2011-11-30

Yuan crash possible?

When asked about a sputter or collapse in the Chinese economy, Faber stated, “I live in Asia and all I can say is I observe a meaningful slowdown in business activity recently and increasing corporate earnings that disappoint.” When asked if he was aware of capital flight out of China, Faber replied, “There’s a huge capital flight, there’s no question about this.” When asked why the Chinese are panicking to move their money out of China, Faber responded, “That is a very good question because, you see, the bullish analysts will tell you will tell you, ‘Oh, if the Chinese economy slows down they are going to print money and lower interest rates and ease monetary conditions.’ But if that happens, then obviously capital flight will increase, especially if, unlike all of the expectations, the Yuan or the Chinese RMB begins to weaken rather than to strengthen against the US dollar. So that could actually accelerate the decline or let’s say capital outflows and declining asset values in China.
Listen to the Marc Faber interview at King World News.

2011-11-29

Social mood, authoritarianism in the UK

The woman in this video has been arrested on charges of "racially aggravated harassment." Free speech is dead in Europe, including the United Kingdom. It's a social mood two-fer though, because it also highlights the growing reaction to unprecedented levels of immigration. The chance for internal conflict along racial lines increases as the social mood declines.

Chinese yuan trades against Aussie dollar

China kicks off Australia yuan trade
Trading was thin on Monday morning, but market players expect it to pick up over time along with the gradual expansion of the yuan’s use in global markets. “This morning those banks trading yuan against Australian and Canadian dollars calculated on the basis of the central bank’s mid-point and real time movements of the two foreign currencies against the dollar in global markets,” said a trader at a European bank in Shanghai. “The PBOC has so far still been pricing the fixing of other currencies based on the yuan’s near peg versus the US dollar.”

2011-11-28

And another government collapses

Kuwait cabinet resigns amid political crisis
The public prosecutor in September launched an unprecedented probe into the bank accounts of around 15 pro-government MPs who were accused of accepting bribes totalling $350m.
Do we believe that there was never any corruption in Kuwait? Why is there a prosecution now, why does this cause the government to fall now? Social mood is the answer.

Zombie walk

Nearly 10,000 zombies march in Mexico City in a bid to smash New Jersey's record

2011-11-27

Incoming premier Li Keqiang says housing policy to stay tight into 2012

Protectionism's many forms

Sen. Schumer Urges Audit Watchdog to Act on China
In a letter expected to be sent Tuesday, Sen. Charles Schumer (D., N.Y.) says the accounting board should suspend or revoke its registration of Chinese firms that it has been blocked from inspecting, thus barring them from preparing audit reports on companies that trade on U.S. markets.
It is "unacceptable" to allow the lack of inspections to continue in the wake of accounting irregularities at some Chinese companies that have been reported this year, Sen. Schumer writes in the draft of a letter to be sent to board Chairman James Doty.

Look out for the rise of zombie buildings

陈真诚:当心楼市出现僵尸楼盘 This is an opinion article by Chen Zhencheng. Highlights: local governments cannot bear a 20% drop in home prices, the macro economy cannot withstand a 30% drop in prices. A 30% drop is just a normal correction, but even after a drop of 30% homes will still be expensive.

After the housing market collapses, who will pay the bill?

楼市崩盘来临后 谁会为房产泡沫破裂埋单? Some highlights from the article. Of the 139 A-share listed real estate developers, 80% saw their debt levels increase during the third quarter. Land sales accounted for 38.9% of local government tax revenue in 2006 and that figure rose to 65.9% in 2010.

New strategy for developers in China

问底楼市
郁亮总结了四条过冬策略:一是现金为王,现金流比利润率更重要;二是积极销售,不囤地、不捂盘;三是谨慎买地,不当地王;四是开源节流,管控运营成本。
Vanke Chairman Yu Liang discussed the strategy with Vanke employees: focus on health and surviving the winter. He summarizes it as: first, cash is king, cash flow is more important than profit; the second, is active selling, do not hoard land; the third is prudent land purchase, do not be the land king; the fourth is find new revenue streams while cutting costs, control operating costs.
Below is a chart of Vanke. Notice the falling volume along with the falling price.

111 months of housing inventory in Ordos

鄂尔多斯鬼城楼市崩盘 万元房价跌去7成

The article gives some background on the area. before 2004, there were two villages with 1400 people. After major coal, rare earth and natural gas development, the GDP per capita exceeded that of Beijing and Shanghai in 2007.

All bubbles accelerate at the peak and the Kangbashi (康巴什) area, where the previous story of the 70% price drop took place, is no different. The above linked article states that as of June 18, the government reported Kangbashi had 3.22 million square meters of property, but by the end of 2011, an addition 3.5 million square meters will be completed!

One positive: filmmakers may find the area perfect for shooting zombie apocalypse and other dystopian films.

2011-11-26

Buy puts on the yuan?

From John Mauldin's Thoughts From the Frontline: Changing the rules in the Middle of the Game
“We saw today that 80% of Chinese construction firms say developers are now behind on payments (late cash flow), and that consequently land purchases are already 42% down y/y (slowing local authority cash flow). We also heard that pricing controls means that utility companies no longer have the cash flow to afford vital imports. Q3 corporate cash flow was down 27%.
“China's trade surplus is annualizing this year at USD152bn, FDI [Foreign Direct Investing] @ USD114bn yet its FX reserve increase is USD472bn. The attached chart [below] shows Chinese external borrowings which unfortunately were last updated at the end of last year, but the data would infer these have continued to soar.
“I am being told that European banks are now starting to shrink their foreign loan books to meet domestic needs, with Mexico, Brazil and China all big losers. With China now saying they may run a full-year trade deficit next year, and with them unable to afford to import vital coal and other resources without either suffering domestic inflation or without selling its FX reserves, it may now well be time to consider some sort of puts on the yuan. In fact the only reason perhaps not to is that India may collapse first, reducing the competition for coal and giving China a little more breathing room.
Using a fund such as ProShares Ultra Short China (FXP) may be the best route for retail investors to directly short a decline in the renminbi, although there will be numerous knock-on effects and funds such as PowerShares DB Base Metals Double Short ETN (BOM) should also do well. Direxion Daily Emrg Mkts Bear 3X Shares (EDZ) would also likely be a winner.

I haven't discussed my Marketocracy portfolios in awhile, but I have these types of ETFs in my China fund, which is up about 2% this year. The gains were mainly from a large gold position, which was the largest holding; it's now a very small position. The aim of the fund is to be a play on China, holding either Chinese stocks (always some), but also commodities and currencies related to China. Chinese are heavy gold buyers, hence the gold position. Europe is the largest export market, so ProShares UltraShort Euro (EUO) or PowerShares DB U.S. Dollar Index Bullish Fund (UUP) get added during crisis periods. The largest position is currently FXP, with short funds totaling about 33% of assets, which works out to effectively 70% short exposure based on leverage. Cash is near the mutual fund regulated limit of 35%, with short term bonds upping that to about 40%. My timing has been bad with the short funds, but I'm still of a mind to increase short positions if the market rallies. If timing remains an issue, I'll just move to cash equivalent assets and ETFs such as UUP to ride out the storm.

2011-11-25

Erdos property values collapse

Mish had this story up: Home Prices Crash 62.5% Since September in Erdos, a Chinese "Ghost Town"

I tracked down the original Chinese article: 鄂尔多斯"鬼城"楼市崩盘 万元房价跌去7成

The main story is that prices are down from 10,000 RMB per sqm to 3750 RMB.

Erdos (Ordos) is somewhat similar to the developments at the edges of cities in the Southwest, areas that may simply be abandoned. The difference is that the government is involved: they can direct development in a way that favors a move to the new city. Also, Ordos is in a resource producing region; the length and depth of this decline partially depends on where you see energy prices heading. All of which is to say, it's a special situation that doesn't directly translate into the housing speculation in Beijing and Shanghai. The takeaway is the trend and the force of the move. If we think of the whole market of individuals, by itself a single project or area going bust has very little effect on the whole. So far, there's the Wenzhou crisis, followed by price cuts in Shanghai and other cities, and now massive price cuts in Ordos. A trend seems to be firmly establishing itself, with Chinese monetary policy and global economic trends all supportive of the current trend. It won't be too long before Chinese recognize the crisis.

Here is more from Caixin: Ghosts of a Property Bust Haunt Erdos
A report by GoHigh Investment Co., a private equity fund, said the 10 million square meters of housing sold in Erdos last year compared to about 15 million in Beijing, even though the latter's population is more than 10 times greater.
The investor said most locals thought the asset bubble would eventually burst, which appears to be happening now, but each expected to grab his or her chair before the music stopped. Much of this speculation was fanned by the city's sprawling private lending network. Flush with money from coal mining and enticed by government invest-locally promotions, most Erdos residents poured personal wealth into the local property market.
Yan said one of her customers, a developer, defaulted and "gave me a property with 1,200 square meters, saying it's worth 60 million yuan. But who will buy it from me?"
1200 square meters is about 13,000 square feet, the price works out to about $725 per square foot. As a comparison, this article says NYC financial district homes are selling for about $900 per square foot.

2011-11-24

Chinese yuan now flowing out of Hong Kong

Offshore yuan market 'vibrant' despite slowing deposits
The ratio of yuan inflows to Hong Kong against outflows to the mainland had decreased to 0.8-to-1 as of the end of September, from 1.5-to-1 in the first half and 3-to-1 in 2010, he said, adding that the situation in October was almost the same.
In a Chinese article on the topic, one reason given for selling of renminbi was fund managers going to cash in U.S. dollars. The article is overall optimistic and blames the dip in deposits and flows on short-term phenomena. I don't think the ongoing debt crisis is short-term though, so it could be a rough 2012 for the yuan.

2011-11-23

Doom goes viral; time to start getting optimistic

Left wing Mother Jones blogger Kevin Drum: How Deleveraging in Europe Might Doom the U.S. Right wing American Conservative blogger Rod Dreher:Get guns & gold; Judgment Day coming

1931 was the tragic year because 1931 was the year people realized it was a depression. Until then, they thought it was a big recession. 2012 will be the tragic year of this crisis (or maybe 2011, depends on the speed of events in Europe).

There will be ways to profit on the short side, but I'm becoming optimistic. I haven't done as much individual stock research these past two years because I was waiting for good prices. I think now is the time to start looking for companies because the buying opportunities are coming. If you were afraid in 2008, 2012 may be much worse. To be a successful contrarian, you need to eliminate emotion or be emotionally contrarian: be greedy when others are fearful. Social mood is always a mix between positive and negative, and individually we can be similar. I'm not bullish here, but in my mind, the optimism bar is ticking up from here. Chance favors the prepared mind.

The Ordos credit bubble

Wild, Wooly Financing Threads Unravel in Erdos
Coal became a kingmaker in 2004, after the central government lifted price restrictions on the mineral. More than 300 mines in the Erdos area operated by small- and medium-sized enterprises quickly accumulated enormous amounts of wealth, and soon this money flooded into the real estate and private lending markets.
Erdos officials saw the economic risk posed by what became an over-emphasis on coal mines, and started trying to attract manufacturers by offering companies or investors 100 million tons of coal for every 2 billion yuan invested locally.
The gimmick worked, and as of August some 45 projects including auto and electronics manufacturing had gotten under way, with combined investments of more than 320 billion yuan. However, Li admitted that some projects have failed because "management was poor, products were not produced, and companies simply sold their coal."
For example, Hawtai Motor Group in 2006 promised to build a 15 billion yuan auto factory in exchange for two coal mines. One mine was sold in 2008, earning the company 700 million yuan. But today, the 400 hectares where Hawtai plans to build a factory remains vacant.
A classic credit bubble.

2011-11-22

The powder keg that is Japan

Japan's debt situation is far worse than Europe's, but thus far it has received a pass. The country is reaching the point where it needs foreign capital to finance its deficit because the pension funds will be net sellers of Japanese bonds, due to demographics. This news doesn't help: Japan slips back into trade deficit in October
Japan had a deficit of 273.8 billion yen ($3.6 billion), reversing a year-before surplus of 812.6 billion yen.

Hong Kong yuan trading limit doubled

China doubles HK yuan swaps to offer relief valve
The expansion will also boost confidence that Beijing intends to internationalise the yuan, which took a knock in recent weeks as trade limits between Hong Kong and the mainland were hit and offshore yuan prices diverged significantly from onshore prices.
The offshore yuan and bond market took a knock in recent weeks as the offshore price deviated as much as 3 per cent from mainland prices, an unwelcome fluctuation for many companies that rely on thin margins.
First takeaway: currency reform continues, a long-term positive for China. Second: the Hong Kong yuan fell against the Mainland yuan, it did not rise. Expanding swaps makes the yuan more attractive in the long-run, but the short-term impact is small.

29 apartment buildings to hit the Beijing market in December; U.S. hits China with diplomatic assault

Last year, 45 buildings hit the market in December. Of the 29, 13 have been priced and 62%, or 8 of them, are below market. 下月29楼盘扎堆入市

A slowdown in sales is worrisome due to the economic impact of the housing sector. China Property Dip Sparks Bank Fears
In April the CBRC told banks to test their loan books against a 50 percent fall in prices, and also a 30 per cent fall in transaction volumes.
In October, however, property transactions fell 39 percent year-on-year in China’s 15 biggest cities , according to government data. Nationwide, transactions dropped 11.6 percent, accelerating from a 7 percent fall in September.
The CBRC has not released the results and declined to comment. But one analyst who reviewed the stress-test documents said they did not take into account the impact that fewer transactions and lower property prices would have on bank collateral.
Adding up the slide in electricity demand, the slide in property prices, the decline in transaction volume, the outflow of hot money and the tight monetary policy, this is either a fluke blip on the radar or the start of a major slowdown. There are too many pieces in play for this to be sector specific. On the social mood front, the U.S. delivered a well-timed diplomatic strike: Softly, Softly: Beijing Turns Other Cheek — For Now
The US is moving forces to Australia, Australia is selling uranium to India, Japan is stepping up military actions and coordinating more closely with the Philippines and Vietnam in the South China Sea, Myanmar is slipping out of China’s column and seeking to reintegrate itself into the region, Indonesia and the Philippines are deepening military ties with the the US: and all that in just one week. If that wasn’t enough, a critical mass of the region’s countries have agreed to work out a new trade group that does not include China, while the US, to applause, has proposed that China’s territorial disputes with its neighbors be settled at a forum like the East Asia Summit — rather than in the bilateral talks with its smaller, weaker neighbors that China prefers. Rarely has a great power been so provoked and affronted. Rarely have so many red lines been crossed. Rarely has so much face been lost, so fast. It was a surprise diplomatic attack, aimed at reversing a decade of chit chat about American decline and disinterest in Asia, aimed also at nipping the myth of “China’s inexorable rise” in the bud.
The timing turned out to be brilliant. China is in the midst of a leadership transition, when it is harder for important decisions to be taken quickly. The economy is looking shaky, with house prices falling across much of the country. The diplomatic blitzkrieg moved so fast and on so many fronts, with the strokes falling so hard and in such rapid succession, that China was unable to develop an organized and coherent response. And because Wen Jiabao’s appearance at the East Asia Summit, planned long before China had any inkling of the firestorm about to be unleashed, could not be canceled or changed, premier Wen Jiabao was trapped: he had to respond in public to all this while China was off balance and before the consultation, reflection and discussion that might have created an effective response.
Leaving aside whether the U.S. moves were brilliant or not, they did catch China off guard and were a direct push back. The Obama Administration has had three years to formulate foreign policy, why unload a multi-policy attack now? Maybe social mood is the answer...if so, diplomatic confrontations will only increase as economic activity declines.

Renminbi versus oil; gold

In Yuan and Oil—The Bubble Connection?, I presented Hugh Hendry's argument that Chinese revaluation was fueling the rise in oil prices in 2008. When I saw speculation that China had intervened to defend the yuan, I remembered this story. Also, I believed that gold had become China's new asset of choice and that it would replace oil.
What do Chinese want to buy today? Yes, they still need oil and natural resources, but to my mind, what's more popular (besides real estate, which should also appreciate) is gold.
With that in mind, here are the charts of renminbi versus oil, updated through the end of October, and a new chart with gold. I lined up the axis to make the trends clearer, but the only thing to look for is similar patterns; these charts say nothing with regards to relative changes.

Number one Christmas gift in Greece: drachma?

Will Greece unravel by Christmas?
Without a credible intervention this process almost always ends the same way. There is in my opinion a very high probability that within weeks, or months at most, Greece will be forced to freeze bank deposits as a prelude to leaving the euro. Mexico in 1994 and Argentina in 2001 chose the Christmas/New Year holiday season to announce their devaluations. Will Greece follow suit? “If history repeats itself,” footballer Andrew Demetriou once pointed out, “I should think we can expect the same thing again.”
Much more, all good at Pettis' site.

Abundant signs of Chinese slowdown; time to get bearish on the yuan?

This ad was in the newspaper on Friday. It's a huge front page ad in the real estate section, boasting a 22% price discount off upscale homes. (10% off in China is advertised as 90% of full price.)


Chinese forex purchases fall on outflows
Foreign exchange purchases fell in October for the first time since December 2007, slipping 24.9 billion yuan ($3.9 billion), central bank data showed on Monday.
The Chinese stock market had peaked one month earlier in 2007. The news here blames outflows of hot money, but this could manifest into a greater problem if the economy weakens.
Some analysts said the fall in foreign currency purchases also suggested the authorities had intervened in markets to buy yuan and prevent the unit from falling — a marked departure from its usual practice of trying to suppress gains in the currency. “The drop is rare and sharp, and happened when market concern about a hard handing for the economy were at a peak,” said Hua Zhongwei, an economist with Huachuang Securities.
If the Chinese government did move to defend the currency, then its time to get bearish on the yuan. This is very, very big news if true because it means the Chinese government is not confident about the value of the renminbi.

10月制造业用电环比降3.2% (Manufacturing electricity use fell 3.2% in October) This story reports that industrial consumption was up, but the manufacturing sector saw a month-on-month decline. Electricity use in this sector fell below June levels. Manufacturing leads the economy and this is one indicator to keep a close eye on.

Amazing subprime ad from Hungary (2007)



ZeroHedge posted this video as part of a story about Austria's credit rating. Austria lent heavily to Eastern Europe (the bank in the ad above is Austrian), just as they did in the 1920s. It was the failure of Austrian bank Kreditanstalt in 1931 that touched off the second leg of the Great Depression.

21st Century bank run, continued

Farm belt rage over MF Global could chill markets
Fed up and frustrated with his broker's collapse and what he sees as the CME's slow efforts to help him retrieve $30,000 in stranded capital, Rietzke says his faith in the futures industry has been shaken to its core. "I would be hedging some feeder cattle right now, but I'm not going to do it. I'm leaving them exposed to the cash market and I don't like that," Rietzke said. Rietzke may reside far from the trading pit in Chicago, but he and thousands of other ranchers and farmers across the country are at the heart of futures trading.
A breakdown in the futures market has immediate effects on the behavior of industry. Consider that futures have traded in Chicago for 150-plus years and you can imagine the disruptive effect this could have. The market isn't threatened yet, but this is a very, very bad sign—and fits Prechter's prediction of a grand super cycle top. Investors abandon the stock market during bear markets, but for industry to abandon the futures market, a critical component of their business, is a much bigger deal.
"The exchange should make this right. Let them hold the bag instead of us," says cattle broker Lynn Wagnon. "We can't trust the system anymore."

2011-11-21

21st Century bank run

MF Global trustee doubles estimates of shortfall
The amount MF Global should have segregated for customers may be short by "$1.2 billion or more," Giddens said in a statement. He added the figure could still change. Giddens also said he currently controls about $1.6 billion of the brokerage's funds that he can use to pay back customers. His plans to pay back 60 percent of customer funds by early December would nearly exhaust that amount.
If you had $1 cash in your account at MF Global, at the moment there is only $0.60 left and they don't know if the rest can be recovered. MF Global was not a fly-by-night boiler room operation, it was run by former New Jersey governor Jon Corzine.

German brandy ad from 1940

Great find from Bruce Krasting. Translation below by him.
Everything should go well for all!
Yes, things should be even better!
Everyone should be able to work without worrying. All should be able to afford to travel, to fill their homes with beautiful things and to fulfill the heart's desires, both large and small.
That is what Germany wants! For itself and for all of the countries in Europe. Together, we will work to secure and raise the standard of living!
That is what Germany is fighting for. And only a German victory will realize the goal of a European economic community.
The ad is from 1940.

SHIBOR rising

Interest costs have been rising around the world and China is no exception. Since China isn't a market economy, the central bank has more power to push this number around, but it can't completely eliminate market forces and for now, this is a reflection of global market forces.

Here's Andy Xie on real estate: Fit to burst
Now is the last chance to burst the bubble without creating social chaos. China's labour market is quite tight. Blue-collar labour is in demand everywhere. As the property market adjusts, some bankruptcies would lead to lay-offs. But the laid-off workers should be able to find alternative employment quickly. Further, bursting the bubble would mainly bring down prices, but not necessarily sales volumes. On the contrary, lower prices would increase sales volumes. Hence, construction work would rise, rather than fall.
Lower prices would decrease local government revenue, which would lead to less infrastructure investment. But the negative effect on demand would be offset by the beneficial impact on consumption, because lower housing prices would mean households have more to spend on other things.
Real estate is China's Achilles Heel in many ways. It is the keystone of the government-led, credit fueled over-investment bubble. As Xie points out, lower real estate prices take money away out of government pockets and into the pockets of ordinary Chinese. Can they thread the needle again and avoid an economic crisis? Or is it too late this time? If there were no crises overseas, I'd lean towards the former, but it really may be too late this time because outside market forces will overwhelm attempts to engineer a soft-landing.

2011-11-20

Voters make their choice in Spain

We are going to see greater volatility at the ballot box in the next year and it will mirror the volatility in the financial markets. The result will be the rise of fringe candidates, but also very high/low results for the major parties. Spain is the first example as the socialist government is dumped for the conservatives.

People's party sweeps to crushing victory over Socialists
With the PP winning 186 of the 350 seats in parliament, 56-year-old Rajoy was given a free hand to carry out sweeping reforms and impose further austerity in an attempt to turn the country around.
In addition to one of the major parties winning an absolute majority and the other suffering its worst defeat ever, fringe parties also advanced:
The Socialists' 110 crop of seats in parliament was their worst result since democracy was restored to Spain at elections in 1977. Among a series of smaller parties to benefit from the socialist collapse was the communist-led United Left party, which increased its number of deputies from two to eleven.

Le Pen correctly reads social mood; does her rise foreshadow a third party in America?

Marine Le Pen is getting more attention these days. It's not because of any new position she holds, but because her position on the euro is becoming more mainstream (or inevitable). She wants France out of the euro and to restore the country's national sovereignty, including an exit from NATO.

Le Pen calls for France to quit euro

The first round of voting is in May. Can Marine Le Pen Win in France?
Le Pen is convinced that we have reached a tipping point. Just as the communist world collapsed, so will the so-called globalized world, she believes. “The future belongs to nations,” she says, at the risk of sounding resolutely anachronistic. “I went to Lampedusa in Sicily a few months ago; the EU cannot stop the flow of immigration coming from Tunisia and Libya. This will soon prove to everyone that only bilateral relations can work. The EU is a fat jellyfish. Can you tell me, really, do you think Latvia is interested in France’s and Italy’s immigration problems?” She recently, and rather astutely, argued in the Daily Telegraph that she was against immigration but in favor of diversity, saying, “I want Malians to remain Malians and defend the language and identity of Mali, Americans to stay Americans, the Chinese, Chinese and the French, French.”
Whether she subscribes to socionomics or not, her description of the situation is exactly on target. Social mood is moving in her favor politically. Also, for the bigger picture, globalization, while seen as an Anglo-American capitalist phenomena, is also an international socialist one, in fact politically it is more so because the institutions are generally socialist in nature. If you are looking at the very big picture, you will the trend of left-wing parties in Europe becoming more nationalist and/or right-wing parties espousing socialist policies, such as the SPD member Sarrazin in Germany or the Finns in Finland. If you stick to looking at the right-left divide between political parties, you will miss that the body politic is shifting to the right. To wit:
Le Pen recently declared on French television that if she were elected, she would partly and temporarily nationalize French banks; she believes their exposure to Greek debt has been too destabilizing. She would also ring-fence retail and commercial banking from speculative and highly risky financial banking. The other guest on the show, a socialist MP, could only discreetly agree.
As for the euro, she would negotiate its end. “The euro will collapse; it’s inevitable,” she tells me. “We just want to anticipate its crash, to prepare ourselves. We don’t want to sacrifice the people in order to save the euro. First, we need to devalue the euro, in order to get some fresh air. We would then plan the exit from the eurozone, but in agreement with our European partners.” As time goes by and the euro crisis deepens, her words sound more and more prescient. And while Sarkozy and German Chancellor Angela Merkel regularly fail to quell the fears of market Cassandras, Marine Le Pen is making the rounds of French talk-shows, smiling like a Cheshire cat, simply saying, “We won’t even need to kill it; the euro will die of natural causes.”
This is a major issue and she has the most common sense position of any candidate.

Le Pen will attract left-wing voters who have turned on globalization. Her main support is right-wing, which means Sarkozy is her chief rival in the first round of voting. The wildcard here is the economy and a possible bailout. If things continue relatively smoothly for the next 6 months (and yes, I consider the current market and economic activity smooth compared to what may happen in 2012), she probably won't win. But if the decline in social mood accelerates in 2012, sends markets tumbling and leads to some type of bailout or even larger power grab by the EU government, then she could find herself headed into the run-off.

Marine Le Pen is very different from Ron Paul in the United States because France and the U.S. have different cultures, but their rise and position in the race is very similar. There's been speculation that Paul could run on a third-party ticket next year and much of the right has focused on this because they believe it would hand victory to Obama. However, if the GOP were to pick Romney and the negative 2012 economic scenario plays out, Ron Paul could turn it into a three way race because he is an anti-war candidate. If he pulls 10% from Obama and added 10% from disgruntled Tea partiers, Ron Paul would be looking at near 30% support.

Academics and analysts starting to take situation seriously

Nomura "Goes There" With "The Legal Aspects Of A Eurozone Breakup"
Eurozone break-up risk has risen notably over the past few months, as European policy makers have failed to put in place a credible backstop for the larger Eurozone bond markets. Given this increased risk, investors should pay close attention to the ‘redenomination risk’ of various assets. There are important legal dimensions to this risk, including legal jurisdiction of the obligation in question. Risk premia on Eurozone assets are likely to be increasingly determined by this ‘redenomination risk’. In a full-blown break-up scenario, the redenomination risk may depend crucially on whether the process is multilaterally agreed and on whether a new European Currency Unit (ECU-2) is introduced to settle existing EUR contracts.

Krugman: The Mark-To-Market Amplification Of Financial Distress
In short, the ECB could be in the process of destroying not just the euro, but the world.

Here, Kyle Bass explains why and how Japan will enter a crisis.

Germans looking to subdue England

GERMANS TRY TO KILL OFF POUND
In a chilling threat to UK sovereignty, German finance minister Wolfgang Schauble predicted that all Europe would one day use the single currency. “It will happen perhaps faster than some in the British Isles currently believe,” he said.
His sinister warning followed the emergence of a secret German plan to build a powerful new economic government for the eurozone and block an EU referendum in Britain.
Social mood declining, conflict rising.

2011-11-19

German neo-nazi murders

This is big news in Germany and dominating all the talk shows. Neo-Nazis from East Germany went on a decade long crime/murder spree. Three dead are known to be involved, but there may have been more. A horror from the past
THE murderers’ boasts are as chilling as their crimes. From 2000 to 2006 the “National Socialist Underground”, an unknown group with just three core members, apparently killed nine people, eight of them of Turkish origin. In 2007 they shot a policewoman in the head. They claim credit for a 2004 bombing in Cologne that injured 22 people, mostly Turkish. A mocking video celebrates all this but has little to say about the group’s goals, promising “deeds, not words”.

2011-11-18

Election in Spain; Ron Paul explains his rise

Voters are swinging from left to right as they search to satisfy their negative mood. Spain on course to elect a conservative as PM
Rajoy, who first challenged for the premiership in 2004, is expected to unseat the Socialists on Sunday amid widespread unhappiness with José Luis Rodríguez Zapatero, who has announced he will stand down after the vote.
Chances are good that he won't last long, similar to Papandreu's reign in Greece, who was in crisis from the first day in office. In the article, Rajoy explains that Spain's government debt levels are low at 70% of GDP, but people are attacking the debt. I see this a lot in the news, but it's completely wrong. The issue with Spain has never been sovereign debt, it's the banking system. Mish has the latest: Spanish Banks Stuck with ‘Unsellable’ Real Estate, 50% of Real Estate Loans are Troubled ; Wave of Debilitating Defaults in Subordinate RMBS Tranches Coming Up; Spain Becomes Eurozone's Weaker Link

As for Ron Paul, he's starting to grab real headlines as he moves into the top tier of Republican candidates. GOP outsider Ron Paul gaining traction in Iowa
"The good news is the country has changed in the last four years in a way I never would have believed," Paul told about 80 Republicans and independents at the Pizza Ranch restaurant in this town on Friday. "In the last four years, something dramatic has happened."
What has changed? Social mood.

Euro bears are back

On the verge of protectionism? Depends on your view of the economy

Analysis: Increasing U.S.-China Friction
Mark Matthews, Head of Research Asia at Bank Julius Baer talks about why the US-China rhetoric is getting so heated.
Key point: he sees rhetoric easing because the U.S. economy will pick up. But he's looking at rear view mirror economic statistics, not the trend in social mood.

Ein volk, ein Reich, ein Zentralbanker

Source of English Translation (pasted below). Original German.
The future of the EU: Necessary integration policies for progress towards establishing a Stability union

1. Starting positions

To overcome the current debt crisis in the euro area permanently we need to meet four challenges:

Firstly, more short-term crisis management is inevitable in order to deal with thesituation in Greece above all, and the prevention to the contagion of states and banks.

Secondly, we must take decisive steps towards forging a real union of stability. Central to this is the establishment of a culture of sound financial management that is binding and firmly anchored. This is the issue that we have to address in the coming days and weeks, and herein lies the focus of this paper.

Thirdly, with the construction of an economic and fiscal union of stability, questions about the political constitution of Europe will be posed in a new light. We will need to think about the functioning and democratic legitimacy of the European Union anew. Therefore in the longer term we need a debate about the way in which the EU will develop into a political union. To that end we need to give Europe the financial constitution that it needs. The establishment of an independent European credit rating agency must be further promoted in this context.

Fourthly, for a permanent culture of stability to be useful corresponding economic growth is required. Our policies must therefore always be focussed on strengthening Europe’s competitiveness. This includes completing the internal market, and concentrating in the 2014-2020 EU budget negotiations on investment in education and research and fewer subsidies.

2. What elements are needed for a union of stability?

A community-wide monetary policy can not continue to operate without an integrated economic and fiscal policy. This is the basic construction deficit of the Economic and Monetary Union (EMU). Only if this deficit is overcome can the euro zone become financially stable and economically strong in the long-term. So far, there has been a lack of opportunities to implement measures tried and tested in difficult circumstances into practice.

Currently, there is no real possibility of imposing discipline on member states with massive budget problems. All previously existing options were premised on the voluntary principle. Moreover, there is no credible and workable solution to problem of excessive indebtedness that can no longer be solved by the bailout
package. We must therefore also create the opportunity for states to default in an orderly manner, and further develop the ESM into a European Monetary Fund. For the establishment of such a real fiscal union of stability, the Treaties need to be amended in several places.

a) Strengthening the Stability and Growth `Pact

Here a multistage process is possible:

• The theoretical sanctions should be upgraded to real automatic sanctions. Sanctions in the event of excessive deficits would then be able to be directly initiated by the Commission, even without a referral from the Council. This would clearly increase the effectiveness of the Stability and Growth Pact, and require a change to Article 126 TFEU. We should also impose sanctions in the preventive section of the Stability and Growth Pact in order to be able to nip emerging problems in euro-zone countries in the bud. Council decisions taken by qualified majority must be replaced here by reverse qualified majority voting, which would require the procedures in Articles 121 TFEU to be adjusted accordingly.

• Where the provisions of the Stability Pact are consistently violated, the possibility of a right of action before the European Court of Justice (ECJ) should be created, something which is presently explicitly excluded in the Treaties. To allow such an action, paragraph 10 of Article 126 TFEU should be deleted. The right of action would then apply to both the Commission and individual member states.

• To what extent persistent violation of the provisions of the Stability and Growth Pact could result in intervention in the budgets of member states should be fully assessed. In the discussion it has been suggested that the post of a European “Stability commissioner” could be established, who would have the right of direct intervention in national budgets in the event of permanent breaches of the Stability Pact, or could make suggestions for relevant Council decisions. In Germany, this would raise fundamental questions of constitutional compatibility (given the financial autonomy of the Bundestag). However, it is conceivable that such a Commissioner could have direct decision rights over the use of structural and cohesion funds if
a country does not comply with its commitments under the Stability and Growth Pact.

b) Development of the European stability mechanism into a "European Monetary Fund"

The instrument of the ESM is not sufficient. It requires real intervention rights in the budgets of those euro member states who are encompassed by the ESM’s programme, and who potentially place the stability of the eurozone at risk. The ESM must also be capable of executing an orderly default of a eurozone member
state. These two steps would allow the ESM to really become an “EMF”. Rights of intervention in the households of ESM programme countries: Those countries who have not been able to keep their fiscal policy in order and have had to claim assistance under an ESM programme will have to accept rights of
intervention in their national budgets.

• If a Member State accepts a support program from the ESM, this shall automatically lead to a restriction of its budgetary sovereignty in the form of a veto at the EU level before the draft budget is presented to the national parliament of the affected country, in the event it fundamentally violates the principles of sound financial management, thereby jeopardizing the success of the consolidation and reform programme.

• If such a country is unable to satisfy the conditions of the ESM programme, it can have concrete budgetary measures imposed upon it, for example specific spending cuts or the establishment of new revenue streams.

• Furthermore, it should be checked - as a last resort – if even more stringent measures are required. Consideration could be given to obtaining the active support of the affected Member State.

The decision to intervene in the budget of another eurozone member state would be taken by other eurozone states following a recommendation made by the ESM. Since a possibility of intervention depends on the fulfilment of a specific ESM programme, the ESM should play a decisive role here. In each case however, the Commission should be included in the process, and there should also be close cooperation between the ESM and a potential "stability Commissioner" (if such a position was desired).

When the exact rights of intervention in national budgets of programme countries are being designed, the constitutional provisions on the budgetary autonomy of the Bundestag must be observed in every case. The important thing is: it is about choices - with no financial obligations - for the other euro countries. Interventions in the budget of the affected member state will only take place following its application. The decision on the underlying ESM program will continue to require unanimity in every case.

The establishment of a procedure for an orderly default as part of the ESM: For member states that are covered by an ESM programme, but despite complying with it are unable to achieve debt sustainability, the possibility of budgetary interventions is not sufficient. Therefore, there must also be the option of an
orderly default in order to reduce the burden on taxpayers ( in the other eurozone states), and also to provide the affected country with an opportunity for a fresh start. In the present ESM Treaty the possible participation by private creditors through socalled "collective action clauses” (CACs) is not sufficient.

The ESM should consider the request made by a member state for relief loans against the criteria of debt sustainability. If this is negative, the affected member state would instead receive loans for a limited time only, during which the procedure for an orderly default would be prepared.

In order to make sovereign defaults possible where they are unavoidable, the threat of instability in the financial system resulting from such a default must be able to be credibly excluded. A plan to maintain the stability of the financial system in the event of an orderly default needs to be developed in close co-operation
with European banking regulators. This would determine which banks would be restructured and/or recapitalised, which will necessitate the drawing up of Europewide rules on bank restructuring.

3. How do we reach the Stability union?

In order to strengthen the Stability and Growth Pact and to further develop the ESM into a European monetary fund, international contractual agreements are required:

• For the creation of true automatic sanctions as well as the litigability of the Stability and Growth Pact for the ECJ (as well as, if applicable, for the establishment of a Stability Commissioner – depending on the extent of his right of intervention) a change of the EU Treaties is required.

• Also for the basic further development of the ESM into a European monetary fund a change of the European Treaties would be the clearest way and would moreover allow the fundamental involvement of EU institutions. In case this is not politically feasible, an alternative treaty between the Member States that
is legitimate under international law ought to be considered.

For a change of the EU treaty a short, detailed and limited Convention should be drafted. Represented in a convention are always (Art. 48 TEU) representatives of the EU institutions, national parliaments and representatives of heads of states and governments. Such a convention should freely present proposals within its narrow financial-political mandate that will subsequently be decided upon by an intergovernmental
conference. After national ratifications have taken place, the coming into force can be made possible in a short time (a few years). “Limiting the effect of the treaty changes to the Eurozone states would make ratification easier, which would nevertheless be required by all EU member states (thereby less referenda could be necessary, which could also affect the UK),

Outlook – from Stability union to Political union

Further development in the area of fiscal policy in the euro zone is essential for the permanent stabilisation of the euro, and also of utmost importance for the entire EU. Apart from its economic necessity, this would also be a great step forward in theintegration of the EU. It will start with the euro states, but should of course also be applicable for the other Member States when they introduce the euro. It is of great importance that as regards to content or institutions there will be no decoupling of the Eurozone from the rest of the EU; this can be met best when the proposed steps of integration, where possible, be enshrined in the EU Treaties. The close linkage between Eurozone and EU Member States could also be underlined by the presence of the EU presidency when the Eurozone meets (also when the President is not a Eurozone country).

In addition to a change of the EU treaties to eliminate the construction of EMU deficits, a new open discussion about long-term and basic deficits of the EU (democratic legitimacy, efficiency, coherency etc.) has flared up. These questions should also be addressed in the medium term. The goal could be a fundamental development of the EU treaties. The two initiatives are not mutually exclusive, but
rather will follow on from one another. The debate on the way towards a political union must begin as soon as the course toward stability union is charted.

Social mood and disease outbreaks

Antibiotic-resistant infections spread through Europe. Diseases conquered at the start of the 20th Century may turn into the plagues of the 21st.

2011-11-17

Financial firm shuts down in wake of MF Global

BCM HAS CEASED OPERATIONS (PART 1)
Everything changed just a few short weeks ago. A firm, led by a crony of the Obama regime, stole all of the non-margined cash held by customers of his firm. Let’s not sugar-coat this or make this crime seem “complex” and “abstract” by drowning ourselves in six-dollar words and uber-technical jargon. Jon Corzine STOLE the customer cash at MF Global. Knowing Jon Corzine, and knowing the abject lawlessness and contempt for humanity of the Marxist Obama regime and its cronies, this is not really a surprise. What was a surprise was the reaction of the exchanges and regulators. Their reaction has been to take a bad situation and make it orders of magnitude worse. Specifically, they froze customers out of their accounts WHILE THE MARKETS CONTINUED TO TRADE, refusing to even allow them to liquidate. This is unfathomable. The risk exposure precedent that has been set is completely intolerable and has destroyed the entire industry paradigm. No informed person can continue to engage these markets, and no moral person can continue to broker or facilitate customer engagement in what is now a massive game of Russian Roulette.
This is definitely partisan, but it's the people at the margin who act first. The first protesters at OWS were heavily represented by anarchists and communists, but it soon swelled to include lots of ordinary Americans. She also stopped paying her taxes, explain in an earlier post. (There are no permalinks so you have to scroll down to read posts.) From a social mood perspective, anger is manifesting. Coincidentally, OWS was on the move the same day she shuttered her firm...

China's forex weaker than perceived

Analysts suspect China's forex may be weaker than perceived. This article is waste of time because not only is there no new information, the conclusion is wrong. The most important piece of "news" is that China's forex is used to defend the currency. China can improve its financial position and strengthen or weaken the yuan depending on its mix of assets, but the immediate effect of spending the reserves is to weaken the currency. If, and that is a big if, those proceeds are used in a way that increases demand for the currency, then it can lead to increased demand for the yuan. However, since China still maintains a quasi-peg to the U.S. dollar, it needs dollars to defend the peg. If for any reason Chinese stopped repatriating yuan and chose to hold dollars, or went to the bank to exchange yuan for dollars and the central bank did not have enough dollars, the supposedly strong yuan becomes the Thai baht of 1997. China's monetary policy is to take export an earned dollar and swap it for Chinese yuan. If the central bank spends the yuan, then more yuan is unbacked. Until China decides to float the yuan, it still requires a large amount of forex to credibly back its yuan price.

The conclusion:
And it explains why foreign reserves cannot easily be used for domestic spending on infrastructure or shoring up pension systems, since simply converting the cash risks driving up both inflation and the value of the yuan currency.
Yes, it would drive up inflation via money printing (they handed out 6 yuan when they swapped the dollar for yuan, now they spend it again for 6 yuan, total 12 yuan per dollar), but government directed spending is no longer efficient. The low hanging fruit was picked and wasteful investments are piling up. Given the state of the global economy, the losses are more likely to show up, at which time some people may question the value of the yuan and switch to U.S. dollars. And note, if they spent all of their forex, then the yuan would likely fall, as one cannot print money at a rate of 12 yuan to 1 dollar and not expect the exchange rate to head in that direction.

Here come the elections: Taiwan

The country has its own prediction market and these are the current forecasts. 未來事件交易所目前對2012年總統選舉預測. The green line is the opposition DPP candidate, the blue the ruling KMT candidate, and the orange a third party candidate from the PFP.

If you want to see more contracts, they break things out to the city level and much more. Here's the link to the xFutures Exchange. Coverage of the presidential race is here. An English blog post explaining the exchange can be found here: The Exchange Of Future Events. (I'm also adding their blog to the Daily Reads on the right, at least until the election is over.) Polls still have the Guomindang (KMT) candidate Ma in the lead, but the prediction markets have the Democratic People's Party (DPP) candidate Tsai in the lead. A third party candidate has jumped in the race, Soong, and he may pull more from Ma or end up being neutral.

In case you have not followed Taiwan politics, the Communist party in China much prefers the KMT to the DPP and relations have warmed over the past 4 years. Social mood predicts both a loss for the incumbent party and a turn inwards by people and nations. The DPP has opposed teaching Chinese history in favor of Taiwan history. In earlier elections it also captured younger voters, which also works in the DPP's favor. It's not purely demographics though, it's related to the history. The KMT draws support from many people who fled Mainland China and have direct ties, whereas the youth feel a greater Taiwan identity.

Leaving Taiwan to check on the U.S., Obama is still way down in the polls, but isn't this headline surprising? Ron Paul’s 19 percent in Iowa may indicate a path to the nomination. Ron Paul still has a small chance of winning, but social mood makes it possible that a candidate intentionally ignored by the media and ridiculed by the elite of his own party stands a shot at winning the first caucus of 2012.

Professor Lang stays on theme

Lang Xianping's comments have been called exaggerated, but he stayed on theme today with his latest Weibo post (Google translated):
Following the debt crisis in Europe and America, 15, World Bank and the IMF warned that China's banking crisis will occur, resulting in a large number of recent European and American banks reducing state shares in the four lines. This crisis of the Great Leap Forward from four trillion infrastructure, resulting in severe local government debt default, leading to banking crisis. For example, 82% of the bank credit and infrastructure-related. European and American debt crisis led global stock market crash, the local government in April began the default is an important reason for the impact of China's stock market.
继欧美债务危机后,15号世界银行和IMF警告中国将发生银行危机,从而导致最近欧美银行大量减持国有四大行股份。这危机来源于四万亿基建大跃进,造成地方政府严重债务违约,从而导致银行危机。例如建行82%信贷和基建相关。欧美债务危机导致全球股市大跌,地方政府四月份开始的违约是冲击中国股市重要原因。

Kyle Bass warns on Japan

Hey talks about social mood around the last 5 minutes or so.

2011-11-16

Eye on Hungary

Hungary sparks contagion fears

Professor Lang goes viral; China is in recession, banking system broke

Last week, a friend of mine sent me the YouTube audio of his speech from October 22 in Shenyang. I've been busy and did not have time to listen to the 250 minute (!) speech. However, the Epoch Times, which seems to exist only as an anti-Communist party mouthpiece for the persecuted Falun Gong, has reported on the newsworthy items. Chinese TV Host Says Regime Nearly Bankrupt
Despite Lang’s polished appearance on his high-profile TV shows, he said: “Don’t think that we are living in a peaceful time now. Actually the media cannot report anything at all. Those of us who do TV shows are so miserable and frustrated, because we cannot do any programs. As long as something is related to the government, we cannot report about it.” He said that the regime doesn’t listen to experts, and that Party officials are insufferably arrogant. “If you don’t agree with him, he thinks you are against him,” he said.
Lang’s assessment that the regime is bankrupt was based on five conjectures.
Hat tip to Mish Shedlock, where I first saw the article. Mish's response is similar to mine, "so what else is news?" However, let's look at it from a social mood perspective. His speech is incredibly negative, delivered to a mainland audience (Lang is a professor in Hong Kong) and other Chinese have "jumped the wall" to listen to it on YouTube, which is how I found out about it. Part of Lang's popularity is due to his use of over-the-top language and hyperbole, something that Liu Junluo is fond of and one can find no shortage of on U.S.-centric blogs such as ZeroHedge. The only difference is the Americans think their leaders are bozos and the Chinese are wise technocrats, while Chinese believe their leaders are bozos and the Americans are led by wily masters of realpolitik. Perhaps the former is true in both cases......either way, social mood in China is low and declining.

2011-11-14

Authoritarianism in Europe aka rule by technocrats

Authoritarianism is back in Europe, it just has a kinder, gentler image. Democracy and Europe
In Greece, Lucas Papademos was sworn in as prime minister last week. He is not a member of Parliament, has never been elected to office and is a former Federal Reserve economist. In Italy, Silvio Berlusconi resigned under pressure and is being replaced by Mario Monti, a former European commissioner and Goldman Sachs adviser. Like Papademos, Monti is an economist who has spent his career in the employment of the international banks and has never been elected to office. He has, however, been appointed to the rather ominous sounding position of senator-for-life. Fortunately, he has yet to make any statements concerning the reliability of the railway schedules.
The media are describing these new unelected governments of Greece and Italy as "technocratic." They are also openly non-democratic. Indeed, to the extent that they are espousing policies that are directly to the contrary of those supported by the vast majority of Greeks and Italians, they are downright anti-democratic.

Land auctions fail in China

The real estate slowdown is picking up pace in China. More China Land Auctions Failing
On Nov. 2, 11 plots of land in Jinan were put up for auction, of which nine fell through because there were no bids. The remaining two were sold at a low price, Xinhua said, adding that the nine plots were for zoned for mixed residential and commercial use. Chengdu recently put up five land plots for auction, out of which two bids fell through and the remaining were transacted at low prices, Xinhua noted. In Nanjing, there were 16 plots put up for auction in October. Seven transacted at low prices, another seven auctions were delayed, while one fell through. Only one transacted at a marginally higher price than the starting bid, Xinhua said.

2011-11-13

OWS is a social mood driven protest

How I Stopped Worrying and Learned to Love the OWS Protests
Occupy Wall Street was always about something much bigger than a movement against big banks and modern finance. It's about providing a forum for people to show how tired they are not just of Wall Street, but everything. This is a visceral, impassioned, deep-seated rejection of the entire direction of our society, a refusal to take even one more step forward into the shallow commercial abyss of phoniness, short-term calculation, withered idealism and intellectual bankruptcy that American mass society has become. If there is such a thing as going on strike from one's own culture, this is it. And by being so broad in scope and so elemental in its motivation, it's flown over the heads of many on both the right and the left.
The writer of this blog post, Rolling Stone contributing editor Matt Taibbi, who is well known for his Vampire Squid take on Goldman Sachs, also gets into political devolution, which is interesting because he leans left in the ideological sense.
We're a nation that was built on a thousand different utopian ideas, from the Shakers to the Mormons to New Harmony, Indiana. It was possible, once, for communities to experiment with everything from free love to an end to private property. But nowadays even the palest federalism is swiftly crushed. If your state tries to place tariffs on companies doing business with some notorious human-rights-violator state – like Massachusetts did, when it sought to bar state contracts to firms doing business with Myanmar – the decision will be overturned by some distant global bureaucracy like the WTO. Even if 40 million Californians vote tomorrow to allow themselves to smoke a joint, the federal government will never permit it. And the economy is run almost entirely by an unaccountable oligarchy in Lower Manhattan that absolutely will not sanction any innovations in banking or debt forgiveness or anything else that might lessen its predatory influence.
What's coming down the road will not be a purely right phenomena, but the left was in charge of the centralization efforts of the 20th Century. The past 60 years or so were so dominated by the left that even the right-wing was much further left, giving rise to the term "paleocons" to describe those left behind in the political shift. Now we see declining social mood in Europe and the United States expressing far more right-wing sentiments: nationalism in Europe and decentralization in America.

Emigration trend in America?

Young males are leading the way in the desire to leave the United States of America.

2011-11-10

Yuan can go down

Yuan Bet Losing Its Luster
"People are backing out of the yuan trade because it's become a riskier bet since the scramble for U.S. dollars intensified in late September," said Tim Condon, Singapore-based chief Asia economist with ING Groep.
The Chinese yuan increases as the Chinese diversify their reserves away from the U.S. dollar. What happens if the U.S. dollar begins a new bull market? What if global financial crisis leads to the most epic dollar rally in history? People think China selling U.S. dollars means the yuan goes up because they believe the U.S. dollar is guaranteed to go down. They believe the Chinese economy will keep growing at 9%. Imagine both these ideas are shattered and China starts looking mortal, or worse, like every other emerging market that goes through a major financial or economic crisis.The other assets in China's reserves will decline relative to the dollar, weakening the yuan's value versus the greenback, but since the dollar still accounts for much of the yuan's value, Chinese exporters will be wiped out by a major rally and the housing market will implode in the face of such deflation. What happens when there's a run on the PBOC as Chinese madly swap yuan for USD? The minute they close the window because they cannot defend the peg, the yuan's value plummets.

China housing market inventory

Mixed Signals on Real Estate's Blind Corner
More than 500 excited shoppers patiently queued late into the night October 25 for a chance to buy a deeply discounted condominium home in a remote section of Shanghai's Pudong District.
the deep price cuts drew a lot of buyers into the market, so does it mean the housing market will stabilize?
Yet broader, third-quarter earnings reports from real estate companies around the country painted a darker picture. Among 49 real estate companies listed on the Shanghai and Shenzhen bourses that reported quarterly results as of October 25, combined housing inventory had climbed 140 percent between June and September, and homes worth about 531 billion yuan altogether were still waiting for buyers. In addition to this mounting backlog of inventory, the companies' financial reports pointed to deteriorating cash flow.
Slowing sales always lead the price reductions. Inventory is growing and developers are using price cuts to get out. This is similar to a bank run, when everyone tries to get their money out before the bank collapses.
Company executives decided that "whoever reduces prices first can absorb latent demand first," the source said. "What's important now is to survive. We'll consider damage to the brand later."

This section is optimistic:
Some experts say "survival" had nothing to do with the big developers' price-cutting strategy. Xue Jianxiong, an analyst at data cruncher China Real Estate Information Corp., said the companies simply sensed a marketing opportunity, and then seized it. Unlike smaller developers, the nation's big guns are less interested in making money on specific projects than maintaining stable turnover and cash flow nationwide.
The government has been pressuring developers to hold down home prices. So rather than wait for what could be more forceful policy action, developers decided to "reduce prices first" in order to "grab demand and take the money," said Li Guoping, chairman of real estate adviser Top Consult. "Price reductions later may be ineffective."
More significantly, big developers have changed market expectations. According to the Longfor source, the government's market-control measures are expected to continue until the end of 2012. Thus, he said, the company will have to work hard to maintain financial stability through what could be a slow period for business.
This is just wishful thinking. If the market hasn't turned, consumers won't wait around to buy homes and there won't be further price cuts. If the market has turned, these firms are going to the wall and some will not survive.
"We see the market trending toward falling sales, especially in big cities, and prices have begun to gradually decline," Vanke Vice President Xiao Li told investors during an October 25 conference call. "We think even those potential buyers who can buy homes will choose to wait because they're hoping prices will continue to fall."
That gradual decline may turn into a waterfall, if only because China doesn't exist in a vacuum: the European and U.S. economies are headed back into recession.
Guo Jianbo of Shenzhen Inland International Real Estate, a consultant, told Caixin some developers may sit on the sidelines in coming months while their competitors cut prices. They would rather wait and hope for a market turnaround that lets them sell at the high prices they really want. But waiting is risky, as government policy will ultimately determine market direction, up or down. "If macroeconomic policy doesn't change," Guo said, "there will be a domino effect of house price reductions."
If we think in terms of Elliot Wave, the first wave down is the initial selling wave, which has probably started. There's a bounce, and then all those developers on the sidelines start trying to sell and that leads to the third wave, the big selling wave when everyone looks to unload as they realize the decline isn't over. Also, if they wait for the government, they're dead. The government cannot control the economy, the upcoming problems are too big for any government to handle. (Excepting inflation, the government could decide to devalue the yuan to support housing and banking.) The government looks competent because its policies were enacted during rising social mood and anything even mildly ineffective can look like it works in an economy growing at 9% per annum. When the market and social mood turn, almost nothing they do will work.

2011-11-09

Jefferson County chooses to file bankruptcy

Jefferson County, Alabama, Votes to Declare Biggest Municipal Bankruptcy
A provisional agreement with creditors that commissioners approved in September included $1.1 billion in concessions and called for sewer-rate increases of as much as 8.2 percent for the first three years. The county, which encompasses the state’s largest city, Birmingham, couldn’t get signed commitments from creditors, Commission PresidentDavid Carrington said today. In addition, the 25-member legislative delegation for the county was unable to unite behind bills needed to implement the tentative settlement.
Notice the theme here. There was a deal on the table. Some of the politicians didn't want the deal, as this October 13 story shows: Jefferson County Democratic Lawmakers May Derail Debt Deal
The Democratic half of the Alabama Legislature’s 25-member Jefferson County delegation opposes a settlement with holders of $3.14 billion in debt, throwing the deal in doubt, according to three lawmakers.
What can explain why lawmakers, with a deal on the table, would toss it away and declare bankruptcy? It doesn't hurt that the deal was politically unpopular, including tax hikes to pay for it, but then, can you think of a bailout anywhere that is popular? That's why the last paragraph of this CNN story, quoting an analyst, is so completely wrong: Jefferson County, Alabama to file for largest municipal bankruptcy
Wilson White, an expert on municipal bonds who has written several books on the subject, said the situations in Harrisburg and Jefferson County aren't cause for concern about the wider muni-bond market. "Both relied on unusual financing agreements that got them into trouble," he said. "It isn't an economic problem -- it's a financial problem, because they did some things that they're sorry they did."
No. It's a social mood problem. It doesn't matter how they got into debt, what matters is that more governments at all levels will be pushed to the brink as social mood takes markets lower, and this will also increase public opposition to bailouts and deals, making bankruptcies more likely.

Socionomics Alert: Euro breakup, for real

There are a few stories out. The first one I want to draw attention to is not the most important, but just shows social mood extremely clearly. U.S. Stocks Extend Declines on Concern Nations May Exit Euro
Merkel’s Christian Democratic Union party wants to make it possible for European Union members to exit the euro area, Handelsblatt reported in a preview of an article to be published tomorrow, citing unnamed participants in the discussion.
I don't think this is the big news that sank markets, but it helped. However, look at what I posted on August 28 of this year: Germans Reject United Europe The post consisted solely of a news item in Der Spiegel, translated using Google. CSU wants to banish debt of euro zone countries
In coping with the euro crisis is the CSU after SPIEGEL information on collision course with Chancellor Angela Merkel (CDU). In a policy paper for a meeting of the Presidium of the party with European experts on Monday intends to CSU collect red lines for the euro rescue. "A permanent and unlimited liability joint and transfer union would mean a pooling of financial policy and change the character of European countries associated decision," says the paper, the CSU General Secretary Alexander Dobrindt and Vice President of the Bavarian Parliament, Reinhold Bocklet, have written. Instead, calls for the CSU ", means an insolvency procedure for sovereigns and banks in the euro zone." Debt notorious sinners are to leave the monetary union. "Is not a Member State willing to meet the convergence criteria permanently, there is the possibility of leaving the euro zone," it says in the paper.
What's the difference in the two stories? The CSU is the Bavarian branch of the CDU. The news is that this idea has spread, but its been publicly discussed at least since August.
The big story of the day is that France and Germany have been discussing a smaller eurozone. French and Germans explore idea of smaller euro zone
"We need to move very cautiously, but the truth is that we need to establish exactly the list of those who don't want to be part of the club and those who simply cannot be part," the official said.
As predicted, by socionomics and the declining social mood.
Social mood is also negative in Germany, but the media seldom cover it because Germans do not protest like the Greeks. Here's an article from Der Bild, a tabloid in Germany. Merkel's cash-All (Google translation)
But millions of workers are frustrated. Because: In our household, there is hardly any scope. The billion guarantees for bankrupt countries of Europe more and more pressing. For tax cuts is Chancellor Angela Merkel (CDU) provides just six billion euros. Rescue the planet burns in Merkel's money-all our hopes for relief? Read how big the giant planet in comparison to others is: With 233 billion euros in debt guarantees for sinners outshines everything else in the planet household universe.
A comparison of tax cuts versus bailouts and other spending programs leaves many Germans quite angry about the situation and with Merkel's performance. Is a breakup coming? I would bet on it.

There she goes...

I didn't think the euro would drop today, but this morning I seriously considered opening a new short position because for the first time in weeks, I was convinved that the larger downward trend would soon resume. I just thought I had some time. Italian politics (Berlusconi out), French politics (austerity plan), italian bond yields, trader sentiment (Tim Knight was losing some confidence again), plus technical signals all were converging as coincident signals.
One thing I always remember is that there are always new opportunities to make money. Preservation of capital is more important than missing a move. And something tells me, there are a lot more downward moves in the euro to come.

2011-11-08

On day YUM acquires Little Sheep, reports of unsanitary conditions hit media

YUM's acquisition of Little Sheep (0968.HK) has been cleared by regulators, but the media has launched an attack on the hot pot chain for unsanitary conditions. It's the big story of the day on the news service for QQ after a reporter in Guangzhou visited one of the restaurants.
小肥羊的卫生“黑幕” (Little Sheep's sanitary "dirty tricks")
Some things include oil residue on plates and cooking implements, reusing dishwater, not wearing gloves while handling food. Chinese consumers are extremely concerned about food safety and fast food companies are seeing more and more scrutiny. I doubt this will be enough to affect YUM"s stock, but look for English news today or tomorrow if the story grows.

Watch out for falling governments

Berlusconi to resign after parliamentary setback Prime minister George Papandreou resigns for new coalition governmentWho's next?

China to execute loan shark; home prices down and wages up

Developer gets death sentence for fraud
Mainland home prices to fall 'by up to 30pc'
"The market will likely experience policy-induced correction by 10 per cent to 30 per cent in the coming year, which should impact economic growth but is unlikely to lead to financial meltdown," Barclays analysts led by Huang Yiping said in a report yesterday. Premier Wen Jiabao reiterated on Sunday the government's decision to continue its tightening policy in the real estate sector and let property prices "fall to a reasonable level".
Nobody can accurately predict how falling home prices will affect the economy. Subprime was "contained" in the U.S.
Factory bosses protest at pay rise
If the pay rise - which will vary from region to region - is implemented, the minimum wage will have risen over 42 per cent in 10 months. Lau said the proposal to raise wages could not have come at a worse time as Hong Kong exporters expect overseas shipments to drop up to 30 per cent, depending on product type, in the year to June 30.

Rise of nationalism in Europe

Far right on rise in Europe, says report
The study reveals a continent-wide spread of hardline nationalist sentiment among the young, mainly men. Deeply cynical about their own governments and the EU, their generalised fear about the future is focused on cultural identity, with immigration – particularly a perceived spread of Islamic influence – a concern.
"We're at a crossroads in European history," said Emine Bozkurt, a Dutch MEP who heads the anti-racism lobby at the European parliament. "In five years' time we will either see an increase in the forces of hatred and division in society, including ultra-nationalism, xenophobia, Islamophobia and antisemitism, or we will be able to fight this horrific tendency."
The second comment is interesting. One thing I look for is where social mood interacts with fundamentals and reality. Social mood declines, but it's the places with weak fundamentals or established movements that are most likely to see rapid changes. In the case of Europe, Muslim demographics are on pace to swamp the natives in some countries, with Holland among the worst cases. Thus, as I've said before, nationalism and anti-immigration are, at this moment, rational reactions to the excessively open policies reached during the last rise in social mood and one place to look for a very strong reaction. By the time the government enacts rational policies, the public may be well on it's way to the other extreme.
Also, the left is absolutely bankrupt and will be unable to stop the rise of the right. Look at the statement from this leftism MEP, who says there will be a rise in "Islamophobia and antisemitism." Except the most radical actor so far is Anders Behring Breivik, who killed dozens of young leftwing political activists in Norway, including some members of the Palestinian Fatah. The rise of antisemitism in Europe is directly correlated to Muslim immigration and left-wing parties are anti-Israel. On top of that, Breivik wasn't just coincidentally killing people who dislike or actively support killing Israelis. Right-wing radical Breivik wrote pro-Israel comments in his manifesto and he chose his targets in part for this reason.
Social mood is declining. Young, male Europeans are turning anti-immigrant in response to mood and they are mainly concerned about Muslim immigration. Those who turn anti-immigration or just consider it, will find a lot of information and arguments that justify at least some reductions in immigration or changes to current policies. What they will hear argued back at them, is that they are Jew-hating xenophobes. This doesn't make one lick of sense, and that's why I say the right has nothing to stop it. It's just a matter of time and building support, the left burned out its ideology at the peak in social mood.

Ethnic conflict coming to America?

It Can’t Happen Here!
Friday, thousands in Moscow, giving Nazi salutes and carrying placards declaring, “Russia for the Russians!” marched through the city shouting racial slurs against peoples from the Caucasus.
In Nigeria, Boko Haram, which is Hausa for “Western education is sacrilege,” massacred 63 people in a terror campaign to bring about sharia law. Seven churches were bombed.
Sunday, The New York Times reported that Uzbeks in Kyrgyzstan are suffering “horrific abuse” following last year’s pogrom.
Ethnic nationalism, what Albert Einstein dismissed as “the measles of mankind,” and religious fanaticism are making headlines and history.
Welcome to the new world disorder.
What has this to do with us? Perhaps little, perhaps everything.
Could ethnic strife be in America's future?

2011-11-07

Wenzhou bosses return

Has the crisis in Wenzhou been halted? A couple stories report bosses returning, factories reopening, government crackdown on violence and an end to the panic. 温州15位跑路老板恢复联系 部分企业已恢复生产
温州15名“落跑老板”回心转意 部分企业已复产

China too maintain tight real estate policy

Now we're going to see how much of a bubble exists. Wen Pledges Property-Tightening Resolve
"I will especially stress that there will not be the slightest wavering in China's property-tightening measures—our target is for prices to return to reasonable levels," Mr. Wen said. "The property-tightening measures have been ongoing for two years, and some major policies have already been rolled out, especially this year's construction of 10 million public housing units, which will temper pressure on prices, and slow demand (for private housing)."
First real estate volume slows, then prices. We are just seeing the start of a slowdown in home prices, if the bubble bursts, 2012 should see a double-digit decline.

2011-11-06

Social mood and the movies: Santa will kill you!

In 1984, a movie titled Silent Night, Deadly Night starred an axe murderer dressed as Santa Claus.
After his parents are murdered, a young tormented teenager goes on a murderous rampage dressed as Santa, due to his stay at an orphanage where he was abused by the Mother Superior.
The movie was picketed by parents and chased out of the box office. Reviewers as well as the public were critical:
To protest the film, critics Roger Ebert and Gene Siskel read the credits out loud on their television show saying, "shame, shame, shame" after each name.

With the advent of the Internet, media has factured and many independent producers can make unpopular movies and release them through other channels. However, a newer Santa slasher film has received very positive reviews. Rare Exports: A Christmas Tale (2010)
It's the eve of Christmas in northern Finland, and an 'archeological' dig has just unearthed the real Santa Claus. But this particular Santa isn't the one you want coming to town. When the local children begin mysteriously disappearing, young Pietari and his father Rauno, a reindeer hunter by trade, capture the mythological being and attempt to sell Santa to the misguided leader of the multinational corporation sponsoring the dig. Santa's elves, however, will stop at nothing to free their fearless leader from captivity.
The reviews at Rotten Tomatoes are 90% positive, with the audience (at Rotten Tomatoes) rating at 71% positive.

According to socionomics, horror movies are more popular during periods of declining social mood. 1984 was in the midst of a major bull market, 2011 in the midst of a major bear market. Has this influenced the public's attitude towards a slasher Santa? Or, since many people probably haven't heard of this newer movie, is it just a result of changes in the entertainment industry? I for one doubt there would be as much protest had the movie run a big marketing campaign, but that is speculative. Note that in the early 1980s, horror movies were still popular. Also from the page about Silent Night, Deadly Night:
Opened on the same weekend as A Nightmare on Elm Street, and briefly out-grossed the latter by around $161,800 before profits fell about 45% by the second weekend.
However, one can view this as a hangover from the previous era, as industries and social mood do not shift on a dime, but change trend. Perhaps the failure of the slasher Santa signaled the waning of horror. Robert Prechter noted that horror as a genre was waning in 1985 in his Popular Culture and the Stock Market (PDF; sign up for free account with Socionomics.net to access).