Archive for the ‘China’ Category

China’s Fix Could Break Things

Monday, August 17th, 2015

Imagine if free markets were allowed to be free.

Of course, in today’s world, they’re not.  Central bankers and government agencies have taken control.  Not knowing what to do with it hasn’t stopped them. 

China is the latest case in point.  We recently suggested that investors worry about China, not about Greece, although for a tiny country Greece gives everyone plenty to worry about.  But China should be the center of everyone’s attention, given its attempt to fix its falling stock market and boost imports by devaluing the yuan.China

While it’s impossible to guess the intentions of China’s rulers – and they’re not about to share them – the 1.9% devaluation announced last week smacks of desperation.  China’s stock market has been swooning this summer and its exports are down by 8.3% (much larger than the expected 1.5% decrease), which is not good for future growth.

In addition, The Wall Street Journal noted, “Pockets of manufacturing have been especially hard hit, as reflected in sluggish electricity use and falling rail cargo. Especially scary is the prospect of deflation; producer prices were down 5.4% from a year ago.”


Worry About China, Not Greece

Monday, July 20th, 2015

When’s the last time markets reacted positively to anything happening in Greece?

Last week, just 10 days after Greek voters voted against a resolution that would have required stiffer austerity measures in return for a third Eurozone bailout, the Greek Parliament voted 229 to 64 with six abstentions in favor of harsher austerity measures than would have been required if voters approved the resolution.

As The Economist put it, “Grief, psychiatrists say, has many stages, from denial to acceptance; and Greece seems to have raced through them all.” Shanghai

So Greece needs psychiatric help.  That should have been clear years ago.  These are the folks who elected Alexis Tsipras of the wacky extreme-left Syriza Party as their prime minster.

Tsipras quickly found that his socialist machismo wasn’t very effective, given that his country needs billions of euros just to survive.  So maybe it’s not surprising that he and the Greek Parliament caved so quickly.

Not everyone was pleased. Fellow Syrizan Zoi Konstantopoulou, the parliamentary speaker, called it a “very black day for democracy in Europe.”  Since when does a socialist worry about democracy?

But enough about Greece.  Which country should we be worried about?  (more…)

It’s Only Money

Friday, September 26th, 2014

“Money often costs too much.”                                                                               Ralph Waldo Emerson

It really does all come down to money.

Money decides the outcome of wars and elections.  It ensures that we are properly fed and clothed.  It buys us an education and pays for all of our material needs.  And it may not be able to buy happiness, but it does have a dramatic impact on that vague thing that’s often referred to as “quality of life.”

All of us, if we’re being honest, would rather have more of it than less of it.

But the value of money is variable.  The currency of one country continuously fluctuates in value relative to the currency of every other country – and those fluctuations can have a dramatic economic impact.

A Stronger Dollar

You’d think countries would be striving to make their currencies stronger, but in recent years, we’ve had “currency wars” as competing countries have tried to weaken their currencies to increase demand for their imported goods.

DollarThe United States has criticized China for its currency manipulation, but in the meantime, the Federal Reserve Board’s easy money policies have deliberately weakened the dollar.

Now, though, as other countries’ currencies have become weaker, the dollar has strengthened.  In fact, the dollar reached a four-year high this week against a basket of major currencies, as The Wall Street Journal reported, “amid mounting expectations the Federal Reserve will raise interest rates next year while its counterparts in Europe and Japan consider further measures to raise inflation and spur growth.”


Fundamentally Flawed

Friday, March 14th, 2014

Imagine if the outcome of a football game depended more on the weather than on the talent of the players.

Weather, indeed, can have an impact and should, but its role is usually to test the talents of the players, not to be the primary factor in the outcome.  When it is the primary factor, anything can happen.  In such cases, would you put money on the game?

The weather is not the number one factor affecting the performance of the stock market these days, but neither is the talent of the players – that is, the fundamental performance of publicly held companies.

In recent years, The Federal Reserve Board has held sway over the market’s performance via quantitative easing, although under former Chair Ben Bernanke, it was somewhat more predictable than the weather.AUDJPY

Now, with tapering under way, that may change (we’ll see, as many expect plenty of bond buying ahead).  Yet other world events may replace QE in determining the performance of the market.  That means potentially greater volatility than we’ve experienced in the easy money era.

It doesn’t take much to affect today’s global economy, especially when the impact of events is amplified by high-frequency trading.  Consider, for example, the impact of the falling yen and Australian dollar on the S&P 500.


Economic Stagnation of Olympic Proportions

Friday, February 21st, 2014

Russian President Vladimir Putin is a busy man.  He’s found time to prop up Syrian dictator Bashar Assad, negotiate a face-saving chemical weapons deal with President Obama and support violence against Ukrainians, all while overseeing the construction of the most expensive Olympic Village in the history of the games.

The Olympic Village at Sochi had a projected cost of $12 billion.  The actual cost was $50 billion.  So no more complaining about The Big Dig.  It could have been worst.

PutinAnd, like The Big Dig, all that money failed to buy quality construction.  Stories abound of shoddy construction and faulty work.  The Olympic Village is more like a Potemkin Village.

At the Olympics, color, pageantry and the world’s best athletes draw the television cameras, while a few hundred kilometers away, the Ukrainian government, with help from the Russian government, is killing its people.  This week, violence in Ukraine was the worst it’s been since the breakup of the Soviet Union.

As with Syria, the U.S. is leading from behind.  While the European Union has at least announced sanctions, the U.S. is only considering sanctions.  President Obama denounced Ukraine violence “in the strongest terms,” but talking is the weakest action.


Breaking China

Friday, November 22nd, 2013

If the United States relies on China as its main lender, what happens when China is having difficulties with its debt?

We may soon find out.  As the Financial Times reported, “several banks have had to delay or dramatically reduce Chinese bond issues as the impact of a tight onshore credit market begins to be felt.”China

Zerohedge noted that Chinese bond issuers are dealing with the drying up of interbank market liquidity, increased competition from wealth management and trust products, and other problems.  At the same time, one analyst said, “China is much more funding dependent than in the past.”

Chinese issuers are steering around their problems by increasing offshore issuance, raising a record $51.6 billion outside of China so far this year, which is more than double the $24.5 billion raised in the same period last year, according to Dealogic.

Unless the People’s Bank of China changes its attitude on liquidity, the analyst said, “it’s going to end pretty ugly.”

U.S. vs. China

Friday, October 19th, 2012

As China has emerged as a world power, it has increasingly been a case of Us (as in U.S.) vs. Them.  Not in military combat, fortunately, but in day-to-day trade battle and all-out currency competition.

So which country currently holds the edge?

Master of compared the two on many different levels – with some interesting results.  Overall, the U.S. retains its top position as THE world superpower.  But China is closing in.

Some of the figures used are outdated, but consider just a few of the comparisons given:

GDP.  The U.S. gross domestic product (GDP) is nearly twice as large as China’s — $15.29 trillion vs. $7.298 trillion, but U.S. GDP is growing at 1.7% annually vs. 9.28%.

Government spending.  U.S.  government expenditures are a whopping $3.599 trillion for a population of 313 million, while China’s government expenditures are $1.729 trillion for a population of 1.343 billion.  The deficit in the U.S. is 8.6% of GDP compared with 1.1% in China.

Poverty and employment.  The U.S., with a labor force of 153 million, has an unemployment rate of 9% and a poverty level of 15.1%.  China, with a labor force of 795 million, has an unemployment rate of 6.5% and a poverty level of 13.4% (of course, it’s all relative).

Freedom.  For economic freedom, the U.S. ranks 4th, while China ranges 118th.  However, the U.S. ranks first for incarceration, with 730 of every 100,000 people in jail, while Chine ranks 124th with 121 of every 100,000 people in jail.

The results, which we found on, are interesting, but we are very happy to be living in the United States instead of China.

The S&P 500 Comes Up Short

Friday, June 22nd, 2012

The S&P 500 fell more than 2% yesterday, recording its worst one-day drop since December.  Was it disappointment with The Fed?  A sudden realization that the market shouldn’t rise when the economy is sinking?  A “fat finger” computer glitch?

There were plenty of reasons for the fall – and collectively they do not bode well for the U.S. economy:

  •  The Philadelphia Fed Survey fell unexpectedly to -16.6 for June, registering its worst reading since August 2011.  New orders, shipments and average work hours were negative this month, suggesting an overall decline in manufacturing business.  The decline was the second in a row, as the reading was -5.8 in May.

  • The HSBC China Manufacturing Purchasing Managers’ Index fell to 48.1 in June, down from 48.4 in May.  It was the eighth consecutive reading below 50.  A reading below 50 indicates contraction.  A continuing economic slowdown in China would slow orders from china’s trading partners.

  • Moody’s Investors Services downgraded 15 global investment banks after the market’s close.  Dick Bove, Vice President of Equity Research at Rochdale Securities called the downgrade “absurd,” arguing that the American banking industry’s balance sheets have improved “dramatically” over the past four years.  He noted that liquidity as a percentage of assets is at a 30-year high, bad loans are down and reserves against them are up.
  • Goldman Sachs recommended shorting the S&P 500, with a price target of 1285, which is about 5% below where it was when Goldman Sachs made the recommendation.
  • The S&P GSCI, a commodities index dropped to its lowest level since 2010.  It’s down 22 percent from a February peak.
  • The U.S. Labor Department reported that the four-week average of applications for unemployment benefits was at its highest level since September.

That’s a lot of bad news for one day.  No wonder traders followed Goldman Sachs’ advice.