Dear Higgie,
Higgenbotham wrote:
> Shanghai made a new high last evening and closed down 5% this
> morning (US time). 5% is a big move down.
> The reversal occurred 1 day ahead of my Tulip Mania model. The
> model indicated the high would have occurred this evening, July
> 29, in the US (the morning of July 30 in Shanghai) instead of last
> evening, July 28, in the US.
> The Category 5 financial hurricane may be hitting landfall. We
> can't know for sure though.
In the last couple of days, following your forecast and aedens'
postings, I've been looking at some of the issues in China's economy.
One important indicator has been copper prices, which appear to be
peaking. China has been using stimulus money to stockpile copper and
other commodities, but by now has stockpiled more than it can use.
http://www.bloomberg.com/apps/news?pid= ... EtKUzeuRFc
Another issue is that the rush to use stimulus money is causing
people rush construction projects, to use the money quickly, rather
than take more time to do it right.
One spectacular failure is a building in Shanghai that seems to have
toppled over on its side.
http://blogs.wsj.com/chinajournal/2009/ ... ly-intact/
> According to Shanghai Daily, initial investigations
> attribute the accident to the excavations for the construction of
> a garage under the collapsed building. Large quantities of earth
> were removed and dumped in a landfill next to a nearby creek; the
> weight of the earth caused the river bank to collapse, which, in
> turn, allowed water to seep into the ground, creating a muddy
> foundation for the building that toppled.
In fact, in Shanghai, "While the real estate market appears to be is
in the midst of a boom, defaults among developers are also beginning
to rise. Small and medium developers are resorting to faking sales to
get bank loans to relieve their funding pressure."
http://www.chinastakes.com/2009/7/real- ... ctics.html
This is interesting from a theoretical point of view because it's a
very powerful illustration of the Law of Diminishing returns.
In this case, China has been pouring money into certain kinds of
projects, but other ingredients are missing -- particular the demand
for the products being developed. The result is that the people are
burning through the money in any way possible, without concern for
whether the result is of any use to anyone.
This has led to a Chinese economy that's completely unbalanced,
according to one one well-known analyst, Jeremy Grantham, who says,
"My colleague, Edward Chancellor, strongly suspects that the Chinese
economy is dangerously unbalanced and very likely to come unhinged in
the next few quarters, surprising the pants off investors."
http://www.businessinsider.com/henry-bl ... pse-2009-7
Chinese officials themselves are also concerned that the stimulus
money is just being channeled into new real estate and stock market
bubbles.
http://ftalphaville.ft.com/blog/2009/07 ... g-bubbles/
For many years, China has had an export-led economy. With the
downturn in the US, China's economy has been in chaos. Here's a
graph of China's trade balance:
http://www.econbrowser.com/archives/200 ... res_4.html
People often ask me what's going to happen to China, especially since
China has been a creditor nation, while the US has been a debtor
nation. The implication was that China would do well, while the US
would do poorly. But all you have to do is look at America in the
1930s, to see that a creditor nation suffers just as much in a Great
Depression.
Chinese officials are now trying to change the Chinese people from
savers to spenders. Fat chance of that. China is in the middle of a
financial crisis and, just like Americans in the 1930s, the Chinese
are going to change from savers to super-savers.
In fact, I still believe that the best way to understand what's going
on in the world right now is to look at "The Bubble that Broke the
World," with China today playing the role of the US then.
** The bubble that broke the world
** http://www.generationaldynamics.com/cgi ... rett071009
However, I'd like to go back to the earlier discussion of Richard
Koo's presentation of the fiscal stimulus programs:
** Fiscal stimulus programs in 1930s and today
** http://www.generationaldynamics.com/cgi ... 01#e090401
and I'd like to quote a few paragraphs:
> Audience question: Where would the stimulus money best be spent?
> Answer: Historically, the best way is military spending, because
> it creates demand, without creating supply. That's why economies
> recover quickly. But if you increase both demand and supply,
> then they start chasing each other. If you want the smallest
> budget deficit, and largest bang for money, that's the best way.
> Koo said he's not here to advocate military spending. "There are
> lots of roads and bridges here needing repair." ...
> Koo's most dramatic remarks came at the very end. FDR's spending
> programs didn't end the 1930s Depression. World War II did.
> Spending on the military, according to Koo, gives the highest
> "bang for the buck."
> Koo said Hitler did everything right -- spending massively on the
> military. (He would be forgiven for not mentioning that probably
> the Japanese did everything right as well.) He expressed the hope
> that this worldwide financial crisis would not allow dictatorships
> to get ahead of democracies.
> What dictatorships is he talking about? Well, maybe Russia, but
> you can be sure that he's thinking of China.
> A few days ago, ..., I discussed the rapid military buildup that
> China is pursuing.
> China is now embarking on a very aggressive fiscal stimulus plan.
> China doesn't say how much of the stimulus is going into the
> military. But China has already been increasing the military
> budget by 10-20% a year for years, as they prepare for war with
> the United States. I think it's quite certain that China will
> take advantage of this fiscal stimulus program to further increase
> military spending.
> In the US, by contrast, President Obama is planning to cut
> weapons systems. As the world becomes increasingly dangerous, the
> US is becoming weaker.
> I don't know whether Koo intended this when he made those final
> remarks about Hitler, but he illuminated a fast-approaching world
> in which the US and the world's democracies will be stumbling
> forward with social programs and bridges to nowhere, while China
> is turning into a high-powered military machine, preparing for
> war.
However else China is spending its fiscal stimulus money, there's
little doubt in my mind that a lot of China's stimulus money is going
into the military, preparing for war with the US.
Returning now to the overnight fall in the Shanghai stock market,
we'll have to wait and see where that goes. It's possible that
Chinese investors, who were burned a couple of years ago when the
Shanghai market collapsed, will now cause a panic out of fear of
being burned again. The same thing could happen on Wall Street.
We'll have to see.
Sincerely,
John