Euro Downgrade Is an American Plot

The general secretary of the Social Democratic party (SPD), Andrea Nahles, described the Standard and Poor’s announcement as “shameless.” Former German finance minister Peer Steinbrück, also of the SPD, spoke of a “provocation” and urged the European Commission to subject the rating agencies to “far stricter regulation.”

German Politician: Euro Downgrade Is an American Plot

Yuan limit down for seventh straight day

A confusing headline for the story: Yuan up vs dollar, hits limit down for 7th day

Spot yuan was at 6.3586 per dollar by midday, higher than Wednesday's close of 6.3643, but hit limit down at 6.3636.

So was the yuan up or down? Hard to say because the currency doesn't float, the price is set by the PBOC:

Before trading began, the PBOC fixed the day's mid-point at 6.3319, stronger than Wednesday's 6.3342. The central bank uses the fixing to express the government's intention for the yuan's daily movement.

As was covered in yesterday's post on the falling yuan, the PBOC is setting the midpoint price too high each day. The limit down is 0.5%, which is equivalent to about 3 cents. However, on the next day, the midpoint price is only moving about 0.04%. Thus, banks are just continually selling into an overpriced market. Right now, the yuan is overvalued in the market and banks are draining undervalued foreign currency from of the system.

Yuan hits limit low for fifth straight day

The central bank is defending the yuan and banks are taking advantage. See 人民币汇率五日连跌停三年首见 市场增持美元套利

“自从9月底以来人民币出现贬值预期后，金融机构都不愿卖外汇而愿意持有外汇，导致人民币兑美元汇率走低。而央行为了维稳汇率，即便在人民币盘中价前一交易日触及跌停的情况下，后一交易日还将中间价定得较高，自然导致金融机构更愿意买入外汇，人民币汇率屡次触及跌停也就不足为奇。”赵庆明说。

Since the end of September, after the forecast for a weaker renminbi came out, financial institutions have all been unwilling to sell foreign currency, this leads to the decline in the renminbi-dollar exchange rate. And the central bank, in order to maintain a stable exchange rate, even if the yuan hits the limit down during the trading day, the next day the midpoint is reset at a relatively high price, naturally this leads financial institutions to buy foreign currency and it's not at all surprising that the renminbi repeatedly hits the down limit.

In short, the PBOC is artificially propping up the yuan and banks are taking advantage by selling yuan and buying foreign currency. There is also a gap between Hong Kong (6.38 yuan per dollar) and Chinese mainland (6.33 yuan per dollar) exchange rates, offering arbitrage opportunities. The Western press seems focused on the economy, as seen in Yuan Tests Weaker End of Trading Band a 5th Day as Growth Slows .

China should increase yuan flexibility and draft clear goals for floating exchange-rate rules, Zhang Monan, a researcher at the State Information Center, wrote in a commentary in the Shanghai Securities News today. Former U.S. Treasury Secretary Henry Paulson said slower yuan appreciation could cause political problems for China in the U.S. during an election year, the Wall Street Journal reported.

This is the corner that China has painted itself into. The renminbi may very well need to decline, but the U.S. may impose trade sanctions if yuan appreciation slows. This is not to defend the U.S. policy, which is moronic, but China clearly had a great opportunity to reform during the period of strong growth and chose not too. Now, like every other government that put off tough decisions, the economic imbalances are too large to ignore and there are no easy choices left.

Where will social mood be when Social Security is cut?

Bruce Krasting delivers his annual report on Social Security. His conclusion, based on current shortfalls is:

If we are, as I contend, five to six years ahead of “schedule” with cash deficits at SSA, there is no alternative besides cutting scheduled benefits.

Social Security 2011 – Another Bad Year

Yuan depreciation a blip or a trend?

PBOC Forex Purchases Drop in Oct

In mid-November, the central bank said that forex funds outstanding for China's financial institutions, including the central bank, commercial banks, trust companies and other institutions, totaled 25.49 trillion yuan, down 24.89 billion yuan from September and the first drop in four years.

Market analysts said that the data reflected the increasing willingness of financial institutions and enterprises to hold foreign currency amid the rising speculation on yuan depreciation.

This remains a blip to most of the investment world and it may well be, but it shows, again, that the yuan can go down. How big is the bearish segment of the yuan market today, and how big could it grow if there's a real economic crisis in China? They key to the equation is the Chinese themselves. The wealthy are moving abroad, the rest of the country is concerned about the property market and social mood is declining. The central bank is still mainly holding reserves in U.S. dollars, but it has been increasing euro exposure and diversifying away from U.S. dollars. Most Chinese think in terms of renminbi and dollars; if they decide they want foreign currency, they will drain dollars from the central bank's reserves and leave the euros. Ultimately, for any type of bearish yuan scenario to play out it will require a very, very strong U.S. dollar.

MF Global fallout hits agricultural production

MF Global fallout delays U.S. farm seed, land deals

Here are a couple important lines:

Still, the delay in returning billions of dollars in customer funds more than a month after MF Global filed for bankruptcy is starting to affect actual decisions on the farm. This threatens to cloud the outlook for U.S. crops, warn farmers who have been ratcheting up pressure on the bankruptcy trustee to move faster to disperse any cash he secures.

Farmers were caught off guard by the disappearance of their money because it was held in segregated accounts considered to be immune from troubles at brokerages. Several farmers said they had felt it was safer to keep cash in the accounts than at local banks.

Farmers worry the cost of doing business could go up permanently due to the increased risk of keeping money in segregated accounts, making it more expensive to produce crops. For Klinker, whose oldest son is entering the family business, that could mean upgrading equipment less frequently than he has in the past. "It impacts everything," he said.

Belgium has a government

Belgium, at Last, Forms Government

Belgium's new cabinet will be sworn in by King Albert II on Tuesday, the royal palace said, ending a world-record 541 days without a federal government for the heavily indebted euro-zone country.

After 18 months of negotiations, Belgium finally formed a government. Let's see how it holds up.

Liu Junluo: if Italy or Spain default, Chinese stock market will drop 40%

So says Liu Junluo in his latest blog, titled: In the theater watching Spain default (电影院里看西班牙违约). He first quotes from his 2010 book (he mainly puts his thoughts into books now, instead of on the blog), in which he says Europe only delayed the Greek bankruptcy and that China stupidly bought euros as the U.S. dollar index tumbled in June and July 2010. He also discusses bank stress tests and related topics. To this he adds new comments:

1年以后的2011年10月底，欧洲正式决定希腊国家债务违约，债务减计50%。如果，我们能够把欧洲问题向一年以前看，那么，中国和欧洲之间是上演了一场银行和借款人之间的电影。现在，连笨蛋都知道欧洲正式决定希腊国家债务违约，只会鼓励西班牙和意大利最终进入选择性违约。所以，我们不需要用1年的时间就可以看到西班牙或意大利违约了。

在2010年初，我提出——美国这个世界警察准备退场了，全球各地将会陷入大规模地区动荡。现在，随着“阿拉伯之春”的临近尾声，中国在阿拉伯地区投资也陷入了灾难，而很快我们也会看到中国在非洲的投资同样是陷入灾难。这个损失是5000亿美元还是8000亿美元，只有“天知道”。

事情是需要巧合，所以，在《欧元巴别塔——黄金套利中国》一书中，说的很清楚——中国股市已经没有任何意义可以来理解。我们应该知道，中国人现在应该努力祈祷西班牙和意大利未来千万不要违约。如果，西班牙或意大利出现违约，那么中国股市就是1000点以下。同时，西班牙或意大利出现违约，也只是欧洲和美国核心层联合导演的“大片”吧。

Translation is mine (not 100%, but better than Google):

One year later at the end of October, Europe formally decided to let Greece default, with 50% write downs. If we look at this a year earlier, China and Europe are the bank and borrower in the movie. Now, even the fools know that the formal decision to let Gerece default will encourage Spain and Italy to default. So, we don't need one year to see Spain and Italy in default.

In early 2010, I suggested that the policeman of the world, USA, was preparing to exit, and all over the world, in every region, would be large scale unrest. Along with the "Arab Spring" approaching epilogue, Chinese investment in the Arab region sinks into disaster, and we'll soon see China's African investments similarly fall into catastrophe. The losses will be $500 billion or $800 billion, only God knows.

Things need coincidence, therefore in , (I) said very clearly—China's stock market already has no meaning that can be understood. We ought to know, Chinese should pray with great effort that Spain and Italy do not default. If Spain or Italy default, then China's stock market will be 1000 points lower. At the same time, as Spain or Italy default, this is also Europe and America's alliance directed "blockbuster movie."

Social mood in China continues on downward slope

Labor unrest increasing among China's workers

Reports of recent strikes at factories and other major employers, especially in southern China, reflect increasing pressure on Chinese manufacturers already grappling with surging costs for labor and materials. The country's manufacturing contracted in November for the first time in nearly three years, according to a survey released Thursday.

Predictions of an economic collapse in China are in vogue. This article talks about Western predictions of economic collapse in China, but ignores Chinese predictions! In fact, the Chinese are also turning negative, as I've covered on this blog. I've followed the bears due to their unique views and because they often have similar predictions to those of deflationists in the West. I will cover Liu Junluo's latest blogs soon; he is extremely pessimistic, saying if Italy or Spain default, the A-share market will fall 1000 points, or about 40% from current levels and below 2008 lows.

Chinese leaders fret about unrest as economy sours

"Faced with the negative impact of the market economy, we still have not established a complete social management system," Zhou said. "How to establish a social management with Chinese characteristics to suit the socialistic market economic system in China is the most pressing task we face today."

The promotion that will not die: Buy a house, get a free car!

February 14, 2008. USA. Buy this House, Get this Car Free April 4, 2008. Ireland. Developer offers 'free' car with new home July 11, 2008. England. Estate agent gives away car with new homes in desperate attempt to shift seaside flats July 19, 2008. USA. Buy a house, get a car November 5, 2008. Canada. Realtor offers free car with home purchase May 6, 2009. France. Get A Free Car In France (With Purchase Of House) April 26, 2011. USA. Desperate sprawl developer gives away cars with houses December 1, 2011. China. Developers in China get creative as home prices dip

The downturn has forced developers to get creative. Buyers are flocking to one real estate company in Wenzhou that's giving away free BMWs with every purchase to its first 150 buyers. The promotion has already attracted 130 buyers in the past two weeks , the company said.

Is Argentina going to war?

Argentina launches naval campaign to isolate Falkland Islands

Argentine patrol vessels have boarded 12 Spanish boats, operating under fishing licences issued by the Falkland Islands, for operating “illegally” in disputed waters in recent weeks.

Hollywood on the defensive, why now?

Recent Charges of Sexual Abuse of Children in Hollywood Just Tip of Iceberg, Experts Say

Feldman, 40, himself a survivor of childhood sexual abuse, unflinchingly warned of the world of pedophiles who are drawn to the entertainment industry last August. "I can tell you that the No. 1 problem in Hollywood was and is and always will be pedophilia,” Feldman told ABC’s Nightline. “That's the biggest problem for children in this industry... It's the big secret.”

From the article, it doesn't sound like a big secret in Hollywood, only a big secret to the general public. So why are people turning on Hollywood now? Why did they overlook sexual abuse of children for decades, only to change their tune now? As social mood declines, the search for villains will intensify and those who are plainly guilty of crimes will find it difficult to remain undetected.

Chinese money supply slows in November after October pop

China M2 money growth slows in November

Below are the charts through October. M1 and M2 money supply; aggregate M2 versus Shanghai Composite; month-to-month change in M2 versus Shanghai Composite.

CME now accepts offshore renminbi as collateral for futures trades

CME Clearing to Accept Offshore Chinese Renminbi (CNH) as Collateral for Futures Trading, Partner with HSBC for Far East Custodial Services

CME Group, the world's leading and most diverse derivatives marketplace, today announced that it will include offshore Chinese Renminbi (CNH) in the range of instruments to meet performance bond requirements on all exchange futures products cleared through CME Clearing, effective January 2012. The company also announced with HSBC Global Banking and Markets that HSBC Hong Kong will serve as CME's first Far East clearing custodian in Asia.

Chinese steel industry profit margins collapse

Hugh Hendry coined the "Confucian" aphorism, "Wise man not invest in overcapacity."

Chinese steel industry profit margins hits a historic low, 0.47% profit margin far below interest rates 钢企利润率创历史新低 0.47%利润率远低于利率水平 October profits fell 82% from September. Inventories are up 20-30% over the start of the year. Steel industry debt ratio is 67% and most of the debt is in the form of bank loans. Banks currently pay 3.50% interest on one-year deposits. Since steel is considered a fundamental industry for infrastructure and national development, bank loans have not been restricted and fixed asset investment in mining grew 17.4% over last year, while smelting and rolling fixed asset investment grew 18.9%.

Below is the Baoshan Compostite Steel Price Index, based on contracted prices. The first chart shows the drop in 2008, the second is the recent price decline.

Here's a short English article covering the news: Chinese steelmakers see profits plunge

Communists surge in Russian election

"With sadness I remember how I passionately vowed to my grandfather I would never vote for the Communists," Yulia Serpikova, 27, a freelance location manager in the film industry, told Reuters. "It's sad that with the ballot in hand I had to tick the box for them to vote against it all."

Putin Loses Majority In Russian Elections As Communist Party Soars

Melancholy Europe votes for world destroying movie

Lars Von Trier's 'Melancholia' Wins Best Film at European Film Awards

Lars von Trier's apocalyptic drama Melancholia blew them away at the 24th European Film Awards, Europe's version of the Oscars, taking home three trophies, including best film.

Social mood in Europe, in a nutshell. Watch the trailer, the father says to his son, "It's not going to hit us." Just like European politicians say Greece will not default.

Euro shorts increase 33%

This is setting up for a major fall in the euro or a major rally.

Bombing at Chinese bank

Not sure if this is a bank robbery attempt or a protest. The bomb went off when armored trucks approached, which makes it seem like an attempted heist.

China: Explosion at Bank Kills 2

A explosion shook a branch of the China Construction Bank late Thursday afternoon in Wuhan, a provincial capital in south-central China, a municipal police official there said, and state media reported that at least two people were killed and more than 10 were injured

The NYTimes also notes that explosives are popular in China.

Explosives are sometimes used in commercial and domestic disputes as well as in crimes in China, partly as an alternative to guns, which are extremely hard to obtain.

How did that make it past the NYTimes editors? It's true though, guns would probably cut down on the bombings. In 2001, a man in Shijiazhuang blew up entire apartment buildings to kill his ex-wife. He blew up several buildings to cover his tracks. Explosives are pretty easy to come by because of all the construction and demolition taking place around China.

Pop goes the Chinese real estate bubble

Gome Drops Real Estate Joint Venture

Citing the rise in uncertainty within China's property markets, Gome said in a press release on November 29 that it would terminate its agreement with Beijing Pengze Property, Beijing Pengrun Property Holdings and Gome (Beijing). The real estate joint venture agreement was signed on September 27 and was formed with the intention to focus on property investment in second and third-tier cities across the country. The registered capital for the joint venture was 200 million yuan, of which Gome held a 45 percent stake.

I highlighted the cities: this wasn't a venture aimed at the high priced Beijing or Shanghai markets, but they still felt uncertain. This story doesn't look very important, but remember bubble economics. An unsustainable growth rate requires acceleration; easing off the gas pedal is as good as hitting the brakes. The bubble needs more money, at faster rates, to continue growing. Since the bubble is also based on psychological perception, it cannot maintain the image. It either grows or dies.

This is also a story of the bubble, in that a home appliance firm was involved in real estate speculation. Many companies in China, with no interest in real estate or little interest beyond their own floor space needs, have created real estate development divisions. As with new money, the bubble needs new participants and the continual entrance of new players kept the bubble afloat. Gome's high profile exit is a major psychological blow.