2013-07-24

A market of two minds....and can China have a depression?

Here's copper today. First, there's the HSBC China PMI number sending copper lower. And then the rebound and rally higher......

I accept that I could be wrong about a recession or serious financial crisis in China. However, one thing I keep seeing the China bulls say is that there's still a lot of growth left because the Chinese economy is still at a low level of development, especially in the west. Then why did the United States have a Great Depression? Air travel, automobiles, radio, rural electrification......how did a country on the verge of a technological boom suffer a decade of economic depression? As Rothbard shows in America's Great Depression, a credit bubble followed by bad policy can be a witches brew. Most people think China has good policy, but it was government intervention by Hoover, then taken to the fifth power by FDR, that made the depression a decade long affair.

I see a conundrum: if Chinese leaders are truly perspicacious, they will allow a major crisis and aim their policies at accelerating the bottoming and next growth phase. All the Chinese response to 2009 was, was Hoover on nuclear steroids. This has created a bigger problem than existed in 2008, when housing prices fell 30% and the stock market fell 80%. Chinese real estate prices are at record highs and still climbing about 7-10% per annum. The yuan is about 10% higher versus the U.S. in a period when most of the world was devaluing their currencies against the U.S. dollar, which is up from its 2008 lows. And yet, stock prices are less then 20% above their 2008 low and still down 66% from their 2007 peak.

I put my money where my mouth is: I own shares of PowerShares DB Base Metals Double Short ETN (BOM) and PowerShares DB Base Metals Short ETN (BOS). BOS is extremely thinly traded, but sells at a 22% discount to NAV, and sometimes more or less during the trading day. It is very hard to obtain shares because of the thin trading, but I'm betting it will be heavily traded when China sinks into recession, delivering a gain on NAV, plus close the 22% discount. I also have puts on Freeport McMoran (FCX), and will consider adding to these positions or opening new positions as conditions and opportunities warrant. Still looking for out of the money yuan puts......

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