Euro shorts ease up

China's economy slowly winds down

China has put up annual GDP growth of more than 7% this year, slower than previous years, but still impressive. M2 continues to grow at mid-double digits rates. The Shanghai Composite Index, meanwhile, is probing new 3 year lows and is within striking distance of the crisis lows! The actual low set on November 4, 2008 at 1706.7, a decline of 13.8% from today's close, a significant decline, but not unimaginable. Currently, at a November 2012 close of 1980, the Shanghai Composite is trading at levels last seen in November, December and January of 2008-2009.

I had to readjust the axis on the Shanghai Composite for the chart below, it was set at 2000. This shows continued deceleration in M2 and the sliding stock market.

Where is this headed? Some economic indicators are turning up, but the money supply figures indicate things are edging closer to deflation. What's most interesting is the hot money from QE3 flowed into China, yet didn't manage to push money supply higher; instead we saw the third month-on-month decline in M2 this year.

Technically, the 2008 lows are strong support. Psychologically, they are strong as well. However, it is a fragile psychology. The initial reaction will be: with 4 years of strong economic growth, why are stocks at 2008 crisis levels? Chinese stocks are some of the cheapest in the world, now is the time to buy!

The next reaction will be: what is wrong? If the answer to that question is debt and unsustainable earnings based on real estate and other speculative projects, then the lows could be breached with authority.


Gold and silver miners cheap relative to gold and silver

Junior gold miners ETF could rally 100% and still not reach the relative price levels seen in early 2011. The big miners (GDX) could stand to rally 50%, while silver miners (SIL) could pop 30%. This is all based on the recent past: GDXJ and SIL have less than 3 years of history. This shows how undervalued the sector is, as the past three years of data ignores the peak levels hit at the top of the financial bubble.

Dematerialized gold in India—it's about the rupee, not gold

Gold bugs are reading this situation wrong, as they did before with regards to Indian gold taxes.
'Demat gold to arrest rising demand'

In India, the high price of gold fails to make a significant dent in massive consumer demand, where gold is used as savings and doubles as wedding jewelry. This leads to massive imports of gold, which causes a current account deficit for India, which weakens the currency, which then makes gold more attractive as an investment. In a normal economic cycle, rising prices would eventually kill demand, but in financial markets there is a positive feedback loop. Rising prices make the asset more attractive, leading to more buying and higher prices, until everyone is involved in the bubble and prices collapse. (I don't think Indian gold demand is a speculative bubble, but the effects of rising prices are the same because one component of demand is speculative.)

Many gold bugs are pointing to this story as evidence of a lack of physical gold. The reality is much simpler: India is trying to defend its currency and cut imports. The aim is to redirect speculative and financial demand into a paper market, with the goal of reducing imports. There's not really a conspiracy here, at least not the one the gold bugs are looking for. If there's a "real" reason behind the move, it is to protect the value of the rupee. As the chart below shows, gold has been a steady winner in rupees and is already back near a new nominal high. If this is smoke, the fire is a slowly unfolding run on the rupee.


Self-determination: coming to a country near you!

Separatists winning in Catalonia, Spain: early results
With half of votes counted, the ruling Convergence and Union alliance, or CiU, was winning 48 seats in the 135-seat local parliament, well down from its current 62 seats.

The separatist Republican Left, or ERC, was winning 20 seats, with two other smaller separatist parties taking a total of 16 seats, giving the four parties 60 percent between them.

Regional President Artur Mas, of CiU, had campaigned on a pledge to hold a referendum on independence, in response to a resurgent separatist movement among Catalans who are frustrated with Spain in a deep economic crisis.
The Reuters article says the main party losing seats may derail a referendum. I see the opposite: the main party lost seats because it is a latecomer to the independence movement.

The recent outbreak of secession talk in the United States could very well end up in the same place as Catalonia. While the U.S. federal government claims states cannot secede, the United States supports secession and self-determination all over the world, from Tibet to Kosovo, sometimes even fighting wars to create new countries. In the not too distant future, you may read news of U.S. states seceding, appealing to the U.N. charter and receiving support from China and Russia.

This article from ABC lays out some of the problems related to secession. The main one is economic: people who choose security over self-determination will obviously opt for security, as seen in Quebec and as will probably be seen in Scotland. In places where the desire for self-determination is stronger, or where there's a strong economic foundation, secession will gain support as social mood declines.


Anti-foreigner sentiment continues to grow

Many Hongkongers urge cut in number of mainland immigrants
In the poll results released yesterday, more than half - 53 per cent - said new immigrants enjoyed welfare benefits, but did not contribute to society, four out of 10 said migrants both enjoyed welfare benefits and contributed to society, while only 3 per cent thought they made contributions without enjoying welfare.

French woman sings, faces racist rant on Melbourne bus
Australian police were Thursday investigating after bus passengers were caught on camera hurling a torrent of threatening and racist abuse at a French woman in an incident that went viral on YouTube. The woman and a group of friends were returning from a day at the beach when one of them

began singing in her native tongue, prompting an angry reaction from some of the passengers on the packed bus.
One aggressively demanded she "speak English or die" and then threatened to cut her breasts off. Another man pushing a pram joined in, shouting: "I'll fucking boxcutter (knife) you right now, dog."

The woman was then told "everybody on the bus wants to kill you" before the incident ended with a bus window being smashed.
Funniest part of the story: Australian police consider the French to be a different race.

American democracy + multiculturalism + negative social mood = recipe for major conflict

SPIEGEL: During your career, you have kept your distance from Western style democracy. Are you still convinced that an authoritarian system is the future for Asia?

Mr. Lee: Why should I be against democracy? The British came here, never gave me democracy, except when they were about to leave. But I cannot run my system based on their rules. I have to amend it to fit my people's position. In multiracial societies, you don't vote in accordance with your economic interests and social interests, you vote in accordance with race and religion. Supposing I'd run their system here, Malays would vote for Muslims, Indians would vote for Indians, Chinese would vote for Chinese. I would have a constant clash in my Parliament which cannot be resolved because the Chinese majority would always overrule them. So I found a formula that changes that...
"It's Stupid to be Afraid"


Excellent post by Mish puts the kibosh on yuan as new reserve currency

There has been a flurry of yuan talk of late, about a new yuan-bloc of nations that are using the renminbi more than the U.S. dollar. While the renminbi continues to grow in importance and currency reforms continue to expand the use of the yuan, the facts on the ground differ from the hype. China doesn't want the yuan to be the reserve currency.

Furthermore, although Mish doesn't get into this, China's currency reform is creating structural weakness, not strength, in the short-term. Over the next few years, the risk of a currency crisis in China will rise because pent up demand for foreign assets on the part of Chinese individuals and companies will drain the central banks reserves. Any policy missteps could lead to a rush for the exits, rather than a slow and steady rebalancing of the economy.

I see yuan hype as mostly coming from U.S. dollar bearishness. People are trying to figure out what will replace the U.S. dollar. Looking at "recent" history, the two reserve currencies were the British pound and then the U.S. dollar—two major superpowers with large numbers of colonies/allied/client states around the globe. Looking ahead, odds favor a multipolar solution, which argues for gold or some type of global fiat currency as the new reserve currency.

Anyway, on to Mish:

Is the Yuan About to Replace the Dollar as the World's Reserve Currency?
Three Essential Facts

1. China's bond markets are not big enough or deep enough for the Yuan to displace the US dollar.
2. Contrary to what most think, having the reserve currency is a a curse more than a blessing.
3. Neither China nor the US wants to be the global reserve currency.

The first point alone seals the fate in my opinion but let's take a closer look at the "curse of the reserve currency".


Bad news for China, if true

Conservatives dominate latest line-up for new Communist Party leadership
However, the sources said that the Politburo Standing Committee's likeliest line-up was now packed with conservatives including vice-premier and Chongqing party chief Zhang Dejiang , 65, propaganda chief Liu Yunshan , 65, Shanghai party boss Yu Zhengsheng , 67, and Tianjin party chief Zhang Gaoli , 65.

They said the biggest surprise was the omission of two reform-minded protégés of party general secretary Hu Jintao - party organisation department head Li Yuanchao , who turns 62 this month, and Guangdong party chief Wang Yang , 57 - mainly due to their relative youth and opposition from conservative party elders, including former premier Li Peng .
I expected the fall of Bo Xilai, a victory for reformers, to be followed by a reform-dominated Politburo. Instead, it appears conservatives are taking control, dashing the hopes for serious reform. There may still be economic reform, after all many major economic reforms occurred under Jiang Zemin, but it also could mean the party will maintain its tight grip on the economy.

An opening of the economy could provide the growth spurt necessary to ease the transition to a consumer economy. Without reform, the dead weight of state owned enterprises will tip the economy in the other direction, leading to much slower growth and a potential currency crisis in coming years.


Best election trade: buy Romney at Intrade

If you are able to trade on Intrade, a good bet is to buy Romney contracts, currently trading at $3.13. They will pay $10 in the event Romney wins and expire worthless should Obama be reelected.

Based on current polling, I expect Obama could win an extremely close race, but most polling is based upon a heavy Democrat turnout. I believe that polling assumption is wrong and Republicans will turn out in higher numbers than in 2008. Depending on the strength of that turnout, I believe a Romney "landslide" is in the cards.

You can also bet on state-by-state elections. Ohio is right in line with the Presidential contract because Ohio is seen as the lynch pin of the election. There's no advantage to buying Ohio then, since it's the same payout as with Romney. However, one could speculate on Pennsylvania or Michigan (I lean towards Pennsylvania). Currently Pennsylvania is $1.68 and Michigan is $1.59.

I can't trade with Intrade due to U.S. government restrictions. If I could trade, though, I'd drop the $300+ needed to pick up 100 Romney contracts.