China’s Stocks Soar as Chinese Officials Scheme, Average Salaries Fall, Fed’s Lose/Lose Situation, and More!

August 21, 2007 by Addison Wiggin & Ian Mathias

  • Shanghai index soars ahead, credit crunch be damned…
  • Chinese government forbids monks to reincarnate without approval from Beijing… no, really
  • Fed stuck between the hard place of credit demand and the “granite facade” of INFLATION… new chart shows it could be worse than Bernanke lets on…
  • Average Joe makes less now than he did in 2000… White House blames tech bust; IRS blames the rich
  • “Leading indicators” show a stronger economy… but compared with what?
  • “Viva la ‘paperless’ revolucion!”: A microcap for your watch list

The Shanghai index was the biggest mover in markets last night. The SSE rebounded from recent losses with a whopping 5.3% gain — its biggest one-day gain since June 8, 2005.

The Shanghai index has escaped the global credit crunch fairly unscathed.

Since the beginning of July, the SSE has rallied 30% against the Dow and S&P.

China’s market has been so hot that banking officers there raised rates this morning for the fourth time in 2007. Effective tomorrow, the one-year lending rate will increase to 7.02% and the one-year deposit rate will rise 0.27%, to 3.6%. The Bank of China said again that it would like to see the economy slow, for fear of overheating.

Good luck… China’s economy grew in the second quarter at the fastest pace in 12 years.

But here’s the kind of footnote that makes covering China so nutty. Yesterday, the Chinese government passed legislation that prohibits Buddhist monks from reincarnating without government authorization.

While generally oppressive and silly, this bizarre act of totalitarianism is aimed at the Dalai Lama — who after death will be “reborn” in another person. When the Dalai Lama dies, the Chinese government will effectively be able to choose the successor (since they now command the “right” to reincarnate), thus finally gaining control over Buddhist Tibetans.

For his part, the Dalai Lama assures the world he will chose not to be reincarnated in China.

Most other markets around the world rested after a long week of trading.

The Dow and S&P ended a mostly down day of trading with a last-minute surge, pushing the Dow to 0.3% gains and the S&P to just about even for the day. Eurozone indexes finished higher on the day, with gains averaging about 1%. With the exception of China, Asian indexes fared similarly.

“Most investors — especially Wall Street’s professional investors — would like to believe that the worst has passed,” writes Eric Fry in this morning’s Rude Awakening. “They would like to believe that the Federal Reserve can cure whatever ails the U.S. economy. They would like to believe that the $200 billion that the Fed has pumped into the U.S. banking system — along with a half-percent interest rate cut last Friday — will provide enough ‘liquidity’ to cause normal lending practices to resume.

“We would like to believe these happy thoughts also,” continues Eric, “but we don’t. Instead, we believe that the Fed finds itself between a hard spot and a granite facade. No matter what the Fed does, borrowers will continue to default on the home loans they never should have obtained in the first place. And no matter what the Fed does, borrowing money will become an increasingly costly and difficult endeavor.

“We would conclude, therefore, that no matter what the Fed does, share prices on Wall Street will favor the downside over the upside. Enjoy the rally, but don’t expect it to last very long.”

The “hard spot” faced by the Fed, as we pointed out yesterday , is the fact that the market forced the fed funds rate down 3/4 of a point last week in response to the credit crisis on Wall Street.

Now, the “granite facade”: inflation.

Our friend John Williams from recently applied 1980s style accounting methods to the current inflation stats and, well… it’s a doozie:

The blue line shows inflation if you used traditional methods for measuring inflation going back to 1980, before the Bureau of Labor starting monkeying with “hedonic” price adjustments.

Here’s the rub. If the Fed continues to buckle to Wall Street’s demand for cheaper credit, inflation will continue to rise unabated. The victim in all this is sitting in your wallet with a smiling George Washington printed on it in green.

Since the Fed cut the discount rate, the dollar’s rally has stalled. The euro is back up this morning to $1.35. And the pound sterling is creeping back toward $2. Of interesting note, the one big central bank that has managed to stay out of this recent liquidity pumping action is the Bank of England.

Yesterday, the index of leading economic indicators rose 0.4% in July, which suggests marginally better economic conditions for the rest of 2007.

But it’s small solace given the index’s performance since late 2004:

And if housing continues its current trajectory, you can expect those indicators to continue down. Foreclosure filings in the U.S., for example, this July nearly doubled from those in July 2006.

Approximately 179,599 Americans filed last month, up 93% from this time last year. RealtyTrac, the purveyor of these findings, originally forecast a 33% increase in foreclosures from 2006-2007, but has since doubled it to 60% — up to 2 million foreclosure filings by the year’s end.

Forty-three states have seen year-over-year increases in foreclosure filings. But over half of the nation’s filings have come from just five states — California, Florida, Georgia, Ohio and Michigan. Who could have seen that coming?

And there’s this pressure, too: The average American earned less in 2005 than they did in 2000, says the IRS.

The Average Joe made $55,238 in 2005, down nearly $500 from the inflation-adjusted average 2000 salary of $55,714. The slump in salaries marks the first multiyear period of decreasing total income since World War II.

The White House, curiously, blamed inflated tech wages during the tech boom. Not a word about global wage rates being driven down by competition.The only income growth during this period was enjoyed by people who earn more than $1 million a year. “These individuals,” says the NYTimes “who constitute less than a quarter of 1 percent of all taxpayers, reaped almost 47 percent of the total income gains in 2005, compared with 2000.” That fact will no doubt be made a source of contention by “progressive” candidates in the coming election year.

“In 2003, for the first time in history, more people paid their taxes electronically than with traditional cash or check,” says Jim Nelson of The Sleuth. “Electronic payments — those made over the Internet or via wire transfer — are expected to increase 12.4% annually through 2009.” After all, the government now takes Visa…

Apart from being a telling trend, Jim and Gunner have a few penny stocks lined up that will profit from the paperless revolution. Jim recommends you put Tier Technologies on your watch list. This undervalued financial transaction processing company is currently tied up in a nasty lawsuit that could wash out the whole business, but if it makes it out, Tier could end up with a great position in a booming market. For more, read Jim’s update here.

“Why is it that there is never a mention of Canada in any of your 5 Minute summaries?” asks a reader. “Maybe it’s because we up here in the north only supply the larger portion of oil used by the U.S. of A, or is it because our TSE index doesn’t rate on a global standard with the likes of Pakistan, Australia and other no-name countries, or possibly in Addison’s opinion we are part of the USA. Comments, please?”

The 5 responds : Hmmn… we really did think that Canada was just a northern state, until, shock of all shocks, on our way back from a week covering the natural resources markets in Vancouver , some uppity character in a blue uniform asked to see our passport before we could get on the plane. Good thing we had it with us.

You Canadians do have good cheese, though.

The number of homes sold in Canada is projected to rise 8% this year , says Royal LePage Real Estate Services. Along with sales, prices are expected to skyrocket, too… by an average of nearly 10%. Western Canada appears to be the heart of this boom. Go Vancouver.This news seems especially impressive in light of this year’s housing stats in the U.S. – sales fell 5.7% thus far in 2007.

“I wonder if anyone else has noticed,” wrote a reader in response to our incredible animated (borrowed) chart that depicted a Chinese demographic crisis “that along about 2015 China will have one very large population cohort at about age 45 — the peak of industrial and commercial productivity — and another one at age 20-25, ideal military age.

“The second peak is very heavily biased toward males, many of whom will never find a mate, due to the abortion of so many girls during the most virulent ‘one-child’ years. This would seem to be an extraordinarily dangerous demographic configuration.”

The 5 responds: Amen.

We covered the impact of rising cohorts of both young productive earners and aging retirees on political and economic systems throughout history in the book Financial Reckoning Day we wrote back in 2002 with Bill Bonner. It’s an interesting, albeit glacial, trend whose impact is hard to see, but unstoppable… more to come here in The 5.


Addison Wiggin
The 5 Minute Forecast

P.S. Bill Bonner, by the way, has a new book coming out in early Septembet called Mobs, Messiahs and Markets. You can preorder on Amazon if you like. Or we’ll let you know when it’s available.

P.P.S. Look for Chris Mayer’s second of five major investment trends report in your e-mail box this afternoon. Click here if you missed yesterday’s.

Or, check out Mayer’s Special Situations report on “America’s Next Energy Miracle.”


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