Just In Time For A Financial Crisis: Bond Futures Are Back

Bond futures trading was halted in China due to a major scandal, known as the 327 incident.
The bond-futures market that operated in China from 1993-95 is a good case in point. It was originally introduced to improve liquidity in the spot market and make bonds more attractive to financial institutions by allowing them to hedge their exposure. But there were two serious problems. First, because most of the bond issuance up until that time had been directed toward individuals, institutional investors did not have large positions to hedge. And second, most interest rates were set by the government and adjusted only infrequently so there was also not much risk against which to hedge.

There was thus relatively little demand for bond futures as a hedging tool and the market quickly became dominated by speculators trading on insider information, with positions often far in excess of the limits set by the exchanges. (Bond futures traded on the Shanghai and Shenzhen stock exchanges and also on a number of "securities trading centers" set up by local governments throughout the country.)

The regulators finally stepped in after massive losses at Shanghai International Securities Co (SISCO), at that time China's biggest broker, which had unsuccessfully attempted to push down prices by taking a short position with a notional value more than eight times the total issuance of the underlying bond. After this scandal, known as the "327 incident" after the series number of the futures contract SISCO was shorting, all bond-futures trading was indefinitely suspended in May 1995.
Liu Jun Luo made a lot of money that day.

China to Start Bond Futures Trading Next Week After 18-Year Halt

Debt Worries Growing In China

Contain the impulse to build new cities
Before building a new city or urban development, the government should not only consider the safety of the proposed project, but also the financial burden that the new development might represent in the long run, says an article of the Southern Metropolis Daily. Here is an excerpt:

The city government of Yan'an in Shaanxi province has started work on its planned new city in the mountains near the old city. The overall planned area of construction is about 50 square kilometers and the new city will accommodate about 400,000 residents.

When the media questioned the government on the rationale behind the project and its safety, the mayor said he was completely convinced on the safety issue and that the new city was being built to protect the revolutionary relics left in the old city by the Red Army in the 1930s and 1940s, while accommodating the city’s rising population.

Yan'an is located on a special geological belt that is often the cause of landslides in the area. The main reason for the doubts voiced in the media is the unstable nature of the mountain on which the city is to be built.

The Yan'an city government should provide more concrete scientific evidence to prove the project's safety.

Another question is whether the Yan'an government will have financial problems in providing the necessary public services for the new city. Some counties in Yan'an are poverty-stricken, while the rich ones benefit from crude oil deposits, which will soon be exhausted after decades of exploitation.

Building a new urban area will contribute to the city's GDP in the short term. However, after the mayor is transferred, or promoted, to somewhere else after several years — as is often the case with Chinese mayors — the new city may become a financial burden.

The financial safety of the project is a question deserving of a response from the mayor. And if the city government cannot sustain such a new city in the future, it will become an empty "ghost city" — like some others in China.

New district construction causes controversy
A new district construction project in Yan'an, Shaanxi province, is causing public concern about safety and ecological risk, says an article in Beijing Youth Daily. Excerpts below:

Recently Yan'an has launched a new district construction project that has reached an overall scale of 78.5 square kilometers. The Yan'an local government said the new district construction project aims to protect revolutionary relics because the population density of the current urban area is almost saturated. But the public is strongly concerned about the negative impacts of district construction in mountain areas.

Yan'an is located on a Loess plateau, which has rather complicated geographic conditions. Whether it is appropriate and safe to conduct large-scale construction, especially tall buildings and large mansions, on collapsible Loess areas is questionable. Even the new district construction official admits that there are major technical risks in the construction project. Since this July, Yan’an has suffered mudslides as a result of continuous heavy rain, which led to mass damage. If extreme weather conditions or serious geologic hazards take place in the new district, there will be disastrous consequences.

In addition, large-scale construction in collapsible loess areas also faces ecological risks. New construction will block mountain ditches that used to be flood discharge channels. Whether such construction will change local ecological situations and lead to floods or drainage problems should be carefully evaluated.

If the new construction project does harm to the local ecological environment and endangers local people's livelihoods, local authority should think twice before taking action.


Grand Super Cycle Top? Cameron First UK PM to Lose War Vote Since 1792

Iraq war ghosts end UK plans to take part in Syria action
Commentators said it was the first time a British prime minister had lost a vote on war since 1782, when parliament effectively conceded American independence by voting against further fighting to crush the colony's rebellion.


Attack of the Trading Machines

The Day Everbright Had to Pull Power Plugs to Stop Erroneous Trading
Everbright has suspended Yang Jianbo, head of its Strategic Investment Division (SID), which is directly responsible for the mistake. Soon after, Xu Haoming resigned as the firm's president.

Founded in 2010, the SID was a rising star in Everbright. It earned 124 million yuan in profit for the company in 2012, a 33-fold increase from the previous year.

The glory ended on August 16. Within two seconds at 11:05 a.m., its trading system generated 26,082 buy orders, sweeping clean all stocks for sale on the main board and pushing up the Shanghai Composite Index by 5.62 percent from its closing level the previous day.
It happened because the order-generating system was programmed to resend orders if it did not receive feedback from the order execution system in 150 seconds, an Everbright executive said.

In itself, the repetitive operations are unlikely to cause much trouble because they need to pass through layers of examination and risk control before being sent to the stock exchange and executed.

But all of these layers failed. By the time the morning trading session closed, Everbright had offered to buy stocks worth 23.4 billion yuan, and shares worth 7.3 billion yuan were actually bought. Traders canceled the rest, resold some of the stocks and shorted the stock index future, narrowing the firm's risk exposure by the end of the day to 196 million yuan.

When the traders realized the system had sent out a huge amount of unintended orders, "new orders were still being generated and there was no way to stop them," a source with firsthand knowledge of the situation said.

"The traders had to pull out the Internet cable and also the power cord" to shut down the computers, he said.
The article goes on to place some blame on the Shanghai Exchange as well. In any case, these types of events are always possible, but the odds of them occurring are more likely during periods of negative social mood. More importantly, the effect is far larger during negative mood. During positive social mood, these types of blunders would mainly be a joke to traders and investors, but during negative social mood, it makes them question the stability of the system.

Gold Soars to New All-Time High in Rupees

Or rather, the rupee has collapsed.


Indonesia Nearing Financial Crisis and Australia Worries About Military Threat

A great example of social mood in The Australian today. I searched for articles on Indonesia, looking for economic and financial news, and came across this headline: Fear and doubt about Indonesia.

Except this article isn't about the economy.
The gap between popular suspicion and warm official relations has been shown by Lowy Institute polls but the latest 91-page study is more detailed and has added significance because it reveals a government anxious to know what underlies the often awkward state of public opinion.

......In the survey, the No. 1 policy issue troubling Australians was people smuggling via Indonesia.

Only 9pc thought Indonesia had made a "strong effort" to do something about this, 31pc acknowledged a "moderate effort", and 18pc believed our neighbour had made no effort at all.

People were more concerned about the welfare of cattle sent to Indonesia than about fair treatment of our citizens in Indonesia's prisons and courts.

Two words that Australians most immediately associate with Indonesia were "holiday" and "Muslim", while nearly one fifth of those surveyed thought Bali was a country all its own.

I did manage to find some news about Indonesia: Indonesia Not in Crisis Level as Conditions Haven’t Deteriorated
Even by comparisons to the 1997-98financial crisis, the current account deficit was exacerbated by large amounts of dollar-denominated debt held by companies, a situation that is different today in which companies’ balance sheets are much stronger. Fifteen years ago, Chatib said [Finance Minister M. Chatib Basri], the banking system was weak, with non-performing loan ratios at more than 30 percent, but now that ratio is less than 4 percent.

“We always perceive ourselves as the only one country in the world. In perspective of many countries, we can see Indonesia more calmly and more clearly,” Chatib said. “We are not in a situation that all is well. The fact that the government is announcing the four policy packages shows that we have to anticipate that the situation can go toward [a crisis]. But now, for example with liquidity measure, we are not like [the situation] in 2008.”
The 10-year government bond in Indonesia is up from 5.5% in April to 8.5% in August. All of the numbers look good before a crisis and turn bad once the crisis gets underway. China also has very low non-performing loan ratios today, but that doesn't mean the system is sound.


Changhsa Sky City Roundup: Regulatory Hurdles, Wetlands, High Cost and Developer Responses

One article calls the building a fantasy, and notes something I hadn't seen before: in addition to a hospital, the building is planning to have a crematorium. It also discusses the regulatory hurdles still in front of the project.


Hunan Provincial Department of Housing and Urban officials confessed a sky city still preliminary technical review stage, is still far away from the administrative examination and approval. "As far as I know, the technical review are just getting started. First determine the technology can do, talk about administrative approval. Program within six months will not necessarily go down."

Lofty hurdle to cross two, one is technical, the other channel is the administrative examination and approval, "the province after receiving design, do demonstrate the whole process, you may have to engage in a year or two could not finish."

Sky City Senior Review Committee, an expert overrun the Southern Weekend reporter said, "overrun review has been carried out over eight months, Broad is currently not pass., There are many issues remain unresolved, such as structure, technology and other aspects of compliance did not . "

Wang investors are not optimistic about the review. "I am Zhang Yue said, it is impossible to build to go abroad. Abroad Some cities have placed orders. Zhang said that this depends on fate."

Wetlands! Apparently Sky City needs an environmental impact study due to wetlands in the area.
长沙“天空之城”被指侵占湿地 未通过环评就开建
Environmental NGO "Nature university" promoters Feng Yongfeng bluntly, Changsha ranks the "stove" the first, mainly due to a large number of natural wetlands disappear Changsha.

"Sky City" developers Yuanda Group, this time to become environmentalists have accused the object. They criticized the "Sky City" is destroying the last piece of wetland Changsha Daze lake.

In the "Sky City" site "leveling" to clear the table work site, you can clearly see Osawa Lake Wetland soils buried by new signs.

Pipeline to the site and some Osawa lake. Field workers according to the argument, laying pipes in water supply lake Osawa construction site use only. The site also dug a ditch to the center of the lake, earthwork has already crossed the lake birds a place to stay.

Exposure due course of time, the water level of the lake Osawa has been less than knee deep.

Osawa lake or some birds habitat. Therefore Changsha Bird lovers protest: Yuanda Group on wetlands and waterfowl wetland how to compensate? Why Broad Group in the "Sky City" in the construction of the EIA does not indicate these?

Osawa around Lake fishing wire mesh and grid fowler prevailed, so that wetland birds and fish are largely disappear. Environmentalists are worried that the drought filling the encroachment of wetlands pumping, it will give Osawa Lake Ecological bring disaster.

Environmentalists have criticized the Yuanda Group barbaric construction, they called in Changsha drought severe cases, "Sky City" project must immediately stop pumping construction, at least for now to "stay the water drought."

By the "natural College" Daze Lake fate initiates concern environmentalists joint letter to Zhang Yue, Broad Group urged not to damage the ecology of Lake Osawa, open the "Sky City" relevant planning and environmental impact assessment reports.
In the U.S., when the environmentalists show up late to protest a project, it's usually funded by a competitor or being used as cover for an otherwise popular project. In China, the environmentalists are less likely to be paid shills, but either way, it's another headache for Sky City.

Finally, this article discusses the cost of Sky City, noting that while the building will be cheap relative to other skyscrapers, the construction costs may be 9000 yuan per square meter, or double the cost of home prices in Changsha. The building may be an impressive feat of engineering and efficiency, but relative to the local market, it will be an expensive building. Might it be the first ghost city in a single building?

远大天空之城遭质疑 成本价超周边房价近一倍

"Sky City" cost of $ 9 billion, has been known only traditional construction costs similar construction, 1/2, compared to the current world's tallest building "Burj Dubai" is also a lot cheaper, but as a high-rise building, the construction cost still much higher than ordinary homes. In this Boao Real Estate Forum, Tang Ying interview at the scene, said, "Sky City" construction costs will reach 9,000 yuan / square meter.

Finally, there are the responses from the developer concerning these issues.

远大天空之城楼面价仅483元 成本价高达九千元

Five responses

  Broad is not wanted landmark?

  Response: Because happens ambitious "Sky City" Bidibaita to 10 meters high, it is defined as the world's tallest building. Everyone says, "You are not wanted landmark"? In fact, we do not to landmark, our idea is very simple, we are ambitious to use sustainable building techniques and principles to build a utility building.

  Sky urban encroachment Changsha wetlands?

  Response: There may be some who question before us where the project area is a wetland, in fact, doing this project wetland area will not decrease, but will amplify. We hope to be able to do what we can build such a building as an urban green space vacated two square kilometers. At present China's urban per capita area is 500 square meters, the sky city was built, our per capita area of ​​only four square meters (including buildings surrounding land). Sky City entire building area is 1,050,000 square meters, the base area of ​​09,000 square meters, the floor covering rate of only 1%.

  How to solve the high-rise buildings enclosed "Air conditioning disease"?

  Response: As we all know, for the high-rise building space, it will produce a sealed air conditioning disease. Sky City each floor of the air is not crossed, after we measure the indoor rather than outdoor air cleaner. This is how you do it? We adopted a new air heat recovery unit, one hundred percent fresh air, the traditional air conditioning 30% new wind, 70% return air. And coming from the outdoor air is collected through three filters, you can filter out 99% of PM 2.5.

  How household contact with nature?

  Response: The question has often been said that the number of how much you lift, you will not feel more inconvenient back and forth? Also including households how to approach the problem of nature. We follow the traditional high-rise is not the same, the design of a 11 km-long ramp, ramp designed around the traditional streets. In addition there are 56 on both sides of the street basketball court than a large space, you can set a variety of formats into a park. Besides building is also designed with more than 86,000 square meters of a three-dimensional organic farm, where building back sets, but also can be made into a large open-air garden.

  If you think this does not work, I can always down to the household level, go outside that large tracts of woods, large wetlands, it is sufficiently close to nature with a contact and exchange.

  How to ensure the safety of such a high building?

  Response: We also include the questions raised safety issues, in fact, than some of our traditional building high-rise some better safety performance. First, from the shape, it is not particularly exaggerated form, is a very simple cone, beneath a large, gradually narrowing above this pyramid shape, the structure is very stable, and I have received such a structural system of the National Expert Group recognition. Steel security at the Eiffel Tower has been confirmed.

  "Sky City" All the seismic performance have already passed the checking and testing to ensure that earthquake did not fall. For steel, may be of particular interest to us is the fire of the problem, we all steel wrapped with fireproof, resistant to burning is three hours or more, which has already passed the Tianjin Fire fire performance testing. There wind problem, we say that this building to a certain height, it may affect not only the issue of the earthquake, as well as the wind problem. We have already passed the three wind loading experiments relevant institutions, to achieve a higher level of safety.

The Mistakes Keep Piling Up

Less than a week after the Nasdaq glitch, Tel Aviv's market suffers a glitch.

Typing error sends Tel Aviv Stock Exchange plummeting

Negative social mood leads to greater numbers of these types of errors.


Will Obama Be Impeached? The Evidence Mounts

In Will Obama Be Impeached? Watch The Stock Market, I explained that the stock market is an important factor for Obama and impeachment. Presidents Reagan and Clinton faced major scandals in their second terms, but rising social mood, evidenced by a rising stock market, allowed both of them to serve out their terms and finish with high approval ratings. President Nixon was not so lucky, with his scandal breaking during a period of declining social mood and a large bear market in stocks. With Obama, I said there's enough evidence to fuel investigations, but the remaining piece of the puzzle is a bear market in stocks.
It is very early, but from the initial reports, there seems to be enough smoke to conclude one or more fires are present. If that's the case, the Obama administration will face serious political repercussions should social mood decline. Social mood is currently trending positive, but remains far more negative than at the 2000 peak in the stock market. Impeachment talk is silly at this point, but since I believe a 20% drop stocks is likely in the next 18 months, my outlook for the Obama administration is not bright. Watch the immigration bill, if it is defeated, it will be a sign that social mood is negative and working against Obama. If he can push it through, it doesn't mean he's past the scandals, only that he's still got enough positive momentum to continue pursuing his agenda.
This week, an influential Republican Senator spoke out about the evidence for impeachment proceedings.

President Obama "Getting Perilously Close" To Impeachment

COBURN: My little wiggle out of that when I get that written to me is I believe that needs to be evaluated and determined, but thank goodness it doesn’t have to happen in the Senate until they have brought charges in the House. Those are serious things, but we’re in a serious time. So whether -- I don’t have the legal background to know if that rises to high crimes and misdemeanors, but I think they’re getting perilously close.

It is important not to conflate social mood with evidence for impeachment. If Obama is wholly innocent in the growing list of scandals, then at worst he will become Hoover or Carter. If instead he is guilty, even of a small violation of the law, he will go the way of Nixon.

Euro Bulls Surge, But Euro Still Lags; Gold Specs Get Even More Bullish


Chinese Woman Has Lived for Nearly Two Months Inside KFC

China doesn't have a generous welfare system, so when you are an unwed mother and you fight with your parents, you go to live at a 24 hour KFC. In other news, China doesn't have many unwed mothers.

未婚妈妈带女婴“安家”肯德基 员工称习惯此情况


Andy Xie Warns of Yuan Devaluation

The Second Leg Down
China's exports are likely to rise at 10 percent or less for the foreseeable future. This means that the money supply will eventually fall below 10 percent too. As money becomes scarcer, it is a bad mistake to put more into supporting the bubble. There isn't much left to support restructuring or rebalancing the economy. The contradiction will trigger an economic collapse.

The argument in favor of supporting the bubble is that the economy is weak and needs help from the bubble. That view is wrong in two ways. First, China has a labor shortage. A weak economy does not endanger social stability. Second, would one pop the bubble in a strong economy? In a strong economy, speculators call the bubble the right pricing for a better future. Hence, there is no bubble to burst. Wavering between the two makes the bubble bigger and bigger. This is why China's bubble is so big now. Delaying action merely takes the economy closer to a collapse.

I'm not sure that the policy support for the bubble will work this time. The global environment is different. No emerging market can run a bubble in an environment of tightening global liquidity. Further, China's domestic savings have a lower home bias than in most emerging economies. When the wind changes direction, foreign hot money and local money alike could move into foreign currencies. The pull effect from higher interest rates offshore may be too strong for domestic policies to offset.

Letting go now is better than waiting for a collapse. China should increase interest rates as soon as possible. It is necessary to sustain yuan stability in today's global environment. The alternative – devaluing the currency – may trigger panic outflow. It is a worse alternative.

Unemployment poll diverges from government data

Which way will the gap close? The poll numbers have been off by about 1 percent before. This time it's 1.5 percent, but for now I still expect the number to fall back towards the government figure.

BLS, We Have A Problem: Polled Unemployment Soars To March 2012 Levels

China Sees Capital Outflows

Report shows fall in China forex purchases
China witnessed a decline in foreign exchange purchases for the second straight month in July, signaling continuous capital outflow from the world's second-largest economy.

According to data released by the People's Bank of China on Tuesday, yuan holdings among Chinese lenders for purchasing foreign exchange stood at 27.36 trillion yuan ($4.4 trillion) at the end of July, a decrease of 24.5 billion yuan from one month earlier.

Lian Ping, chief economist at the Bank of Communications, said tapering off of United States' quantitative easing policies is attributable to the declines, as direction of global capital flows started to change.

"In addition, economic slowdown of China has also made the country less attractive to international capital," Lian said.

And yet more money flows out: US studios, China OK box-office settlement
China and Hollywood studios have reached an agreement that allows United States companies to recover more than $150 million of revenue-sharing box office receipts, ending an almost six-month dispute in the world's fastest growing movie market.

The Motion Picture Association of America Inc issued a statement on Aug 13 from its chairman and CEO Chris Dodd saying the Chinese government had intervened in the dispute between US movie companies and China Film Group Corp, the dominant distributor of foreign movies in the country.

The US businesses will get back the owed revenue in full and the payment process has started, Dodd said.


O'Reilly: Warfare Breaks Out In Major League Baseball

Alex Rodriguez signed his $275 million contract with the Yankees in December 2007. The stock market peaked at the end of October 2007. Today, with social mood sinking, Rodriguez faces a suspension for more than 1 year (the MLB season is 162 games and his suspension is for 211 games).

Notice how far he has fallen, to the point where even the Yankees dislike him. Any popular figure in the public eye, from Warren Buffett to President Obama, faces the same challenges as social mood continues to sink. The margin for error is shrinking, the public is angry and they will turn quickly and suddenly on their soon to be former heroes and idols. Also, note O'Reilly's description of what's happening in baseball: warfare. Yet another sign of the social mood.


Did Martin Armstrong Call The Current Market Slide? Will Obama Be Impeached Next August?

What is interesting to me is not that he predicted the exact tops or bottoms, but that he got the turns correct, such as in March 2009 he has a bounce top, but it was actually the bear market bottom.

Economy Turning Down
We should see the Dow drop into next week. The ideal target will be Monday. Support is 148250 and 14805. The next area will be 14450. We should start to see volatility rise the last wee of August into the first week of September.

If the above chart is correct, President Obama may find himself impeached next August.

American Secessionists Step It Up A Notch

Thus far we have seen counties break apart, but now we're going to see part of a state try to secede. This is big because there are other cases for secession out there, such as Western New York breaking away from NYC, Long Island and Westchester County. If there's a precedent here, there will be many follow on cases.

Rural Coloradans to vote on breaking away as 51st state, angered by liberal policies on guns, energy
The Weld County Commissioners voted unanimously at Monday’s meeting to place a measure on the Nov. 5 ballot asking voters whether they want the county to join other rural counties in forming another state.

If one looks at a map of America by political affiliation (based on presidential candidate votes) at the county level, one generally sees a sea of red (right-wing) with blue islands (left-wing). I have circled the potential hot spots in yellow. In the northeast, there is New York and Pennsylvania, dominated by New York City and Philadelphia. To the south is Virginia, dominated by the DC area. The strip of blue across the south in the form of a crescent are the areas with a large black population. In south Florida are the Hispanics and Northeast retirees from the blue Northeast. Further west is a dot of Hispanics on the Mexican border in Texes. Further west from there is a huge Hispanic population, plus some liberal whites, that stretches from New Mexico into Colorado. Although the fight in Colorado is about what the voters say it is, energy and gun rights, behind the shift in power is demographics from Hispanic immigration. Further west still is Hispanic dominated South California. All along the coast from California up to Canada are the liberal elites who control the country and the expensive real estate. Back towards the middle is Illinois, dominated by Chicago.

All of those states have some form of secession talk. In some cases it is rural right-wingers who are dominated by a very small geographic area. In others, there's an emerging Hispanic majority that is likely to seek to rule itself in coming years, if they are unable to fully takeover a state such as New Mexico. This is why a single success will be huge. Many states will want to effectively jettison their cities, which they disagree with strongly politically and which many see as tax eaters. There's plenty of precedent in history for city-states, and the U.S. already has Washington, D.C.

Back to the article:
“Again, folks say this can never happen. However, we are starting to hear from disenfranchised groups all over the country,” said a post on the 51st State Initiative’s website. “We are truly a divided nation. It is possible, if not likely, that we may not be the only group requesting from Congress the formation of a new state.”

This isn’t the first time disgruntled residents have explored the option of a state split. In the past few decades, movements have sprung up in favor of carving California and Washington into two states.

New York has had a host of proposals aimed at peeling off jurisdictions, including New York City, upstate New York and western New York. The most recent effort was in 2008, when the Suffolk County comptroller proposed splitting off Long Island.r
There's nothing sacred about state borders. The Founders designed the nation to be run close to the local level, so there's nothing wrong with devolving power. If I was giving a recommendation to the federal government based on socionomics, it would be to ease any opposition to this and let states break apart or merge. This will blow off a lot of tension because it will become the outlet valve for conflict. Instead of fighting, people will be free to walk away. If instead they are forced together, then there will eventually be a battle for control because the two sides are too far apart to compromise.

How Quickly Things Change: Indonesia Small Caps Gain 45% Then Lose It All

Up about 45% in the first six months of 2013. Then down more than 30% in 2.5 months, wiping out all the gains and then some.


Social Mood in Action

From hero to goat.

GOP in Civil War; Democrats Head Towards Race War

Chris Christie and Rand Paul had a disagreement last month over issues such as national security. The battle that began before 2008 and burst open in 2012 will take center stage in the 2016 battle for president. The media has covered this extensively, and it will decide the GOP's future for the next generation.

What hasn't been covered as much is the brewing race war in the Democratic party. Multiculturalism is finally reaching the tipping point, to where white people are a minority and no longer represent the base of the party.

Feminists on Twitter say #SolidarityIsForWhiteWomen
Whose voices are most heard when it comes to feminism? On Monday, the hashtag #SolidarityIsForWhiteWomen trended worldwide as Twitter users criticised what they call the exclusion of nonwhite women from mainstream feminism.

The hashtag was originally coined by blogger Mikki Kendall during a Twitter debate about Hugo Schwyzer, an American academic and self-described "male feminist". Schwyzer has been accused of harassing non-white female bloggers and recently wrote that his critics drove him offline.

The debate quickly went global as netizens from South Africa to Japan started using the hashtag. Many said they felt excluded from mainstream feminism and shared examples from media outlets and pop culture.
This is going to be a big story in coming years. It might even explode in 2016 because white Hillary Clinton is the presumed Democratic nominee for president.

Why Is The Fed Tapering? Did They Realize QE3 Is A Failure?

Has anyone made the connection between QE and the federal deficit?

Note that fiscal years end in October, so the year's don't line up perfectly. First the federal deficit:

FY2009 $1413 Billion Deficit

FY2010 $1294 Billion Deficit

FY2011 $1299 Billion Deficit

FY2012 $1100 Billion Deficit

FY2013 $759 Billion Deficit
The last number is estimated.

Now let's look at QE. I'm using the government's fiscal year during which the bulk of the Fed program was in effect.
FY2009 $1.55 trillion in MBS and Treasures (QE1)

FY2011 $600 billion in Treasuries (QE2)

FY2012 $400 billion in Treasuries (Operation Twist)

FY2013 $1.02 trillion in Treasuries and MBS (QE3)
FY2010 only saw a partial QE program. It ended in March and Bernanke didn't pre-announce QE2 until August. The markets went 4-5 months without QE. All hell broke loose in Greece and there was a flash crash in May 2010.

Here is part of the Fed's QE3 announcement:
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

How did interest rates perform, with $1.02 trillion in Fed buying and a much smaller U.S. Treasury bond creation (courtesy of the smaller deficit)?

From last September: Why QE3 will completely fail. Click the link to read the whole thing, below is the conclusion:
The U.S. is in a debt crisis. This crisis exploded in 2008 and was relatively quickly halted by federal government and Federal Reserve emergency policies. In the ensuing years, the U.S federal government ran large fiscal deficits and the Federal Reserve engaged in various policies designed to stimulate the economy. The result has been stasis at a lower level of economic activity, with consistently high unemployment.

The impact of QE3 will be a short-term bounce in financial markets and commodities, a portion of which was anticipated by investors ahead of the QE3 announcement. When QE3 fails, the Federal Reserve will announce an increase in the amount of debt purchases or the economy will sink into recession, with very negative results for the financial and commodity markets. That said, while deflation is the overriding concern today, investors should be hedged with precious metals.
I missed the rise in rates because I expected general economic deflation to keep rates low. And even with a shrinking deficit (and Treasury issuance), QE3 was too small to generate inflation or suppress interest rates. What's shocking is that the failure of QE has the Fed talking about a taper. But now we will really see if my forecast was correct. If the Fed does begin to taper in September, we should see market effects by November at the latest if deflation takes over once more.

A Run on the Rupee?

I have covered gold and India in several posts (Scroll down), mainly focusing on the trade deficit fueled by gold imports.
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.
It seems the government's efforts have failed. To be clear, gold was merely a symptom:
In the end, India's problem is not really gold. It is about weakness in the political-economy. They are dealing with a symptom, rather than a cause. The greatest proof of this is China. Why has Chinese gold demand surpassed that of Indians? China is India's mirror case: the government promotes physical ownership of gold. Physical gold products are on sale at state-owned banks, alongside brochures for precious metals accounts.
It doesn't matter how the point is arrived at when considering the next step. The Indian government is signaling that it is losing control of the currency:
There is "no question" of India going back to an economic crisis experienced in 1991, as its rupee currency is now linked to the market and foreign exchange reserves are adequate, Prime Minister Manmohan Singh said on Saturday.
The denial is proof of concern. This only makes gold more attractive to Indians who will now add currency devaluation to their list of fears. As I wrote previously, Indian gold demand is going to slow because of a financial crisis.

Here is the Bombay Stock Exchange, down about more than 1% after falling 4% on Friday:

India isn't alone in falling today, Indonesia is down as well. This may be the incipient U.S. dollar rally finally taking form.

H/T: Mish. See more of the story at: Official Denials Run Rampant in India; "No Question" of Economic Crisis; Rupee Plunges to Record Low; Gold Coin Imports Banned

The Chinese Economy Is Slowing, But Home Prices Stay Hot

Rising House Prices in China Spark Concern

I like the intro to the article:
Steady Increases Could Provoke Sharp Corrective Action by the Government to Realign Home Prices With Average Incomes
The same exact thing could have been written in 2010, 2011 or 2012. The government has tried and failed at every turn to slow the growth of home prices.

Prices rose an average 6.7% year-over-year in July, up from 6.1% in June, calculations by The Wall Street Journal based on official data released Sunday showed. On a month-to-month basis, the increase in prices moderated slightly.

In a statement, National Bureau of Statistics analyst Liu Jianwei said the continued rise in prices is due to genuine home buyer demand as well as recent land price gains.
Land prices are going up for the same reason home prices are going up. Saying home prices are going up because land prices are going up is a misdirection aimed at moving attention away from the inflationary monetary policy.

A sharp increase in lending in the first half of 2013, combined with a quiet relaxation of strict controls on home purchases in some cities, also played a part in boosting sales and pushing prices higher.

From early 2010 to the beginning of 2013, China's central government tightened property-sector controls, aiming to rein in runaway house prices. But with growth fragile and the real-estate sector a key contributor to demand for everything from steel to furniture, in 2013 policy makers have taken a more relaxed approach.
Blowing an even larger speculative bubble to bailout the rest of the economy is not a good idea.


What Happens When The Central Bank Dies?

One common point of agreement between nearly all deflationists is that the central bank is not all powerful. In the end, either the public will demand the central bank be reigned in or the market will decide the central bank is no longer in control and ignore their policies. As has been shown, central banks track short-term interest rates in the market. When the Fed and other central banks cut rates, they are almost always following, not leading the market. Even in 2008 and beyond, in some cases the market went to negative interest rates on U.S. Treasuries or German bonds, which indicates that central banker's zero interest rate policy (ZIRP) was not an invention of the central bankers, but of market participants.

I have pointed out before that many hyperinflationists have great trust in the central bank's power. While they believe the central bank will fail, they nonetheless look upon the central bank as the King Kong in the market. They believe that central banks will fail in their goal not because they utterly fail to implement their policies, rather they will fail because their policies are wrong. (The exception here are the hyperinflationists whose believe the path to hyperinflation is loss of faith in the currency, similar to what happened during the Asian Crisis of 1997 when currencies like the Thai baht and Indonesian rupiah collapsed. Hyperinflation is a consequence, not the cause of the currency collapse.) Deflationists take a different view: the central bank will be unable or unwilling to implement inflationary policies. The modern financial system is a credit system, not a fiat currency system. The central bank can create fiat currency at will, but it cannot create borrowers and lenders at will. Coupled with declining social mood, which causes people to lose faith in institutions generally.

Taking it one step further, what happens if "the market" loses faith in the central bank?

Signs of the Top
How will it all end? Faith in central banks today is equivalent to faith in the word dot-com in 1999 or faith in the eternal rise of housing prices in 2006. With the support of a powerful narrative—that central banks can support asset prices and effectively backstop financial crises (eliminating tail risk)—sentiment is driving the markets higher in the face of cyclically improving but historically weak and unstable fundamentals (plagued by debt deleveraging and aging demographics).

Ultimately, the stability of the system depends on central banks' credibility, markets'sentiment, and policy responsiveness to prevent minor drawdowns from becoming full-blown crashes. My friend Mohamed El-Erian has written extensively on the importance of the central bank "brand" and warned of the danger of a broken narrative. Markets tend to overshoot in both directions and will most likely fall even farther than fundamentals warrant when and if central banks lose control of popular sentiment.

It is not only the credibility of sovereign nations burdened with debt that can reach a Bang! moment. The credibility of and faith in central banks is just as fragile. Today we see humorous images of dollar bills with Ben Bernanke's face on them, with the words "In Ben We Trust." Unfortunately there is truth in that jest. Whether it is Mark Carney at the BOE or Mario Draghi at the ECB or the future chairperson of the Fed, central bankers are in the hot seat when it comes to global stability. The world no longer worries first and foremost about the products corporations make or the services they perform. Rather, it is focused on the amount of easy money the central banks can dish out.

What happens when that amount is no longer enough and market forces turn?
Here Charles Gave is talking about what happens when the central bank loses control, but still exists, like the Federal Reserve in the 1970s. I suspect we will see a crisis one order of magnitude larger that challenges the very existence of the central bank and the idea of central banking.

Most people think of losing faith in the central bank as the step towards hyperinflation or high inflation, which it well may be. The central bank says interest rates should be low, but the market takes them higher. The deflation camp considers another possibility: that the Fed will be unable or unwilling to stop a deflation. If people come to view the banking system or the central bank as insolvent, then the central bank cannot save them. If there is a rejection of credit, bailing out credit markets is futile—they are on their way to total destruction. It would be akin to giving the passengers on the Titanic financial bailouts as the ship was sinking. The hyperinflationists step in here and say at that point, the Fed will press CTRL-P and "save" the debt. Add one or two zeros to the U.S. dollar. For every $1 in your bank account, you would now have $100. However, this would destroy the financial sector because the debts would remain constant. It would be a massive transfer of wealth from the people holding debt (foreign central banks and pension funds holding U.S. Treasuries, the Federal Reserve itself, the entire financial system) to the holders of titled property. Those who hold title to land, factories, whether in debt or not, would see their asset prices remain constant on a relative basis, but their debts would be reduced greatly or completely eliminated.

Ignoring economics for a moment, consider politics. Since the Federal Reserve is a private entity owned by the member banks, since the federal government has been captured by the financial interests, which outcome is more likely from a political standpoint (assuming no mass movement to change the power structure)? I submit the most likely outcome is to preserve debt and/or to transfer title to the debt holders. Mass bankruptcies concentrate title of property in the hands of the banks and the financial system. The Fed's job is to prolong this process as long as possible because the holders of title are the "winners" during inflation and hyperinflation. In this way wealth is concentrated at the top (consider how the banks now own millions of foreclosed homes). When the system is finally reset, the financial sector owns the property. You will have to go to the bank to borrow $300,000 to buy a home which is owned by the bank. The bank will create $300,000 in new money which it loans to you. You turn around and give the $300,000 to the bank (plus $1500 in fees), and you will still owe the bank $300,000 plus interest!

Whether by fire or ice, hyperinflation or hyperdeflation, the system will ultimately be destroyed. Declining social mood will make sure of it, the only question is whether people lose faith in the credit system while maintaining faith in fiat (the physical U.S. dollar), or whether total faith is lost and the currency collapses into oblivion. I lean towards deflation because of the way the current system is constructed, but it could go either way depending on the herd (and we could very well see both, a deflation followed by hyperinflation, for example). Even if on paper it makes no sense for a perfectly solvent bank to fail, if there is a run on the bank, it will fail because the herd is able to change reality. The force of change is so great that it renders the previous analysis useless. Even if I was 100% sure that deflation was what had to happen, what should happen, I still would not predict it with 100% confidence because if the public panics out of the U.S. dollar, then hyperinflation will be the result. One cannot reason with the mob, one is either following or getting out of the way.

When the herd panics on a scale large enough to topple governments and financial systems, it will quickly seek out new reference or stability points, Schelling points, and it will move to them regardless of the fundamentals. In the financial world, this will likely be gold in the case of inflation or deflation.


Gold Rally Unfinished; Euro Had Better Rally

Speculative long positions on the euro have increased sharply, but the euro remains flat. The euro should rally next week, but if it does not, these spec longs will become the fuel for a bear run.

Gold is in a similar position to the euro, but we've seen a clear bounce. The upswing in speculative longs should pull gold higher next week.


Shanghai Gold Premium

The Shanghai gold premium continues to come down in percentage terms, but it remains consistently elevated.

Interest Rates Back Over 100% In China As Another Boom Town Goes Bust

We saw interest rates go above 100% during Wenzhou's cash crunch. Now another city in China has seen the same, plus mass protests.
Easy Credit Dries Up, Choking Growth in China
As some borrowers began defaulting early this year, worried lenders in the informal sector raised interest rates for small and medium-size businesses, previously 25 to 40 percent a year, to as much as 125 percent a year. The increase set off a much broader wave of defaults in recent weeks, as owners found themselves unable to repay billions of dollars in bad debts, many of them handwritten and hard to enforce in court.
Another ghost city bites the dust. This is a bit like the Wild West boom towns in America, except that in the U.S. there was some economic activity, such as a gold rush or timber industry, that created a boom town. In China, there is no economic activity that leads to a boom town, the boom town is an artificial construction by central planners.

Liu Linfei, a government official from nearby Yulin, stood on a Shenmu street corner in a T-shirt and shorts on a recent weekend afternoon, outside two high-rise hotels where construction had been stopped just before the windows could be installed. He said he had borrowed 600,000 renminbi, almost $100,000, from a bank shortly before the collapse, at an interest rate of 4.1 percent a year.

Mr. Liu then lent the cash to moneylenders here at an interest rate of 10.4 percent, planning to pocket the difference.

The moneylenders who borrowed from Mr. Liu defaulted, and now he is struggling to repay the bank. “I’m not going to lose my house, because I’m repaying it little by little with money I borrow from my relatives,” he said.
Same story, different place.

This paragraph gets to the heart of the matter:
Private sector businesses could afford to borrow at double-digit interest rates because nominal growth of 16 to 23 percent a year from 2004 through 2011 exceeded the rates. But nominal growth slowed last year to 9.8 percent and fell again in the first half of this year, to an annual pace of 8.8 percent.
You will always hear people say that China will still grow at 4 or 5%t, and that's still great compared to the rest of the world. The issue though is the debt. Chinese companies came to expect double digit rising nominal GDP growth. In other words, it was an inflationary boom, and as soon as the inflation slows, not stop mind you, but simply slows, the system comes collapsing down upon itself. Once borrowers start defaulting and credit slows, the system swings into reverse and the bust spreads across the whole economy.

Here is a Chinese language report from July:

Here is a translation from the YouTube page of the contents:
Shaanxi Shenmu More than 10,000 people on a continuous two days surrounded by the local county government, anti- corruption meeting county party secretary, led the local economy has crumbled, secretary was promoted transferred. But authorities sent one thousand police violence repression, at least a dozen people were arrested, and Internet-related net posts are deleted. Had rushed to the scene of protests, Mr. fold Shenmu residents told the "Tang Dynasty", and the surrounding streets in front of Shenmu government is anti- people and the police proposed packed. Shenmu residents, Mr. fold: "More than 10,000 people now have it! Yesterday, a day when the highest reaches two, thirty thousand, police were maybe a few hundred! I go over there and have martial law, the blockade, the people would go through now Each intersection is the police are . " people said they surrounded the county government, mainly for promotion of the county party secretary Ray coming due west. Fold President: "do not let the county go, that now you a go down this mess, so who pays?" people accused Ray due west during his tenure, not only has no achievements, the economy has plummeted, leading to hundreds of thousands of people affected. Shenmu resident Ms. Wang: "The economic downturn is no one to appreciate it. Anyway, this thing affects people's life." fold Sir: "There are a lot of supermarkets, shopping malls, have closed down, why Shenmu now a lot of houses, high-rise buildings are now built to a semi stopped, because it is now no money, and another one, a lot of small loans or pawn shops closed down, it put that money one put out erupted after the money back. " Finance pointed out that since late last year, Shenmu outbreak of severe credit crunch folk, the Chinese authorities not only failed to take measures to prevent, but rather let local officials will finance 60 billion squandered until the liabilities 30,000,000,000. Order by the people ultimately bitter.


Messaging Battle Royale: Sina vs Tencent vs China Unicom vs China Mobile

Sina's Weibo service and Alibaba have linked up. Now China Unicom has linked up with Tencent's WeChat software.
Wechat, Weibo vs. SMS
"The telecommunications companies may try to invent a competitive instant messaging service of their own. The other way is to cooperate with OTT service providers. But the disadvantage in the first solution lies in the fact that the telecom companies are unfamiliar with making Internet-related products; so their products might not give the users the same comfortable experiences when it's put to use. China Unicom has opted for the second solution by seeking cooperation with WeChat."

In fact, the popular messaging App -- WeChat is not just conquering user but turning rivals into partners. China Unicom in Guangdong province and WeChat's owner Tencent are introducing the first joint SIM card. Users can enjoy both WeChat's new services and discounts from China Unicom.

From August 8: China Unicom’s WeChat Subscription Plan Hits China Today
Today marks the first step in the tentative and possibly-doomed alliance between Chinese telecoms and WeChat, the OTT chat app that’s destroying their text messaging revenues. As of right now — the minute this post is published — China Unicom users nationwide* can purchase a special WeChat SIM card and access the app even if they don’t have a regular 3G subscription through the telco.

The card doesn’t just allow use of the wireless web for chatting, though, it also will allow users to use other data-heavy aspects of the app, including playing games, sending stickers, and making payments online. Users who purchase it can choose from a variety of plans, which run between 30 and 60 RMB ($5-$10) per month although other fees apply, including and up-front price for the card itself.
WeChat is Tencent's strong play. Weibo is Sina's. Weibo has added chat service and WeChat integrates with Tencent's other programs such as QQ and Tencent Weibo. But for now, both programs have a dominant niche. The main outlier so far is China Mobile.

Physical Demand Remains Bullish: Dubai Refiner Has 90 Days Order Logbook

H/T: On Physical Gold Supply Tightness


Fertilizer and Agricultural Prices Set to Soar?

This could be something. I don't know enough about it, but if it is directly comparable to the example from the 1990s, then agricultural prices may be headed higher next year and forever.

Executive Order -- Improving Chemical Facility Safety and Security

Here's one site's take on the Executive Order: From Over The Transom
Obama issued an Executive order on August 1, 2013 that will effectively ban Ammonium Nitrate in the USA. It will become too expensive and create too much possible civil and criminal liability to manufacture, store, or transport it. Clinton did the same thing to Anhydrous Ammonia dealers in 1999. It put most Anhydrous dealers out of business. Obama is imposing the same regs and adding explosives regulations on top of OSHA and EPA regulations. It’s all there if you know how to read bureacratese.

Tannerite will probably be banned outright as soon as DHS & BATFE finish making policy based on this E.O. Whether or not they can criminalize it I don’t know. You can count on it being taken off the market though. The government has had it’s sights on Tannerite for a long time now.

Food and Fuel prices will skyrocket because Ammonium Nitrate forms the basis for almost all nitrogen in granular fertilizers used in American farming. There are no cost and ease of manufacture/use equivalents for ammonium nitrate. Supply and demand economics are going to be the harsh lesson of the day. Crop yields will go down. Corn is the basis for the American food supply and the fuel additive ethanol. A.N. is critical in corn production.

Hope everyone is ready for $12/gallon gasoline and $20 a box corn flakes.
Rhetoric aside, even a modest rise in food prices will bring starvation to nations such as Egypt. Inflation will pick up sharply all across the emerging world. China's CPI is 31.4% food and they are relatively developed in the emerging world. Poorer nations will all see inflation shoot higher if food prices take off again.


Social Mood in China: Opposing the Leadership's Big Plans

China's big plan to keep growth rates high is to push urbanization deeper into the central and western provinces, plus increasing the flow of migrants into existing cities. But even the Chinese people have their limits.

China Urbanization to Hit Roadblocks Amid Local Opposition
“Nobody wants such a big group of migrants to be their neighbors and share their so-called civilized space. This is a conflict of interest,” Li, director-general of the China Center for Urban Development under the National Development and Reform Commission, said at the forum. “We are facing rejection from the hearts of so many mayors and city elites who have enough ability to influence decision making.”
This comment is once again illuminating in the context of the immigration debate in the United States. Even within China, there is growing opposition to Chinese migrants.

In a report last month, HSBC estimated the total fiscal cost for local and central governments on public housing and children’s education would be 6.24 trillion yuan for 260 million migrant workers in cities, equivalent to 53 percent of China’s national fiscal revenue in 2012.

Local authorities are barred from directly selling bonds or borrowing from banks and can’t run budget deficits. To raise money to fund spending they set up thousands of financing vehicles, racking up debts that Fitch Ratings Ltd. said in April increase risks to the country’s financial stability.
If the growth materializes, then this can be paid for. What happens if the growth estimates are too optimistic though?

Taking Beijing as an example, Mao said that assuming 700,000 people moved into the city each year, it could cost the local government at least an extra 77 billion yuan a year in urbanization-related spending, equivalent to doubling its annual land sales or a 25 percent increase in tax revenue.

“This is totally beyond the affordability of a local government, Beijing can’t afford it,” Mao said. He also questioned whether China needs more cities when most migration has been to the 70 biggest conurbations.

“These big cities interest people because they have more job opportunities, education opportunities and medical resources,” Mao said. “Those other 610 cities can’t attract people even though they already exist,” he said, adding “it indicates some of those 610 cities have problems or can’t survive.”
If social mood declines in China, opposition to government plans will grow and that will guarantee a lower growth rate. That isn't to say the urbanization plan will succeed—it could lead to even bigger problems down the road—but without that gambit or a new strategy, slower GDP growth rates are all but guaranteed.

UPDATE: 87% of Skyscrapers Being Built in China and the Business Cycle

The Chinese press is spreading the story that 87% of skyscrapers (defined as buildings of at least 500 feet or 152 meters) are being built in China. For the previous post, see: Skyscraper Index Alert: 87% of World's Skyscrapers Being Built in China

I took these pictures with my phone, if I can find a large version online I will replace them later. First up is a pictorial of the tallest buildings in the world. The Dubai tower is cut-off at the right, and to the left, the next building would be the Sears Tower at 443 meters.

Next up are the buildings being built in China. The tallest in the world (Sky City) has stopped construction due to lack of government approval. According to the latest reports, construction is continuing on Sky City because the current construction (such as ground leveling) does not fall under the scope of a government investigation into the construction plans. (Chinese source) Still, If we assume it get's approval, China will have the tallest building in the world, followed by the Dubai tower, then three buildings in China, followed by the Mecca Royal Hotel Clock Tower, followed by four Chinese buildings, then the Tapei tower in Taiwan, giving China 7 of the top 10 tallest buildings in the world. The only proposed building that I'm aware can change that list is Busan Lotte World II, which would bump Taipei off that list.

Next up is a comparison with the U.S. This stat was covered in the prior post, but this graphic breaks the numbers down, showing us existing skyscrapers in the U.S. and China, those under construction, and those in the planning stages. China is already close to the U.S. in the number of skyscrapers, but it blows the U.S. away in terms of buildings under construction and planned.

Finally, in the prior post there was a breakdown of how many buildings were under construction or in the planning stages for ten cities. The numbers are broken out here again, but this time it includes the number of existing skyscrapers as well. Top to bottom the cities are: Shanghai, Shenzhen, Guangzhou, Tianjin, Beijing, Nanjing, Shenyang, Wuhan, Chongqing, Chengdu. (In the previous post Dalian was listed, here it is replaced by Nanjing.)

The skyscraper index:
The Skyscraper Index is a concept put forward in January 1999[1] by Andrew Lawrence, research director at Dresdner Kleinwort Wasserstein, which showed that the world's tallest buildings have risen on the eve of economic downturns. Business cycles and skyscraper construction correlate in such a way that investment in skyscrapers peaks when cyclical growth is exhausted and the economy is ready for recession. Mark Thornton's Skyscraper Index Model successfully sent a signal of the Late-2000s financial crisis at the beginning of August 2007.

The buildings may actually be completed after the onset of the recession or later, when another business cycle pulls the economy up, or even cancelled. Unlike earlier instances of similar reasoning ("height is a barometer of boom"), Lawrence used skyscraper projects as a predictor of economic crisis, not boom.

Careful statistical study has found that the height of buildings can not be used to accurately predict recessions or other aspects of the business cycle, but that GDP can predict the height of building construction.
The existing skyscraper index is based on the world's tallest building, which broke ground in July in China, but was then saw construction halted by government regulators. That 87% of skyscrapers under construction are in China is even more incredible and is a flashing neon red sign.

Mark Thornton's article is available here: Skyscrapers and Business Cycles
In response to the change in relative prices, more resources are allocated to long-term capital goods. Unlike other aspects of the self-adjusting market process, such as money, land, labor, and short-term or intermediate capital goods, these resources become suspended or fixed in long-term fixed capital goods. These resources become formulated in a highly specific capital good that may not be well suited to the alternative production processes of the postadjustment economy. As a result, all of the adjustment in these long-term fixed capital goods must come from a change in price and this will entail large losses and possible bankruptcies by the owners of these capital goods. To the extent that these types of adjustments are widespread, they pose a threat to capital markets and the banking system.
One of the key concepts of the Austrian school is that the artificial lowering of interest rates by the central bank leads to malinvestment. The artificial lowering of interest rates signals to the market that there is a large amount of long-term savings for use in long-term capital projects, which in fact do not exist. Borrowers then "tap" this savings and build fixed capital such as skyscrapers and infrastructure, leading to a distortion of the market demand and funding for fixed capital and the amount built. The only way to balance this misallocation of resources is to liquidate the bad fixed investments. In the mot simple terms, the supply of fixes capital, the supply of skyscrapers, exceeds the demand and so prices fall.

The first Cantillon effect is the impact of the rate of interest on the value of land and the cost of capital. A lower rate of interest tends to increase the value of land, especially in the central business districts of major metropolitan cities. Land values rise because lower rates of interest reduce the opportunity cost or full price of owning land. Treating the rate of interest as an exogenous cause, a reduction in the interest rate will increase the demand for land and result in an increase in land prices. However, the overriding issue with land is "location, location, location," so that the interest rate will have differential effects on land prices.
Exacerbating this effect in China is that local governments derive an extremely high portion of operating revenues from land sales.

The second Cantillon effect from lower rates of interest is the impact on the size of the firm. A lower cost of capital encourages firms to grow in size and to become more capital intensive and to take advantages of economies of scale. Production and distribution become more specialized and take place over a larger territory. Instead of a dairy farmer raising cows and producing milk for the domestic market, larger firms raise a greater quantity of dairy cattle, ship raw milk to processing plants and ship processed dairy products back to wholesale and retail distribution sites. The production of dairy products becomes more roundabout, but also more productive. As part of this more roundabout production process, firms develop central offices or headquarters, as well as marketing offices within their market territory. This increases the demand for office space in central business districts. This demand in turn raises rents and encourages the building of more, and still taller, office buildings within the central market district.
This is happening all over China, as the stats above show.

The third Cantillon effect is the impact on technology of constructing taller buildings. Inevitably, record-breaking skyscrapers require innovation and new, untried applications of technology. Buildings that reach new heights pose numerous engineering and technological problems relating to such issues as building a sufficiently strong foundation, ventilation, heating, cooling, lighting, transportation (elevators, stairs, parking), communication, electrical power, plumbing, wind resistance, structural integrity, fire protection, and building security. There is also a host of "public" issues connected with increases in employment density brought about by tall structures, such as transportation congestion and environmental concerns.[14] Beyond the mere technology it takes to build the world's tallest building, every vertical beam, tube, or shaft in a building takes away from rentable space on each floor built, and the more floors in the structure, the greater the required capacity of each system in the building, whether it is plumbing, ventilation, or elevators. Hence, there is a tremendous desire to innovate with technology in order to conserve on the size of building systems or to increase the capacity of those systems. Therefore, as the height of construction rises, input suppliers must go back to the drawing board and reinvent themselves, their products, and their production processes.
The world's tallest building, the Skyscraper City in Changsha, is planned to be built in less than a year, breaking the 410 day record held by the Empire State Building.

The Mark Thornton article goes into great detail. Recommended for anyone interested in the Skyscraper Index and how it relates to the business cycle. Skyscrapers and Business Cycles


The Battle Is Joined

Gibraltar: Spain considers joint diplomatic offensive with Argentina over Falkland Islands
Spanish foreign minister Jose Manuel Garcia-Margallo will use a trip to Buenos Aires next month to raise the possibility of forging a joint diplomatic offensive with the South American country over the disputed territories, sources told Spain's El Pais newspaper.

Spain's foreign ministry was also discussing whether to take its complaints over Gibraltar to the United Nations, the newspaper reported on Sunday.

The sources did not specify whether Spain would ask the UN to back a request for Britain to give up sovereignty or just adhere to certain agreements.

It could take its petition to the Security Council or take up the matter with the UN General Assembly.

Spain is also considering the option of denouncing Gibraltar to the International Court of Justice in the Hague for its "illegal occupation" of the isthmus - the strip of land connecting the peninsula to the mainland that was not included in the 1713 Treaty of Utrecht.
Lest you think it is just the Asians fighting over maps hundreds of years old, here's Spain getting worked up over a 300 year old treaty.

Gold Bottoming In Most Currencies

Here is a chart of GLD versus PowerShares DB U.S. Dollar Index Bearish Fund (UDN). This shows the price of gold relative to the foreign currency basket that is the U.S. Dollar Index (Euro 57.6%; Japanese Yen 13.6%; British Pound 11.9%; Canadian$ 9.1%; Swedish Krona 4.2%; Swiss Franc 3.6%). Notice that the 50-day moving average is still above the 150-day.

Here is GLD alone. The 50-day moving average has cross the 150-day moving average, but the bounce is more pronounced due to recent USD weakness relative to the euro and yen.

Here is GLD against CEW, an emerging market currency basket.

Finally, GLD versus the Australian dollar (FXA), which has been very weak since May. Notice that gold has actually flat-lined since May in the Australian dollar. Good news for Aussie miners?

Gold also appears to be topping versus the miners. Here is GDXJ, which formed a head-and-shoulders pattern in the 14-day RSI. This isn't necessarily bullish for miners, only that they will outperform the next move in gold, up or down.

Since I expect a U.S. dollar rally, the gold price may be under pressure moving forward, but I expect it will not breakdown again in currencies such as the Australian dollar.

Long-Term Interest Rates Rise In China

Cash crunch round two may be coming in the fall, if the trend in deposit rates is any signal.

Medium-, long-term deposit rates increase
More commercial banks are offering the highest rates legally allowed for medium- and long-term yuan deposits as competitive and liquidity pressures intensify.

......The central bank's recent move to abolish the lending rate floor, which was 70 percent of the benchmark rate, reconfirmed policymakers' determination to push financial sector reform, which is expected by the market. It is also an essential step to the liberalization of interest rates.

The scrapping of the loan rate floor won't have much impact on bank lending rates, as banks don't compete on loan pricing and rarely lend at the floor rate. Therefore, the real economy may not get lower funding costs, and economic growth may not benefit much from this move, according to a recent Barclays Research report.

Before the abolition of the rate floor, benchmark loans cost 6 percent to 6.55 percent, according to PBOC data.

Removal of the savings rate cap, which has been widely discussed, may take more time, said analysts. "We believe the deposit rate ceiling move is a key and risky step for interest rate liberalization and it will have an impact on banks' behavior and banks' net interest margins," said May Yan, an analyst with Barclays Research.


Euro speculators net bullish again; gold speculators continue to grow bullish

The Obamacare Bomb

Here's something about Obamacare that I did not know, and it could be the bombshell that blows Obamacare out of the water if people become aware of it before the debate in Congress over defunding the Affordable Care Act.

Obamacare, Redistribution, Meta Levels, and Percentage of Coverage

Obamacare sets the percentages that insurance companies must pay for medical costs BY GROUP.

(Please note: this does not mean that your insurance company will pay that specific percentage of every bill. It simply means that the insurance company will pay that average percentage for all policyholders over the course of the year.)

As an example, saying you are guaranteed that 90% of your medical bills will be covered is very different from saying the government will pay 90% of total medical expenditures in the nation. One guarantees you what you pay for, the other sets up a situation, where maybe the government makes you pay 100% of your bills, while covering 100% of the bills of 9 other people. Overall, your group gets 90% coverage, even though you ended up getting nothing. According to this, you can legally end up being forced to buy an insurance which will not legally have to pay for any of your specific bills.

Now Americans will be able to buy insurance that guarantees them nothing! Somehow I doubt this revelation will be popular.

Obama Approval Rating

An Elliot Wave A-B-C pattern underway? His approval is barely above the lows reached during the debt ceiling debate in the summer of 2011, and a similar debate over Obamacare could be coming up. Meanwhile, the market breaks out to new highs. So which chart will close the gap, presidential approval or the stock market?

What Do Car Colors Say About the Future of Social Mood?

In Social Mood and Automobile Colors, we learn that white, black and red are positive social mood colors, while silver peaks midway between a top and a bottom in social mood. It begins its run-up along with stocks and then tops out before the bottom. Greens and browns dominate periods of negative mood. Yellow is post-peak mood. Blue and gray seem to have no correlation with mood.

Now let's look at colors expected to be popular in coming years.

Your next car color? Look at your iPhone
Greens and blues are becoming increasingly popular, he said, reflecting a heightened environmental focus. Meanwhile, white is taking over from the long-popular silver shades, which appears to be linked to growing concerns "on both sides of the political spectrum ...that things are not working right," he added.

White has also been buoyed by trends in consumer electronics, Czornij said. The trendsetting Apple (AAPL) iPhone made white a symbol of high technology, something long associated with silver-a color that has lost momentum over the past several years, according to industry sales data.
The commentary on silver is interesting, since it rises into and beyond the peak of the stock market. The association with tech may explain this action, since positive feelings about technology accompany positive social mood. Will white grab some of this market?

The general trend for the 2014 model-year will be "more and more rich, saturated colors," Czornij predicted. But even white will have more subtle variations in tone and gloss. In fact, one of the biggest trends over the next few years could be the move to lower-gloss paints, in satiny or even matte finishes.
I'm guessing gloss would associate with positive mood.

Along with greens and blues, American car buyers are expected to have an attraction to brown shades over the next several years.

But color choices are typically quite different in other parts of the world.

BASF forecasts that "sophisticated intermediate colors, such as olive-greens and bluish grays" will become increasingly popular in the Asia-Pacific region.
So the color guys are predicting negative social mood for several more years in the U.S.

You'll need to sign up to download the above report on socionomics and car colors for free. It's free to register at the Socionomics Institute.

Norway Swings Right

Anti-immigration stance is helping the right-wing in this election cycle.

Norway’s Right Turn


Skyscraper Index Alert: 87% of World's Skyscrapers Being Built in China

The skyscraper index is based on the building of the tallest building in the world, but this number deserves consideration: 87% of skyscrapers currently under construction are located in China.

English podcast: Skyscrapers

Chinese:中国在建摩天大楼占全球87% 被批暴发户式炫耀

The Chinese article hits the nail on the head, at least in terms of socionomics and the skyscraper index. It is an opinion piece that criticizes the building boom as a nouveau riche method of flaunting money, among various other reasons such as the skyscraper being a symbol of wealth in the 1930s (USA) or 1960s (Japan), but not today. Agree or disagree with the author, the mood it represents is one near the peak for wealthy Chinese.

Here is a infographic on them all:

Here's what the picture says. First is a picture showing that Skyscraper City will be the world's tallest building if it is built according to plans (the other building is the Dubai tower). The second shows it will be built in record time, 4 months versus 410 days for the current record holder, the Empire State Building. Next shows the stat of 87% of skyscrapers being built in China, and 10 out of the 20 tallest buildings are in China. If all of the planned buildings are constructed, in the next 3 years, on average a skyscraper will be completed every 5 days. Five years from now, there will be more than 800 skyscrapers, 4 times the amount of skyscrapers currently in the U.S.

Finally, there is a breakdown of skyscraper construction for 10 cities. On top is under construction, on bottom is planned.

Guangzhou: 21 under construction, 32 planned
Tianjin: 16 under construction, 25 planned
Shenyang: 16 under construction, 15 planned
Shenzhen: 12 under construction, 40 planned
Shanghai: 13 under construction, 13 planned
Chengdu: 12 under construction, 15 planned
Chongqing: 12 under construction, 13 planned
Wuxi: 10 under construction, 10 planned
Dalian: 10 under construction, 7 planned
Wuhan: 5 under construction, 27 planned

English Translations of Chinese Economic News

Here are some links to translated stories at the Economic Observer.

The Strictest Audit in History
The EO learned from several ministries and local governments that the audit might be in preparation for parts of China’s tax system reform; which includes improving transfer payments from central to local authorities, making better use of reserve funds at all levels and standardizing local government channels for borrowing.

The source close to the NAO said that the central government isn’t very clear on the scale of local government debt, and that a detailed understanding is needed. In recent years many local governments have launched large scale construction projects. It’s unavoidable that some have under-reported or not reported their debt, he said.

An official from the Shaanxi Provincial Development and Reform Commission told the EO that this audit will be the most accurate yet and catch those who’ve been misreporting. “During the last two audits, it was possible to hide some debts by shifting them to upper or lower governments,” the official said. “This time it’s impossible for them to transfer debts.”

The Tenement Nightmares Of Beijing
Wang Mengyun (王梦芸) seems satisfied with her new bedroom, even if it's less than seven square meters and originally served as a kitchen. "This is the biggest room I've had in the four years I've lived in Beijing," she says. "And it only costs me 950 yuan ($150) a month."

Peng, the head tenant who sublets the room to Meng Yun, notes the rising prices of rentals. Any bedroom with a window is always more than 1,000 yuan. "A kitchen usually has three walls and a window, so many people would rush to grab it," he notes.

Meng Yun, who arrived in the capital after graduating from a college in her native Henan Province in 2009, currently earns 2,500 yuan ($408) a month as a clerk at a wine importing business, but is always uncertain about having decent place to stay.
One of the big stories in the news this week is about affordable housing. The government forced builders to provide plans for affordable housing as part of their land bids, but the housing is built on cheaper land outside of cities. Since there is no or little supporting infrastructure such as workplaces, markets, hospitals, schools, etc., there are tens of thousands of empty apartments, a new form of ghost city in China.

China’s Steel Problem
In June, crude steel production across China reached 64.67 million tons. From January to June, crude production totaled 390 million tons and another 550 million tons of rolled steel. This has pushed prices ever lower. At the end of June, the prices of eight major steel varieties monitored by China Industry and Steel Association (CISA) all continued their decline.

China’s leading steel company, Baosteel, is expected to see a 50 percent fall in net profits in the first half of 2013. It’s also forecast that that China’s largest private steel company, Jiangsu Shagang Co., Ltd, will see a 65 to 95 percent drop, and Hebei Steel, which has the largest production capacity in China, is expected to see profits drop by between 70 and 90 percent.
Here is picture from Monday's Beijing Times.

The headline is "life or death" for Chinese steel companies. On the left hand side is a comparison of Hebei province's (the one that surrounds Beijing) steel production versus Japan, USA and Russia, with Hebei producing 1.5 times as much as Japan, 1.85 times as much as the entire U.S.A., and 2.3 times as much as Russia. On the right (it's hard to see) is a comparison of profit margins on a ton of steel. Several years ago it was an iPhone, then it was meat, and now it is a popsicle.

Also speaking of steel, I used to track the Baoshan steel index, but the data stopped being reported at the start of 2013.

Finally, Economists on Li Keqiang's New Slogan
An interview with three economists about the challenges of directing credit towards the real economy against a backdrop of slowing growth.