Turkey going down the tubes

Spengler writes: Recall notice for the Turkish model

As a matter of record, I wish to state that I am shorting Turkey not for any political motivation, but only because the Turkish government economic policy is a clown show.

Erdogan has the weirdest economic views of any serving head of government. He justified the credit bubble on religious grounds, pledging repeatedly to cut the "real" interest rate (the cost of interest minus the inflation rate) to zero.

"We aim to cut the real interest rate in the long run, so people will increase their incomes through working, not through interest," he said last April. "Eventually we aim to equalize the interest rate and inflation rate."

Erdoğan believes that this would fulfill the Islamic injunction against lending for interest; if the real interest rate is zero, he seems to think, the sharia ban on interest is fulfilled de facto. In order words, Turkey provided nearly free money to bank customers. Erdogan's program set in motion a series of perverse effects. One is a sharp fall in the exchange rate.

iShares MSCI Turkey Investable ETF (TUR) was down 37% in 2011, with currency depreciation and declining stock prices both contributing to the losses.

Hyperinflation in Iran

Iran rial slides, 'dollar' text messages appear blocked

The central bank reportedly pumped $200 million dollars into the market last Wednesday after new and much tougher U.S. sanctions prompted nervous Iranians to change rials into hard currency, accelerating a rise in the price of dollars on the open market.

Saying it would act to stabilise the currency, the Central Bank of Iran (CBI) imposed a rate of 14,000 rials to the dollar - up from record lows of around 18,000 rials - but many exchange offices would not sell at that price.

By Tuesday the exchange rate had risen again to around 17,000 rials, according to exchange bureaus, 50 percent more than the CBI's "reference rate" of 11,240 rials.

In his latest interview at King World News, Jim Rickards says U.S. war with Iran is very likely.

Taiwan re-elects President

The media polls and financial markets were right on this one, while the prediction market was off—most likely because it doesn't use real money. Supporters of Tsai Ing-wen may probably signed up and pushed her contract price up.
Taiwan says yes to Ma re-election and his "three no's". His victory was by a much smaller margin than in 2008 though.

Update: The prediction market post-election report is out. Here's the Google Translated version:

Future events published by the Exchange will be closed before the election, presidential election prediction market. According to the last day before the election on 13 January at 24:00 of the closing price, Tsai Ing-wen of the vote is forecast to be 48.8%, 45.4% Ma Ying-jeou and James Soong of 6.8%, 3.4 percentage points Tsai leader Ma Ying-jeou; based on the last day before the election January 13 day weighted average price, Tsai Ing-wen of the vote is forecast to be 47.9%, 46.1% Ma Ying-jeou and James Soong of 6.7%, 1.8 percentage points Tsai leader Ma Ying-jeou. In addition, exchanges of future events of the three candidates were elected to the probability forecast: Tsai Ing-wen 60.0%, 44.5% of Ma Ying-jeou and James Soong of 0.1%.

Separatist sentiment rises in Canada: demographics or social mood?

Graeme Hamilton: As Montreal’s demographics shift, anti-anglophone sentiments make a comeback

Yves-Thomas Dorval, president of Quebec’s largest employers group, was in his car the Sunday before Christmas when the head of the nationalist Société St-Jean-Baptiste came on the radio urging a boycott of the National Bank. Move your mortgages and cut up your credit cards, Mario Beaulieu advised. The crime committed by the Montreal-headquartered bank? Hiring a unilingual anglophone as vice-president responsible for information technology.

How are demographics playing a role? Is it another baby boom that fueled the earlier rise in separatist feelings in Quebec? No, it's the exact opposite:

But the tension can be seen as a reaction to demographic trends that show no sign of reversing. A low birth rate, the flight of francophone families to suburbs off the island of Montreal and an influx of immigrants have combined to produce a steady decrease in the proportion of francophones living in the city.

If populations become separatist/imposing when they grow, and they also behave that way when they shrink, perhaps there's another factor at play? It is social mood that drives the feeling of conflict and separation, but it is the demographic reality that forms the basis of action. As I've written before, social mood expresses itself where there are fault lines in society, established political movements, needs for reform, etc. The danger with this demographic related conflict is that it is all over the Western world. Buchanan's Suicide of a Superpower is heavily based on demographics, growing conflict in Europe is based on native versus immigrant demographics and now a similar situation exists in Canada.

Media extortion: The DaVinci Saga in China

In a Retailer's Crisis, Hunting for the Real Knockoff

In the letters to GAPP and SARFT, Da Vinci claimed Li as a CCTV reporter had been responsible for intentionally misleading news reports, favoritism, hiding the truth and using his ties to Tang and Cui for extortion.

In letters to CCTV, company officials requested a public apology and a retraction of Weekly Quality Report's first segement. They also said they would retain the right to sue CCTV for defamation and financial losses.

Discipline committee members in mid-December told Caixin they'd received a letter from Da Vinci and were investigating, but had reached no conclusion.

Caixin learned Da Vinci has filed a case with the Beijing police for extortion and fraud on the part of Li and Cui.

There's also a length blog post on the story from the same media source as the above story: The Da Vinci “Code” of Middlemen, Bribes, Power

Although media autonomy is the basis for eradicating media corruption, without checks and balances, power will inevitably corrupt. China’s media exists in a pyramid-like hierarchy. The central media stands alone in its size and influence, and once a scandal breaks out in the central media, it is likely to affect all media in China in a negative way. The good news in the Da Vinci case, however, is that while the scandal involves CCTV, it was Caixin’s Century Weekly magazine that exposed the story. From this, we can see that there are checks and balances within Chinese media as a result of competition, an important force in resolving corruption.

No bounce in euro; spec shorts at new high; S&P slashes ratings

S&P Cuts Ratings on France, Italy, Other European Countries

S&P lowered by one notch the long-term ratings on Austria, France, Malta, Slovakia, and Slovenia, and by two notches ratings on Cyprus, Italy, Portugal, and Spain. The ratings firm affirmed long-term ratings on Belgium, Estonia, Finland, Germany, Ireland, Luxembourg, and the Netherlands. Each of the countries has been removed from S&P’s CreditWatch, where they were placed with “negative implications” in December.

France and Austria had their credit downgraded a single notch, from the coveted AAA rating to AA+.

Business confidence sinks in Beijing

Chinas Entrepreneur Confidence Falls In Q4 Beijing

Meanwhile, the entrepreneur confidence index, a gauge of the views and opinions of the country’s entrepreneurs, fell 7.4 points to 122 in the last quarter of 2011, the NBS said.

Within the national measure, 38.7 per cent of respondents polled in the Westpac-Melbourne institute confidence index see home prices rising in the next 12 months, while 31.5 per cent saw them unchanged.

Housing prices in China declined for the first time this year, according to a private index, and Beijing cut government-controlled fuel prices in response to tumbling global oil prices, two welcome developments in the country’s battle against inflationary pressures.

Entrepreneur confidence in the real estate sector slid for seven consecutive quarters, plunging 18.4 points to 81.5 in the fourth quarter after falling below the boom-or-bust line of 100 in the third quarter of 2011.

This Chinese article also discusses home prices and says price declines should accelerate in 2012. No surprise there. 房产行业企业家信心低迷 北京楼市拐点已经明确.

Factories closing in China; regulator attacks shadow banking system

Dire Straits in the Pearl River Delta

Small and medium-sized enterprises involved in manufacturing are still an important pillar of the Pearl River Delta, but what started as a sharp decline in orders in 2008 has evolved into a more severe problem. Tens of thousands of small enterprises engaged in low value-added manufacturing are under pressure as foreign orders decrease, costs rise, labor becomes scarce, profit margins decline and financing difficulties arise. Amid all these problems, production is difficult to sustain.

Research by the Guangdong provincial government suggests that the difficulties facing Guangdong's SMEs are not the same as those that arose in 2008. Then, orders fell sharply as enterprises cleared inventories, but manufacturers were still able to profit from new orders. But now, according to the Guangdong government research report, "Even if there are orders, (companies) don't dare accept them, because it is difficult to make a profit. Fifty percent of surveyed companies said they were losing money or had profit margins of less than 2 percent. Only 22.2 percent of companies stated they had profit margins of 5 percent or more."

Companies are also finding it difficult to leave the region because of all the attendant infrastructure that cannot be replaced in the cheaper inland provinces. And how are entrepreneurs coping with their closed factories?

With relocation and upgrading facilities both difficult, companies can only reduce capacity and maintain basic business. Some entrepreneurs were even going under. He Xiaying, who operated a jeans processing business in Zhongshan, said that in 2011 she closed the factory she ran for more than a year. Today, she relies on income from renting out shops and gold investments. Many other people like her were going into other businesses, she said.

China Halts Commercial Paper Trust Products

China's banking regulator has banned the rapidly-growing sales of investment trust products that invest in commercial paper in an aim to boost credit controls, Caixin learned from an official at the China Banking Regulatory Commission. According to the source, who was unwilling to be named, some banks' commercial paper businesses are substandard and commercial paper investment schemes are not only unprofitable but are high-risk assets for trust companies. "It is better to stop such business," said the official.

Taiwan election this weekend

The prediction markets in Taiwan are shut down because the government considers them a form of polling, which is not allowed two weeks ahead of the election. However, given that DPP candidate Tsai Ing-wen was the predicted winner when the market stopped trading, there are contracts predicting when she will visit the Mainland of China. Currently, those contracts are trading at around 90% for a visit in Q2.

In the financial and media markets, falling bond yields are being interpreted as a sign that Ma Ying-jeou is headed for victory. Low Bond Yield Shows Faith in Taiwan-China Ties

Taiwan’s 10-year bond yields at 1.28 percent are lower than any of the 47 major sovereign issuers except Switzerland’s 0.80 percent and Japan’s 0.95 percent. The Taiwan dollar strengthened 1.3 percent in the past three months against the greenback as investors favored economies with the strongest finances during the European crisis. The island’s debt is 33 percent of gross domestic product, half the ratio of the U.S., and its $386 billion foreign reserves are the fifth largest.

Financial assets have rallied in the island before the Jan. 14 contest between President Ma Ying-jeou of the Kuomintang Party, who has championed closer ties with China, and Tsai Ing- wen, chairwoman of the opposition Democratic Progressive Party. While Tsai said in a November interview that the island should avoid becoming too dependent on China’s economy, she said her party is now more focused on domestic issues than sovereignty questions.

Socionomics and the prediction markets argue for a change in leadership, the financial markets and the last media polls had a slight edge for Ma. In two days, we'll find out.

Skyscraper Index and China

The Skyscraper Index is an encapsulation of social mood. At peak social mood, man reaches for the heavens and looks to outdo his rivals, building the tallest skyscraper in the world. Coincident economic factors including demand for commercial office space, real estate bubble and easy financing for a massive development. For predictive purposes, sometimes a skyscraper is completed before the market peaks, sometimes after.

China Soaring Skyscrapers Latest Confirmation Of Housing Bubble, Barclays Finds

The completion of the Park Row Building, New York in 1899 and Philadelphia City Hall in 1901 foretold the US stock market crash and panic of 1901.

The construction of the Singer Building, completed in 1908, and the Metropolitan Life building, completed in 1909, both in New York, coincided with an economic crisis in the United States which commenced in October 1907 reflecting a monetary expansion brought about by the establishment of trust companies. The Woolworth Building, New York, that opened on 24 April 1913 coincided with the 1Q13 peaking of the US economy and a fall in GDP that lasted until 4Q14.

The Great Depression, marking the end of the extended post-World War I boom, was matched by three record breaking New York skyscrapers: 40 Wall Street in 1929; The Chrysler Building in 1930 and the Empire State Building in 1931.

The completion of One World Trade Centre, New York in 1972, Two World Trade Centre, New York in 1973 and The Sears Tower, Chicago in 1974 marked a period of US currency speculation, the collapse of the Bretton Woods system and the OPEC price rises which caused an economic crisis across the world.

Perhaps unsurprisingly, the first of the world's tallest buildings in the last 130 years to be built outside the US heralded its own regional crisis. The completion of Petronas Towers, Kuala Lumpur in 1997 was followed by a region-wide economic crisis and the collapse of Asian currencies. Likewise in technology-centric Taiwan, Taipei 101, although completed in 2004, start of construction in 1999 was well timed to coincide with the early 2000s recession and the end of the technology bubble.

Where is China now?

Looking forward, using skyscrapers under construction, it is evident that the skyscraper boom in China continues to grow. China will complete 53% of the 124 skyscrapers under construction over the next six years, expanding the number of skyscrapers in Chinese cities by a staggering 87%. China's skyscrapers are not only increasing in number — it now has 75 completed skyscrapers above 240m in height - but the average height of the skyscrapers that it is building is also increasing as past liquidity fuels the construction boom.

In addition, to the increase in size and number of China's skyscrapers, their geographic profile is also changing. Today over 70% of China's skyscrapers are unsurprisingly clustered in the more economically advanced coastal areas of the Pearl River Delta and the Yangtze River Delta. Yet between now and 2017 over 50% of China's skyscrapers will be built inland as China's building boom moves from first-tier cities to second- and third-tier cities. Over 50% of China's skyscrapers are today in tier 1 cities, and based upon current completion plans about 80% of China's new skyscrapers will be built in tier 2 and 3 cities over the next six years - evidence of the expanding building bubble.

More charts and info at the link. China Soaring Skyscrapers Latest Confirmation Of Housing Bubble, Barclays Finds

Unelected European Commission tells elected Hungarian government to change policy

It's authoritarianism all around in Europe!
European Body Threatens to Sue Hungary Over Its Policies

“The commission recalls that a legally stable environment, based on the rule of law, including respect for media freedom, democratic principles and fundamental rights, is also the best guarantee for citizens’ trust and confidence of partners and investors,” the European Commission’s warning said. “This is particularly vital in times of economic crisis. The swiftest way to lay to rest the concerns mentioned would of course be action by the Hungarian authorities themselves.”

Hungary has a lot of policies worthy of criticism, but ending central bank independence is not one of them. As we've seen through history, including twice in the United States, central banks are killed off periodically due to historic mistrust of banks and their role in financial crises, which tend to damage an economy for years if not decades (certainly decades from the standpoint of asset prices). Hungary may well use political control over the central bank to usher in another era of hyperinflation, but it may also rein in the excesses of the past two decades. In any event, socionomics tells us central bank independence is on the way out, a prediction supported by the history of banking, central banks and fiat currencies.

The frame of the story should be broken to understand it. The media is focused on the wrong issues. Yes, Hungary's right-wing government has troublesome policies and they certainly appear headed in a bad direction. However, their government is elected. The European Commission and central banks are not elected. Central banking played a central role in the crisis and one reason why Hungary is being attacked strongly is because its actions are very anti-bank. This is a banking story and an economic policy story, not a question of politics. The two are intertwined because of the nature of events, but the strong pressure on Hungary is driven by the banks, not their right-wing politics.

From Sepetmber 2011: Hungary to Force Banks to Foot Franc Losses, Irking Austria

Hungary wants to allow fixing the Swiss franc at more than 20 percent below market rates for early repayment, Prime Minister Viktor Orban said today in parliament. Austria “firmly rejects” the measure, which may cause “enormous losses” to banks and risks regional financial stability, Finance Minister Maria Fekter said today. Erste Group Bank AG (EBS) and Raiffeisen Bank International AG (RBI) dropped, while Hungary’s risk rose.

“It tells foreign banks that they can go to hell, which in the long run is extremely negative,” Daniel Bebesy, who helps oversee $1.5 billion mostly in Hungarian government bonds at Budapest Investment Management, said in a telephone interview.

And then in December 2011: Erste Bank of Austria Sends Risk Head to Hungary Following Mortgage Losses

Erste Group Bank AG (EBS), eastern Europe’s second-biggest bank, is sending Bernhard Spalt, chief risk officer, to Hungary as bad debts soared following a government decision forcing banks to swallow mortgage losses.

Spalt will take over risk management at Erste Bank Hungary Zrt., the nation’s second-biggest lender, from Feb. 1, the Vienna-based bank said in a statement today. The position had been vacant since the summer.

The lender set aside 701 million euros ($912 million) in the nine months to Sept. 30 to cover bad loans in Hungary following Prime Minister Viktor Orban’s foreign-currency mortgage law passed in September. The provision is almost four times the 180 million euros the bank set aside for souring loans in Hungary in the same period of last year.

Yes, there is concern about Hungary's right-wing populism, but the real concern is the banks! And on this issue, the trend in social mood is Hungary's friend. The government is pursuing a double-win policy: anti-foreigner, anti-bank. Foreign attacks may help the government stay in power and achieve victory, whereas during rising social mood it probably would doom the efforts and lead to electoral losses.

Hungary is also on the right track economically because the banking sector needs serious reform. Ron Paul's approach in the United States is a far better one because seeks competition in the monetary system rather than political control over banking decisions, but Hungary's potentially bad policy is better than continuing with the existing failed policy that the European Commission, IMF and others are trying to shove down their throat.

Lots of charts on China's economy

Over at ZeroHedge. China Enters The Danger Zone, SocGen Presents The Four Critical Themes

U.S. and China intervene in Taiwan election; both fear KMT loss

U.S. unusually involved ahead of Taiwan elections

US involvement in the election has come under scrutiny after the American Institute in Taiwan, America's de facto mission on the island, announced last month that Taiwan had been nominated for inclusion in the United States' visa-waiver programme.

The institute's acting director, Eric Madison, sought to downplay links between the announcement and the election, saying Taiwan only recently completed the statutory requirements.

But analysts said Tsai's Democratic Progressive Party (DPP) has been pushing for a visa-free arrangement with the US for years, and were sceptical of the explanation.

"Actions such as announcing only a few weeks before the election that it is about to approve visa-free entry to the US for Taiwan can only help Ma and the Kuomintang," said Dr June Teufel Dreyer, a political science professor at the University of Miami. "So while they say they are not intervening, of course they are intervening."

According to to some analysts, the intervention is even more direct:

However, Professor Arthur Waldron, who teaches international relations at the University of Pennsylvania, said the most striking intervention by a US official came in the form of an unattributed quote made to the Financial Times on September 15. The official said Tsai had left the Obama administration with "distinct concerns" about her ability to handle cross-strait relations.

Although the American Institute in Taiwan later sent five officials to celebrate the DPP's 25th anniversary, some analysts say the US is telling Taiwanese politicians what to do.

"This is something that the US does not normally do with other countries," Waldron said.

China is also getting involved, albeit less directly, as direct Chinese intervention could work in the DPP's favor. 180,000 secure flights to Taiwan to vote in elections

"The race is so close that many businessmen, originally not planning to return, have decided to fly back to Taiwan for the vote," Yeh said.

Asked whether those businesspeople were worried about Ma's chances, Yeh said he had no idea who they preferred.

Yeh denied rumours that the mainland had subsidised the businesspeople's return in an attempt to strengthen Ma's re-election chances. Beijing has reportedly backed Ma for a second term in a bid to maintain warming cross-strait relations.

China A-share ETFs

For U.S. investors who want to capture the A-share market in China, Market Vectors creates A-share exposure via swaps—but that exposes the fund to counter party risk, in this case Credit Suisse. The ETF has very low volume and assets; it's hard to know if this is because of the product or the terrible performance in the Shanghai Composite. I lean toward the latter explanation because investors don't seem to mind complex products with added risk. I'm not buying the fund because the market is weak and not worth the potential counter party risk. If the A-share market were looking very strong, I might consider the fund against the risks, but even then I'd probably prefer a sector fund or individual H-shares. Market Vectors China ETF (PEK) There's a similar fund in Hong Kong, iShares CSI 300 A-Share Index ETF (2846). It uses derivatives to achieve the returns, in essence similar to swaps. iShares has some other A-shares funds, if you follow that link you can find them on their HK website, if you're interested.

One positive for these funds is the announcement stock market reforms in China. One risk was that the institutions issuing the derivatives would be unable to hedge underlying assets and end up with a situation such as with iShares India ETN (INP), which turned into a closed-end fund when they couldn't create new shares. It traded at a big premium during the bull market and that led to losses when the premium eroded during the bear market. With the market opening up a bit, at least this portion of the derivative risk is lessened.

Below is PEK versus the Shanghai Composite; then against the index it tracks, the CSI 300. It does a reasonable job of tracking the index, but as you can see, it differs slightly from the reported Composite number.

Don't count U.S. manufacturing out

I've seen a number of sources predict a U.S. manufacturing renaissance. I agree with the forecast, but now there's some real world evidence that the trend is for real. See Toyota wants North America to become big export base

Toyota made headlines last year by announcing the start of Camry exports from the United States to South Korea, instead of shipping them from neighboring Japan. In 2010, the latest year for which data is available, Toyota exported 16,700 vehicles from the United States to 19 countries, mainly in the Middle East, across six models: Avalon, Sequoia, Tacoma, Tundra, Camry and Sienna. Including markets in the North American Free Trade Agreement (NAFTA) zone, exports totaled 100,000 vehicles, Toyota said.

Let's see whether protectionism gets in the way of exports and added production ends up in the domestic market.

BofA slash and burn; OBT portfolio update

Bank of America to Slash Asia Staff in First Quarter

Bank of America Merrill Lynch aims to cut about 20% of its Asia-Pacific managing directors by the end of the first quarter, a person familiar with the situation said Tuesday.

It's been awhile since I updated the OBT (Obama Bernanke Turbo) portfolio. I created the portfolio with five equal shares in the government bailout financial firms—AIG, Citigroup, Bank of America, Fannie Mae and Freddie Mac—and it is now down 61.3%, led by 87% losses in Fannie and Freddie. BAC is down 63% since inception; AIG down 33% and Citigroup down 35%. Inception date is August 26, 2009.

Audit of China's 3 trillion shadow banking system: situation not very good

约3万亿事实贷款在银行表外运作暗藏风险 审计署排查 The audit is showing more illegal loans than expected. One method used by banks was to have another bank lend to a customer that demanded more credit. This is likely to push money supply higher if the PBOC has to step in and bail out the banks, just as we saw money supply jump in the U.S. This is a typical pattern: the banks create the credit and then the central bank fills in the holes when the credit bubbles burst.

Chinese M2, Shanghai Composite, Federal Reserve comparisons

Chinese money supply growth in December 2011 was actually about 16% year-over-year, not the 13.6% reported by the PBOC, because their number is the 2011 growth rate. I noticed this when I tried using their growth number and the previous year's M2 number to calculate December's M2 total and found it showed a decline in M2. However, I did match their numbers by going off of the starting M2 for 2011. In any event, here are some charts, some updated and some new.

The first compares M2 money supply in China and the U.S. The Chinese title is an idiom about a soldier who runs away for 50 yards laughing at the soldier who ran away 100 yards, alluding to Chinese criticism of U.S. money printing. The second is a new one, the year-on-year change in money supply as calculated by me, using PBOC and FRB numbers. The third is also a new one. Previously I've compared MTM changes in Chinese M2 to MTM changes in the Shanghai Composite. It gives a noisy picture of what the third chart, using year-on-year numbers, more clearly shows: a general deceleration in money supply growth and a decline in stock prices.

Strikes in China grab headlines, but no widespread change in activity

Hundreds Threaten Suicide At Microsoft Supplier Plant In China

Some 300 Chinese Foxconn employees who manufacture X-box 360 machines said they would throw themselves from their Wuhan, China, plant if demands for lost wages were not met.

Recall the Foxconn suicides where Apple products are made, which led to wage increases. Also see Strikes erupt in China’s Sichuan province.

Thousands of workers from the state-owned company Pangang Group Chengdu Steel & Vanadium (known as Chengdu Steel) went on strike on January 4 over low wages in Chengdu, the capital of the inland province of Sichuan. The New York-based China Labour Watch put the number of strikers at 2,000, but other reports estimated that 10,000 were involved. Hong Kong’s Ming Pao Daily News said 1,000 police were sent to block the workers, who marched to a crossroad of the Chengdu-Mianyang Highway near the factory.

Anecdotal coverage is up, but thus far there's no increase yet. Spring Festival starts in another week and workers head home for a long vacation. If there's to be an increase in strikes and labor disputes, it will happen after the holiday, but as of now, there's absolutely no signs of it. There should be an increase in labor disputes if social mood continues on its downward path.

More talk of brokered GOP convention

Goldberg: Romney's authenticity problem

Every four years pundits and activists talk about how cool it would be to have a brokered convention (if no candidate has 50% of the delegates by convention time). This is the first time I've heard people saying it may be necessary.