solution?

Eurozone quick-fix will create political monster
Second, even if European governments put up enough capital, they would not do it right. They would repeat the mistake they made in October 2008, when EU leaders agreed to recapitalise their banks, each for themselves. Judging from their comments, Europe’s leaders have learnt nothing. The reluctance to shift power over banking to the eurozone level is, of course, deeply rooted in national politics. Political parties and non-commercial banks are closely interlinked in Spain and Germany. In Germany, the savings banks and Landesbanken play an important role in the financing of industry. In political terms, this minimal solution is not minimal at all.
Third, a solution that relies on the financial sector hits a dilemma inherent to the structure of the European Union. A single market for finance is an EU-level competence that cannot easily be reduced to the eurozone. Non-eurozone members such as the UK would almost certainly not join such a system, and might block a single banking supervisor. If you rely on a financial insurance backstop as your main strategy, the non-eurozone members would ultimately be forced into the eurozone, or out of the EU. So you might end up saving the eurozone, by breaking the EU – or vice versa.
His comments on the UK come the same day that former PM John Major called on the UK to take power back from the EU. Many analysts looking for a euro or EU breakup have far too "optimistic" time lines. The politicians of Europe are willing to accept pain in order to preserve their political gains. The question is how much pain does the market inflict before they arrive at a solution? In the long-term of 5 to 10 years, the EU optimists have not factored in the impact of declining social mood. Some of the pro-EU leaders in power now may be replaced by anti-euro/anti-EU leaders as soon as next year and if mood declines, the probability of anti-EU or anti-euro parties winning increases as time goes by.

Fannie and Freddie not out of the woods

Fannie and Freddie debt fuels anxiety
Spooked by US political wrangling, major investors including the National Pension Service of Korea and the Kuwait Investment Authority have sold out of their holdings of the debt of the US Treasury-backed housing agencies since the 2008 global financial crisis. Officials from central banks, including the Bank of Japan, say they will be far more cautious in future.
Even though Asian and Middle Eastern investors are buying less Fannie and Freddie debt, the price of the bonds does not reflect their fears of the risk. Fannie and Freddie debt trades at a very narrow spread to Treasuries. But analysts said market prices have been skewed because of Fed involvement. During the first round of quantitative easing in 2009, for example, the Fed bought more than $175bn of GSE debt in the secondary market. Former Fannie Mae officials and other people familiar with the situation said the sellers of that debt were mostly Asian central banks.
Guess which country still owns lots of GSEs—China.

Win back power from the EU

Major: This is our chance to win back power from the EU
The Prime Minister signalled to around 120 Conservative MPs in a new Eurosceptic grouping that the debt crisis engulfing the eurozone and threatening the British economy must take priority.
Sir John, however, said there could be a ‘much more speedy’ opportunity to renegotiate, particularly on issues affecting employment law and regulation of the City.
He claimed it was likely that Europe was heading towards a ‘federal state within the eurozone’.
‘At some stage there will be another treaty because if there is fiscal union in Europe it changes our relationship to Europe,’ he told the BBC’s Andrew Marr programme. ‘It gives an opportunity for two things. Firstly it gives us an opportunity to negotiate for the looser form of Europe that I would have liked to have seen in the 1990s.


Slovakia says no?

Slovakia On Why It Votes "No" To EFSF Expansion: "The Greatest Threat To The Euro Is The Bailout Fund Itself"
Sulik: The opposite is actually the case. The greatest threat to the euro is the bailout fund itself.
Sulik: It's an attempt to use fresh debt to solve the debt crisis. That will never work. But, for me, the main issue is protecting the money of Slovak taxpayers. We're supposed to contribute the largest share of the bailout fund measured in terms of economic strength. That's unacceptable.
SPIEGEL ONLINE: That sounds almost nationalist. But, at the same time, you've had what might be considered an ideal European career. When you were 12, you came to Germany and attended school and university here. After the Cold War ended, you returned home to help build up your homeland. Do you care nothing about European solidarity?
Sulik: If we now choose to follow our own path, the solidarity of the others will also crumble. And that would be for the best. Once that happens, we would finally stop with all this debt nonsense. Continuously taking on more debts hurts the euro. Every country has to help itself. That's very easy; one just has to make it happen.
This is a minority party head, but he has sway in the process. He later goes on to say he wants to preserve the euro, but notice the knee-jerk cry of "nationalist" from Der Spiegel. A politician believes the current policies will destroy the multinational euro, which he seeks to preserve. He believes they need to stick to the agreed upon rules and each country should deal with its debt problem. For this, he is branded "nationalist," an artifact from the extreme in positive mood. This is why nationalism becomes more appealing, it is a reaction to anti-nationalist attitudes that peaked in 2000, which reached the point that common sense is deemed "nationalist."

Chinese yuan depreciation coming soon?

I have previously argued that the yuan could drop, you can find posts under the renminbi tab. I was expecting a decline much earlier, but then I was also incorrectly bearish on the economy and the market as it rallied from 2009 all the way into mid-2011. The increase in the yuan has been slow, steady and managed, lulling many investors into a false sense of security. Outside of the vocal China bear crowd, which tends to overlap heavily with deflationist and/or followers of the Austrian school, the overwhelming consensus assumes yuan appreciation.

On the front page of the Economic Observer this weekend are several articles on the yuan: 人民币拐点临近? (Renminbi turning point approaching?); RBS:人民币贬值可能性大为加强 (Possibility for yuan depreciation increases); 人民币汇率与央行的面子 (Renminbi and the central bank's "face"). The gist of these articles is that the renminbi is close to fully valued, U.S. pressure on China to appreciate the currency is unrealistic and not backed up by the facts, and a small depreciation is even possible.

I don't expect yuan depreciation will be slight because it will happen when hot money flows out of the renminbi and economic indicators, most importantly the trade surplus, reverse. It seems like every time there is a bubble, there are people explaining how it will be limited, the impact will be concentrated in housing/stocks/Greece and so on, and this is almost always wrong. Also important to watch is the political angle. If the renminbi doesn't continue to appreciate, U.S. politicians will become more open to the idea of retaliatory tariffs. This is why China's policy makers are in a bind. What happens if the yuan needs to depreciate in the midst of a crisis? U.S. politicians will be open to extreme policy choices during a crisis, such as the TARP plan that many were cajoled into voting for. Conversely, if the Chinese do not depreciate the yuan in a deflationary crisis, the economy will experience crushing deflation. This is why Liu Jun Luo warns that hyperinflation may be on the way if the Chinese do not inflate now.


Right wing rising in France

In France, far right capitalizes on euro crisis
Fabien Engelmann, a 32-year old municipal plumber with tight-cropped hair, was an activist with France's leading trade union and a Trotskyist for many years. Later he joined the far-left "New Anticapitalist Party". This year he switched party again, but not on a leftist ticket. He joined France's famed far-right National Front, and he was not the only one.
This year, five trade unionists have joined the minority party that made its name with the anti-immigrant rhetoric of its founder, Jean-Marie Le Pen. Since January, Le Pen's daughter Marine has been in charge of the party, and Engelmann says she is a magnet. "It really is the arrival of Marine Le Pen that convinced me to join the National Front," Engelmann told Reuters. "She has an economic program that is much more geared to defending the little people, the workers, the popular classes of France."
The National Front has a platform growing in popularity and its political opponents are starting to co-opt some of its issues. There may not be enough time between now and the election for the National Front to win, but if Prechter's Elliot Wave predictions pan out, betting on a win by the National Front could not be a crazy one.
The party offers a radical alternative. To restore French competitiveness it will quit the euro; to boost employment it will close French borders to cheap Chinese imports, reindustrialize and empower the state's regulatory role. And it will bring the banks to heel.


1000 employee factory cannot earn 1/30 the profits of 1 wife speculating in real estate


One factory owner unwilling to be named told the Morning Post, after a hard year's labor, profits don't even reach 1 million yuan, but his wife bought 10 apartments in Shanghai and over 8 years she has earned more than 30 million.

Wenzhou loan sharking case grows; government officials involved in loan sharking; Premier Wen Jiabao travels to Wenzhou

Authorities have broken a 1.3 billion case in Wenzhou. The loan sharks are government officials.
温州破获13亿高利贷案 八成债主竟是官员

Premier Wen Jiabao headed a government rescue team sent to Wenzhou
温州许多中小企老板欠高利贷外逃 温家宝率大批高官到浙江救局


On the cusp of deflation?

Shanghai Tang homeless ... for now
Luxury brand Shanghai Tang plans to move into a group of tents at a ferry pier after becoming the latest victim of soaring commercial rents in Central.

The iconic Hong Kong clothing company is quitting the Pedder Building premises that housed its flagship store for 17 years after the monthly rent more than doubled to HK$7 million. It plans to move the flagship store to a four-storey building 350 metres east of the Pedder branch in March next year.
Rioting in model village attests to graft woes

On the morning of September 21, hundreds of villagers took to the streets and staged a sit-in protest against local officials for "secretly selling" hundreds of hectares of collectively owned farmland to a real estate developer and "embezzling" more than 700 million yuan (HK$853 million) of compensation money since 2006, a young woman who saw the protest said.

"Some policemen were sent in and severely beat some teenage schoolchildren who had sounded the brass gong to urge fellow villagers to join the protest that morning," she said. Upon hearing that several of the youngsters had been seriously injured and sent to hospital, hundreds of furious villagers fought back before laying siege to a local police station in which 30 to 40 officials and policemen had taken refuge.

Hundreds of fully equipped riot policemen then engaged in a stand-off with peasants armed with iron bars or wooden clubs. "At this point, some said two of the teenagers were severely hurt and in critical condition," she said.

"Others suggested they might have died because no one knew their whereabouts in the hospital."

The rumours spread like wildfire and thousands of villagers blocked the nearby highway and smashed the windows and overturned at least six police vehicles.
This village is in prosperous Guangdong province.

  Net tightens on online rumours
"The central government has recently passed new measures to manage [mainland microblogging site] Weibo," Song said, adding that provinces and municipalities were also experimenting with new controls.

"For example, Beijing's municipal government is likely to promulgate a real-name requirement system to regulate Weibo soon."

China's subprime mortgage crisis

中国式次贷危机 A Chinese website is tracking what the Chinese are dubbing China's subprime crisis. Bookmark it if you want to stay on top of the news.


Sign of the times

This advertisement from Shanghai is offering discounts off the new home price. Companies are selling SOHO apartments with the pitch that they don't qualify for government restrictions because they are offices, not homes. Anxious developers use every trick in the book


Is gold a bubble?

I've noticed two different arguments for why gold is not a bubble. One is that gold is not a bubble because hardly anyone owns physical gold, very few people own mining shares and institutions are under-exposed. Most of these commentators are looking at Western investors, perhaps mainly U.S. Another thing one hears, and which is fully backed by the data, is that the gold market is international and actually driven by Chinese and Indian demand. These two facts are exclusive. Of course U.S. and especially Western markets are wealthy, and if they decide to seriously buy gold, the price will advance strongly. That said, the Western markets may be superfluous. For a long-time the world has watched the U.S. equity and bond markets for signals, but now the time has come to watch Indian and Chinese sentiment on gold. And in China, gold is very bubbly.......although I haven't seen a gold advertising poster in my apartment building for quite a few months.


China at the edge

This is a long and detailed article covering some of the topics discussed recently and in the past (such as RMB depreciation). Anyone interesting in the Chinese economy and the global implications (just about everyone) should read it. China: Economy on the Edge of a Nervous Breakdown

In recent days, however, something else has happened that potentially has far more serious implications.  For the past decade, China has run surpluses on both its current and capital account.  When it comes to both trade and investment, China is a net importer of foreign currency, which places pressure on its own currency to appreciate in order to resolve the imbalance.  China has prevented the RMB from appreciating more rapidly than it desires by fixing a price at which it buys dollars (and other foreign currency) and stockpiles them as official reserves.  Because that price has always been fixed below the market equilibrium point (the RMB has been kept undervalued), whatever limited trading band was set, the RMB tended to bump up against the upper limit.  In other words, the RMB was a one-way bet, always under pressure to appreciate against the dollar.
Until this week, that is, when it started to bump up against the bottom of the trading band, implying that the RMB wanted to depreciate against the dollar.  Why?  Presumably because the capital account had flipped, and speculators were now rushing to turn their RMB into dollars in order to take their money out of China.  It’s important to clarify what this does and does not mean.  It does not mean that the RMB is now suddenly going to collapse in value.  China holds US$3 trillion in currency reserves, and can deploy those reserves to support any exchange rate it wishes.  Even if China were tempted to devalue (at the cost, it should be noted, of fanning inflation), the mounting political pressure in the U.S. Senate to take action against China for its undervalued currency would pose an obstacle to pursuing that path.
The author lives in China, note the implied social mood in the title.

Senate passes anti-China bill

China currency bill clears Senate hurdle

QE1 and QE2 were euro support programs

Even with massive Fed intervention, the euro could not break out of its bear market versus the U.S. dollar. The euro consistently falls ahead of the end of Fed intervention and continues falling until the time that a new QE is (accurately) rumored.
Protectionism beckons as leaders push world into Depression
This outcome in Europe is not deliberate (I hope); it is not a German plot; it is the unintended effect of a currency union created by ideologues against Bundesbank advice, and which has calamitous implications for German foreign policy and for Latin social stability. My sympathies go to the hard-working citizens of Germany, Spain, Italy, Portugal, and Ireland for being led into this impasse by foolish elites.

Social mood and innovation

Neal Stephenson, science-fiction writer, pens an essay titled: Innovation Starvation
Still, I worry that our inability to match the achievements of the 1960s space program might be symptomatic of a general failure of our society to get big things done. My parents and grandparents witnessed the creation of the airplane, the automobile, nuclear energy, and the computer to name only a few. Scientists and engineers who came of age during the first half of the 20th century could look forward to building things that would solve age-old problems, transform the landscape, build the economy, and provide jobs for the burgeoning middle class that was the basis for our stable democracy. The Deepwater Horizon oil spill of 2010 crystallized my feeling that we have lost our ability to get important things done. The OPEC oil shock was in 1973—almost 40 years ago. It was obvious then that it was crazy for the United States to let itself be held economic hostage to the kinds of countries where oil was being produced. It led to Jimmy Carter’s proposal for the development of an enormous synthetic fuels industry on American soil. Whatever one might think of the merits of the Carter presidency or of this particular proposal, it was, at least, a serious effort to come to grips with the problem.

Chris Matthews taps into the social mood

Watch this clip. He "gets it." Matthews: Obama Being Too "Debonaire" For The Mood Of The Country


China on a collision course

Slowdown in reform efforts under attack
Wu Jinglian , 81, who has been advising the mainland's top leaders since the beginning of the market-oriented economic reform, also called for the breaking away from old ideologies and for the continued reform of state-owned enterprises.
Wu is a researcher with the Development Research Centre of the State Council and a member of the Chinese People's Political Consultative Conference's national committee, a top political advisory body of the government.
With more public figures chiming in on the reform issue, opinions have been fermenting in the run-up to the Communist Party's transition of power set for autumn next year, and the consensus is showing a rising dissatisfaction with the slow progress in recent years.
Even Premier Wen Jiabao , in his speech two weeks ago in Dalian at the annual World Economic Forum, called for a systematic political reform to put more restrictions on the Communist Party's use of power.
Wu noted that state-owned enterprises had been rapidly expanding their monopolistic power as a result of the administrative protection they received, as well as from the massive credit support from the state-owned banking system in recent years.
China has painted itself into a corner with its currency, credit and economic policies. The situation in Wenzhou is the tip of the iceberg. Private companies are taking massive risk because they have no access to capital. One part of the economy is coddled, riddled with bad debt and inefficient. The other is drawing blood from stone, overcoming crushing interest rates and managing to survive a difficult period in the global economy, only to finally succumb as Europe and the U.S. fall back into recession. There is a path forward, one of reform, and it is the only path that is littered with low-hanging fruit. Economic power must shift from the public to the private sector in the next great wave of reform. Chinese consumers and entrepreneurs receive the short-end of the stick in a system that favors state-owned companies and local governments, and this must change. I believe a major privatization wave is in front of us. It is something that I have been in favor of for a long-time because it is a great way to close the wealth gap and hand over more economic power to the people. If the Chinese government transfers its share of state-owned companies to the people, the poor will receive assets similar in value to their savings, while for the rich, it will be small change. If they do not transfer the assets directly, they may use them to fund a pension system for the country, among other possibilities. Either way, it can increase efficiency and send stocks rallying as former SOEs turn into privately run companies. The weak companies will die off and the private sector will see an explosion of profitability as credit flows to private business. All of this will put a strain on labor, which thanks to the one-child policy, is seeing the entry-level workforce population start to decline. In sum, a great combination to rapidly accelerate wage growth.

SCMP covers Wenzhou loan sharking

Here's an English article on the situation in Wenzhou. Wenzhou in bid to curb loan sharks
One of many company bosses who fled Wenzhou after finding himself unable to pay off maturing corporate loans is returning, mainland media reported, as the city government steps in to save businesses from ruin.
Hu Fulin , chairman of one of Wenzhou's biggest makers of spectacles, Zhejiang Centre Group, has decided to return to the mainland's entrepreneurial capital to deal with a 2 billion yuan (HK$2.4 billion) debt, The Beijing News said.
Hu admitted to colleagues via phone on September 21 that he had run away because he was not able to repay debts to banks and loan sharks.
He was among at least 26 bosses of small and medium-sized Wenzhou businesses to go into hiding due to their debt burdens, said the municipal financial office, China Business News reported. It said nine did so on September 22.
Zhou Dewen , chairman of the Wenzhou Medium and Small Enterprise Association, said the central government's tight monetary policies and high interest rates for private credit were the two main causes of the SMEs' financial woes.
Private lenders in Wenzhou charge interest rates of 25 per cent, up from 23 per cent since January.

Martin Armstrong Interview with Eric King

Martin Armstrong: Former Head of Princeton Economics Ltd.

More deflation mechanics

Mish Shedlock has a post about deficiency judgements. Go there to read it all, I just want to pick out a snip from an article on the post. House is Gone but Debt Lives On; Expect Huge Surge in Deficiency Lawsuits
Silverleaf says its collection efforts are limited. "We are waiting for the economy to somewhat heal so that it's a better time to go after people," says Douglas Hannah, managing director of Silverleaf.
Investors know that most states allow up to 20 years to try to collect the debts, ample time for the borrowers to get back on their feet. Meanwhile, the debts grow at about an 8% interest rate, depending on the state.
Debt haunts the economy. If people borrow money, it might be to pay off their debt...

Mechanics of deflation

In order to have deflation, there must be a contraction of credit. We have seen consumers use less debt, along with rising fees and interest rates. Now, the debit cards are getting in on the act. If nothing else, it is safe to assume that rising debit card fees will cause customers to use their cards less or cancel them completely, leading to reduced velocity of money. Citi Follows Bank Of America In Instituting Debit Card Fee, $1.9 Trillion In Deposits At Risk Citi and BofA will charge up to $5 a month for debit cards. ZeroHedge takes stretches this into potential bank runs and certainly some consumers may move to smaller banks. However, the definite effect will be reduced consumption as consumers see their ability to spend slowed.


Casino stocks tumble in HK

Macao casino operators hit by China fears
The sell-off appears to have been triggered by rumours that some junket operators were in trouble. These are companies responsible for drawing so-called VIP gamblers to Macao casinos by extending them generous credit and, sometimes, by being flexible about debt collection.
A junket operator in Macao who spoke on condition of anonymity said he was not aware of rivals experiencing a credit crunch. However, he had heard of mainland Chinese investors pulling capital from their investments because of monetary tightening at home.
“There are many wealthy factory owners from the east coast of China who have been making good returns from Macao simply by lending money to junket operators in return for 1-1.5 per cent in monthly interest. They have seen Macao as a profitable sideshow to their real business, which is experiencing a slowdown. However, some of them are in need of cash at home and have trouble borrowing from banks. So they are cashing out from Macao,” he said. So far, this only had a limited impact on the junket operators, he added, as they were still seeing strong growth in business.
Consider this story in light of my earlier post, Wenzhou factory owners run away from debt.

Liu Jun Luo on Operation Twist & U.S. strategy

I have translated this shorter post from Mr. Liu. Note that for number 5, he is referring to QE1. The Fed extended the program with QE2, but it concluded at the end of June.
America's Operation Twist and Happy National Day
On September 9, 2011, America's central banker Bernanke started replacing U.S. short-term Treasuries with long-term ones, the market nicknamed it "Operation Twist." Today, no matter which market, the U.S. has already completed a perfect opening. In June 2010, I published "China's Kidnapped Economy", in which I pointed out after America completed its macro-strategy layout, the start of the dollar rally offensive would be signaled by:
1. Strengthen financial oversight
2. Start large scale debt issuance procedures
3. America's central bank replaces short-term Treasuries with long-term Treasuries
4. America's central bank stops mutual action with other central banks
5. America's central bank ends it's 1.3 trillion in purchases
6. American hedge funds short Japanese long-term government debt
Today just as I said, the third offensive signal is "America's central bank replaces short-term Treasuries with long-term Treasuries." Indeed, America is already too powerful, and in the rear of this formidable America , merely China's central bank sparing no effort to strike at inflation and China's media doing it's utmost to brainwash the Chinese people into madly buying gold.
This has already developed into a national disaster, our national catastrophe comes from ignorance, arrogance and discrimination.
Wish you a happy National holiday
Liu Jun Luo
October 1, 2010

Social mood and Europe in a nutshell

No, it isn't Ambrose Evans-Pritchard's latest piece. Although he's been accurate, I want to focus on the comments of a Nobel Prize winner towards the end of this article. NEIN, NEIN, NEIN, and the death of EU Fiscal Union
“All I heard was Germany, Germany, Germany. There was nothing about Europe. It was astonishing,” said Myron Scholes, the winner of the 1997 Nobel Prize. Indeed it was. Fellow laureate Joe Stiglitz said that if President Wulff’s views reflected the outlook of the German government, monetary union would have collapsed already.
The whole thing is worth reading, but this encapsulates the social mood. This is a political crisis! There are economic and sovereign debt problems, but at it's heart this crisis is driven by social mood and the desire to preserve the nation state. On to the euro. A number of people were looking for a bounce due to very negative sentiment. However, an even larger gap opened this week and despite a brief post EFSF-vote rally, the euro closed at a new low for the year. This is going to get resolved with a lot of shorts coming out of the market or a steep drop in the euro. If this wave down is larger than 2010, then we should expect the number of speculative shorts to exceed those in 2010, thus there's room for much more shorts to pile in here and open the trap door underneath the euro.