Category: zerohedge

Presented with no comment…

 

 

(h/t Sunday Funnies via The Burning Platform blog)

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/F_duyOsgtlI/story01.htm Tyler Durden

Authored by Dani Rodrik, originally posted at Project Syndicate,

Economic policymakers seeking successful models to emulate apparently have an abundance of choices nowadays. Led by China, scores of emerging and developing countries have registered record-high growth rates over recent decades, setting precedents for others to follow. While advanced economies have performed far worse on average, there are notable exceptions, such as Germany and Sweden. “Do as we do,” these countries’ leaders often say, “and you will prosper, too.”

Look more closely, however, and you will discover that these countries’ vaunted growth models cannot possibly be replicated everywhere, because they rely on large external surpluses to stimulate the tradable sector and the rest of the economy. Sweden’s current-account surplus has averaged above a whopping 7% of GDP over the last decade; Germany’s has averaged close to 6% during the same period.

China’s large external surplus – above 10% of GDP in 2007 – has narrowed significantly in recent years, with the trade imbalance falling to about 2.5% of GDP. As the surplus came down, so did the economy’s growth rate – indeed, almost point for point. To be sure, China’s annual growth remains comparatively high, at above 7%. But growth at this level reflects an unprecedented – and unsustainable – rise in domestic investment to nearly 50% of GDP. When investment returns to normal levels, economic growth will slow further.

Obviously, not all countries can run trade surpluses at the same time. In fact, the successful economies’ superlative growth performance has been enabled by other countries’ choice not to emulate them.

But one would never know that from listening, for example, to Germany’s finance minister, Wolfgang Schäuble, extolling his country’s virtues. “In the late 1990’s, [Germany] was the undisputed ‘sick man’ of Europe,” Schäuble wrote recently. What turned the country around, he claims, was labor-market liberalization and restrained public spending.

In fact, while Germany did undertake some reforms, so did others, and its labor market does not look substantially more flexible than what one finds in other European economies. A big difference, however, was the turnaround in Germany’s external balance, with annual deficits in the 1990’s swinging to a substantial surplus in recent years, thanks to its trade partners in the eurozone and, more recently, the rest of the world. As the Financial Times’ Martin Wolf, among others, has pointed out, the German economy has been free-riding on global demand.

Other countries have grown rapidly in recent decades without relying on external surpluses. But most have suffered from the opposite syndrome: excessive reliance on capital inflows, which, by spurring domestic credit and consumption, generate temporary growth. But recipient economies are vulnerable to financial-market sentiment and sudden capital flight – as happened recently when investors anticipated monetary-policy tightening in the United States.

Consider India, until recently another much-celebrated success story. India’s growth during the past decade had much to do with loose macroeconomic policies and a deteriorating current account – which recorded a deficit of more than 5% of GDP in 2012, having been in surplus in the early 2000’s. Turkey, another country whose star has faded, also relied on large annual current-account deficits, reaching 10% of GDP in 2011.

Elsewhere, small, formerly socialist economies – Armenia, Belarus, Moldova, Georgia, Lithuania, and Kosovo – have grown very rapidly since the early 2000’s. But look at their average current-account deficits from 2000 to 2013 – which range from a low of 5.5% of GDP in Lithuania to a high of 13.4% in Kosovo – and it becomes evident that these are not countries to emulate.

The story is similar in Africa. The continent’s fastest-growing economies are those that have been willing and able to allow yawning external gaps from 2000 to 2013: 26% of GDP, on average, in Liberia, 17% in Mozambique, 14% in Chad, 11% in Sierra Leone, and 7% in Ghana. Rwanda’s current account has deteriorated steadily, with the deficit now exceeding 10% of GDP.

The world’s current-account balances must ultimately sum up to zero. In an optimal world, the surpluses of countries pursuing export-led growth would be willingly matched by the deficits of those pursuing debt-led growth. In the real world, there is no mechanism to ensure such an equilibrium on a continuous basis; national economic policies can be (and often are) mutually incompatible.

When some countries want to run smaller deficits without a corresponding desire by others to reduce surpluses, the result is the exportation of unemployment and a bias toward deflation (as is the case now). When some want to reduce their surpluses without a corresponding desire by others to reduce deficits, the result is a “sudden stop” in capital flows and financial crisis. As external imbalances grow larger, each phase of this cycle becomes more painful.

The real heroes of the world economy – the role models that others should emulate – are countries that have done relatively well while running only small external imbalances. Countries like Austria, Canada, the Philippines, Lesotho, and Uruguay cannot match the world’s growth champions, because they do not over-borrow or sustain a mercantilist economic model. Theirs are unremarkable economies that do not garner many headlines. But without them, the global economy would be even less manageable than it already is.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/F6yqnsrK-6Y/story01.htm Tyler Durden

What is more valuable than the life-giving properties of human blood? Why, in the new normal, it’s the life-blood of the financial markets – printer ink!!

 

 

 

(h/t @DataIsAmazing)

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/E6ufVtZwzhQ/story01.htm Tyler Durden

“We already live in a financial economy in which the debt and capital markets exceed the value of the real economy by far,” Marc Faber explains to Germany’s Finanzen100, “and that’s before the current formation of bubbles.” His most ominous warning, and one that fits perfectly with the seeming insanity of Federal Reserve (and all developed market central banks) is that “the next time a bubble bursts, then the capitalist economic system as we know will falter.”

Via Finanzen100 (Google Translate),

The numbers speak for themselves: In 1980, the market capitalization of the U.S. stock market was less than 40 percent of gross domestic product (GDP). The debt, measured in credit markets, was about 130 percent of GDP. Today these figures are higher, according to Marc Faber many times: The market capitalization has reached over 100 percent of GDP, the debt about 300 percent. This is consistent with figures from the consulting firm McKinsey. After calculation, the global debt still stood in 2010 at 158 ??trillion. In 2012, there were already $ 200 trillion – and rising. This makes for a worldwide economic power of slightly more than $71 trillion about three times.

It is a powder keg on which we sit. In a normal real economy, said Marc Faber, the debt and equity markets are small – and there in order to steer the accumulated capital into investments. Net interest acts as a regulator. That is, there are only those made with the capital investment that is truly an attractive return, so a higher yield than fixed-income investments bring.

Speculative bubbles encourage innovation

However, it can also come here to the formation of speculative bubbles, as Faber points out. They are there but small, focused on little damage. On the contrary, you might even be necessary because they enabled quantum leaps in progress and can only increase the production capacity. Such a bubble bursts, then prices will fall, and so more consumers can benefit from the development. Examples give it enough: Whether the railroad boom in the twenties of the last century, the Internet boom in the late nineties or real estate bubbles. When prices dropped after the bursting of a speculative bubble, it benefited from broad sections of the population.

Such bubbles are therefore an integral part of the capitalist system. They promote the progress and increase productivity. But the decisive factor: In a real economy, the amount is limited to credit, as much as the real economic performance. Otherwise, with quasi unlimited credit available, investment is driven purely by liquidity – not real economics. And this is even more true when the market interest rate is distorted, as explained Cindy Sweeting of Franklin Templeton. The capital costs are no longer currently being determined by the market, but distorted by the intervention of central banks. Short-term financing costs are close to zero in nominal terms and negative in real terms.

Central banks override market mechanisms

The seemingly favorable debt financing and the affects it also on the decisions of the company. Incorrect or depressed capital costs can prevent new growth and lead to business transactions operate on, which should give it better. Insolvency and bankruptcies are mechanisms to ensure capitalism that no capital flows in companies that do not use it effectively. This mechanism is, however, set by the central banks suspended.

“The unintended consequences of the current artificial reduction and manipulation of interest rates and finance charges are potentially very serious,” Sweeting explained: “The risk of asset price bubbles by cheap credit financing, the resolution of leveraged carry trades and the continued preference for cheap, financed on credit, investment in existing systems instead of productive and. because the capital costs are no longer determined by the market growth-enhancing investment in the creation of new facilities, many companies are able to finance subsidized low quality. “

Too much speculative and leveraged capital

…in an economy driven by liquidity accept this very different proportions. The benefit that instigate these bubbles can then be significantly lower than the destroyed by the bursting of such bubbles prosperity. Because there is too much speculative and leveraged capital within the game. There are just too many white elephant ‘investments made.

The crises of the past decades due to Faber’s view on interest rates too low. In every crisis, but the banks increased the dose they took a more expansionary monetary policy. The patient, however, the real economy, more and more immune to it. So the doctor increased the dose and on. Although the medicine brings temporary relief, but it does not eliminate the cause. The liquidity-driven economy, it is growing like a cancer, according to Faber and on. And that will, as Karl Marx predicted, lead to the ultimate collapse that will put the foundations of our capitalist society on fire.

How it will actually go out is open. Investors should nevertheless take the warning seriously, because the end result will be a violent crash in the capital markets.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/jSjTqKNY-cM/story01.htm Tyler Durden

“We already live in a financial economy in which the debt and capital markets exceed the value of the real economy by far,” Marc Faber explains to Germany’s Finanzen100, “and that’s before the current formation of bubbles.” His most ominous warning, and one that fits perfectly with the seeming insanity of Federal Reserve (and all developed market central banks) is that “the next time a bubble bursts, then the capitalist economic system as we know will falter.”

Via Finanzen100 (Google Translate),

The numbers speak for themselves: In 1980, the market capitalization of the U.S. stock market was less than 40 percent of gross domestic product (GDP). The debt, measured in credit markets, was about 130 percent of GDP. Today these figures are higher, according to Marc Faber many times: The market capitalization has reached over 100 percent of GDP, the debt about 300 percent. This is consistent with figures from the consulting firm McKinsey. After calculation, the global debt still stood in 2010 at 158 ??trillion. In 2012, there were already $ 200 trillion – and rising. This makes for a worldwide economic power of slightly more than $71 trillion about three times.

It is a powder keg on which we sit. In a normal real economy, said Marc Faber, the debt and equity markets are small – and there in order to steer the accumulated capital into investments. Net interest acts as a regulator. That is, there are only those made with the capital investment that is truly an attractive return, so a higher yield than fixed-income investments bring.

Speculative bubbles encourage innovation

However, it can also come here to the formation of speculative bubbles, as Faber points out. They are there but small, focused on little damage. On the contrary, you might even be necessary because they enabled quantum leaps in progress and can only increase the production capacity. Such a bubble bursts, then prices will fall, and so more consumers can benefit from the development. Examples give it enough: Whether the railroad boom in the twenties of the last century, the Internet boom in the late nineties or real estate bubbles. When prices dropped after the bursting of a speculative bubble, it benefited from broad sections of the population.

Such bubbles are therefore an integral part of the capitalist system. They promote the progress and increase productivity. But the decisive factor: In a real economy, the amount is limited to credit, as much as the real economic performance. Otherwise, with quasi unlimited credit available, investment is driven purely by liquidity – not real economics. And this is even more true when the market interest rate is distorted, as explained Cindy Sweeting of Franklin Templeton. The capital costs are no longer currently being determined by the market, but distorted by the intervention of central banks. Short-term financing costs are close to zero in nominal terms and negative in real terms.

Central banks override market mechanisms

The seemingly favorable debt financing and the affects it also on the decisions of the company. Incorrect or depressed capital costs can prevent new growth and lead to business transactions operate on, which should give it better. Insolvency and bankruptcies are mechanisms to ensure capitalism that no capital flows in companies that do not use it effectively. This mechanism is, however, set by the central banks suspended.

“The unintended consequences of the current artificial reduction and manipulation of interest rates and finance charges are potentially very serious,” Sweeting explained: “The risk of asset price bubbles by cheap credit financing, the resolution of leveraged carry trades and the continued preference for cheap, financed on credit, investment in existing systems instead of productive and. because the capital costs are no longer determined by the market growth-enhancing investment in the creation of new facilities, many companies are able to finance subsidized low quality. “

Too much speculative and leveraged capital

…in an economy driven by liquidity accept this very different proportions. The benefit that instigate these bubbles can then be significantly lower than the destroyed by the bursting of such bubbles prosperity. Because there is too much speculative and leveraged capital within the game. There are just too many white elephant ‘investments made.

The crises of the past decades due to Faber’s view on interest rates too low. In every crisis, but the banks increased the dose they took a more expansionary monetary policy. The patient, however, the real economy, more and more immune to it. So the doctor increased the dose and on. Although the medicine brings temporary relief, but it does not eliminate the cause. The liquidity-driven economy, it is growing like a cancer, according to Faber and on. And that will, as Karl Marx predicted, lead to the ultimate collapse that will put the foundations of our capitalist society on fire.

How it will actually go out is open. Investors should nevertheless take the warning seriously, because the end result will be a violent crash in the capital markets.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/jSjTqKNY-cM/story01.htm Tyler Durden

The investment climate is characterized by the continued accommodative monetary stance by the three key central banks, the Federal Reserve, the European Central Bank and the Bank of Japan. Although there is a slew of economic data that will be released in the coming days, and a BOJ meeting, it is unlikely to alter the widespread understanding that the ECB and BOJ may take more measures later, the Federal Reserve is likely maintain the current course until at least the end of Q1 14.  

 

The fact that the Vice Chairman of the Federal Reserve did not run away from the central bank’s course that she herself help establish, and did not signal a desire to change course immediately, was some how seen as revealing or newsworthy by many pundits.  She delivered what any one in her position would have, and she did it with aplomb.   Much of the subsequent commentary, especially those that claimed, in some fashion, implied that she represents Bernanke’s third term, do much injustice to the situation and the people.  

 

As the circumstances change, the policy response can be expected to change. Partly based on the expectation the fiscal drag in 2014 will be around a third or 1.0% less than this year and partly on the cumulative effect of more people working, we expect the US economy to strengthen and provide a basis on which the Fed can begin to slow its asset purchases.  

 

Nevertheless, more immediately, the week’s economic data is unlikely to encourage investors to bring forward the tapering into this year.  Even anything, the unexpectedly weak import price index ( -0.7% in Oct and the Sept series revised to a 0.1% gain instead of 0.2%, pushing the year-over-year pace to -2.0% from -1.0%), points to downside risks to measured inflation.  The consensus expects the Oct CPI to match its 3-year low of 1.0%.  

 

Meanwhile, retail sales slowed marked in Q3, where cumulative monthly gains of 0.5% were recorded, after 1.4% in Q4 and are expect have begun off Q4 on a soft note.  The government closure may have exacerbated the weakening trend in Oct; in which case some rebound should be expected in Nov.  The FOMC minutes appear to have in part been superseded by Yellen’s confirmation hearings, but perhaps some color can be added to what it means that the Fed is awaiting more economic progress and its views of the fiscal threat.  

 

The Empire Survey last week (Nov -2.21 vs consensus of 5.0 and an Oct reading of 1.52) warns that the economy may have downshifted in Q4.  The Philly Fed report this week is expected to confirm the absence of a post-closure lift to the economy.  

 

There are two other developments that should be on investors’ radar screens.  First, last week the hearing on Detroit’s bankruptcy concluded and the judge’s decision is awaited.  There is no good outcome.  If the judge does not allow the municipality to have the protection (from creditors) that bankruptcy proceedings allow, there will be a wave of lawsuits as the creditors seek to recover their $18 bln (Detroit’s liabilities).  Yet, if Detroit is granted protection, which would allow it to cut pensions of city workers, it would violate the city’s constitution, which explicitly bans pension cuts.  

 

Second, the free-trade agreement called the Trans-Pacific Partnership (the largest trade agreement in history) is in jeopardy.  Reports indicate that 151 House Democrats were joined by 23 Republicans in signing a letter that informed President Obama that they were reluctant to grant him trade promotion authority (“fast-track”).  This authority allows the executive branch to negotiate a trade agreement and then Congress votes up or down in its entirety.  No major trade agreement in the last few decades has been agreed upon without it.  

 

Just as the US data is unlikely to alter views of the trajectory of QE, euro zone data do not have the heft to change perceptions that the ECB is going to have to do more if it wants to arrest the disinflation forces before they morph into outright deflation.  The main economic report in the week ahead is the preliminary Nov PMI.  A small uptick is expected to 52.0 from 51.9 in October on the composite reading.  This is seen consistent with around 0.2% Q4 GDP.  

 

As we argued before, despite the expansion of GDP, it probably behooves investors and policy makers to continue to regard the euro area as in recession.  Although Q4 GDP looks to be the third consecutive quarter of expansion, an broader assessment is required to pinpoint the economy’s location in the business cycle. While many people cite the two-consecutive quarterly declines as indicative of a recession, we note that even the official arbiters of the US business cycle eschew such simplistic definitions.  For example, the latest unemployment report showed a new cyclical and record high of 12.2% for September.  The Oct report is due on November 29.  

 

German surveys ZEW and IFO will bookend the week.  While offering some headline risk, the surveys are unlikely to alter perceptions that Europe’s largest economy is chugging along at an uninspiring pace of around 1% (Q3 GDP 1.1%).    Its 1.2% year-over-year CPI also belies arguments that ECB monetary policy is too ease for it.  The increase in house prices, that the BBK recently cited, has other drivers.  

 

The euro area trade and current account figures will be reported on Monday.  They will help drive home the point that the austerity in the periphery is not being offset by increased activity in the core. The result is a increasingly large external surplus.   It follows on the heels of last week’s decision by the EU to investigate the Germany current account surplus.

 

The descent of Italy’s Berlusconi took another step.   The center-right has formally split.  Berlusconi has re-launched his Forza Italia party, while his long-time deputy, and deputy prime minister in the Letta coalition government, Alfano has created a new center-right party.  Reports suggest this new party will be supported by as many as 37 Senators and 23 MPs.   

 

There are two immediate implications.  First, it leaves little doubt that Berlusconi will be evicted from the Senate, following his tax evasion conviction, probably before the end of the month.  This will not be as disruptive as it appeared a couple months ago.  Second, and related, the Letta government may be more stable than previously perceived.  

 

While it is tempting to suspect this can lead to a relative out performance of Italy, we are closely watching developments which warn that the capital flow patterns see in recent months are changing. Spain and Italy were market darlings, with both their stock and bond markets easily out performing. However, in the last few weeks this has ceased.  Over the past month, Spanish and Italian equity markets are off 3%, while the DAX is up 3.5% and Dow Jones Stoxx 600 is up 1.5%.  In the bond markets, the 15 bp decline in Italian’s 10-year yield has clearly lagged behind other European bond markets.  Spain’s 10-year yield has fallen almost 23 bp and is on the low side with the euro area.  

 

A similar reversal of recent flow patterns is seen in Asia to some extent. Both Taiwan and South Korea experienced large foreign inflows into their equity markets in October.  In the first half of  November, both reported a net outflow of about $675 mln by foreign investors.    

 

We note that the MSCI Emerging Market Equity Index fell about 6.5% from Oct 30 through the middle of last week.  In the second half of last week, it recovered by 3% and appears poised for additional gains in the c
oming days.  It closed a little above 1005 before the weekend.  Technically, there is potential toward 1018, before more formidable resistance is encountered.  

 

Japanese investors, who have been net sellers of foreign bonds this year, has swung to the buy side, with net purchases for five consecutive weeks (through Nov 8) for a total of around $35 bln.  They have been net buyers in 8 of the past ten weeks.  For their part, there is renewed interest by foreign investors in Japanese equities.  The four-week average has risen to about JPY202 mln, which is the second highest since July.  With the capital gains tax set to jump from 10% to 20% on January 1, investors are urged to stay attentive to signs of domestic profit-taking ahead of it.  

 

Surveys show that an overwhelming majority of Japanese businesses do not expect the BOJ to reach its 2% inflation target in the next fiscal year.  Most economist expect the BOJ to take additional steps.  However, there is unlikely to be an sense of urgency at this week’s BOJ meeting.  Oct trade data may be more interesting.  The trade deficit has yet to improve on a trend basis, but export growth is accelerating.  

 

Using monthly data, exports rose 1.5% on average in Q1, 7.1% in Q2 and 12.8% in Q3. Exports are expected to have accelerated in Q4 and we note that the yen, on a trade-weighed basis has now fallen to new 5-year lows.   Of course, the other half of the trade balance, imports, are also rising rapidly and this reflects both energy imports and the yen’s depreciation.    

 

To round out the economic reports, we note that minutes from the Reserve Bank of Australia and the Bank of England will be reported in the new week.  Both have likely largely been superseded by subsequent central bank reports.  In Australia,  the detailed quarterly statement on monetary policy is likely to be reflected in the minute.  It was left the door ajar to additional easing and the Oct labor report was disappointing (a loss of 28k full-time jobs and Sept’s gain was revised away).  In the UK, last week’s Quarterly Inflation Report likely stole whatever thunder the minutes contain.  

 

Canada will reports its Oct CPI figures at the end of the week.  The headline pace is expected to fall back below 1.0% for the first time in four months.  The core rate is likely to edge lower to 1.2%. Canada also report Sept retail sales.  The 12- and 24-month averages are identical at 0.2% (by comparison the US monthly average is 0.3% and 0.4% respectively.  

 

Finally, we bring to you attention news that New Zealand’s government will sell-off 20% of Air New Zealand (leaving it with a 53% stake).  The stock will likely be suspended pending the results of the sale.  The value of the stake is estimated at around NZ$362 mln (or $302 mln).  The shares are up 27% this year.  This will likely be understood within the context of Prime Minister Key’s larger privatization effort that has already included parts of a couple of energy companies.  The effort is expected to continue into 2014.  The government plans on using the proceeds from the privatization to pay down debt and fund infrastructure spending.     The impact on the New Zealand dollar is likely to be minimal at best. 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/mh0sGDEYG6U/story01.htm Marc To Market

Submitted by F.F.Wiley of Cyniconomics blog,

This may be a little after-the-fact, but I’ve been thinking about the ACA mess this weekend and keep coming back to President Obama’s November 7 interview with Chuck Todd. 

Visit NBCNews.com for breaking news, world news, and news about the economy

 

 

Or more precisely, Ann Althouse’s post on the interview.  (I admit to not watching the full interview – Althouse’s excerpts were enough to stick in my head like an annoying song.)

Speaking about why his campaign website worked so well compared to the ACA site, Obama said:

You know, one of the lessons – learned from this whole process on the website – is that probably the biggest gap between the private sector and the federal government is when it comes to I.T. …

 

Well, the reason is is that when it comes to my campaign, I’m not constrained by a bunch of federal procurement rules, right?

He later added that:

When we buy I.T. services generally, it is so bureaucratic and so cumbersome that a whole bunch of it doesn’t work or it ends up being way over cost.

BO, aren’t you kind of acknowledging that your ideological opponents are right?  Yet, you claim that these fundamental inefficiencies are easily fixed?

As Althouse notes:

we've been told we must buy a product, and things have been set up so we can only go through the government's market (the "exchange"), and the government has already demonstrated that its market doesn't work. But you can't walk away, you're forced to buy, and there's nowhere else to go. And yet, he wants us to feel bad about the cumbersome bureaucracy the government encountered trying to procure the wherewithal to set up the market it had already decided we would all need to use.

Check out the Althouse post for appropriate commentary and YouTube clips.

(h/t David Henderson)

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/QtZOhI7oNxY/story01.htm Tyler Durden

China has unveiled its most sweeping reform agenda in more than 30 years, after a meeting of key Communist Party leaders in Beijing last week. The agenda aims to transition China to a more free-market consumer economy with fewer social controls. On the economic front, the plans include reducing the power of giant state-owned companies, removing a swathe of price controls, phasing out caps on interest rates and moving towards yuan convertibility. More broadly, the plans also outline loosening the one-child policy, abolishing the controversial “re-education” labor camps and introducing steps toward an independent judiciary.

Surprises include the commitment to reducing the power of state-owned enterprises (SOEs), as this wasn’t flagged prior to the meeting. The breadth of price controls to be removed – including water, oil, gas and power – is also a surprise. Though its made headlines, relaxation of the one-child policy was well flagged and actually doesn’t go as far as some would have liked. One of the most unexpected reforms is the abolition of labor camps. This was a key gripe of foreign governments as it allowed the detention of people without trial.

So what’s missing then? Well, the agenda doesn’t specifically address bank non-performing loan (NPL) issues. Though it’s pledged to introduce a property tax to curb the housing bubble, taxes have been introduced before with minimal impact. It also doesn’t address the problem of the so-called shadow banking system, which has grown to worrying proportions. And more broadly, Xi has made it clear that reform will be gradual. In fact, the reform document states that the proposed agenda must be implemented by 2020. The Chinese are nothing if not long-term thinkers!

As for the impact on markets, Asia Confidential is likely to be in the minority in suggesting that the bold reforms are bad news for markets. Short-term, the reforms are unlikely to alleviate growing concerns about China’s credit bubble. Long-term, the switch to a consumption-led economy will undoubtedly slow GDP growth, potentially more than most think (I view this as a positive as it will mean more sustainable growth but the GDP-obsessed economists won’t see it that way).

Moreover, the Chinese stock market itself is dominated by SOEs and cutting into their profits will undoubtedly hurt the market. The obvious trade in China remains to avoid regulated industries – such as financials and utilities – which will be stung by these reforms and stick with less regulated industries such as consumer staples and consumer discretionary.

Bold, broad-ranging reforms

A key meeting of Communist Party leaders wrapped up mid-week and the leaders then issued a statement which said little. The financial media and China bears had a field day bagging the meeting. Meanwhile China bulls groaned but urged patience as further announcements on reform might still be forthcoming.

Fast forward to Friday and the state news agency, Xinhua, released a 20,000 word document from the meeting. It was a bombshell as it went above and beyond the expectations of a even the most ardent China optimist.

Let’s go through the key items:

Market reform

• Accelerate yuan convertibility and interest rate reform.
• Push pricing reform for oil, gas, power, water, transportation, telecom & other sectors.
• Allow local governments to expand financing channels for construction projects, including the issuance of bonds.
• Set up free-trade zones in more areas.
• Improve treasury yield curves to reflect market supply and demand.

Property reform

• Push through legislation for a property tax and go ahead with further reforms at “an appropriate time”.

SOE reform

• 30% of profits from state assets will go toward public finances, principally social security. That’s up from 15%.
• Allow non-state involvement in government projects.
• Proactively pursue a “mixed ownership economy”.

Population reform

• Relax the one-child policy. Couples may have two children if either of the parents was an only child.
• Accelerate so-called Hukou (residentship) reform. This will allow people in rural areas easier means to move into urban areas.
• Study policies to delay the retirement age.

Political reform

• Abolish re-education labor camps.
• Place more emphasis on management of resource consumption, overcapacity, debt and the environment.
• Change policy of judging performance of officials primarily by growth rates achieved.
• Strengthen anti-corruption measures.

Legal reform

• Reduce the power of local governments over the court system and move towards an independent and fair j
  udiciary.

The surprises

A number of the items were well-flagged but many weren’t. Amid the proposed market reforms, the removal of a broad-range of price controls is a surprise and welcome move. The remaining market reforms had been expected and the government has already starting implementing several of them, such as free-trade zones.

The idea of a property tax isn’t unexpected but the key will be in implementation. The fact is that the government has tried to clamp down on a property bubble with various measures for a number of years and yet the bubble has inflated during that time.

In terms of SOE reform, the increased profits going towards social security isn’t totally unexpected but is a big step nonetheless. For several years, China has shown a clear commitment to improving its social security system and this is another step in that direction. It’s a needed step given the country’s rapidly ageing population, thanks to the one-child policy.

Other reforms proposed for SOEs are somewhat vague but there is a clear commitment to reduce state involvement in the economy and correspondingly increase private sector involvement. That’s a good thing.

Relaxation of the one-child policy has already garnered international headlines. But this was well flagged for months and it’s actually not a radical reform. It’s best described as incremental. Many people would be disappointed that further loosening didn’t happen.

Hukou reform has been talked about for months. It is significant as it’s likely to increase urbanisation (people moving from country to city). That’ll drive increased consumption, an important goal of the new regime.

Studying delays to the retirement age is an interesting one. I hadn’t seen this flagged prior to the meeting, though it may have been.

As for political reforms, one of the biggest surprises is undoubtedly the proposed abolition of labor camps. These camps have been hugely controversial both within China and outside. Even China critics will be somewhat taken aback by this measure.

The remaining political reforms are all largely expected. It’s good to see that better management of debt is one of the goals. A vague statement granted, but nice to see that it’s a priority given the current credit bubble.

But the biggest surprise for mine is the proposed legal reforms. The text of the document on these reforms is more detailed than I’ve outlined here, but moves toward establishing an independent judiciary is groundbreaking. If implemented, it will have huge implications for property rights and the conduct of business affairs.

What’s missing?

Ok, the reform agenda may be bold and broad-ranging, but what doesn’t it address? Broadly, my sense is that the new government may not be taking the risks from China’s credit bubble seriously enough. I say this because the document doesn’t address the non-performing loan problem among the banks. For those new to the subject, the state-owned banks largely funded the mammoth 2009 stimulus undertaken by the government. No-one doubts many of these loans can’t be repaid but the banks aren’t recognising the bad debts on their books.

Secondly, the reform agenda does suggest a new property tax, but count me among the skeptics. China’s property bubble has been years in the making and many government measures have been utter failures. And if the new government was serious about addressing the issue, it would’ve already done so.

Finally, the document suggests implementation of reform will be gradual. I like the fact that the Chinese leadership are long-term thinkers and don’t rush into decisions, despite pressure from the financial media and investment community to do otherwise. But China’s credit problem is critical and needs immediate attention. Time is not on their side when it comes to this issue. But I’m not sure that the Chinese leaders realise this.

Asia Confidential fully understands that Xi Jinping has to consolidate his political power before he can aggressively move forward with his reform agenda. Not much of the commentariat appreciate this important point. However, the hope here is that he can consolidate power soon to accelerate reform in the near-term.

Why the reforms are bad for markets

When the reform agenda was released on Friday, China’s stock market immediately popped. The reaction was understandable given low expectations following a vague statement issued immediately post the leadership meeting.

A mix of relief and surprise at the extent of the proposed reforms may be enough to push Chinese markets higher earlier this week. But upon further analysis, the reaction may become more mixed, if not negative.

There are a few simple reasons why I think these bold reforms will be negative for markets. First, it’s obvious that this will be net-negative for the majority of China-listed companies. Investment firm, Eastspring Investments, estimates 64% of profit from the Chinese stock market comes from sectors which have benefited from regulated pricing – such as banks and utilities. These sectors will get pummeled by the proposed reforms and consequently so will profits for the majority of Chinese-listed firms. That’s bad for the local stock market.

More broadly, I don’t think this reform agenda will reduce concerns about China’s growing debt bubble. These concerns may actually grow. The bubble is a real problem which needs concrete, immediate solutions that this agenda doesn’t provide.

Long-term, if the agenda’s reforms are implemented in full, there’s a greater chance of China growing in a more sustainable manner. That’s undoubtedly a good thing for China. However, the switch to a more consumption-led economy will almost certainly mean much slower GDP growth. Over the past decade, investment growth has averaged close to 15%, while consumption growth has averaged about 9%. If you’re committed to significantly slowing investment growth, then consumption has to make up some of the difference. And it’s very unlikely too given it’s already coming from a high base. Therefore, simple maths suggests that GDP growth slowing towards 5% is highly probably over the next five years. The world may not be prepared for this type of slowdown.

This was originally published at Asia Confidential:
http://asiaconf.com/2013/11/17/chinas-reforms-bad-for-markets/

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/665JDbE52wc/story01.htm Asia Confidential

China has unveiled its most sweeping reform agenda in more than 30 years, after a meeting of key Communist Party leaders in Beijing last week. The agenda aims to transition China to a more free-market consumer economy with fewer social controls. On the economic front, the plans include reducing the power of giant state-owned companies, removing a swathe of price controls, phasing out caps on interest rates and moving towards yuan convertibility. More broadly, the plans also outline loosening the one-child policy, abolishing the controversial “re-education” labor camps and introducing steps toward an independent judiciary.

Surprises include the commitment to reducing the power of state-owned enterprises (SOEs), as this wasn’t flagged prior to the meeting. The breadth of price controls to be removed – including water, oil, gas and power – is also a surprise. Though its made headlines, relaxation of the one-child policy was well flagged and actually doesn’t go as far as some would have liked. One of the most unexpected reforms is the abolition of labor camps. This was a key gripe of foreign governments as it allowed the detention of people without trial.

So what’s missing then? Well, the agenda doesn’t specifically address bank non-performing loan (NPL) issues. Though it’s pledged to introduce a property tax to curb the housing bubble, taxes have been introduced before with minimal impact. It also doesn’t address the problem of the so-called shadow banking system, which has grown to worrying proportions. And more broadly, Xi has made it clear that reform will be gradual. In fact, the reform document states that the proposed agenda must be implemented by 2020. The Chinese are nothing if not long-term thinkers!

As for the impact on markets, Asia Confidential is likely to be in the minority in suggesting that the bold reforms are bad news for markets. Short-term, the reforms are unlikely to alleviate growing concerns about China’s credit bubble. Long-term, the switch to a consumption-led economy will undoubtedly slow GDP growth, potentially more than most think (I view this as a positive as it will mean more sustainable growth but the GDP-obsessed economists won’t see it that way).

Moreover, the Chinese stock market itself is dominated by SOEs and cutting into their profits will undoubtedly hurt the market. The obvious trade in China remains to avoid regulated industries – such as financials and utilities – which will be stung by these reforms and stick with less regulated industries such as consumer staples and consumer discretionary.

Bold, broad-ranging reforms

A key meeting of Communist Party leaders wrapped up mid-week and the leaders then issued a statement which said little. The financial media and China bears had a field day bagging the meeting. Meanwhile China bulls groaned but urged patience as further announcements on reform might still be forthcoming.

Fast forward to Friday and the state news agency, Xinhua, released a 20,000 word document from the meeting. It was a bombshell as it went above and beyond the expectations of a even the most ardent China optimist.

Let’s go through the key items:

Market reform

• Accelerate yuan convertibility and interest rate reform.
• Push pricing reform for oil, gas, power, water, transportation, telecom & other sectors.
• Allow local governments to expand financing channels for construction projects, including the issuance of bonds.
• Set up free-trade zones in more areas.
• Improve treasury yield curves to reflect market supply and demand.

Property reform

• Push through legislation for a property tax and go ahead with further reforms at “an appropriate time”.

SOE reform

• 30% of profits from state assets will go toward public finances, principally social security. That’s up from 15%.
• Allow non-state involvement in government projects.
• Proactively pursue a “mixed ownership economy”.

Population reform

• Relax the one-child policy. Couples may have two children if either of the parents was an only child.
• Accelerate so-called Hukou (residentship) reform. This will allow people in rural areas easier means to move into urban areas.
• Study policies to delay the retirement age.

Political reform

• Abolish re-education labor camps.
• Place more emphasis on management of resource consumption, overcapacity, debt and the environment.
• Change policy of judging performance of officials primarily by growth rates achieved.
• Strengthen anti-corruption measures.

Legal reform

• Reduce the power of local governments over the court system and move towards an independent and fair judiciary.

The surprises

A number of the items were well-flagged but many weren’t. Amid the proposed market reforms, the removal of a broad-range of price controls is a surprise and welcome move. The remaining market reforms had been expected and the government has already starting implementing several of them, such as free-trade zones.

The idea of a property tax isn’t unexpected but the key will be in implementation. The fact is that the government has tried to clamp down on a property bubble with various measures for a number of years and yet the bubble has inflated during that time.

In terms of SOE reform, the increased profits going towards social security isn’t totally unexpected but is a big step nonetheless. For several years, China has shown a clear commitment to improving its social security system and this is another step in that direction. It’s a needed step given the country’s rapidly ageing population, thanks to the one-child policy.

Other reforms proposed for SOEs are somewhat vague but there is a clear commitment to reduce state involvement in the economy and correspondingly increase private sector involvement. That’s a good thing.

Relaxation of the one-child policy has already garnered international headlines. But this was well flagged for months and it’s actually not a radical reform. It’s best described as incremental. Many people would be disappointed that further loosening didn’t happen.

Hukou reform has been talked about for months. It is significant as it’s likely to increase urbanisation (people moving from country to city). That’ll drive increased consumption, an important goal of the new regime.

Studying delays to the retirement age is an interesting one. I hadn’t seen this flagged prior to the meeting, though it may have been.

As for political reforms, one of the biggest surprises is undoubtedly the proposed abolition of labor camps. These camps have been hugely controversial both within China and outside. Even China critics will be somewhat taken aback by this measure.

The remaining political reforms are all largely expected. It’s good to see that better management of debt is one of the goals. A vague statement granted, but nice to see that it’s a priority given the current credit bubble.

But the biggest surprise for mine is the proposed legal reforms. The text of the document on these reforms is more detailed than I’ve outlined here, but moves toward establishing an independent judiciary is groundbreaking. If implemented, it will have huge implications for property rights and the conduct of business affairs.

What’s missing?

Ok, the reform agenda may be bold and broad-ranging, but what doesn’t it address? Broadly, my sense is that the new government may not be taking the risks from China’s credit bubble seriously enough. I say this because the document doesn’t address the non-performing loan problem among the banks. For those new to the subject, the state-owned banks largely funded the mammoth 2009 stimulus undertaken by the government. No-one doubts many of these loans can’t be repaid but the banks aren’t recognising the bad debts on their books.

Secondly, the reform agenda does suggest a new property tax, but count me among the skeptics. China’s property bubble has been years in the making and many government measures have been utter failures. And if the new government was serious about addressing the issue, it would’ve already done so.

Finally, the document suggests implementation of reform will be gradual. I like the fact that the Chinese leadership are long-term thinkers and don’t rush into decisions, despite pressure from the financial media and investment community to do otherwise. But China’s credit problem is critical and needs immediate attention. Time is not on their side when it comes to this issue. But I’m not sure that the Chinese leaders realise this.

Asia Confidential fully understands that Xi Jinping has to consolidate his political power before he can aggressively move forward with his reform agenda. Not much of the commentariat appreciate this important point. However, the hope here is that he can consolidate power soon to accelerate reform in the near-term.

Why the reforms are bad for markets

When the reform agenda was released on Friday, China’s stock market immediately popped. The reaction was understandable given low expectations following a vague statement issued immediately post the leadership meeting.

A mix of relief and surprise at the extent of the proposed reforms may be enough to push Chinese markets higher earlier this week. But upon further analysis, the reaction may become more mixed, if not negative.

There are a few simple reasons why I think these bold reforms will be negative for markets. First, it’s obvious that this will be net-negative for the majority of China-listed companies. Investment firm, Eastspring Investments, estimates 64% of profit from the Chinese stock market comes from sectors which have benefited from regulated pricing – such as banks and utilities. These sectors will get pummeled by the proposed reforms and consequently so will profits for the majority of Chinese-listed firms. That’s bad for the local stock market.

More broadly, I don’t think this reform agenda will reduce concerns about China’s growing debt bubble. These concerns may actually grow. The bubble is a real problem which needs concrete, immediate solutions that this agenda doesn’t provide.

Long-term, if the agenda’s reforms are implemented in full, there’s a greater chance of China growing in a more sustainable manner. That’s undoubtedly a good thing for China. However, the switch to a more consumption-led economy will almost certainly mean much slower GDP growth. Over the past decade, investment growth has averaged close to 15%, while consumption growth has averaged about 9%. If you’re committed to significantly slowing investment growth, then consumption has to make up some of the difference. And it’s very unlikely too given it’s already coming from a high base. Therefore, simple maths suggests that GDP growth slowing towards 5% is highly probably over the next five years. The world may not be prepared for this type of slowdown.

This was originally published at Asia Confidential:
http://asiaconf.com/2013/11/17/chinas-reforms-bad-for-markets/

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/665JDbE52wc/story01.htm Asia Confidential

One day before the Senate’s digital currency hearing titled “Beyond Silk Road: Potential Risks, Threats, and Promises of Virtual Currencies“, BitCoin is largely oblivious to any potential regulatory threats, either at the legislative or the city level, where as reported previously the New York superintendent is in a rush to enforce BitLicenses on businesses that accept BitCoin, and moments ago crossed $500 for the first time ever. Instead, it appears that as we also reported previously, the Chinese BitCoin craze has reached the parabolic threshold, going so far as making BitCoin an acceptable payment for real estate, which means that while for the time being BitCoin becomes the alternative inflation protection medium for hundreds of millions of Chinese, all bets on how high it can get are off.

Intraday chart:

1 Year Chart:

1 Year log chart:

 

Curious where the demand is coming from? A week ago we showed a handy utility, FiatLeak, which shows where the BitCoin transactions are taking place:

 

Finally, for those curious what a “fair value” on BitCoin may be, here is what we presented a week ago, courtesy of Global Macro Investor’s Raoul Pal:

So yes: Bitcoin is volatile. Very. That much is clear. But what is not so clear, and perhaps a key reason for this volatility, is just what the fundamental, or intrinsic value of BitCoins is when one strips away the pure euphoric momentum to the upside or downside.

To answer that question, we go to Raoul Pal, head of the Global Macro Investor, and his November 1st recommendation to “Buy Bitcoins”(when BTC was $210 so nearly a 100% return in 1 week) which among other things attempts to “value BTC using a macro framework” or, in other words, the first supply-demand driven fair value assessment of BTC.

His take, and price target, in a nutshell:

A fudge, but not a stupid one

 

Let’s use a broad guesstimate. One Bitcoin should theoretically be worth 700 ounces of gold or pretty close to $1,000,000, if we adjust existing supply of both to equal eachother.

 

One BTC is currently worth 0.14 ounces of gold.

 

That gives BTC an upside of 5000 times to equal the current price of gold, supply adjusted. Clearly, I and everyone else believes that Gold may well be much higher than here in the next 5 to 10 years, thus versus the US Dollar the upside for BTC could be multiples of that.

 

Now, before you shake your head, simply go back to the chart of Gold versus the US Dollar and just recognise that it has risen 8750% since the 1920s. And just remember that Microsoft rose 61,000% from its IPO to it’s peak.

 

Considering what we know about the world, I personally believe that Bitcoin may well explode in value as more and more people begin to use it.

 

If you stuck $5,000 into Bitcoins and each Bitcoin did go up to a gold equivalent of let’s say, only 100 ounces of gold (not the potential fair value of 700), then at current prices your Bitcoin stash would be worth $3.3m.

 

Now that’s what I call a tail-risk option. It’s either worth zero or it’s worth a truly outstanding amount of money.

 

I bet you never thought you’d see this in a macro publication. But I’m serious. This just might work.

Read on in the attached pdf below (link)

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/KqiilDWMl3o/story01.htm Tyler Durden