Snapshot of social mood in Europe and America, April 2012

This came to my email inbox via John Mauldin's Outside the Box.

I’m Worried

David Kotok
April 8, 2012

A note to readers. This 2000-word commentary is a longer-term view; think in terms of years, not months or days. The essay is not in conflict with the fully invested position currently held at Cumberland. The words reflect my personal thinking only. Some of my colleagues disagree. In my personal view, the future is uncertain (of course) and may be unattractive for the longer-term outlook. In my view, our American political system is failing us. In my view, we are joining the list of declining world powers. The framework to support that argument follows.

"The external menace 'You'll end up like Greece, if you do not do this and that' and the internal opprobrium heaped on some categories of taxpayers are very powerful and dangerous instruments to deprive people of their own personal freedoms." –Vincenzo Sciarretta

My friend Vincenzo is a journalist from Italy. He is a serious writer and researcher. He has covered the financial markets and economy of Italy for years. He and I co-authored a book on Europe during the optimistic period. If he and I were to write such a book now, it would probably be quite pessimistic.

Vince responded to my recent email series about the downward spiral underway in the euro zone. Readers may find those essays at www.cumber.com. Vince noted my reports from the meetings in Paris and my reference to the upcoming French elections, where the promise of the Socialist candidate is to raise the tax rate on the highest income level to 75%. I will end this commentary with a longer email from Vince, in which he quotes historian Will Durant and discusses the fall of the Roman Empire.

Now to write some thoughts that gnaw at me in the late of the night, when sleep is elusive.

Simply put: I'm worried.

When I get worried, I read and re-read in my library. I can honestly say that I have had my nose in a thousand of those books. The library holds many texts by giants. They wrote about history, economics, and finance. They took the strategic view. George Akerlof, Jared Diamond, Niall Ferguson, Carmen Reinhart & Ken Rogoff, Robert Shiller, and Nassim Taleb are among the modern writers. Milton Friedman, Martin Gilbert, Friedrich Hayek and his polar opposite John Maynard Keynes, Ludwig von Mises, R.R. Palmer, and Adam Smith are among the classics.

A favorite of mine is Paul Kennedy. Twenty-five years ago, this Yale historian concluded his monumental work The Rise and Fall of Great Powers with a profound observation:

"In the largest sense of all, therefore, the only answer to the question increasingly debated by the public of whether the United States can preserve its existing position is 'no – for it simply has not been given to any one society to remain permanently ahead of all the others, because that would imply a freezing of the differential pattern of growth rates, technological advance, and military developments which has existed since time immemorial."

Kennedy then argued that the United States has the ability to moderate or accelerate the pace of decline. Such is also the case for other great powers, many of which are in a state of decline from their centuries-old power peak. Among others in his treatise, Kennedy's history lessons examine Spain, France, Rome, and the Austro-Hungarian Empire.

I think I just covered a lot of the euro-zone geography.

In 1987, Kennedy warned us, "The task facing American statesmen over the decades, therefore, is to recognize that broad trends are under way, and that there is a need to 'manage' affairs so that the relative erosion of the United States' position takes place slowly and smoothly." He added the additional warning that it not be "accelerated by policies which bring merely short-term advantage but longer-term disadvantage."

Unfortunately, America's leadership has not heeded such warnings.

For decades futurists have complained about the rising use of government debt financing by the United States. They predicted calamitous outcomes, which did not arrive as expected. Paul Volcker and Alan Greenspan applied monetary policy in ways that allowed inflation and, hence, interest rates to spend a quarter century in decline. The Volcker-Greenspan era opened with the highest interest rates since the Civil War. Building on this downward momentum, Ben Bernanke has taken the target short-term interest rate to near zero and held it there.

During the same three decades, the US altered its fiscal policy, first under Ronald Reagan and almost continuously since. (The Clinton administration was the exception.) Rising deficit financing has been facilitated by falling nominal interest rates. That combination leads to level, or even falling, aggregate debt service. You can owe more and more and have smaller and smaller monthly payments. That is the magic of falling interest rates. Until they hit the zero boundary.

What happens when the music stops and the chairs are full? Are we reaching that point in the United States? It appears we have done so in Europe, certainly in Greece, the eldest of the declining great powers. We are also getting there in Japan and the UK. All four confront similar financial straits: zero-bound interest rates coupled with expanding national government debt.

About 85% of the capital markets of the world trade by means of the dollar, yen, pound, and euro. The G-4 central banks have collectively expanded their holdings of government securities and loans from $3.5 trillion to $9 trillion in just four years. At the prevailing very low interest rates, the functioning of monetary policy and the role of fiscal policy merge. Is there any difference between a million-dollar suitcase of one hundred dollar bills and a million-dollar, zero-interest treasury bill? You need an armed guard to protect the first one. With the second one, you need to clear an electronic trade in a safe financial institution, not an unsupervised (no more Fed surveillance) Federal Reserve primary dealer like MF Global. Your earnings on either the cash or the T-bill are the same: you earn zero. You can use the treasury bill to secure a repo transaction at a near-zero interest rate. You can use the cash to conduct many types of black-market or gray-market trades. Is it any wonder that the hundred-dollar bill is so popular? Isn't it understandable that roughly two-thirds of US currency circulates outside the United States?

Is this a healthy situation? How long can it persist? What happens next? When interest rates eventually rise, what will be the result of this blend of monetary/fiscal policy as its unwinding turns malignant?

Moreover, who then will be the politicians that inherit this mess? Who will occupy the central banker's chair?

I worry because there is no rationally explained strategic-exit plan in the G4. Not in the US. Not in Japan. Not in the euro zone. Not in the United Kingdom.

I also worry because the direction of taxation is up, if certain politicians continue to have their way. I worry because US business tax rates are now the highest in the entire world. In addition, I worry because of the increasing power that national governments wield in the mature economies of the world.

Applied power eventually leads to serfdom.

Increasing taxation is a characteristic of a declining great power.

Governments are failing to heed Paul Kennedy's warnings. They are worsening the longer-term outlook. The Western world's leaders ignored Kennedy when he wrote "… accelerated by policies which bring merely short-term advantage but longer-term disadvantage."

Zero-bound interest rates are a short-term advantage. We enjoy them. We profit from them. We expect them to continue for a while. They are like the oxygen administered to a very ill patient. If the patient dies, the oxygen has eased the pain in the terminal phase. If the patient lives, the lungs have been scarred and need many years of healing and repair. Today, the patient is receiving oxygen in the G4. Death is being delayed (Greece) or, perhaps, thwarted (elsewhere in the euro zone, Japan, US, and UK).

We do not know how this will play out. History only warns us that many of the likely outcomes may be unpleasant. The authors I cited have articulated their differing and diverse views. Their conclusions have tended to be in the form of warnings.

Paul Kennedy favors candor. In his second, exquisite work, Preparing for the Twenty-First Century, he wrote: "Many earlier attempts to peer into the future concluded either in a tone of unrestrained optimism, or in gloomy forebodings, or (as in Toynbee's case) in appeals for spiritual revival. Perhaps this work should also finish on such a note. Yet the fact remains that simply because we do not know the future, it is impossible to say with certainty whether global trends will lead to terrible disasters or be diverted by astonishing advances in human adaption."

Of course, we hope for the latter and worry about the former. History gives us little comfort.

For the time being we shall remain on the sanguine side with regard to this global experiment with increasing debt, zero-bound interest rates, and a monetary/fiscal policy compromise that obfuscates the difference between them.

As long as this persists, it means financial markets do well, stocks rise, risk assets regain favor, bonds with hedges yield results, and cash continues to earn zero return.

That is now. It may change tomorrow, next week, next month, next year or not for quite some time. There is no way to know.

For the downside from history we return to Vincenzo's email to me:

"Dear David,

"I invite you to read the last few sentences of the below article from The Lessons of History, by Will and Ariel Durant. It is about how the destruction of the Roman Empire through the taxation channel made people 'slaves,' in other words how serfdom emerged. This is my number one fear for Italy, but I guess France is making the same mistakes, just starting from a lower debt level. You can also find an online version of the book, thanks to Google.

"Rome had its socialist interlude under Diocletian. Faced with increasing poverty and restlessness among the masses, and with the imminent danger of barbarian invasion, he issued in A.D. 3 an edictum de pretiis, which denounced monopolists for keeping goods from the market to raise prices, and set maximum prices and wages for all important articles and services. Extensive public works were undertaken to put the unemployed to work, and food was distributed gratis, or at reduced prices, to the poor. The government – which already owned most mines, quarries, and salt deposits – brought nearly all major industries and guilds under detailed control. 'In every large town,' we are told, 'the state became a powerful employer, standing head and shoulders above the private industrialists, who were in any case crushed by taxation.' When businessmen predicted ruin, Diocletian explained that the barbarians were at the gate, and that individual liberty had to be shelved until collective liberty could be made secure. The socialism of Diocletian was a war economy, made possible by fear of foreign attack. Other factors equal, internal liberty varies inversely with external danger.

"The task of controlling men in economic detail proved too much for Diocletian's expanding, expensive, and corrupt bureaucracy. To support this officialdom – the army, the courts, public works, and the dole – taxation rose to such heights that people lost the incentive to work or earn, and an erosive contest began between lawyers finding devices to evade taxes and lawyers formulating laws to prevent evasion. Thousands of Romans, to escape the tax gatherer, fled over the frontiers to seek refuge among the barbarians. Seeking to check this elusive mobility and to facilitate regulation and taxation, the government issued decrees binding the peasant to his field and the worker to his shop until all their debts and taxes had been paid. In this and other ways medieval serfdom began."

Thank you, Vincenzo, for this serious response. Thank you Paul Kennedy for superbly articulating history and issuing clear warnings. Thank you, dear reader, if you are still with me. I hope I have provoked some thought.

Now we will seek another night's sleep and hope it is not elusive.

David R. Kotok, Chairman and Chief Investment Officer

India to scrap gold import duty?

Thus far only promises from the finance minister, no action. India Jewelers End Strike Over Gold

This is short-term positive for gold, but overall economic performance from China and India is still important. Nevertheless, I was expecting the tax to rise until gold imports slowed. I assume we'll see a new policy from India that aims to achieve the same goal (lower gold imports) without tipping off the domestic industry.

France looks to go its own way

One theme here is the social mood is driving the crisis in Europe and for that reason, one needs to view the European crisis as political, not economic. The initial crisis over Greek debt levels and the subsequent bailouts all have the veneer of finance and economics, but this is truly a political crisis because it deals with the concept of a unified Europe pushed by European political elites coming face-to-face with growing nationalist sentiment as social mood declines. Now France, in typical bold fashion, is leading the way.

Sarkozy dangles "empty chair" threat over Europe

French President Nicolas Sarkozy told a Sunday newspaper he is serious about pushing for more trade protectionism in Europe and tighter external border controls, hinting he could take a stand as tough as Charles de Gaulle's 1965 "empty chair" policy.

The conservative leader told the weekly Journal du Dimanche in an interview that he meant business with an election campaign pledge last month to push for a "Buy European Act" and a threat to pull France out of Europe's open-border Schengen zone unless external controls are tightened.

Many no doubt see Sarkozy's move as cynical and opportunistic, aimed at picking up right-wing voters in the coming election. However, his shift reflects underlying political shifts. Whether he believes it or not is irrelevant because the electorate will continue moving right. Either he or another politician will eventually satisfy voters, or they will find someone who will.

"All the public markets on our continent have been open since 1994. In Japan the only open market is water. In China no public market is open," he said.

"All I am saying is, show reciprocity. Otherwise, French public contracts will only be awarded to companies that produce in Europe. When General de Gaulle instigated his empty chair policy in 1965 he obtained the Common Agricultural Policy and pushed Europe forward."

Former president de Gaulle triggered a crisis in the nascent European Economic Community in 1965 when he withdrew France's representative during a disagreement over agricultural funding, leaving the organization crippled for several months until the so-called Luxembourg compromise agreed to give more weight to national sovereignty in voting conflicts.

An empty chair policy at this moment would be terrible for Europe if it crippled political cooperation. I doubt he will need to implement the policy though, my hunch is that most politicians will cave to public opinion if they are faced with discord in Europe over what are widely seen as unfair trade practices by Asian nations. Ten to twenty years ago, when social mood was high and peaking, France would be alone and end up losing the battle. Today, the establishment will fight, but ultimately the victory will be France's.

European officials have said privately that they hope Sarkozy's stand is just election rhetoric.

But he reiterated his vow to pull France out of the 25-nation Schengen zone, which guarantees the free movement of people, unless the bloc's external frontiers are strengthened.

"There are 120 km between Greece and Turkey which are not guarded. I am in my right to demand what the sanctions should be," he said.

They hope it is just rhetoric, but the real issue is that Sarkozy's rhetoric will be popular in Germany, Italy, Holland, Poland......once the cat is out of the bag, the right will see a surge in popularity. Sarkozy is putting the issue on the table and that will make it a topic across Europe where it isn't already (such as Holland).

France's stock market has steadily advanced on gold since the yellow metal peaked last September, but we are now witnessing another test of the trend. Any breakdown is bad news for Sarkozy domestically, but good for him if he pushes this new political strategy, because it will become more popular. At this point though, one must say the election seriously favors Hollande. I posted the lower chart on March 26, the CAC 40 closed at 3217 today. If it goes below, Sarkozy will tack even harder to the right.

Chinese billionaire disappears, banks concerned about loans

Not sure what to make of this story, if this guy is genuinely missing or he's fled to avoid debt.

Dalian Businessman Who Built An Empire Vanishes

China Construction Bank's preliminary investigation found that the amount of its outstanding loans to Shide Group has steadily declined over recent years, but still stands at roughly 1 billion.

The current loans are "relatively well collateralized and have not been classified as non-performing loans," said a loan officer from CCB's Dalian branch bank. He added, however, that there was no guarantee that the loans would be repaid in full because all concerned parties had become extremely wary of making further loans to Shide Group, which could put the corporation in financial distress.

Also hanging in the balance is a 600 million yuan debt from a wealth management product CCB issued in 2010 on behalf of Shide Group. The debt comes due in May, but it is unclear how much risk the bank assumed.

It is not mentioned in the story at all, but Bo Xilai used to be in charge of Dalian. There may be nothing to that, but then again......

Xu has also reaped enormous profits from investing in the equities market. But some of his transactions were suspected by securities regulators of involving insider trading and infringing upon listed companies' interests.

Currently, no special risk reviews have been ordered for financial institutions, including city commercial banks, in which Shide Group holds shares, an official from the China Banking Regulatory Commission said.

However, Xu's disappearance and the dark clouds hanging over Shide Group have many in Dalian nervous. "Until it becomes clear whether the authorities intend to use Shide as a breach to hunt down people behind it, every government official and business person in Dalian feels imperiled," said a local bank executive, who declined to be named.

Hangzhou developer with ￥60 million in debt and unpaid taxes goes bankrupt

Hangzhou Venus Real Estate filed for bankruptcy and the petition was accepted by the court. Debt is ￥40 million and unpaid taxes ￥24 million; the firm ranks number 2 in Hangzhou for unpaid taxes. It's parent company, Zhejiang Zhongjiang, also filed for bankruptcy protection.

This is a small developer and we will see many more exit the market this year mainly due to poor financial management. A rising tide lifts cash flow for almost all companies in the industry, but as the market really turns down in 2012, firms that do not have adequate cash flow to match debt servicing needs will go bust.

杭州一家房企欠税欠款6千余万申请破产
杭州首现房企申请破产案例 专家称破产数量还会增加

Gold is not a bubble; bears watch the wrong indicators

Ambrose Evans-Pritchard makes a point that I've made previously here in different ways, that non-Western forces are changing the markets.

Gold crash on Fed tightening and euro salvation looks premature

“The game has changed,” says Dennis Gartman, apostle of the long rally who now scornfully tells gold bugs that he is just a “mercenary”, not a member of their cult. “They genuflect in gold’s direction; we merely acknowledge that it exists as a trading vehicle and nothing more. There are times to be bullish, and times to be bearish … to every season, as Ecclesiastes tells us.”

...The stock markets of Europe, America, and Japan churned sideways over the same decade, and that precisely is the clinching argument against gold for contrarian traders. You avoid yesterday’s stars like the plague. “Gold is far too popular,” said James Paulsen from Wells Capital. It has reached a half-century high against a basket of indicators: equities, treasuries, homes, and workers’ pay.

What is wrong with their indicators? They are all Western! Did the 1960s U.S. bull market care about Chinese GDP? Do Beijing home prices care about Turkish housing demand? As a global asset, Western indicators do matter and as a massive economic force, the West still matters. That is changing, however, especially with respect to gold. The U.S. and Europe can impact the market massively because of their buying power, but right now demand pales in comparison to India and China. If gold is overvalued, it must be overvalued by Indian and Chinese metrics, not Western ones. I do believe $1900 gold was an overvaluation in the current market, because even at $1600 and change, India's current account is in deficit. China's economic slowdown may also hit gold demand. In the long-term though, these rising economies have a much more favorable attitude towards gold, while the relatively (absolutely?) falling Western economies have a less favorable view.

After running through a deflationary scenario that lays out a good case for gold prices falling (though Evans-Pritchard sees it as a case for central bank money printing and therefore bullish for gold), he writes:

Mr Steel said the “marginal cost” for mining gold is around $1450. That is when miners leave low-grade ore in the ground and weaker producers shut down. It creates a natural floor of sorts. Besides, `peak gold’ is a more immediate reality than `peak oil’, he said. There has been no equivalent to the shale revolution seen in oil and gas. World output has been stuck for a decade at around 2700 tonnes a year despite a fourfold increase in investment. There are no great finds, no Wittwatersrand this time.

There will come a day then the bullion super-cycle finally sputters out. My guess is that it will come once Europe’s monetary system has returned to a viable footing - either by real fiscal union, or by break-up - and once China’s RMB becomes fully convertible and takes it place as the third pillar of the world’s currency system. We are not there yet.

This time is different. Not on a 500 to 2000 year time scale, but on a 50-100 year time scale? Absolutely.

There is one group of bears that do have a good case against gold— the deflationists—but for them, gold is merely one asset that will also fall during a widespread deflation. I see the deflation argument as intellectually coherent and still believe it is possible. However, for people who are talking of rotating out of gold and into stocks, I believe their bearish gold position does not comport with the full picture. The bullish "gold bear" scenario is one where the economy has recovered and Europe, the United States and possibly Japan, can only see their debt troubles in the rear view mirror. As Evans-Pritchard says, "We are not there yet."

Average new home transaction price in Beijing down 20% from 2011

From the article linked below: Beijing new home prices declined 7% from the start of 2011 to the end of 2011, and at the end of first quarter in 2012, prices are 20% below year-ago levels. 90% of the 16,000 housing transactions involved first-time homebuyers. Total housing turnover was 18,000 units and 1.8 million square meters, down 14.2% and 19.6% from last year and the lowest figures since 2007. Average price for all housing transactions was ￥19,516 per square meter, down 19.4%.

The most likely way for transactions to pick up is through price cuts. They are coming.


北京新房成交均价下降20% 商品房成交量创5年新低

Euro shorts continue to cover

Leftists websites shutdown again

China shuts political websites in crackdown

Two Chinese political websites said Friday they had been ordered by authorities to shut for a month for criticising state leaders, the latest move in a broad government crackdown on the Internet.

Officials told the Mao Flag website, named after late leader Mao Zedong, and the Utopia website, also known for a leftist political stance, to close for "rectification", the sites said in separate announcements.

Authorities said their postings had "maliciously attacked state leaders" and given "absurd views" about politics, according to statements posted on the websites.

Those statements, dated Friday, were later removed. The operators could not be reached for comment and content on the sites was unavailable.

Does no one notice the irony of a reforming Chinese government shutting down Maoist websites? These headlines are often presented as typical of authoritarian China, but even Western governments have restrictions on hate speech and Germany restricts Nazis, thus in this case, it's hard to see how China is a special case. Shutting the websites of people who are the ideological heirs to the Cultural Revolution is at least on par with Germany's Nazi policies, and Germany's policies are permanent.

Chinese real estate market reaches critical stage; rising sales signal new price wave cut may start soon; ￥800 billion in debt offset by ￥723 billion in depreciating inventory

In March, real estate transaction volume by area increased in 33 of 40 cities monitored by China Index Academy. First quarter volume by area fell in most of 20 major Chinese cities tracked by the China Index Academy, while prices were down in all 20. On transaction volume by area, Suzhou led the six cities with increased volume, up more than 100%. Of the 14 cities with decreased volume, Dalian led with a 73% decline. The numbers are starting to improve a bit and year over year comparisons will start getting better as time goes by, but the absolute level of transactions remains very low.

Shanghai saw 800,000 square meters transacted, for example, the highest since May 2011. Shenzhen saw more than 300,000 square meters and 3,420 properties transacted, both 7-month highs. Shimao Cross Straits Plaza, a commercial property in Xiamen, has sold ￥1.2 billion of office space since hitting the market on March 24. Individual firms also saw an uptick in volumes, with Poly Group's March yuan volume of ￥9.6 billion up 267% from February, while Greenland was up 589%.

However, signs still point to weakness as land transactions and volume tumbled, showing that developers continue their pessimistic outlook. More importantly, 69 listed developers have a combined ￥800 billion in debt and ￥723 billion in inventory. When looking at Chinese developers ability to finance this debt, one must understand that these firms use advance sales tactics. Revenues are pushed forward under this accounting policy, while profits are reported when the transactions are completed. Thus, 2011 saw solid earnings from many developers, despite the balance sheet deterioration seen in inventory and debt levels, because 2010 sales were finalized in 2011.

According to E-House China data, last year in 30 representative cities, area volume was about 138 million square meters, down 26% from 2010. To break the transaction deadlock, developers slashed prices as much as 30%, which is why deputy director of E-House China, Yang Hongxu, says the developers' situation is not as good as their annual reports showed. (Some firms reported 30% earnings growth, even though many firms reported declining profit growth.)

Vanke's inventory is ￥208 billion against 2011 sales of ￥122 billion, or 21 months supply at the 2011 rate of sale. However, since sales growth declined during 2011, at current rates it would take the market even longer to digest this supply. Zhong Wei, director of BNU's Financial Research Center, said under the most pessimistic scenario where new construction falls 5% and area sold remains the same as last year, developers' 2012 year-end inventory will reach 4.7 billion square meters; and under the most optimistic scenario where new construction falls 15% and area sold increases 10%, inventory is estimated to be about 4.5 billion square meters. He estimates it would take about 3 years to clear this inventory when factoring in new construction. Also, this inventory costs roughly ￥345 billion to finance (interest and debt repayment), while 2011 profits were only about ￥500 billion.

If those ￥500 billion in 2011 profits are partially made up of 2010 sales, then a baseline earnings figure for 2011 would be lower. If one factors a 30% decline in area sold and a 15% price decline (thus far citywide average declines are in the low single-digits or less) since the fourth-quarter of 2011, the industry as a whole would operate at a loss.

Interest payments remain high, with Vanke's interest cost at ￥1.2 billion (last year the firm reported net profit of ￥9.6 billion), though still well within the firm's ability to pay. That said, many analysts are looking to the real estate trusts that are coming due this year. Shenyin Wanguo issued a report showing ￥306 billion in trust principal and interest coming due, with the peak payback period starting in March. The trusts are financial products sold by financial firms as high-yield products for investors and loaned to real estate developers (as high as 20% interest) who had trouble accessing bank credit. (Not because they were credit risks, but because state-owned firms were taking the lion's share of bank loans and the government restricted credit to the sector.)

China E-House data shows sales in January and February of ￥415 billion, down 20.9% from 2011. Developers have increased self-financing in the face of tight credit and a weak market, raising nearly ￥600 billion in those first two months, up 43.3% from last year and accounting for 42.3% of all financing, an increase of 1.3% from 2011. This scramble for cash has replaced the developers' strategy of "grab land when the market is bad, sell homes when the market is good." Now they are simply hoping to raise enough capital to pay back their creditors.

If the real estate market holds the line here and prices do not decline, developers as a whole may see another profitable year. However, if a second wave of 10%-plus price cuts begins as transaction volume picks up (which I predict will happen), then the industry as a whole may see net losses. Looking into 2013, the big question is whether the bubble continues to deflate. Firms may escape 2012 by paying debt with debt, but if the market weakens, their balance sheets will look much worse as debt levels stay high, but inventory depreciates.

There are two additional factors that make me confident things will get worse for developers. The first relates to inventory. In every bubble, assets are overstated and I would be surprised if Chinese developers didn't have write downs. Even assuming the numbers are accurate, a further price decline of 20% would lower inventory values and could wipe out the equity of many firms. Second, I believe the market has turned a psychological corner. Home buyers no longer believe prices always go up and they now expect price cuts. Government policy remains tight and lower home prices are conducive to building a consumer economy, by increasing disposable income, which is why I do not expect it will loosen much unless/until a disaster appears imminent.

We have yet to see a developer panic. At some point, however, I expect one of the financially weak firms will try to dump inventory (possibly into a second-tier city that hasn't seen major declines) and prices will tumble, setting off the waterfall price declines and the period of maximum pain for developers. General sentiment still seems to be that major price declines will end in the first half of 2012 and the government will ease up in the summer. If bigger declines are coming then, I expect they will arrive as the optimism for the second-half of the year (optimism means no or mild price declines) meets the reality of debt repayment and continued pricing weakness.

Finally, remember that many state-owned companies opened real estate development divisions, along with private firms. The focus on listed developers such as Vanke masks the weakness in the industry as it is the unlisted and small developers that will be forced out or bought up in a recession. Listed developers may eventually represent investment value, especially if restarted financial and economic reform lifts the long-term growth rate of the Chinese economy in the years ahead.

Source articles:
3月全国楼市成交参差不齐 价格以降为主
69家上市房企负债超过8000亿元 楼市进入去库存时代

Socionomics Summit 2012 is coming up; how social mood affects presidential elections

Here's a video featuring Bob Prechter discussing herding, followed by his latest media appearance discussing how social mood affects the presidential election.

(VIDEO) The Only Time You'll Hear Bob Prechter Suggest Joining the Herd

By Jill Noble | March 21, 2012

In this clip Prechter explains why people herd in financial
markets -- and then makes one suggestion to his audience at last
year's inaugural Socionomics
Summit that you may find surprising.

What's especially noteworthy about what you just saw is that almost
every single attendee at the packed-house event really did take
Prechter's suggestion!



Last year's Summit was a sold-out event, and was full of finance
professionals, social mood researchers, Elliott wave analysts and
more.



Yet after the day-long Socionomics Summit ended, these individuals
found themselves all herding together -- as the dialogue continued
downstairs at the Georgia
Tech Conference Center's lobby and bar.



This year's Socionomics Summit: New Initiatives in Social Mood Research
and Application promises to be another fantastic networking opportunity,
with plenty of chances to mingle with an impressive group of like-minded
individuals.



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Editor's note: Additional video from Prechter's presentation
on herding is available here>>

This article is syndicated by The Socionomist, a publication of the Socionomics Institute, and was originally published under the headline (VIDEO) The Only Time You'll Hear Bob Prechter Suggest Joining the Herd. The Socionomist is designed to help readers understand and anticipate waves of social mood. Copyright © 2012 Socionomics Institute.

Interview with Robert Prechter: Forecasting the Presidential Election

Robert Prechter talks to Fox Business News host Neil Cavuto about his latest research on how social mood affects presidential re-election bids. In the interview below, he reveals what is the most reliable indicator in predicting incumbent re-election.

Download and read a landmark academic paper by Prechter, Goel,
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People's Daily op-ed discusses reform

The bones of reform are more and more difficult to chew (改革的骨头必定“越来越难啃)
(Google Translate version)

Facts have proved that such reform will not happen overnight, perfect, and to avoid social unrest, and to maintain continuity and stability of China's development. Analysis, as many Chinese and foreign scholars, the success of China's reform and an important reason for the gradual reform process to ensure that change is always in the "control environment", such a valuable experience - For a large country like China, for the social well-being of over one billion people, there is no more important than stability.

Of course, follow this path, we should also be noted that earlier Yi difficult to reform the order selection strategy, the bones of the reform must be more and more difficult to chew ". The one hand, we can not turn a blind eye to the contradictions and problems, timid, passive stagnation. On the other hand, in a big country to engage in reform also need to be extra cautious, and steadily push forward. In contemporary China, the occurrence of extensive and profound changes in the environment, and promote self-improvement and development of the socialist system, we must adhere to actively and steadily ideas for reform, promote reform and development with maintaining social stability, persist in reform efforts, the pace of development and social can withstand a degree of harmonization, promote reform and development in the social stability and promote social stability through reform and development, which is a bottom line in all of China's reform, the best interest of the 1.3 billion Chinese people.

Strong sense of responsibility and sense of urgency, starting from under our feet the land of China, both unswervingly explore bold and innovative, but also the overall situation, focused, easy, step by step, we will be able to reform push to move forward, so that countries have a better future, more stable and harmonious society, people have a better well-being.

Why is Wen Jiabao criticizing the banks?

In the SCMP's Bankers reject Wen's criticism, George Chen writes:

Premier Wen Jiabao's tough talk about breaking the monopoly enjoyed by the nation's state-owned banks has rattled executives at those lenders.

But sceptics wonder whether Wen has the power to push through change. He has the reputation of advocating reforms that do not always happen. Moreover, Wen is due to retire in less than a year.

...Wu Jinglian , an influential economist, said recently that he believed it would be very hard for Beijing to break the industry monopoly among SOEs, which may challenge certain special interest groups.

Wen Jiabao is targeting the banks because they are the linchpin of the centrally planned economy. The state-owned banks lend to state-owned companies controlled by high ranking party members. Political reform in China has failed because financial reform in China has stalled. Fresh off a political victory, Wen Jiabao is pressing for financial reform and he does not expect to see any changes. What he is doing is paving the way for Li Keqiang to follow through on his rhetoric.

The Wenzhou pilot program cannot be overlooked because it is a very bold proposal. It is a common-law style advancement: allow the underground banking sector to become legal. Instead of prosecuting the booming gray market business, China has legalized it and after it succeeds, will spread it across the country. A private financial system will compete with state-owned banks for deposits. It will pay higher interest rates and charge higher rates for loans, to better credit risks, while the state-owned banks continue make bad loans to politically connected firms. Eventually, this will start impacting the state banks and instead of being regulated by politics, they will be regulated by markets. The old way to reform the banking sector was top down reform of the state-owned banks. This failed, the PBOC was blocked by the Ministry of Finance, and everything went back to business as usual after 2008. Now, a new reform effort is taking place, a bottom up approach that is more likely to succeed and far greater impact on the Chinese economy.

Another article in the SCMP from today notes the reform effort picking up. In Days numbered for monopoly of state firms, Eric Ng writes:

In 2005, the State Council issued a policy circular on supporting the development of private enterprises. It said private firms should be allowed to invest in sectors monopolised by state-owned firms. It called for faster reform and greater competition in sectors such as electricity, telecommunications, railways, aviation and petroleum.

Private firms should have equal access to the capital markets, and banks should be encouraged to increase their lending to small and medium-sized firms, it said.

It also said private capital should be permitted in financial services like banking and insurance, as well as utilities that had been traditionally operated by the government, such as water, gas, domestic heating and waste treatment and disposal.

While the policy sounded good on paper, putting it into practice has proved complicated.

...The State Council signalled Beijing's resolve to make reforms when it set a deadline of June 30 for civil servants to come up with detailed plans to implement the circular. And late last month, the National Development and Reform Commission called a meeting of 45 government departments to drive the initiative.

Reform is slowly restarting in China, but the property sector and broader economic weakness will assist in jump-starting the process.

Chart of the Year? Decade?

Foreign demand for U.S. Treasuries. (WSEFINT)

Here it is as a y-o-y percentage change:

Wen Jiabao: With common purpose, the central government will smash the banking monopoly

At least the reform rhetoric is getting heated in China as Wen Jiabao pledges to smash the bank's monopoly during his tour around southern China. China's outlook remains negative in the short-run and there will be shifts between leading sectors, but if this rhetoric is followed by action, China can again move ahead of the bank captured Western economies.

温家宝：中央已统一思想要打破银行垄断


Here's the Google Translate of the article to give you the gist of it:

According to the Voice of China "Network News" reported on April 1st to the 3rd, Hu Jintao, Premier Wen Jiabao in Qinzhou, Quanzhou, Fujian Province, Putian, Fuzhou and other places on the economic operation of research. Wen pointed out that the overall economic operation in China is good, although some of the major economic indicators fell back, but still at a reasonable level. To fully see the favorable conditions and positive factors, the firm to do a good job of economic confidence in the work. The same time, we must implement a flexible and prudent macroeconomic policies, appropriate and timely pre-tune fine-tuning.

Premier Wen Jiabao's recent visit to the study, Guangxi, Fujian would like to know the current economic situation. Three days, he went to Fujian seven wolves, three trees, Fuyao and other three companies to understand the situation, also went to a small micro-enterprise e-commerce, advertising and media to understand the situation, and held three forum and entrepreneurs. At the forum, Wen said:

Wen Jiabao: I come to this, the main purpose is to look at the current economic situation, for you, is the operational status. I know most of the situation this year is the pressure of economic downturn, and then a big, corporate losses.

Fujian Peak Group chairman Jingnan enterprises is still in profit, but the lack of domestic demand, external demand weakness.

Jingnan: At present, there is a problem? Is the domestic demand is insufficient, leading to increased inventory levels, but also a comprehensive cost on the rise, leading to export growth did not lift it.

Jingnan recommend continued to fall in the bank deposit reserve ratio to ease monetary policy. Wen said:

Wen Jiabao: You just mentioned, the state must ensure that the financial certain liquidity and loan size. Today, our governor is also, we propose that the economic development, appropriate timely pre-tune the fine-tuning, including the regulation of the currency.

From the Group of Heng Xu Lianjie at the same time is also a small loan company's chairman, he said that the financing difficulties of SMEs is also reflected in the funds does not match the needs of enterprises.

Xu Lianjie: business often come to be loans, but funds can not get bit; when funds become available, the business lost. This is a problem long been plagued by small and medium-sized corporate entities.

Wen said that private capital into the financial sector is to break the monopoly, the Wenzhou pilot some successful experience across the country.

Wen Jiabao: financing costs, in fact, I frankly, I said that our banks make a profit too easy. Why? A few all banks in a monopoly position, only to it where the loan before the loan was very difficult elsewhere. To resolve their private capital into the financial, fundamentally speaking, or to break the monopoly. The Central Committee has unified this idea, you can see the pilot in Wenzhou. I think the pilot in Wenzhou, some successful, to promote the country, some now in the country.

China Infrastructure Machinery Holdings Limited is a domestic construction machinery industry is the first overseas listed companies, the output value and sales have declined year on year for 1-2 months, Premier Wen asked the company president Qiu Debo:

Wen Jiabao: You are engaged in the machinery?

Qiu Debo: loaders, excavators, road rollers, forklifts ...

Wen Jiabao: infrastructure.

Qiu Debo: Contact.

Wen Jiabao: I would like to pre-tune fine-tuning is actually a focus of the ongoing projects under construction must ensure that the funds.

Qiu Debo: a recent move, I have found. For example, our tunneling machines, has been continuous for six months, only a dozen orders, all of a sudden began to emerge in March seventies and eighties, started to move.

Wen Jiabao: for instance, railway last year was 700 billion investment this year, fell by 500 billion of investment, 500 billion of investment should be in place so that the railway line under construction to start ah ... a Wenzhou accident impact, but We can not but comprehensive look at our railway these years of development, including high-speed rail development, the positive impact to economic and social life of the masses.

We can not too quickly, blindly growth in China, the so-called domestic demand including consumption and investment demand, investment demand, domestic demand also expanded up to me give a very simple example, not a lot of migrant workers earn to wages, the domestic demand to expand from where?

And entrepreneurs forum, Wen said:

Wen Jiabao: dealing with the current macroeconomic situation, to overcome the difficulties we face, still the relationship between the stable and rapid economic development, structural adjustment and management of the relationship between inflation expectations, it is not empty. Although we encountered difficulties, but we should still have confidence: confidence in China's economic confidence in the development of enterprises.

Update: Reuters finally got around to covering the news. China's Wen says bank monopoly must be broken: state media

China's state banks make money "far too easily" and their monopoly on financial services has to be broken if cash-starved private enterprises are to get timely access to capital, state media cited Premier Wen Jiabao as saying on Tuesday.

Minor earthquake in Shanghai

Shanghai has 1.2 magnitude earthquake Weibo users report feeling quake上海发生1.2级地震 微博网友曝有震感

【新民网·独家报道】4月2日0点27分左右，上海市府新闻办官方微博"上海发布"发布微博称：上海地震台网测定，2012年4月2日23时27分51.9秒，在上海市闵行区发生1.2级地震，震中位置北纬31.1度，东经121.5度。新浪微博大量网友表示有震感。另据上海地震局官方微博称，这种大小规模的地震在上海每年会发生5次左右，属地壳正常能量释放状态。

At 11:27:51.9 PM in the evening, there was a 1.2 magnitude earthquake in the Minhang district of Shanghai. The epicenter was latitude 31.1 degrees north, longitude 121.5 degrees. Weibo users reported feeling the quake. The Shanghai Seismological Bureau says Shanghai experiences about five quakes of this magnitude each year.

Chinese home prices fall in March

In the 100 city survey, 34 cities saw rising prices, 66 saw declines. The average price in the survey was ￥8741/sqm, down 0.3% from February.

3月百城房价连续七月下跌 北广深现“大促销”

Deflation in America

In Manhattan Pizza War, Price of Slice Keeps Dropping

In the amped-up war of commerce and 75-cent pizza on the Avenue of the Americas in Midtown, a perilous moment is approaching. Circumstances suggest that ravenous New Yorkers might soon witness 50-cent pizza, 25-cent pizza or, yes, free pizza.

All politicians losing popularity and likability

Examples from Italy, Spain and the USA.

First up the USA.

Not-So-Smooth Operator

Something's happening to President Obama's relationship with those who are inclined not to like his policies. They are now inclined not to like him. His supporters would say, "Nothing new there," but actually I think there is. I'm referring to the broad, stable, nonradical, non-birther right. Among them the level of dislike for the president has ratcheted up sharply the past few months.

It's not due to the election, and it's not because the Republican candidates are so compelling and making such brilliant cases against him. That, actually, isn't happening.

What is happening is that the president is coming across more and more as a trimmer, as an operator who's not operating in good faith. This is hardening positions and leading to increased political bitterness. And it's his fault, too. As an increase in polarization is a bad thing, it's a big fault.

I don't believe Obama is behaving differently, though if he is, it is a subtle change and one that could probably be explained by the same social mood that's causing him to lose likability with his political opponents.

Now onto the puppet government in Italy.

Storm clouds gather over Monti's Italy reform drive

Storm clouds are gathering over Mario Monti's efforts to transform the Italian economy, with his approval ratings dropping, mounting protests against his reforms and a damaging row with the parties that sustain him in parliament.

Monti shot out of the blocks after being appointed prime minister in November and quickly implemented tough austerity measures to fend off the debt crisis. But he now risks running into political quicksands that will slow down and weaken the much harder task of reviving a notoriously stagnant economy.

A labour reform that is at the center of Monti's programme has hit heavy opposition, forcing him to abandon immediate implementation and accept a parliamentary debate that will delay the law for months and could lead to it being diluted.

The reform has also caused rifts in the center-left Democratic Party, his second-biggest parliamentary backer, destabilizing the alliance on which he depends to govern.

This is exactly the same popularity path followed by all Japanese prime ministers since 2006 and many other leaders worldwide. Initial optimism for the new leader is quickly subsumed by social mood and their popularity declines almost non-stop.

And now Spain.

Spain’s Ruling Party Disappointed in Regional Ballot

In Sunday’s vote, the Popular Party won 50 of the 109 seats in the regional assembly of Andalusia, against 47 seats for the Socialist Party. While the Popular Party won the most votes in Andalusia for the first time since Spain’s return to democracy, it fell short of the 55 seats needed for the absolute majority. Instead, the outcome leaves the door open for the Socialists, who have controlled Andalusia for 30 years, to continue in government there if they can secure the support of another left-of-center party, United Left, which won 12 seats.

Riots and general strikes are now taking place in response to austerity cuts.

I earlier covered Japan and Australia in Australian Labor party internal dispute puts the U.S. GOP to shame; Japanese voters unhappy, may give reformers a shot at leadership

Protectionism rises in India; Gold "bubble" about to burst?

Rising Risk: Foreign Firms Sense Hostility in India

Tax proposals in the national budget unveiled in March stunned foreign firms. They could create significant retroactive tax liabilities for international mergers stretching back a half-century and eliminate a tax exemption many investors now have, wreaking havoc on corporate deal making, legal experts say. More than a half-billion dollars in foreign capital has left the Indian stock market in recent days.

The government also singled out a U.K.-based oil producer for a multibillion-dollar levy that the company calls discriminatory. Internet executives from Google and Facebook are facing criminal prosecution for not removing Web content that some consider objectionable even though the companies have said they followed the letter of the law. And long-promised efforts to liberalize foreign investment in the retail, defense and insurance sectors have stalled.

Social mood is negative in India, as witnessed by stock market and current account figures.

The current account has plunged into deficit:

One reason for the high trade deficit is rising oil prices, but another reason is Indian's steady importation of gold. This is why the Indian government has raised import taxes on gold: India to review gold tax but import duty to stay

However authorities said they would not budge on an import duty hike from 2% to 4%.

India is the biggest importer of gold in the world.

...However he added that the import duty would stay because Indians were spending "precious foreign exchange" to buy gold.

The high gold imports have weakened the rupee against the major global currencies.

This is an important equation. If domestic investors are dumping their currency to buy gold, they are weakening their currency on the global market. When it reaches the level of Indian consumption/investment and it's coupled with a weak economy, it can turn into a self-fulfilling prophecy of currency "collapse," i.e. the currency could suffer a mini-crisis and decline sharply until the gold price rises enough to slow imports. The Indian government would rather have gold imports decline gradually, rather than abruptly through a financial or economic crisis.

I don't follow the Indian market or political situation closely, but the tariffs aren't very high at 4%. My expectation is that the tax will continue to increase until gold imports slow. Gold investors take heed. I put bubble in quotes at the top because I do not believe gold is in a bubble, but a drop of a few hundred dollars would catch bulls by surprise and cause naysayers to say the bubble is bursting.