Dave Gonigam – June 5, 2012
- Seriously? China bans Web searches for “Shanghai Composite Index”
- Marc Faber, Frank Holmes, Chris Mayer all weigh in on the China slump… an update on the only three indicators that matter… and the best way to invest around the slowdown
- No Westerners allowed: China and Russia plot their next moves to escape the U.S. dollar’s clutches
- An eye-popping gold chart… a reader’s cautionary tale about capital controls… the “clash of generations” revisited… and more!
For the moment, China’s government has banned the search term “Shanghai Composite Index” from the country’s popular microblogging sites.
A search on Weibo, China’s version of Twitter, turns up this message: “According to the relevant laws, regulations and policies, the results for this search term cannot be displayed.”
Yesterday was the anniversary of the Tiananmen Square crackdown on June 4, 1989. The Shanghai Composite fell precisely 64.89 points.
Get it? 6… 4… 89.
Nor did the coincidences end there. The index opened at 2,346.98: The 23rd anniversary followed by the date, albeit a bit scrambled. “Whoa, these figures are too freaky! Very cool,” said one blogger quoted by Reuters.
Maybe it’s just us… but moves like this don’t exactly speak of a “business friendly” environment. We eagerly await what Niall Ferguson, the Harvard historian, has to say about China and the rule of law when he speaks to our confab in Vancouver next month.
Not that Americans should feel too smug, given the words of Sen. Joe Lieberman two years ago: “Right now China, the government, can disconnect parts of its Internet in case of war and we need to have that here too.”
Or maybe in case of the Dow crashing 911.01 points on some random Sept. 11? Just sayin’…
We’re not even sure what the Chinese government is feeling so defensive about.
As of last Friday, the Shanghai Composite was the best performer year to date among 22 asset classes tracked by Frank Shostak and the crew at Applied Austrian School Economics:
Going forward, however, is another matter entirely.
“There is a very meaningful and more substantial slowdown in China than the official statistics would suggest,” Gloom Boom & Doom Report editor Marc Faber tells CNBC.
“Probably there is, at the present time, hardly any growth at all. If you look at electricity production, you look at cement production, steel production, it’s essentially flat to down over a year ago. And these are very important indicators. You look at the demand for iron ore and copper coming from China, it’s all essentially flat to down.”
Slowing demand for those commodities eventually translates to slowing production elsewhere. “So you have a vicious spiral going through the global economy, which means that corporate profits in the U.S. — and don’t forget that 40% of corporate profits [come from] outside the U.S. — corporate profits will disappoint.”
[Ed. Note: Dr. Faber is another of the headliners at this year’s Agora Financial Investment Symposium in Vancouver. We’ve had a handful of cancellations, so we still have a few seats remaining. The dates are July 24-27. Registration details — and a glowing endorsement from Dr. Faber — at this link.]
About China’s electricity production: Readers with long memories will recall that figured into one of the big WikiLeaks revelations 18 months ago.
At that time, we learned of three economic indicators followed keenly by Li Keqiang — the man most likely to succeed Wen Jiabao as premier. Forget GDP or consumer prices: For him, these three things are all he needs to know when taking the pulse of China’s economy:
With that in mind, where do things stand? We turn to U.S. Global Investors chief and another perennial Vancouver favorite, Frank Holmes.
- “Power production in April,” Frank writes, “was slightly positive on a year-over-year basis, but still remained weak.”
- On May 31, railroad freight volume was released for April, and showed an increase of 3.3% over last year, the same reading as March
- Meanwhile, “New bank loans are down 7.8% year over year as of May 11, which we believe was the primary reason that China cut the required reserve ratio on May 12.”
Conclusion? All three indicators are near five-year lows… and below their three-month moving averages.
“Keep in mind,” says Mr. Holmes, “that negative news in the media may be a danger sign to some people; to Chinese policymakers, it’s a signal to act. We believe the next government policy cycle might be just around the corner.”
“China is talking stimulus,” says Chris Mayer, nodding his head in agreement. “That means it will spend a lot of money on government-directed projects. Some think this is a good thing. I fail to see how.”
According to yesterday’s Financial Times, previous stimulus efforts have larded China down with, among other things, an overcapacity of trains… the world’s longest bridge… the largest indoor ski venue (eat your heart out, Dubai)… the world’s second- and third-tallest skyscrapers under construction… and iron ore ships too big to dock in Chinese ports.
“So yes,” says Chris, “the new stimulus spending will get the construction crews and blast furnaces cranked up. It will drive demand for copper, steel, iron ore and the rest. The Chinese will burn more coal and oil than they otherwise might have without the stimulus.”
“The flaw in stimulus spending is that it misrepresents what real economic growth is all about. Growth doesn’t come from bureaucrats building bridges and railways. Real growth comes from entrepreneurs and businesses who invest savings wisely in meeting the wants and needs of consumers.”
“These things always end badly. China cannot repeal the laws of economics.”
Chris’ forecast: Chinese stimulus won’t deliver a sharp bounce in commodity prices. But there are still ways companies can create value.
“Those kinds of ideas,” he says, “are best found outside of mining. No amount of brilliance can overcome a decline in what a miner produces. What commodity names we’ve added have been pick-and-shovel plays on mining and oil and gas.”
“Thinking five years out,” Chris concludes, “China’s economy will be much bigger than it is today. To invest today, you have to look out several years and think about what our businesses can achieve in terms of growing cash flows, dividends and asset values per share. On that front, I’m more optimistic.”
Chris named three of his favorites yesterday for subscribers of his premium advisory, Mayer’s Special Situations. Access here.
Meanwhile, China moves to a new phase of its plan to diversify out of the dollar… as premier Wen Jiabao meets today in Beijing with Russian President Vladimir Putin.
Nearly 18 months ago, we chronicled how China and Russia agreed to bypass the U.S. dollar in their international trade.
That process is rapidly gathering speed. “This is a growing trend,” Putin adviser Sergei Markov tells The Christian Science Monitor, “to denote deals in yuan or rubles, instead of going via the dollar as in the past, and it reflects growing confidence in our partnership.”
Look for even more dollar talk tomorrow as Wen and Putin convene the annual meeting of the Shanghai Cooperation Organization — a no-Westerners-allowed club of nations led by China, Russia and the central Asian “Stans.”
Events are moving quickly, coming on the heels of China and Japan launching trade in yuan and yen last Friday. China keeps firing new volleys in its war on the dollar; best prepare yourself for the consequences.
Major U.S. stock indexes are treading water today. Traders waited in vain for an announcement from an “emergency conference call” among finance ministers and central bankers from the G-7 countries. Topic: Spain and Greece.
In the end, all they agreed to do was “speed up their efforts to resolve those problems,” in the words of Japan’s finance minister. Par for the course with what Addison has labeled “the longest, most-boring financial crisis in history.”
Gold is likewise moving little. At last check, the bid is $1,615. Silver’s gotten a little bump, though, to $28.45.
One more China item, if you’ll indulge us… because the latest number on the chart is an eye-popper.
Looks as if the Chinese took advantage of gold’s springtime swoon… because China’s gold imports via Hong Kong grew 62% from March to April. At 101,768 kilograms, the monthly total was the second highest ever — eclipsed barely by the figure last November.
By the time you read this, California might be home to a gleaming new municipal bankruptcy. Indeed, Stockton — population 292,000 — would be the largest U.S. city to land in bankruptcy court.
The final straw came last week when Wells Fargo repossessed the new city hall. Just as well, since the city was too broke to move from the old one.
Between a huge downtown redevelopment project and the usual overpromising on city employees’ retirement and health care, Stockton is $977 million in the red. The city council will decide tonight whether it’ll authorize city leaders to throw in the towel if they can’t come to terms with creditors by the end of the month.
As Addison has long said, the mother of all financial bubbles makes itself felt on the local level first.
“The new reality in Argentina is old reality in Venezuela,” a reader writes after yesterday’s musings on capital controls.
“Granted, things have calmed down, but up until not too long ago you would have — at every international airport in Venezuela — national guardsmen (not the same as in the U.S. They’re more like a national police) going through your cash, counting, asking for proof of exchange or purchase, counting your foreign credit cards, interrogating you, threatening with confiscating cash and credit cards…”
“Eventually, things calmed down a bit as (I guess) they found it difficult to enforce where someone ‘bought’ U.S. dollar bills. Still, to this day there are very strict exchange controls to the point where you can’t even mail a check to the U.S. (FedEx/DHL packages are routinely opened in search for such subversive items).”
“Argentina is probably being coached by the Vene-Cuban band of thugs.”
“I’d love to tell them I deposit U.S. dollar/bank checks with my iPhone…”
“I would like all of those who focus on ‘the government’ owing them their Social Security to sit back and reframe their thought process,” a reader implores.
“‘The government’ only has funds that they get from the citizens — in the case of Social Security and Medicare, the payroll tax on the younger working generations. Since those generations aren’t doing so well, the system is running low, and pretty soon the taxes will not cover the payments.”
“To those who are collecting now, stop thinking about what you paid. That supported your parents and grandparents in their time, and the percentage of your income was not high. Instead, think about how much of your children’s and grandchildren’s income is going to support you.”
“With total payroll tax contributions nearing 20%, it is no wonder that there is a huge generational war on this subject. There isn’t any ‘magic’ money that the government miraculously produces. It is a massive tax on those younger generations, and even at those levels, it is insufficient to support the programs in their current form. Recognize the reality and start thinking about what real solutions might look like.”
“I really wish,” another reader chimes in, “someone at Agora would take on the subject of the ‘clash of generations’ that you refer to in the May 30 issue of The 5.”
“I’ve believed for a long time that it is the ‘Greatest Generation’ (those about dead now) that have really screwed us all. I also believe that there really is a sinister cohort of the baby boomer generation that is the leading tail (those retiring now) that identify with and mimic the behaviors of the prior generation of dying ‘Greatest’ oldsters.”
“These people are not, nor should be considered to be, baby boomers. They are some sort of evil hangers-on that do not share the same values of the boomer generation that is really defined by the Vietnam War protests, the sexual revolution and the rise of LSD.”
“This leading tail of non-boomers were already out of college and having babies when the real fun started and the boomer generation was truly defined. These folks are the neocons and Clintonistas who really didn’t inhale and would prefer to sing along with Mitch Miller than play an air guitar along with Pink Floyd’s ‘Comfortably Numb.’ They are in leadership positions in the House and Senate and are just now turning about 65 years old.”
“These people can’t be trusted and we will not see real change in this country until the real ‘boomers’ take over. It boils down to a simple fact: You can’t trust anyone over 65 for the next five or six years.”
The 5: Not if they hold public office. But we’d submit that’s true of any age cohort — past, present or future. Heh…
Regards,
Dave Gonigam
The 5 Min. Forecast
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