2012-06-30

Euro shorts smoked......lightly

On Friday.

The story going around is that this is a short-squeeze, but the pop up in the two weeks prior squeezed out 70,000 short positions and only led to a small bounce in the euro. Assuming more than 20,000 short positions closed this week, the euro has barely gained ground despite the shorts running for cover. There's still plenty of powder for a big short covering rally, but they'll need to be chased out by heavy buying to push the euro up. Otherwise, if the shorts return, it's new lows for the euro.

How China will weaken the yuan

A good article by Andy Xie on China's problems. He doesn't discuss the value of the yuan, but we can extrapolate from his prediction.

Dealing with a Double Whammy

The reason for the above is that Western economies are falling. In the past, they lost jobs to China and borrowed to support consumption. China benefited from both, gaining jobs and exports. The double benefits covered up lots of domestic problems. As the bond market no longer supports such unsustainable spending in Western economies, their demand has fallen and China's exports have fallen with it. At the same time, China's market share of global trade is so high that increasing it is difficult because the West doesn't have many jobs left to shift to China. The double benefits China enjoyed have become a double whammy.

Without another export boom, China's domestic problems are exposed. If the government tries to stimulate the economy by increasing money supply, more inflation and declining efficiency will result because the stimulus money mostly ends up in the state sector and export revenue won't rise sufficiently to pay for rising inefficiency.
Given the increased internationalization of the yuan and Chinese investors main inflation fighting weapon being home purchases, the result will not be a mild inflation, but one that could potentially become hyperinflation.

Italian 5 Star movement surges in popularity

A new political party, the brain child of an Italian comedian, has surged in popularity. There's very little coverage in the media, but Mish has been covering it on his blog. His latest post: Time-Lapse Interactive Graph Shows Stunning Rise in Anti-Euro Sentiment in Italy

Below is one snapshot of a poll from his post. It shows support for the center-right (blue), center-left (red) and 5-star (yellow).

That is a meteoric rise.

It seems the party leans right-wing, since leader Beppe Grillo's main policy idea is "Get out of the Euro and default on debt" and they have been taking right-wing support, but the party only requires these five ideas:

Not be an elected politician prior to 5 Stelle
Commit to stay in charge for no longer than 2 terms
Commit to take a minimum salary and give the rest back to the community
Post a public platform on the internet
Be willing to hold a public debate on the platform

If their rate of ascent continues, they will be the majority party by autumn.

2012-06-29

China real estate market paradox: home sales rising as developers dump land

China's end market for housing has been picking up of late, a large factor being the effect, perhaps mainly psychological, of the PBOC's rate cut. However, developers continue to struggle financially and two Zhejiang developers have returned land to the government. Rongan Property (000517) and a real estate subsidiary of Languang (000981) have returned land in Ningbo and Zhoushan, respectively.

In Ningbo, the land in question originally sold for ¥90,000 per mu in 2009, only to later see its secondary market price increase well over 100 fold, to ¥15,600,000 per mu. A dispute with farmers delayed development for a year and Rongan cannot afford to sit on the land any further, with new regulations increasing the costs for holding idle land.

The story is similar with Languang's subsidiary. A third firm has quit the real estate business entirely: Zhejiang HSD Industrial (600687). Shares of the firm were suspended since April, but in the past three trading days (including today), shares jumped the 10% limit as the firm revealed plans to sell assets.

The apparent paradox referenced in the headline is not a paradox at all. End market demand for homes are seeing a bounce, but the financial stress on developers continues to grow. Eventually, the higher and lower stages of production will converge and it is always the higher stages that lead the lower stages. In sum, the outlook for China's real estate market remains bearish.

Referenced articles:
楼市回暖悖论:浙江10天爆两起退地事件
刚泰控股股价异动 连续两日涨停

Down come the dominoes in China; Big things have small beginnings

In a January post titled Financial firm fails in Beijing, I wrote:
Take out a loan from a bank, using a guarantee from a credit firm. Use part of the money to make short-term, high-yield loans to said firm. That firm then loans high-interest money to pawn shops.
That was specific to Zhongdan, but the practice is widespread in China.

Domino Risk Grips Zhejiang Bankers, Borrowers
The companies were financially linked to Tianyu through a province-wide, reciprocal loan-guarantee network. Tianyu's sudden failure raised the specter of a domino effect of defaults taking down every network participant and devastating their lenders.

"After Tianyu went bankrupt, banks in Hangzhou started calling in loans to other firms guaranteed by Tianyu," said the owner of a company tied to the network. "That had a ripple effect and affected a number of other companies."
People think China can bail out anyone because of their system of government, but even the Chinese suffer from the problem of complexity. Who do they bail out? Look at the chart below showing all the reciprocal agreements, these are industrial firms, not financial firms, with a massive web of financial interdependence. The policy implication is that Chinese regulators likely do not understand the relationships and will fail to stop the domino effect with targeted efforts. Instead, if there's a successful bailout, it will require the central government to spend vast sums of money.
Guaranteeing loans for each other has long been common in Zhejiang, said a risk officer at a major bank. Neither is there anything unusual about credit crises and subsequent government bailouts in the province.
The city of Shaoxing, for example, rode to the rescue in 2008 following the failure of a local petrochemical firm called Zhejiang Hualian Sunshine Petro-Chemical Co. Ltd.

Hualian Sunshine borrowed more than 8 billion yuan from eight banks and let a number of enterprises use that borrowed money to guarantee their own loans. Together, the network's participants borrowed more than 100 billion yuan, said an Industrial and Commercial Bank of China official.

The Shaoxing government intervened to arrange a restructuring of Hualian Sunshine's debt, assuming half the burden through a state-owned enterprise. Companies in the lending network also received government support.
This latest breakup is bigger. And there's another major Zhejiang firm involved in this type of lending and credit business: Evergrande.

2012-06-28

Citron says Evergrande is insolvent

Citron Research is pleased to present our analysis of Evergrande Real Estate Group. This research and analysis, compiled over several months, presents the conclusion that HK:3333 is essentially an insolvent company that has consistently presented fraudulent information to the investing public.

At the end of the report is a discussion of the Chairman's pet projects. This jarred my memory: there have been a lot of stories in the Chinese press lately about Evergrande's Guangzhou soccer club.

Star wants to attract more foreign soccer talents
After being voted the best player in Brazil in 2009 while playing for Fluminense, Conca signed a three-and-half-year transfer contract worth $10 million - a record at the time in the Chinese league - with Guangzhou Evergrande in July 2011.

Guangzhou Evergrande planning £325,000-a-week offer for Man Utd ace Rooney
Guangzhou Evergrande owner Xu Jia Ying has his sights set on bringing Manchester United star Wayne Rooney to China.

Chinese club preparing huge offer for Kaka
Spanish and Italian newspapers are speculating that Chinese football side Guangzhou Evergrande are preparing an offer for Real Madrid's star Brazilian midfielder Kaka.
Italian paper El Corriere dello Sport and Spain's Diario AS both report than Guanzhou are prepared to offer Kaka around 18 million euros a season on top of paying 25 million euros to Kaka's current club, Real Madrid, for his transfer, Xinhua reported.

From the report, he's a comparison of payroll and cost per win and per point. They are buying championships, but at a heavy cost. This is nowhere close to being Moneyball.


Impact of Obamacare ruling: deflation

The Obamacare ruling seals the major question facing the country: the fiscal cliff and Taxmageddon. There will be no stopping the deflationary tax increases now.

I'm not prepared to go full in here, but I'm thinking the best strategy is to short everything, even gold (use futures or derivatives, do not sell physical) and go long USD.

2012-06-27

Negative social mood leads to conflict, do not increase the odds of conflict

I like these examples from China because it shows that negative social mood leads to conflict and one major source of conflict is the large migration of people, regardless of where they come from. In the West, this conflict is often blamed on racism or other prejudices, but while they may be present, they are not the cause—social mood is the cause. In Europe and the United States, those debating immigration and migration should be looking at the increased conflict in China and consider what will take place as ever growing migrant populations, with far less in common than Han Chinese who share language and culture, enter their countries at the same time social mood falls off a cliff. It is a recipe for disaster.

Zhongshan township sealed off after riot
A township in Zhongshan city in Guangdong was sealed off by police yesterday as tensions remained high following a riot on Monday night that was believed to have been caused by disputes between locals and migrant workers.
About 30 people were said to have been injured and at least two public security vehicles vandalised in a clash with police in Zhongshan's Shaxi township, the Hong Kong-based Information Centre for Human Rights and Democracy said.

The exact cause of the riot was unclear, but a statement issued yesterday by the Zhongshan city government said security personnel at Longshan village, under the jurisdiction of Shaxi, restrained a 13-year-old boy from Chongqing by tying him up after he beat up a local primary school pupil in the town.

...Monday's riot drew renewed attention to unrest between locals and migrant workers from Sichuan . Last June, rioters torched government offices and burned cars for days in Zengcheng , Guangdong, known as the world's denim-manufacturing hub. The incident made international headlines and triggered soul-searching in the province about the need to address tensions involving migrant workers and locals.

2012-06-25

PBOC gives in, weakens yuan

However, the yuan weakened in the spot market, climbing above 6.37 yuan to the U.S. dollar. Based on the today's fixing, the yuan can fall beyond 6.38 before hitting the 1% limit.

With the euro down sharply today, the yuan is likely trading in overvalued territory once again.
Yuan dives vs dollar after holiday, spot near 7-mo low

Beijing home sales surge during Dragon Boat Festival

Friday through Sunday was the Dragon Boat Festival and Beijing home buyers came out to buy.

Sales were up 56% from the May 1 holiday and up 289% versus last year's holiday.

端午假期京楼市签约量增近三倍 楼盘抬价难成气候

2012-06-24

Chinese yuan at the lower limit; will central bank begin the defense of the yuan?

The widespread assumption of a stronger yuan faces a tough test here as the market pushes the yuan right to the lower edge of the trading band. Last week, central bank moves to strengthen the yuan lasted for two days before it resumed its fall. At this point, one side must give: either the yuan rallies or the central bank lowers the daily fixing to stay in line with the market.

I can find articles discussing China's desire to defend the yuan for political reasons (U.S. elections), but found no discussion of what it means if China begins depleting its dollar reserves in order to maintain the value of the yuan. China's large reserves and capital controls will mask the situation, but if the currency becomes overvalued, U.S. dollars will start flowing out of the banking system.

Key to the picture is the euro and yen, but for the moment more so the euro. Since the currency basket is unknown, no one knows the impact of euro weakness, but if it drops sharply versus the U.S. dollar, the yuan should decline as well. Failure to move lower with the euro would indicate the yuan is overvalued, attracting speculators who will start taking U.S. dollars out of the system.



A NYTimes article from Friday provides some explanation for a weaker yuan: Chinese Data Mask Depth of Slowdown, Executives Say
Questions about the quality and accuracy of Chinese economic data are longstanding, but the concerns now being raised are unusual. This year is the first time since 1989 that a sharp economic slowdown has coincided with the once-a-decade changeover in the country’s top leadership.

Officials at all levels of government are under pressure to report good economic results to Beijing as they wait for promotions, demotions and transfers to cascade down from Beijing. So narrower and seemingly more obscure measures of economic activity are being falsified, according to the executives and economists.

“The government officials don’t want to see the negative,” so they tell power managers to report usage declines as zero change, said a chief executive in the power sector.

Another top corporate executive in China with access to electricity grid data from two provinces in east-central China that are centers of heavy industry, Shandong and Jiangsu, said that electricity consumption in both provinces had dropped more than 10 percent in May from a year earlier. Electricity consumption has also fallen in parts of western China. Yet, the economist with ties to the statistical agency said that cities and provinces across the country had reported flat or only slightly rising electricity consumption.

Massive short covering barely boosts the euro

and it already declined from the June 19 levels in this chart.


2012-06-21

Zombie attacks continue

The zombie meme is firmly planted in the media's head, and perhaps the public as well, if this is a new trend rather than a shift in reporting focus.

Latest 'zombie' eating attack: Man under the influence gets naked, bites off chunk of man's arm

It comes as Moody's kicks off another round of action among the zombie banks: Credit Suisse Cut 3 Levels As Moody’s Downgrades Banks
“All of the banks affected by today’s actions have significant exposure to the volatility and risk of outsized losses inherent to capital-markets activities,” Moody’s Global Banking Managing Director Greg Bauer said in the statement.
The downgrades leave Citigroup Inc. (C) and Charlotte, North Carolina-based Bank of America Corp. (BAC) as the lowest-rated banks among the 15 at Baa2, two levels above junk. Moody’s kept the long-term ratings of both lenders on negative outlook, which means they may be cut again.

2012-06-20

Beijing Times editorial warns on housing

Yesterday, I discussed the early signs of a reflating bubble and an admonishment from Xinhua. Today, the Beijing Times chimes in with an editorial on the housing market.

The property market is not on a stable growth path (楼市不是稳增长的实现路径)

The editorial asks if the price spike in Guangzhou is a sign that housing policy will be relaxed, that another turning point has been reached? It answers in the negative, the rebound in the market is not a sign of policy easing, but rather could lead to further tightening.

It also asks where the lines are on the government policy: what constitutes skirting the line and what is over the line when it comes to local government housing regulations?

An important line in the editorial referenced losing in the last moment, i.e. the government fails to finish the job and allows the bubble to reflate. This is a major risk, since the government would need draconian measures to pop a housing bubble that reflates over the government's strict regulation and obvious objection.

I still stand by my comments from yesterday: it appears the government may be losing control. Unlike previous editorials that combated rumors of policy easing, these are trying to talk down an actual increase in prices and activity with threats of further tightening—but there's no talk officially yet of tighter housing regulations. In a flip of the script, the editorials are now using rumor to stop a potential market trend.

The housing market is now at the mercy of the economy and the central bank. A repeat of 2008, courtesy of Europe this time, will hammer the housing market even worse than 2008. On the other hand, if the Fed eases and inflation picks up, it appears the real estate market is ready to take off.

Corsets are back

Perhaps not so much a sign of social mood as a sign of obesity.
The re-re-re-rise of the corset

2012-06-19

PBOC forces yuan lower amid G20 summit

The central bank is forcing the yuan lower as the daily fixing falls more than 1% below the market price. Look for a reversal after the G20 summit ends.



Doom and gloom, American apocalypse

The public feels doom is imminent because they have negative mood.
'MODERN-DAY NOSTRADAMUS' WARNS U.S. OF DOOM
“My concern is we are experiencing an epic failure of leadership at almost every level of American society right now,” Rosenberg told WND. “Something has gone terribly wrong with the American experiment. Our families are imploding, our national debt is exploding, experts on the left and right are warning us that we need to change our direction because we’re on an unsustainable trajectory economically, socially and culturally.

“Unfortunately, too many leaders in our country are stuck in business as usual mode and Americans are getting anxious that the ice is cracking under our feet.”
There's certainly some reality behind the feeling of dread. The present value of all future U.S. liabilities, based on current Medicare and Social Security law and including all other debt and obligations, is $100 trillion, well beyond the ability of the American people to pay. However, it is mostly fueled by negative mood. In another time, the inevitable cuts would be ignored (1982 to 2008) or even seen as great reform about to unleash a new era of economic growth.

Chinese real estate bubble at risk of reflating

There are signs that China's real estate bubble is reflating.

Evergrande buys Guangzhou site for record sum
Mainland developer Evergrande Real Estate won a commercial site yesterday in Guangzhou's new business district for a city record price of 32,968 yuan (HK$40,353) per square metre.

The bid surpassed the previous record of 20,605 yuan per square metre paid by a consortium of China Overseas and Poly Real Estate for a residential site in the city in 2010.
The property slowdown in China has been mainly contained in the residential sector, though some residential developers have sold commercial projects on the cheap in order to stay in business. This news signals there's no sign of a slowdown and the bubble may even be reflating, especially since China just changed the rules on vacant land: Mainland developers to pay 20% vacant land fee.
Starting next month, developers who have not started construction work on any land in accordance to the new policy will be slapped with the levy, according to the new rules promulgated by the Ministry of Land and Resources (MLR) issued on Thursday.

Under the regulation, developers’ vacant land will be defined under three categories. First, it relates to those developed land area which are less than one-third of the total construction area, or second, the land’s investment capital outlay is less than 25 percent of the total investment amount, or third, the land on which construction has already been terminated for over a year.
If Evergrande sits on that land, it will cost them about $10 million per year.

Elsewhere, the decline in home prices is slowing or even picking up.

Price falls ease as buyers return
Property sales increased significantly in May, said Alan Chiang Sheung-lai, head of mainland residential property at DTZ. "A number of new projects in Beijing and Shenzhen drew many home seekers, who queued up overnight to buy flats. These projects recorded strong sales as the asking prices were far below market expectations and the banks offered a discount on mortgages."

Homebuyers queued for new projects in Beijing, Shenzhen, Qingdao, Nanjing and Shanghai, according to mainland media reports. Some of the projects sold out in just a few hours, but the reports said some sales were faked by developers.

In Beijing, new home prices fell 0.1 per cent in May - a slight improvement from the 0.2 per cent decline in April, the statistics bureau data showed.

New home prices in Guangzhou and Shenzhen also fell - by 0.1 per cent and 0.3 per cent, respectively, last month, up from 0.2 per cent and 0.4 per cent the previous month.
The rebound in activity has led the government to step up the rhetoric once again, this time through Xinhua:

Xinhua: Some people intentionally misread the policy signal to push up home prices again (新华网:一些人有意误读政策信号 希望再次炒高房价)

This article quotes an analyst saying the rate cuts helped release pent up demand and developers jumped on the shift in psychology by raising prices. The article goes on to reiterate the government remains committed to bringing down home prices.

The big outside factor: QE3. China's real estate market should have started slowing considerably by now and with the PBOC in a rate cutting cycle, the government may be unable to control prices. Should there be another global easing, or even one by the Federal Reserve alone, inflation will surge in China and bubble will take off again.

2012-06-18

Economist Tyler Cowen says there is a lack of trust; socionomics says it's negative social mood; Hungary as test case of my theory

In Lack of trust is one reason why macro policy is underperforming, economist Tyler Cowen discusses his NYTimes article, Broken Trust Takes Time to Mend.

The point of his article is that politicians must first restore trust, before they can implement effective policies. He's only one step away from the answer: social mood!

Why is trust low? Socionomic theory posits that trust is just one factor that rises and falls along with the optimism and pessimism of society. Mood peaked in or around 2000 and has been in decline since then (in the developed world). Belgium had no government for more than a year; Japan has had six prime ministers in six years and their approval ratings begin to fall moments after taking office; the UK has a coalition government, the first since WWII; Greece cannot even form a government; EU states that launched the euro in a great show of unity at the start of the last decade, find more and more issues to disagree over; the United States similarly has a very divided electorate with a divided government.

Besides internal fighting, protectionist rhetoric and measures are increasing: the EU threatens to impound Chinese planes, China threatens to retaliate. European candidates are talking up protectionism and one just won (Hollande), as are U.S. politicians, most notably Romney (who stands about an even chance to win). Greece accuses Germany over the debt crisis, Germany accuses Greece.

Trust in things as basic as the money we use has decreased. To restore trust, politicians must realize that they are in such an environment and that extreme trust restoring measures are needed. However, mood is exogenous: policy makers must play with the mood given them, not the mood they want. Electorates are playing musical chairs with extreme parties and my prediction is that they will keep playing musical chairs until they land on extreme right wingers because the governments of the West are firmly left-wing (liberal) and so turning right represents real change (for example, U.S. right-wing foreign policy would be isolationist, anti-free trade, anti- mass immigration; there is basically no right-wing presence in the U.S. government). In the U.S., there will be the election of a paleo-conservative/libertarian president; the UK will see a similar result. In Europe, the right isn't so libertarian. Hungary already elected an extreme right-wing government and the opposition is coming from even further right!

That is the future, a hard tack to the right. Wisconsin is a foretaste of the future in America and the faster politicians tack hard-right, the faster they will restore trust in government and the better they will prevent more extreme outcomes by satisfying voter demand for change.

Here's a look at Hungary today: Crisis-weary Hungarians lose faith in government
The deepening economic crisis is taking its toll on Hungarian Prime Minister Viktor Orban’s government — two years after a landslide election victory his party’s support is crumbling and three-quarters of voters believe the country is on the wrong track.

Growing disillusionment can be felt across the central European nation, whose economy is sliding into recession again after a sharp downturn in 2009, with the rising living standards that Orban promised when his party won power failing to materialise. While still paying off a 2008 bailout from the European Union and the International Monetary Fund, the government is seeking a new financing backstop to shield the indebted economy from the neighbouring euro zone’s mounting debt crisis.

Negotiations with the IMF will be difficult, however, as Orban will be reluctant to give up or tweak his Fidesz party’s main policies, including a flat income tax and family tax breaks aimed to support the middle class, the party’s core voter base. Orban has been at loggerheads with Brussels over several laws that critics say served to cement his party’s strong powers beyond the end of his term, while huge windfall taxes imposed on banks and selected business sectors eroded investors’ trust.

......According to a survey by pollster Median, Fidesz’ support dropped to its lowest in a decade at 22 per cent last month, even though it still has a lead over the opposition Socialists, who stand at 16 per cent. Far-right Jobbik hovers around 11 per cent. The survey showed 76 per cent of the people are pessimistic about the country’s outlook while another recent poll by Ipsos showed this rate even higher, at 81 per cent.
Hungary tacked right, rejected the IMF and Brussels and saw popularity rise even as the economy weakened. Voters are upset and want a change, that must be good news for the socialists, right?

Hungary Lauds Hitler Ally Horthy As Orban Fails To Stop Hatred
From such hamlets to the halls of the neo-Gothic Parliament in Budapest, where the nationalist Jobbik is the second-largest opposition party, radicalism and its symbols are spreading as Hungary heads into its second recession in four years. Prime Minister Viktor Orban is seeking to obtain an international bailout after Hungary’s debt was downgraded to junk last year.

“Where there are economic problems, there are tensions between peoples and groups,” said Gabor Bognar, 47, Csokako’s deputy mayor. “If we don’t allow people to let their steam out by erecting a statue, then they’re not going to stop there.”

Nationalists are making gains across Europe as leaders struggle to avert prolonged economic turmoil.

What’s different in Hungary is that Orban is accused by Jewish groups and political analysts of including parts of the radical agenda in his own policies, a charge the government denies. Orban, 49, has condemned a flurry of anti-Semitic attacks in the past month, which the Jewish group Mazsihisz has called a “tide of hatred inundating Hungary.”
See also: Hungarians hail Horthy as recession fans nationalism

If you click the Hungary tag on this post, you can see previous coverage of the country. Viktor Orbán leads the right-wing Fidesz party. It is portrayed as extreme right-wing by the European media, with some truth, but the reality is also that Fidesz isn't the far right. There's no love between Fidesz and the more left-wing European establishment, but to the extent the European left weakens Orban, the result will not be to their liking. Instead of helping the Socialists retake power, they are increasingly likely to assist the far-right Jobbik party. One of the concerns of the party is the status of Hungarian minorities in other nations, if the parallels to the 1930s aren't clear enough.

2012-06-17

Rate of home price decline slowing in China

Prices are down in China, but the rate of decline is slowing and transactions are picking up. If the bubble were bursting, price declines should pick up with transactions. The rate cut is likely having some effect and if this holds up for a few months, the soft-landing argument will start showing some real evidence. Then the story shifts to relative price declines in 2013, as the new government is likely to implement a massive tax cut package along with policies aimed at rapidly growing wages and disposable income.

房企降价动力减弱 6月楼市成交有望再创佳绩

Hong Kong exchange to offer silver futures trading in yuan

Hong Kong is moving quickly to compete with Shanghai's silver trading:
Gold exchange to launch trading in silver futures
The Chinese Gold & Silver Exchange Society is launching silver trading in three different currencies, predicting continued gains in precious metal prices and rising mainland demand.......

......Cheung said the exchange plans to launch silver futures in Hong Kong dollars, followed by US dollars and later by yuan. Investors could settle in cash or opt for physical delivery.
This follows the Hong Kong Mercantile Exchange's silver trading launch in 2011 and Shanghai's start last month: China's SHFE silver futures contracts expected to have impact on global market
With the Shanghai Futures Exchange gaining approval to begin trading silver futures, traders insist a significant shift appears to be in the making.

Wang Ruilei, an official with precious metals trader CGS Company told newswire agencies that the market would be bigger and more liquid with the advent of the futures contracts. Traders added the futures exchange would provide direct access to silver for Chinese investors.
And oil futures may be coming later this year: Crude Futures to Be Launched This Year
The Shanghai Futures Exchange aims to launch the nation's first crude futures by the end of the year, said Wang Lihua, chairwoman of the exchange.

The exchange will allow foreign investors to trade the contracts, as part of the nation's move to make its commodity futures market more accessible to foreign capital, Wang told a forum in Shanghai on Monday.

Herman Van Rompuy and José Manuel Barroso see their shadow: six more weeks until next Greek election



Link.

Here's reaction from the UK: Greek election: Live. The have this graphic:


The most important news is that PASOK says it won't join a coalition unless Syriza is in it. New Democracy and PASOK could form a government, as they had before the previous election. The only other pro-bailout party, or at least not anti-bailout, is the Democratic Left, but they don't have enough seats to form a majority with ND.

Syriza considers the election a win since their percentage went up, but after the first election, ND and PASOK only had 147 seats, meaning Syriza had a shot at a grand coalition, if Golden Dawn was included. I believe they would have secured the votes for a coalition this time around had they proposed a grand coalition, but instead, ND and PASOK combine for 162 seats, meaning Syriza would need PASOK to join a coalition.

In sum, while anti-bailout parties gained ground in their electoral percentages, pro-bailout parties gained more ground and more importantly, they control more seats.

The euro is up on the news, but the rally won't last more than a few days, if it even lasts one day. The rally could extend if PASOK changes its mind and forms a coalition with New Democracy, but they seem to understand that such a coalition is unlikely to last long. If no coalition is formed, there will be new elections in August, setting the stage for six more weeks of the same.

Euro shorts ease up; renminbi stays weak

There was a small rebound in the euro this past week as shorts eased their positions, most likely due to uncertainty over the policy response to the Greek election. The best trading scenario would be a mildly positive election result, leading to a euro rally and no central bank response. The bigger the euro spike in that scenario, the better the chance to fade the rally.


The renminbi remained weak and the PBOC again tried to take the market lower, leaving the market and the central bank at odds once again.




2012-06-15

Andy Xie says Chinese home prices could quickly fall 25%

He says the housing bubble is blocking economic reform because disposable income is going into housing. A decline in home prices will lead to faster rebalancing as assets come out of the real estate sector and flow into the economy. He says the government shouldn't fear a drop in revenue and a decline in infrastructure development.

My take: China's government leaders need to trust in the free market and let their economy stand on its own. Propping it up with government directed investment and a real estate bubble is a recipe for stagnation. Let the people spend and invest.
中国房价可能很快会跌25% 财富转向居民

Apocalypse watch

Mostly links and excerpts in this link, but the current movement away from society is very similar to the movement in the late 1960s and 1970s when social mood last tumbled.
Apocalypse & the Uses of Religion

2012-06-14

Forced abortion makes national news in China

A mother could not pay the ¥40,000 fine for having a second child (about $6,300) and was forced by the relevant local government department to have an abortion. This has become national news with photos on major news websites.

Late-term abortion forced on woman
Deng was working in Inner Mongolia when the abortion was carried out. He was contacted after authorities took away his wife to discuss the fine for having a second child, which was 40,000 yuan (HK$49,000). "That's more than what I earned in four years," he said. "We don't have that much money."

Deng wrote in the online posting that township officials used black cloth to cover Feng's head while she was driven to the Zhenping county hospital in Ankang. They then induced the labour by giving her a shot that killed the fetus.

Zhenping family-planning authorities quickly issued a statement on Monday saying that a consensus was reached with Feng to carry out the abortion, "after repeated persuasion by the township officials". However, Deng yesterday refuted the local government's statement.

"Several people pushed her into a car and then drove her to the hospital. My family was barred from seeing her. She would not consent to the procedure, so they forced her to put her fingerprint from her left hand on a document," Deng said. "It was against her will to have the abortion."

Photos here. Warning: The photo in that link shows the aborted 7-month old child laying next to the mother, although the child is blurred.

2012-06-13

North Dakota keeps the property tax

According to one report, less than 25% of voters voted for the proposal. That said, lawmakers say they received the message from voters that property taxes are too high.

Measure 2 fails: North Dakotans vote to keep property taxes

Hong Kong dollar-peg creator says HK can ditch the peg

The former head of the Hong Kong Monetary Authority, in charge when the U.S. dollar peg was launched, says it's time for Hong Kong to get rid of the peg.

HK 'can ditch dollar peg' - Yam
The peg is considered a pillar of the city's financial stability and is such a sensitive issue that officials hardly ever talk publicly about it. Yam is the highest ranking former official to publicly question it.

This is all the more remarkable given that one of his career highlights as head of the Hong Kong Monetary Authority was his successful defence of the currency mechanism amid tremendous pressure during the 1997 Asia financial crisis. He pushed the overnight interbank rates up to 280 per cent to squeeze speculators from the currency market.

Now his questioning of a policy he once defended is bound to kick-start debates over the currency's future.

Many public figures in recent months have criticised the peg for contributing to inflation, but none of them carried the political and intellectual weight of Yam.


'Too-hasty' Yam gets taken down a peg
Responding after Yam's briefing, chief executive-elect Leung Chun-ying said the former central banker had not talked to him before releasing the paper.

Leung said Yam's views were purely personal and had absolutely nothing to do with the new government, which would stick to the peg.

In fact, if Leung had not beaten rival Henry Tang Ying-yen in the chief executive election in March, Yam's proposal might well have been adopted by the new government.

Yam, a long-time colleague of Tang, was known to be the former chief secretary's senior adviser during the campaign. And in an interview with the Wall Street Journal in March, Tang said he did not rule out adjusting the Hong Kong dollar's trading band against the US unit if he was elected.

Tang did not spell out when would be the right moment for such a change, saying only that he would bear it in mind as a possibility to serve the best interests of Hong Kong when necessary - words that Yam strongly echoed yesterday.

2012-06-12

Green protectionism leads to EU-China conflict

China ready to impound EU planes in CO2 dispute
Chinese airlines, which have been told by Beijing not to comply with the European Union's Emissions Trading Scheme, refused to meet a March 31 deadline for submitting carbon emissions data.

A new stand-off looms after EU Climate Commissioner Connie Hedegaard said the carriers would have until the end of this week to submit their data or face enforcement action.

"Chinese airlines are unanimous on this. We won't provide the data," Wei Zhenzhong, secretary general of the China Air Transport Association, said on the sidelines of an International Air Transport Association (IATA) meeting in Beijing.

EU member states can fine airlines for non-compliance or carry out other reprisals including impounding aircraft.

"We would not like to see a situation of 'you hold up my planes and I hold yours'," Wei said.
Actually, they might like it, given the negative social mood.

As the euro crumbles, Britain looks to exit the EU, soon EU breakup will be mainstream

Is the end finally arriving for the euro?
EU: movement of money, people can be limited
The European Commission has been providing legal advice to others who are considering possible scenarios should Greece leave the euro, a European Union spokesman said.

Olivier Bailly said Tuesday that, legally, limits could be imposed on movement of people and money across national borders within the EU if it's necessary to protect public order or public security — but not on economic grounds.

EU studies options if Greece abandons euro
"At the commission, there is no plan whatsoever pre-supposing a Greek exit from the eurozone," he said.

"If there are people within member states or elsewhere who are studying risks, that's their responsibility.

He said: "Others are doing speculative scenarios, we are doing legal clarification," Bailly said.

The spokesman said these ideas had been discussed under "disaster scenarios," but said "we are not scriptwriters."

NOW 80% DEMAND VOTE TO QUIT EU
It also showed most of those expressing an opinion wanted to leave although the questions did not explicitly spell out the option. On if Britain should belong to a single market in a wider European Community, 40 per cent said No, 32 per cent Yes and 27 per cent Don’t Know.

Answering the peer’s second proposed question of whether to stay in the EU with the option kept open of joining the more integrated eurozone, 44 per cent said No, 36 per cent Yes, and 19 per cent Don’t Know.

Meanwhile, eurosceptic think tank Open Europe said yesterday that failure quickly to rewrite our terms of membership would result in unstoppable public support for what it believes would be a damaging exit.
Calling for the breakup of the EU was a fringe position only a few months ago, let alone years ago. Within the next few months, I suspect it will become a topic of mainstream debate.

Candlestick chart shows yuan weak almost everyday

The yuan has consistently been falling, made clear by this candlestick chart that shows most days closing near the low (in terms of RMB, it appears high because this chart is USD/CNY) for the day.





Below the chart is the renminbi prices at various banks. The second and fourth boxes from top to bottom are the bid and offer at various large banks.

Rightward movement continues in American Midwest: taxes may be abolished; cops can be shot

First, in the mother of all tax revolts, North Dakota is considering the elimination of the property tax. A property tax rebellion in the late 1970s California is often credited as a sign of or a spark for the deregulation and tax cutting of the Reagan era.

North Dakota Considers Eliminating Property Tax
“I would like to be able to know that my home, no matter what happens to my income or my life, is not going to be taken away from me because I can’t pay a tax,” said Susan Beehler, one in a group of North Dakotans who have pressed for an amendment to the state’s Constitution to end the property tax. They argue that the tax is unpredictable, inconsistent, counter to the concept of property ownership and needless in a state that, thanks in part to wildly successful oil drilling, finds itself in the rare circumstance of carrying budget reserves.
This paragraph explains most of the force behind the move. North Dakota is reaping tax windfalls from the energy sector and doesn't need to rely on property tax. More importantly though, is something that has been going on across America: property taxes have been increasing, even though property values are falling. The government decides the value of a home for tax purposes and in many areas of the country, they have refused to account for the popping of the real estate bubble. When times were good, they were quick to adjust higher and take in more revenue. As prices fall, they are slow to adjust, if at all, and raise property tax rates to maintain revenues. In this light, the move to ban property taxes in North Dakota is not unlike the battle over collective bargaining in Wisconsin: it's about the cost of local government.

North Dakota voters to decide on abolishing property tax
North Dakota voters will decide Tuesday on the ultimate tax revolt: abolishing the property tax altogether. A citizen-led petition drive has put the daring, all-or-nothing proposal before the voters in a state flush with tax revenue, jobs and prosperity generated by an oil boom.

If the property tax is eliminated, it would be the first time since 1980 — when oil-rich Alaska got rid of its income tax — that a state has discontinued a major tax, reports the Tax Foundation, a non-partisan research group. North Dakota would become the only state not to have a property tax, a levy the state has had since before it joined the union in 1889.
In all of the talk about the U.S. national debt, one threat that's seldom mentioned is the risk that, contra what everyone expects, the taxpaying public revolts and causes the crisis. Just about everyone I read expects tax hikes, some spending cuts, economic stagnation and/or inflation. A tax revolt is a fringe idea at this point, but these battles could spread nationally. A tax revolt is interesting to consider because as the articles point out, there isn't enough money to cover existing spending in North Dakota. However, if the public becomes angry enough, it may not care. Also, taxpayers wouldn't feel the most pain, that would be spread across millions of people receiving welfare, entitlements, corporate subsidies, defense contracts, etc. But in the political scheme of things, the taxpayers hold asymmetric power because if they choose to revolt, they don't need to do any violence or even protest, they only need to stop paying the bills.

Meanwhile, Indiana is the first state to allow citizens to shoot the police. That is not a typo.

Indiana First State to Allow Citizens to Shoot Law Enforcement Officers
Police officers in Indiana are upset over a new law allowing residents to use deadly force against public servants, including law enforcement officers, who unlawfully enter their homes. It was signed by Republican Governor Mitch Daniels in March.

The first of its kind in the United States, the law was adopted after the state Supreme Court went too far in one of its rulings last year, according to supporters. The case in question involved a man who assaulted an officer during a domestic violence call. The court ruled that there was “no right to reasonably resist unlawful entry by police officers.”
Citizens can only shoot officers who are acting illegally, but this type of law is a strong counter to growing authoritarianism. The main question is whether Indiana expands the scope of a legal entry into a home, or whether the law serves to curtail police abuses.

2012-06-11

Crackdown on homeless people

Another consequence of negative social mood. Cities' homeless crackdown: Could it be compassion fatigue?
"It is a good thing when you see municipal governments paying attention to the homeless population and trying to find a number of solutions to the crisis," said James Brooks, the National League of Cities' program director for community development and infrastructure. "Cities have an obligation not only to the people in the parks but to people in the wider community to prevent a public health problem."

Brooks' group supports the ordinances and said they are holistic approaches to solving a problem that will not simply end by giving people shelter. The key to helping homeless people is to get them indoors where social service workers can help them, Brooks said.

An opponent of the measures, Neil Donovan, executive director of the National Coalition for the Homeless, sees the ordinances as possible signs of "compassion fatigue."

"People are getting frustrated and getting angry at the issue," he said. "The person who is asking for money outside a coffee shop, the person who is camping just outside the ballpark, the chronically homeless are getting the brunt of this anger."

2012-06-10

Chinese interest rates liberalized as part of rate cut

China's central bank has given deposit and lending rates a wider band.

Lowered Interest Rates 'a Step Toward Liberalization'
Based on the size of current outstanding loans, a 0.25-percentage-point cut in lending rates means the combined interest payout could be reduced by 145 billion yuan, Liu said.

Under the new rule, the interest rate for one-year deposits can rise to 3.575 percent, 10 percent above the benchmark rate and higher than the old 3.5 percent level.

The adjusted one-year lending rate can drop further to 5.04 percent, 20 percent less than the benchmark lending rate.

This is in contrast to the old rule which stipulated that deposit rates cannot exceed the benchmark level and lending rates are at most 10 percent below the benchmark level.

2012-06-09

Greek social mood

A Golden Dawn party member throws water in the face of a leftist and smacks a communist.

Far Right Greek MP slaps down female rivals on TV, wanted by police
Greek far-right leader of Golden Dawn says women in TV debate provoked him into attack

Another look at the renminbi

This chart is updated through Friday, more clearly showing how, if the trend continues, the PBOC will have to decide whether it will follow the market lower or force the renminbi higher and risk secondary losses (such as U.S. dollar outflows).


Shorts keep piling into euro trade



Are the printing presses firing up?

In posts in 2009 (Evidence of inflation?) and 2010 (You call this inflation?), I looked at actual Federal Reserve money printing. In a credit system such as in the United States, the Federal Reserve swaps Federal Reserve notes for debt, often U.S. Treasuries. Money creation is actually done through the banks, and the Federal Reserve creates the base money after the debt is first created by the private economy. When the system goes into deleveraging, debt is destroyed, either through repayment or default, and the Federal Reserve cannot stop the decline because it swaps debt for debt. Since 2008, the U.S. government has offset private sector deleveraging by running trillion dollar-plus annual deficits, which the Fed monetizes.


The Fed's 2012 New Currency Budget. As you can see from the second chart, while the value of printed notes is forecast to rise, it's not all that much in the scheme of multi-trillions in deleveraging and a low velocity. Furthermore, if you compare 2011's budget to 2011 actual printing, the Fed forecast a similarly sharp increase last year that never materialized, with the value of printed notes actually falling.

Turning away from the U.S., ZeroHedge noticed news that could indicate the printing presses in Europe may fire up: "Material Banknote Order Reinstated"
Fortress Paper Ltd. ("Fortress Paper" or the "Corporation") (TSX:FTP), announces that its wholly-owned subsidiary, Landqart AG, a leading manufacturer of banknote and security papers, has had a material banknote order reinstated. This order was unexpectedly suspended in the fourth quarter of 2011 which negatively impacted the financial results of Landqart's operations in the first half of 2012.
Shares of Fortress Paper gained 17% on Friday on the news. ZeroHedge comments:
Well, if the chart of De La Rue is any indication of how banknote printers respond to potential European disintegration, it just may be that the best hedge to a VIX soaring to 80, aka "disorderly Grexit" as explained earlier by Citi, just may be TSX:FTP.
This is yet to be confirmed, but this is they type of news needed to lead to inflation. The central banks cannot inflate by swapping debt for debt, they must create paper currency that survives debt repayment and default, in that way the money supply does not contract when debt is destroyed.

2012-06-08

Israel deports illegal infiltrators; immigration is on the wane

Anti-immigration sentiment has swelled in Israel and spilled over into government deportations and mob violence.
Netanyahu orders swift deportation of 25,000 illegal African migrants
Speaking at Sunday's cabinet meeting, Netanyahu said that while it is not possible to expel citizens of Eritrea and Sudan, whose lives would be at risk in their home countries, holding facilities for them must be built in the Negev as quickly as possible.

A senior Israeli official said that two different groups of migrants were presented during Sunday's cabinet debate. The first was migrants from countries with which Israel has diplomatic relations, and with regard to whom there is no barrier to repatriating them under international law, he said. This group numbers some 25,000 of the approximately 60,000 African migrants now in Israel.

The second group comprises migrants from Eritrea, Sudan and Somalia, who cannot be repatriated because their lives would be at risk, according to the official. This group comprises some 35,000 people.

...The Foreign Ministry also said that over the past five years it has approached third countries to ascertain whether any of them would be willing to accept refugees from Eritrea or Sudan. Israeli diplomats were in touch with 30 African countries and 10 Western countries but were categorically refused.
The migrants who cannot be deported are to be housed in a desert facility.

Jerusalem apartment housing migrants firebombed
An apartment housing 10 Eritreans has been firebombed in Jerusalem, against the backdrop of rising anti-migrant sentiment in Israel.

Four of the occupants were taken to hospital suffering burns and smoke inhalation. Graffiti sprayed on the walls of the building said: "Get out of the neighbourhood."

The Jerusalem fire department and police said arson was indicated. "This looks like an arson attempt on an apartment which housed Eritrean migrants. The police [are] treating this all due seriousness and will employ all means at its disposal to apprehend those responsible," said a police statement.

The attack in the early hours of Monday morning follows a series of firebombings in southern Tel Aviv – an area in which African migrants are concentrated – including apartments and a kindergarten. Shops run by or serving migrants were smashed up and looted in a violent demonstration last month, in which Africans were attacked.
Israelis and Jewish people generally have been more pro-immigration and anti-deportation because of Jewish history. However, every society succumbs to social mood. Israel's actions may have some impact on the United States as well because many Jewish Americans also live or have relatives in Israel.

Peter Beinart looks at the issue in What Gives on American Jews and Immigration?
In other news we already knew, American Jews are wildly liberal when it comes to sex. They overwhelmingly support gay marriage and abortion rights. They’re a lot less enthusiastic about immigration. A slight plurality opposes “the U.S. government making it possible for illegal immigrants to become U.S. citizens.” On immigration, in fact, American Jews are slightly to the American Jewish leadership’s right. I think Steven M. Cohen, who conducted the poll with Samuel Abrams, has noticed this waning Jewish support for immigration before. It’s intriguing, and depressing, given that many Jews still valorize their Ellis Island roots.

Not quite sure what explains this. I’d suspect that anti-immigrant sentiment is highest near the border and among the Anglo working class, since such populations most often compete with immigrants for services and jobs. But Jews aren’t well represented in either cohort.
The United States is the least likely nation in the West to deport its illegal migrants, but if social mood gets as negative as forecast by Prechter, even the U.S. will have mass deportations. Even large pluralities and sometimes majorities of Hispanics in America favor tighter border controls and immigration restrictions. As Beinart notes when looking at Jewish opinion, open-borders is really an elite opinion in America and well out of touch with the opinion on the ground. If it were put to a vote today, the U.S. would probably come close, if not vote in favor of, deporting all illegal immigrants. At this point, it's just a matter of how long the elite can hang on to political control. As Wisconsin showed, once a popular policy is implemented, decades long trends can be ended quickly, therefore it's about not letting any politician implement a popular policy, which is why the Obama administration has fought so hard against state level immigration or voter ID laws (mainly intended to keep illegal immigrants from voting and to reduce voter fraud) such as in Alabama, South Carolina and Arizona.

Yuan tumbles on rate cut

The yuan closed down about 0.1% to 6.3705 and the central bank raised the fixing to 6.3188 on Friday. At this fixing and close, the yuan is down 0.8% from the fixing and the central bank allows it to float within a 1% band. Here's a chart of the renminbi against the daily fixing, through June 7 (yesterday).



This shows the central bank has thus far failed to push the renminbi higher, but if it keeps moving the fixing, it can force the market lower—at the risk of dollar outflows. If they go with the market and allow depreciation, 6.40 would be the first level to watch for, since beyond that level the renminbi will very quickly hit a 52-week low versus the greenback.

The renminbi is appreciating versus the euro and this is not across the board weakness, but many investors still watch the U.S. dollar cross, it's still the bulk of the currency basket and it's important politically. And if China wants to ease its currency to help with export to Europe, it will have to depreciate against the dollar, at risk of it becoming a big issue in the U.S. presidential campaign, where Romney and his surrogates continue to say he will name China a currency manipulator on day one in office.

2012-06-07

No economic growth since 1980?

Karl Denninger has an updated chart on deflation in Oh No, Not The Truth!
Nobody over there (or here) is talking about this, of course, and the reason is simple: The rich and powerful in the banking industry made "their money" not through industry and innovation but through fleecing the people via unbridled credit creation, which they controlled!

If that is withdrawn then their "wealth" suddenly disappears from whence it came, and what's worse is that the pension funds and insurance companies who sold contracts to pay specified amounts of money predicated on this credit creation being able to be maintained suddenly cannot make those payments and collapse.

It would be nice if we could avoid having to take this adjustment but even simple maintenance of the credit system at its present level is insufficient! The only way those promises can be kept is if the rate of expansion is maintained, and that's mathematically impossible.

And the longer we wait to take the adjustment the worse the economic impact will be.

I'm more focused on 1997-1998, when the Asian Crisis erupted. The period since then clearly is a debt binge that fueled the housing bubble and GDP growth.

This chart shows the compelling case for deflation because the increase in credit has already occurred. There will be no further increase in credit without an increase in money, and thus far the governments of the world have not implemented true inflation plans. Up until now, all of the bailouts involve swapping debt for debt, leaving total credit intact. Deflation remains the most likely outcome until a political decision is made to truly inflate the currency, which would mean bypassing the central bank and having the government increase spending beyond tax revenues without issuing debt.

China's rate cut: behind the curve

China is starting to cut interest rates, but they're starting slowly and they're behind the eight-ball. These rate cuts won't have real impact until 2013 at the earliest.

All eyes need to remain on housing. Home sales are picking up in Beijing (北京部分楼盘被曝单价涨五千 逼近调控前水平), and that means price declines should accelerate. However, with the renminbi weak in the forex market, there's also the possibility that inflation picks up. Here's English coverage of the data: "Big four" cities' home purchases bounced in May
Broader pictures across these big cities in China, according to the latest report, said trading volume of new homes in Beijing, Shanghai, Guangzhou and Shenzhen averagely increased more than 20% year-on-year in May. And except for Beijing, average home prices in the other three cities all increased, with Shanghai 2.46% year-on-year, and Shenzhen almost 20% year-on-year.

Compared with the statistics released by China Index Academy, average price of 100 home price tracked cities decreased for the ninth consecutive months, home prices of the big four cities seems more reluctant to follow the trend.

The sudden bounce of home buying was stimulated by the the released demand for home using. While at the same time, more homes designed within 80-120 square meters are provided in the market, which also stimulated the aggregating buying, Centaline research department explained in its released analysis.

"People have the psychological inclination to buy when the home price is going up rather than when it's going down. This is another stimulus of the current high-volume home purchase," added in the analysis.
Another blow to the "savvy Chinese investor" meme one often comes across. If home prices do recover though, the government will look very weak and the central bank has started a rate cutting cycle. It will require extreme measures stop the bubble if it reflates, otherwise inflation will come back and this time, the renminbi will devalue.

Social mood, pandemics and permanent cultural shifts

One of the big ideas of socionomics is that mood affects events, not the other way around. The arrow of causation runs from mood to events: people are unhappy so they start fights (wars), the economy sinks and stocks plunge. Common wisdom is the opposite: people are unhappy because there is a war, the economy is weak and stocks plunged.

Where does the line end? For example, can birth control be separated from social mood, or is it actually one piece of the larger social mood? Most people believe birth control led to the sexual revolution, not that some type of sexual revolution was inevitable based on previous grand supercycle peaks in social mood.

Most simply, it seems there are a lot of coincidences around changes in social mood and rather than being coincidences, they may in fact be a result of social mood.

To wit: Drug-resistant gonorrhoea has spread across the world, say health officials
"Gonorrhoea is becoming a major public health challenge," said Manjula Lusti-Narasimhan, from the WHO's department of reproductive health and research. She said more than 106 million people were newly infected with the disease every year.

"The organism is what we term a superbug – it has developed resistance to virtually every class of antibiotics that exists," she told a briefing in Geneva. "If gonococcal infections become untreatable, the health implications are significant."

If left untreated, gonorrhoea can lead to pelvic inflammatory disease, ectopic pregnancy, stillbirths, severe eye infections in babies and infertility in both men and women.

It is one of the most common sexually transmitted diseases in the world and is most prevalent in south and south-east Asia and sub-Saharan Africa. In the United States alone, according to the Centers for Disease Control and Prevention (CDC), the number of cases is estimated at around 700,000 a year.
If the arrow of causation is running from social mood, sexual attitudes are changing and people aren't becoming more traditional because of drug resistant STDs, drug resistant STDs are allowed to develop because people are becoming more traditional. Society has a limited amount of time and resources to spend on scientific research and when the bulk of the public wants consequence-free or consequence-reduced sex, time and money are spent on it. When they do not, time and money are focused elsewhere.

2012-06-06

Middle East has most negative social mood, Asia the least

Followers of socionomics don't need a poll to tell them social mood in the Middle East is negative, but here's one anyway: Middle East Leads World in Negative Emotions
People living in Iraq, the Palestinian Territories, Bahrain, and a few other Middle Eastern countries are among the most likely worldwide to experience a lot of negative emotions on a daily basis, according to Gallup's Negative Experience Index. Iraq's score of 59 on the index in 2011 -- which is based on respondents' reports of experiencing anger, stress, worry, sadness, and physical pain -- is the highest in the world. The Palestinian Territories placed a distant second with a score of 43.
The pollsters could use a little socionomic study:
Major world events did not necessarily affect the daily negative emotions in some countries. Japan's score of 21 on the index was exactly the same three months after the massive earthquake in 2011 as it was the year before. The trend was similar in earthquake-ravaged Haiti, where the level of negative emotions did not change between December 2008 and June 2010. However, Haiti saw a six-point decline in negative emotions between 2011 and 2010, as reported stress, anger, sadness, and worry dropped.
According to this poll, even earthquakes didn't affect social mood, a powerful piece of evidence in favor of the socionomic theory that social mood is endogeneous.

Click through to see a list of OECD countries. Greece leads with a score of 38, while the U.S. is a relatively high 32. Asian countries have the lowest negative scores.

Market continues to ignore PBOC daily fixing

Daily fixing drops but market ignores the move.


Major structural defeat for the left in America; the political center is now clearly moving to the right

Wisconsin's governor made headlines when he took on public employee unions and sought to strip them of their collective bargaining powers. Historically, public employees were not allowed to form unions and it was illegal until President Kennedy allowed it in the 1960s. Mish has a quote from FDR on collective bargaining for government workers:
All Government employees should realize that the process of collective bargaining, as usually understood, cannot be transplanted into the public service. It has its distinct and insurmountable limitations when applied to public personnel management.

The very nature and purposes of Government make it impossible for administrative officials to represent fully or to bind the employer in mutual discussions with Government employee organizations.

Particularly, I want to emphasize my conviction that militant tactics have no place in the functions of any organization of Government employees.

A strike of public employees manifests nothing less than an intent on their part to prevent or obstruct the operations of Government until their demands are satisfied. Such action, looking toward the paralysis of Government by those who have sworn to support it, is unthinkable and intolerable.
I believe FDR and previous American law had it right because public workers have a close relationship with government and importantly, government doesn't spend it's own money. Whereas private unions will strike and management will lockout workers, government workers and politicians have a much closer relationship because public unions fund their campaigns. If the United Autoworkers were paying big bribes to auto executives, I'd also expect them to have more favorable outcomes.

Unions are default allies of the left (except where it involves fighting environmental restrictions that reduce job opportunities), doubly so for public employee unions. Since private unions have slowly decreased in size and power with the transformation of the American economy away from manufacturing, public employees became the bulk of union supporters for left-wing politicians. Furthermore, they form a massive support force. Unions can force government workers to join unions and force them to pay dues. Those dues are funneled to Democrat politicians, while many unions also volunteer to work on campaigns, in some states having the laws changes so that workers can leave to campaign without losing pay.

In and of itself, this is incestuous politics that the right would like to clean up, but never had the chance because most of the public doesn't see the debate this way. Usually, when public unions are challenged, it is painted as evil politicians trying to fire teachers. Voters always want to spend more money on education and that means more money for the teachers, and on it went for decade. Until now, that is, because the accumulated structural imbalances in local governments are now too large to bear.

Usually the debates center on pension costs. Politicians over promised and underfunded pensions and the bill is coming due. But that's not the whole story. I've served (unelected) in local government in the U.S. working on government finances and seen first hand how government has transformed over the past 50 years since collective bargaining for public employees was established, and what I saw in my local community is no doubt repeated all over America.

Have you heard that U.S. infrastructure is deteriorating and in need of investment? Why hasn't the government been repairing infrastructure, a basic function of government spending in the U.S.? The answer is that labor costs have slowly grown to account for the bulk of government spending. In my town, public wages and pension costs were 70% of the budget. Simple repairs to buildings and roads were delayed or put off because there was "no money" in the budget; the funds went to labor. With the economy growing well below trend for several years in a row and federal stimulus running out, local governments have no where to turn except labor.

Enter Governor Walker of Wisconsin. Due to collective bargaining rights, unions are able to successfully fight local governments on spending. Essentially, and I do not exaggerate this point, public employee unions can hold a budget hostage because they help determine how money is spent by controlling who is hired and fired. For example, if the town wants to make teachers pay more for their healthcare and pensions and use these savings to retain all jobs, the union can refuse. Instead, teachers are fired. Unions fight to keep their members' wages and benefits high, not to expand their membership at the expense of wages and benefits.

Facing deep spending cuts that would lead to many job cuts, Walker proposed to strip public employees of their collective bargaining rights. The Democrats fled the state house in order to forestall a vote that would pass the Republican controlled legislature. In the end, they returned and the measures passed. In the interim, there have been acrimonious debates over the law—but it has worked. Cities and towns across Wisconsin were able to cut spending and public employees had to accept the results, which have been good for local communities. They've avoided layoffs and cuts to services while closing fiscal deficits.

However, the law has an even greater affect. Members are no longer forced to pay dues or even join the public unions and many have quit. This in turn means that a major funding source and labor source for the Democrats was in danger of being destroyed, which is why they fought extremely hard against Walker. They threw everything they had into this election because they know that they are fundamentally and permanently weakened if his policy remains in effect. For this reason, they tried to have him recalled. Yesterday, he won reelection.

Walker's victory paves the way for other governors to follow suit, and the end result will be the destruction of a major pillar of left-wing political support. There's almost no way for the left to replace this loss of funding and labor supply for campaigns. They were essentially getting free support funded indirectly by taxpayers and they must find new private sources. Those sources will want to influence policy, unlike the unions which only sought to grow government. It is possible that a more left-wing funding source will emerge, but my expectation is that the political center will shift right as the Democrats find their greater support by moving towards the center.

Elections are one thing, but major policy shifts are rare. The post-9/11 growth of the security state at the federal level was the first great political change in the wake of post-peak social mood. This is the second. Whereas the security state doesn't necessarily benefit one side over the other, this is the first clear victory for right or left.

This period of declining social mood is long from over, but the road map is starting to unfold. Ironically, while it favors the right, it's a very mild political victory. The Democrats may move slightly to the center, but the big losers are the public unions. Walker's policy is 80% good government and 20% good for the right because his cost savings help fund the existing welfare and entitlement state, not reform it or roll it back, as many on the right may like. Democrats aren't happy, but there's still plenty of time for momentum to shift before negative social mood bottoms out.

Russ Douthat in the NYTimes echoes my take: No Recall
A similar message is currently being telegraphed by the respective postures of the two parties in Washington. The House Republicans have spent the past two years taking tough votes on entitlement reform, preparing themselves for an ambitious offensive should 2012 deliver the opportunity to cast those same votes and have them count. The Senate Democrats, on the other hand, have failed to even pass a budget: There is no Democratic equivalent of Paul Ryan’s fiscal blueprint, no Democratic plan to swallow hard and raise middle class taxes the way Republicans look poised to swallow hard and overhaul Medicare. Indeed, there’s no liberal agenda to speak of at the moment, beyond a resounding “no!” to whatever conservatism intends to do.

That “no!” might still be enough to win Barack Obama re-election. But November 2012 will just be one battle in a longer war, and the outcome in Wisconsin suggests that the edge in that war currently (and to some extent unexpectedly, given the demographic trends that favor the left) belongs to a limited government conservatism. The Democrats threw almost everything they had at Scott Walker, and it wasn’t nearly enough. And when you fail in what is essentially a defensive campaign, it makes it that much more difficult to get back on offense.

China gold and silver heist

SOE boss stole 60kgs gold, 1.4 tons silver
A former top official of a state-owned gold and silver refining giant in north China's Inner Mongolia Autonomous Region has been detained for embezzling nearly 60 kilograms of gold and 1.4 tons of silver, and selling them in his jewelry stores.

Song Wendai, former chairman of the Qiankun Gold & Silver Refinery Share Co Ltd, was also discovered to have siphoned off 21 million yuan (US$3.32 million) of state assets since 2003 to found three companies of his own, according to prosecutors.

Bejing's 3.8 million vacant homes: for real?

Beijing's municipal government responded to the 3.81 million vacant homes number that went viral yesterday. The number isn't final and empty homes were recorded if no one answered a knock on the door. Therefore, it's not a very robust data point. Articles discussing it have suggested a way of reducing the number of vacant homes though: a vacant home tax. In the current market, it wouldn't take much of a tax to push properties onto the market.

Rather than a vacant home story, this news highlights a growing problem for the Chinese economy: lack of accurate information. China's economy must develop into a service/information economy if it will continue to grow, but there's a real lack of accurate data. People are using methods such as counting lighted windows in the evening (I do see a very high proportion of dark windows in the evening, suggesting vacant homes are everywhere, not just a function of newly built homes) to estimate vacant home totals, but the government could clear it up using water and electricity data.

In the end, a lack of data always backfires. During the worst of an economic crisis, the public will believe the scaremongering rumor mill and ignore the government, even if it gives 100% accurate information.

没房住?北京空了381万户
市公安局回应“381万空置房” 数据不是最后数据

2012-06-05

China's Huaxia bank falls below asset value

And Chinese bank stocks are trading with P/Es between 4 and 7. Value and bullish investors won't find much better prices......unless the bears are right.

China's mainland market peaked in August 2009 and has stayed down, still some 60% off the peak in 2007. It sits roughly 20% above its 2008 low.

华夏银行跌破净资产 银行股白菜价是不是投资机会

2012-06-04

America's political divide at widest in decades

When pollsters ask questions of voters a host of values questions, the gap between different groups has remained almost static. For example, voters of different races have a consistent 12% gap in their opinion on issues, while sex was the least at 6%. In between were different qualities such as income, education and religion. The one area that has been steadily growing, especially since 2000, is partisan differences.



What's very interesting in light of socionomics is that there was almost no change from 1987-2000, but since then the partisanship has almost doubled. This raises the question of whether voters are really expressing partisan political views they firmly believe in, or whether they are in a bad mood and fighting over politics. That in turn is interesting for what it means politically and for the future of a nation. Many people think of history in terms of rising and falling nations and cultures, with eyes now focused on the U.S. and China. However, as I've often said, social mood plays out based on the existing political realities. People don't spontaneously create new movements or political ideas in response to changes in social mood (though it can happen), they generally shift their support to an existing political movement that was formerly considered fringe or radical. If that's true, national success may depend on the choices available, which is based on a nation's culture. Those with a tendency towards dictators or bad economic and political systems will face the risk of choosing poorly and dooming their country to a long period of stagnation, whereas more politically centered nations will almost never face the risk of a truly poor choice.

The counter argument would be that political failures accumulate during periods of rising social mood and that while the voters are angrier and ready to fight, it has some rational basis. For example, looking at Japan, Europe and the U.S., and even China, accumulated political choices have led to untenable situations. The developed world cannot pay for its welfare state, while China must effectively end communist party management of the economy if the domestic economy is to grow. Social mood in this view isn't the driver of change: a crisis (defined as a turning point) was inevitable. Instead, it is about timing. Negative social mood forces the crisis.

Sharp increase in partisan divides among Americans

Chinese censoring software sweeps financial data

China censors mentions of 6/4 and 1989, especially around the anniversary date, and today the stock market fell 64.89 points, causing posts about it on Weibo to be erased by censors. In the strangest of coincidences, the opening price for the Shanghai Composite was 2346.98. which read backwards is the date, plus 23 for the 23 year anniversary.
China stocks fall bizarre 64.89 points on June 4,'89 anniversary

Chinese foreign reserves to peak in 2014? What about within the next year?

This is good analysis from Nomura about changes in the Chinese economy. Where I differ is that I do not believe this will be a smooth transition.

China’s FX reserves: the coming peak
Nomura has called the top: $3.68tn at the end of 2014, up from a mere $150bn at the start of 2000. China’s reserves will then start to decline, albeit gradually, in 2015.

More than just a curious milestone, this process of peaking out will have important consequences for everything from Chinese monetary policy to US Treasury yields.

Forecasting Chinese foreign exchange reserve growth is no easy task. There are many moving parts at play in the balance of payments, the key channel for accumulating reserves. These include the current account, foreign direct investment and investment portfolio flows.

Rob Subbaraman and Zhang Zhiwei, two analysts with Nomura, have done the legwork and lay out in detail why they think China’s balance of payments will swing to deficit by 2015.
Long story short: China's domestic economy grows, FDI slows and Chinese investors go abroad. When the global economy gets growing again, this analysis will be correct, but in the meantime, events will unfold very haphazardly. Whereas they expect higher Treasury yields, I think we will see China's central bank selling Treasuries into a strong market that pushes interest rates even lower. Chinese selling will come from pressure on the renminbi, not from strength. It may be a policy of choice to depreciate the renminbi against a rapidly appreciating U.S. dollar, or it may be forced upon them by massive Chinese buying of U.S. assets.

To put an exclamation point on why I disagree with the timeline and smoothness of their forecast:


They are extrapolating existing trends. A smooth line assumes smooth sailing for the global economy.

A Chinese translation of the article: 中国外汇储备2014年将见顶

2012-06-02

New fault lines in American politics

Congressman Pascrell is best for New Jersey
THERE are some who still call parts of Paterson "Little Jerusalem" because the area is home to places of worship for Christians, Jews, and Muslims. Relations among the people and leaders of the area have generally been friendly and cooperative. But now, a political race is threatening that cordiality...

...The Arab and Muslim community of northern New Jersey is taking notice of how Steve Rothman is using his support of Israel as the centerpiece of his campaign. They detest being labeled simply as an 'anti Israel constituency", a blanket judgment made by one of Rothmans's formidable financial backers (Chouaka of NORPAC in the Jewish Voice, Jan 12). They take issue with Rothman bragging about his help in getting Israel over $50 billion in aid since 2001, while bringing back only $2 billion to New Jersey residents. Critics of Rothman see this as a lopsided math expressive of misdirected commitment. ("Pro-Rothman letter by synagogue presidents stirs debate," Jewish Standard, February 24)

Arab and Muslim grassroots meetings are forming all over District 9, strategizing for a massive voter turnout, with voter registration drives outside mosques and along Main Street, fundraising, and a targeted mobilization of volunteers. I was invited to observe several of them, and invariably, the mood was intensely personal. Ethnic newspapers based in Paterson have published articles, opinions, and even paid ads supportive of Pascrell. The candidates' position on Palestine appears paramount, and for many, it has already informed their expected vote.
Nothing really new here in electoral politics, even ethnic and religious tensions have occurred before, but this is a new fault line as Muslims begin to outnumber Jews.