The FT has this update from Jim Chanos and his opinion that China will crash. It turns out that he was really focusing on the property market.One part of the call I did not understand was that since Chinese markets are way below where they were a couple of years ago that they would crash seemed like a low probability.
Last night I was looking at some Chinese stocks that are all in a similar business, the names don't matter and so I have removed the tickers from the chart, and as you can see they are all still down a ton from a couple of years ago.
This is not to imply they cannot go down from here but as a rule of thumb buying something that is two years and 60% from its high that has a reasonable fundamental basis for future success is not likely to be the single dumbest thing you ever do.
16 comments:
I cannot stop being curious about what's going to happen to China when eventually the liquidity boom slows down a bit. It's so interesting to watch an emerging market grow up. The resource/food issue and the idea of ordinary everyday people parking their savings in real estate alone are fascinating.
I think you are correct about China for now, but volatility is to be expected.
Am I missing the obvious, but doesn't the fact that China has a surplus of trillions of dollars count for something ? -- esp. in contrast to the tremendous debt owed by just about every other major nation.
Roger, RW, Mike C.,
China does not look as overvalued as the BVSP. On 6 January, 2010 I wanted to warn you that my program was flashing a red signal. However, I do not know that market, so I left it alone. I watched Nicole Elliott today on CNBC Europe and she talked about the brazilian market.
Best,
Jeff from Milan, Italy
Nicole was also down on the Hang Seng.
Anon 3:30PM,
Within broad boundaries the issue of whether a country has a budget surplus or a deficit is not a highly significant statistic and a surplus will not prevent economic contraction if demand for goods falls below productive capacity. That reality can be masked for a time by financing the building of things that are not used or will be blown up in a war but that's about it.
It bears repeating: Countries w/ their own currency do not function the same as any other economic entity and analogies to entities such as households or corporations because they are more familiar must mislead.
3:30 again.
RW -- I wasn't clear but I was referring to China's actual reserves. If this is not relevant, does it mean that the tremendous national debt of countries (relative to their GDP) like the Japan, US, and Britain are not important ?
Anon 3:30PM, I understood what you meant and, no, debt is not unimportant but the large numbers can mask a fundamental reality that every investor really needs to understand: Debt is not the same for country/federal governments.
The difference is that a sovereign government is the monopoly provider of a nonconvertible currency of issue with, in most cases, a floating rate (since April 15, 1971 in the US): States, corporations and households can not produce currency, they must use the government's. The government as the sovereign issuer does not need to tax or borrow in order to spend so any analogy between household budgeting and government monetary and fiscal policy is not only misleading it is a major category error.
Since US currency is not convertible (e.g., into gold), the government is not revenue constrained in its issuance of it and that means the US government, as the issuer, cannot default on its debt nor can it become insolvent.
Why tax then? Because excess money must be sopped up or there will be inflation which, in this context, typically occurs when the government issues more currency than the public wishes to save. However, as long as there is a way to sop up or sequester excess cash (a sovereign wealth fund will serve here too) then national income will be insufficient to purchase all of the goods and services that can be produced at full capacity and matters proceed normally.
But should the gap between goods/services and what can be produced grow then unemployment increases and the entrance to the liquidity gap opens. Budget surplus or deficit is largely irrelevant here: Let that trap close shut and there is not only economic contraction but households and firms become hoarders, reluctant to spend, leading to deflation and eventual economic depression.
This is basic national accounting 101 for any and all countries and while producing a currency that other countries also use for trade and reserves as the US does can complicate matters it does not alter the fundamental distinction.
Failure to understand this difference harms an investor's ability to accurately assess currency movements and the relative value of a country's assets. This same failure when spread throughout a country's citizenry can create political pressure for serious fiscal policy mistakes such as spending too much when the national economy is in surplus and spending too little when the output gap grows and the national economy is in trouble.
If China can neither (a) generate enough internal demand nor (b) grow imports then its national account will fall and so, eo ipso, will its economy.
Sorry for the length of reply but, in the absence of a 4th Estate willing to do its job and a host of know-nothings willing to write or speak as if they know something, it has become necessary ...probably insufficient too but we do what we can.
Oops, meant liquidity trap in the above, not liquidity gap.
Roger is right in that Chanos is talking real estate (mostly) at least as I understand it.
It really doesn't matter about the excess reserves or government debt levels when you are talking about an asset class tied to wage growth (or inflation). Relative to the average income of a Chinese citizen, housing is astronomical. I can't remember the source, but I recall reading a 5 or 6 to 1 ratio. Just last year, real estate climbed 68%.
I don't care if the GDP was 10%. If the incomes or inflation doesn't keep up with the appreciation in prices, then you will eventually experience a deflation.
RW,
what you are saying is: V=PQ/M.
As money is increased the velocity decreases therefore a liquidity trap. Mopping out excess money will increase the velocity.
Best,
Jeff from Milan, Italy
Jeff,
Not entirely but, yes, the theory of money provides a good foundation. However it also seems true that government fiscal policy can have a significant impact on price level and, if you add the growing complexity of financial intermediation and cross-border trade to the mix, you wind up with a blend of monetary theory and fiscal theory that is not fully resolved as far as I can tell: Some economists view the two frameworks as complementary (I do too FWIW), other economists strongly disagree and regard them as contradictory, and some don't like either framework; but that's their debate, as a non-economist it is not mine.
From my POV as an investor (and a citizen) there are elements in each framework that help explain how central banks and governments interact with markets, each other and international trading partners and, in this instance, why comparing modern government finances to the finances of other entities could lead to significant errors in fiscal judgment; i.e., IMO what got us into this mess was as much a result of the real cost of the $USD being used as a primary international reserve masked by easy monetary policy as it was US government overspending and under-regulating for the past decade.
Knee-jerking the reins on one side w/o due attention to the other (pardon the mixed metaphor) would be foolish in my view but countries such as China who relied on the $USD to keep their own inflation in check (as much a consequence of their fiscal polices as their monetary ones) are only slightly better off than we are and frankly have more riding on the outcome; e.g., as angry and wacky as politics gets over here, and as ragged as the safety nets are, we manage to muddle through somehow (although I'm not always sure how) but China has different traditions and the lid has been on the pressure cooker a long time.
Cripes I'm becoming long winded. All right, that does it, too much time at the desk; more walks in the rain and no comments for awhile, I promise. Jeez
@RW,
The difference is that a sovereign government is the monopoly provider of a nonconvertible currency of issue with, in most cases, a floating rate (since April 15, 1971 in the US): States, corporations and households can not produce currency, they must use the government's. The government as the sovereign issuer does not need to tax or borrow in order to spend so any analogy between household budgeting and government monetary and fiscal policy is not only misleading it is a major category error.
Since US currency is not convertible (e.g., into gold), the government is not revenue constrained in its issuance of it and that means the US government, as the issuer, cannot default on its debt nor can it become insolvent.
Why tax then? Because excess money must be sopped up or there will be inflation which, in this context, typically occurs when the government issues more currency than the public wishes to save.
As I continue on my quest to understand the Matrix that is government central banking fiat money and the inflation/deflation issue, help me out here on what you are saying.
I just don't follow. If we are all worried about deflation, depression, contracting aggregate demand, and the government is not constrained, then why not just have the government mail a check to every family in the U.S. for 100K? I'm only half-kidding here. That would certainly boost demand and economic activity, right? Companies would pick up hiring to meet the demand of all these people now running around with an extra 100K?
Not trying to be argumentative, just trying to understand. My instincts tell me the law of there is no free lunch must put some constraints on government.
MikeC,
And here I promised to shut up for awhile [g] but just cuz you asked: Yes, of course there are constraints, not the least of which would be a significant depreciation of any currency dispensed on that scale; meaning the extra $100K folks were running around with would no longer be sufficient to purchase $100K of goods and services (if you see what I mean).
OTOH giving folks money to spend who need to spend it right away (AKA poor and working folks) is a very good way to improve money velocity and the probability a weakened economy will catch fire again: This is one explanation for why the economy historically does better under Democratic administrations (you could look it up, really).
TANSTAAFL is alive and well -- running chronic (structural) deficits is going to cost a country someday -- but sometimes you can make that reality hurt less and sometimes you can do some good besides too; timing is half the game but I have little confidence a feckless, reckless congress and a young president will get the mix right, more's the pity.
Hey RW,
Don't worry so much about being long winded. I appreciate the insight.
Mike
SIRI is way down from its high, below a buck for over a year plus. Some say that it's true valuation is $0.25 but it trades at $1+. Can it be a bubble stock even though its down so far and so long ago from its high.
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