Professional Documents
Culture Documents
A Bipartisan Belief
Reuters (11/17/10): The United States should use all available tools, including labeling China a currency manipulator, to put pressure on Beijing to raise the value of its yuan, a U.S. watchdog panel said on Wednesday. "China's deliberately undervalued (yuan) has unfairly conferred substantial economic advantages on China to the detriment of major trading partners, principally the United States and Europe," the U.S.China Economic and Security Review Commission said in an annual report.
A Bipartisan Belief
Rueters (3/12/10): Senator Charles Schumer said on Friday he plans to move forward soon on legislation aimed at stopping China from "manipulating" its currency. "Now more than ever, there is a consensus to finally confront China's currency manipulation," the New York Democrat said in a statement. "It is the single biggest step we can take to promote U.S. job creation, particularly in the manufacturing sector. We plan to move forward with revamped legislation on this issue in the coming days," he said.
A Bipartisan Belief
Activity is much easier to manipulate than consumption This affects data in many ways
When Chinese stimulus loans were made we were supposed to be in a rapid recovery by now (the much heralded V shaped recovery)
Fraud
The root evils of the system still remain With export growth tabled, the credit surge mandated by Chinas central party is running into speculation and outright fraud
Fraud
Muddy Waters LLC has initiated coverage on RINO International Corp. (RINO) with a Strong Sell rating and a $2.45 price target. RINO claims to be the leader in selling desulfurization (FGD) and other environmental equipment to Chinese steel mills. It reported 2009 revenue of $193 million. In reality its revenue is under $15 million, and its management has diverted tens of millions of dollars for its own use. We value RINO based on the cash we believe remains in the company after the most recent raise.
Fraud
Fraud
Hedge fund manager John Paulson is most famous for betting against subprime mortgages by being long synthetically engineered CDOs. He hand picked mortgage pools he thought would go bust and used investment banks to create instruments whose payoffs mirrored those mortgages and marketed those investments to other banks (this made national news in the Goldman Sachs hearings on Abacus and Timberwolf). The largest loss his fund has ever incurred is happening today.
Fraud
Paulson was the premier investor in Sino-Forest The company is a Chinese timber producer and has been exposed as nothing but paper The company claimed to had purchased a sizeable portion of land outside Lincang City in the Yunnan Province. This purchase never happened, the records verified by the city itself Its profits, as reported, and audited, are impossible because those profits are based on timber production that isnt happening on land it doesnt own. Sino-Forest is traded on the Toronto exchange.
Fraud
There are only approximately 3,000 companies which list on the New York Stock Exchange The NYSE holds itself up as the premier stock exchange in the world with rigorous listing standards Less than 100 of those companies come from Asia, with just a fraction coming from China
Fraud
A fraction of one percent of the companies listed on the NYSE are Chinese. These companies are supposed to be the best companies in that country. And several of those companies (RINO, CCME, etc.) have just been nailed as a fraudulent ponzi scheme whose internal financials were so poor that a two man research outfit could issue a report so damning that the stock price has plummeted over 50% in less than a month No one is even appearing to do due diligence on China anymore Much like the subprime boom in the US, no one cares until it all blows up
Boom Times
Chinas November car sales hit a one-month record. Total cars and light vehicles shipped to dealers reached 1.34 million, up 29% from the same month last year. Sales for the first eleven months of the year were 12.45 million, up 35%. Car sales in China have now outstripped the US for three straight years, despite an economy that is a fourth of the size Many sales are done with extravagant government incentives This is similar to mid-decade US auto sales based on 0% financing and employee pricing
Hookers In Macau
The latest report from PricewaterhouseCoopers LLP (PwC) on Casino Gaming estimates that revenues in Macau will grow at a compound annual growth rate (CAGR) of 24.7 percent, reaching USD 45.1 billion (MOP 360 billion) in 2014. PwCs outlook for the global casino market forecasts that Asias and Australias fast-growing gaming industries will account for nearly as much of the world market as the United States in four-years time.
Hookers in Macau
No city in America benefitted more from the subprime debt boom than Las Vegas, Nevada In fact, the largest annual convention for the subprime industry took place in Las Vegas Ask Steve Eisman about casino girls who owned 5 homes and stories of tables being three deep Easy money goes hand in hand with gambling
Hookers in Macau
Las Vegas Sands Macau revenue for Q3 of 2010:
$1,097,750,000
Compared to 2009:
$850,055,000
30% growth YoY in revenues and a 125% growth in net income Las Vegas, NV properties accounted for just $290,600,000
Hookers in Macau
3Q Revenue (In Thousands)
$1,200,000
$1,000,000
$800,000
$600,000
$400,000
$200,000
Hookers in Macau
Throngs swarmed the gaming hall, lining tables two to three deep. Near riots greeted the opening of a series of other new casinos in this gamblingcrazed city. Sands doles them out free to high-rollers, mainly new-moneyed Chinese driving Macaus renaissance.
Boom Times
Boom Times
The empty city of Ordos during morning rush hour. Ordos has the second highest per capita income in the country, behind Shanghai and ahead of Beijing. Hardly anyone lives there
Boom Times
New development projects in the interior of China are accelerating The Communist government wants to crack down on migration of youth to the cities of Shanghai, Hong Kong and Beijing They must create jobs for the youth in the backwards west Those jobs are in construction. Building cities, apartments, and factories which serve no purpose China must create 25 million jobs a year or risk civil unrest, the price of totalitarianism
Boom Times
According to Pivot Capital:
Excess cement capacity is greater than the combined consumption of the US, Japan and India! Idle Chinese steel factories total more than the total steel production of Japan and South Korea
Boom Times
One clear clue (regarding the rising real estate prices in China) is that the average price-to-income ratio in Beijing has reached 27:1, five times the world average, according to data from the Bureau of Statistics of the Beijing Municipality. In addition, the average price-to-rent ratio neared 500:1 in the city, far above the international alarm threshold of 300:1, which sends out a clear signal that the foundation of the real estate boom is losing stability. Shanghai, Shenzen, Beijing, Guazhong (see slide 26) Southern California, Florida, Arizona, Las Vegas
Boom Times
Massive amounts of third mortgages, given with low interest rates and little down payments Sound familiar? To keep the bubble blowing, the government has to continue to press hard on the gas
Atlas Shrugged
Imagine standing with your arms outstretched and a weight in each hand It starts out as being easy but eventually becomes excruciatingly painful The hand weights now feel like stones Your arms burn as lactic acid builds up quickly
Atlas Shrugged
Adrenaline pumps through your system To drop the weights, all that is necessary is for your arms to give ground Once they begin to drop, only supports can stop the free fall What looked like calm, stability, strength has disappeared in an instant
Atlas Shrugged
What happens on an economy wide scale? Assets become liabilities, factories idle, money dries up. The boom goes bust. All that is left is the pain. Borrowing rates skyrocket The currency collapses as money flees In a speculative boom, the catalyst for economic destruction is simply a drop in the growth rate In statistical terms, reversion to the mean Romans designed executions around the crucifixition In short, gravity always wins
Currency Devaluation
China has pegged the Yuan to the Dollar for many years It attempted to placate critics by instituting a floating rate policy recently but this new policy is more lip service than actual substance Many believe that this peg has caused the Yuan to be severely undervalued to what it would trade at if there was a free market price allowed
Currency Devaluation
Rarely has this been the case over history though Pegged currency, stability lull markets into a false sense of security, causes the market to overlook threats Pegged currencies tend to exhibit sharp devaluations during crises This has happened recently in Asia
Currency Devaluation
In 1997, the world caught Asian Flu
Thailand South Korea Indonesia Malaysia Philipines
Causes
Easy money creates inflation CPI is officially up to 5.1% Property prices are up around 10% YoY, much higher in certain areas Food inflation is near 7.5% YoY Michael Pettis has estimated CPI at over 7%
Causes
Copper, cotton, silver prices are skyrocketing Oil is at $93 a barrel Costs are exploding This is disastrous for the Chinese people, many still live in poverty (per capita GDP is 102nd in the world) It also hurts Chinese factories; textiles, toys, many of the factories which we associate with China have margins of 5% or less
Causes
China so far has taken only half measures to corral these price shocks The required reserve ratio has been raised three times This policy doesnt even combat the effects of the Federal Reserves quantitative easing policy let alone counteract the effects of Chinas stimulus policies
Causes
The true answer to Chinas inflation woes would be to curtail new bank lending This cannot happen though because it would deprive the asset bubble fire the oxygen it needs to keep burning In a country that rules over its citizens, severe inflation would be enough to change government policy Nothing scares Beijing more than an unhappy populous
Causes
Many talk about an exploding Chinese middle class and a new consumer culture on the rise We hear about China carrying the world economy going forward Missing from this analysis is any mention of demographics and the effects of government policy on the aging of the Chinese population
Causes
The One Child Policy has been in force since 1978 It is estimated that a woman is forced to have an abortion under the law every 2.4 seconds That amounts to 35,000 a day New York City is aborted in nine months Overall, it is estimated that 400 million children have been killed since the policys inception
Causes
There are other effects besides the staggering loss of life Boys are preferred over girls. Many first children are killed if they are daughters This has led to a gender inbalance within Chinese society further deteriorating the birth rate within the country What does this mean for the domestic marketplace?
Causes
It will shrink drastically The working age population will begin to decrease within the next few years China has no social security program The burden of caring for the elderly falls to the children We are seeing a classic pyramid trap occurring
Causes
Two parents care for four parents At any one time we can expect only two Chinese workers to be responsible for one retired pensioner That is worse than the ratio in the United States The fiscal responsibilities for carrying on our entitlement programs has caused the release of the Simpson-Bowles recommendations
Causes
We are also seeing the fiscal effects that result from demographic changes in Europe and Japan These countries are rightfully identified as slow growth nations Big government is crashing, retirement ages are being raised and benefits cut Yet the largest government is viewed as immune to this trend? Why?
In Conclusion
Adam Smith wrote about China: China has been long one of the richest, that is, one of the most fertile, best cultivated, most industrious, and most populous countries in the world. It seems, however, to have been long stationary. Marco Polo, who visited it more than five hundred years ago, describes its cultivation, industry and populousness, almost in the same terms in which they are described by travellers in the present times.
In Conclusion
All travellers agree with the low wages of labour, and in the difficulty which a labourer finds in bringing up a family in China. If by digging the ground a whole day he can get what will purchase a small quantity of rice in the evening, he is contented. The poverty of the lower ranks of people in China far surpasses that of the most beggarly nations in Europe.
In Conclusion
Any carrion, the carcass of a dead dog or cat, for example, though half putrid and stinking, is as welcome to them as the most wholesome food to the people of other countries Marriage is encouraged in China, not by the profitableness of children, but by the liberty of destroying them. In all great towns several are every night exposed in the street, or drowned like puppies in the water This was written in 1776. It could easily be written today