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SHANGHAI — James S. Chanos built one of the largest fortunes on Wall Street by foreseeing the collapse of Enron and other highflying companies whose stories were too good to be true.
Now Mr. Chanos, a wealthy hedge fund investor, is working to bust the myth of the biggest conglomerate of all: China Inc.
As most of the world bets on China to help lift the global economy out of recession, Mr. Chanos is warning that China’s hyperstimulated economy is headed for a crash, rather than the sustained boom that most economists predict. Its surging real estate sector, buoyed by a flood of speculative capital, looks like “Dubai times 1,000 — or worse,” he frets. He even suspects that Beijing is cooking its books, faking, among other things, its eye-popping growth rates of more than 8 percent.
“Bubbles are best identified by credit excesses, not valuation excesses,” he said in a recent appearance on CNBC. “And there’s no bigger credit excess than in China.”… continue here.>>
Meet the Bialystock & Bloom of the Mortgage Meltdown
by ilene - April 9th, 2010 8:16 pm
Meet the Bialystock & Bloom of the Mortgage Meltdown
Courtesy of Joshua M Brown, The Reformed Broker
This is an incredible story. I recommend you find the time this weekend to read the entire article (Pro Publica) about how hedge fund Magnetar figured out a way to invest in and even help create some of the most horrid debt bombs of the credit bubble era.
Like Broadway’s scheming Bialystock & Bloom (The Producers), Magnetar figured out a way to ensure the collapse of their own product – and to profit immensely from these failures in a self-funded, diabolical way.
The slant of the article is that had they been stopped, the bubble/ crisis would’ve been over and done with earlier and easier – but that’s debatable.
Have at it and prepare to lose a bit more of your innocence…
In late 2005, the booming U.S. housing market seemed to be slowing. The Federal Reserve had begun raising interest rates. Subprime mortgage company shares were falling. Investors began to balk at buying complex mortgage securities. The housing bubble, which had propelled a historic growth in home prices, seemed poised to deflate. And if it had, the great financial crisis of 2008, which produced the Great Recession of 2008-09, might have come sooner and been less severe.
At just that moment, a few savvy financial engineers at a suburban Chicago hedge fund helped revive the Wall Street money machine, spawning billions of dollars of securities ultimately backed by home mortgages.
Read on below:
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10 Signs of Speculative Mania in China
by ilene - March 30th, 2010 5:13 pm
10 Signs of Speculative Mania in China
Courtesy of Mish
Inquiring minds are reading a GMO white paper on China’s Red Flags
In the aftermath of the credit crunch, the outlook for most developed economies appears pretty bleak. Households need to deleverage. Western governments will have to tighten their purse strings. Faced with such grim prospects at home, many investors are turning their attention toward China. It’s easy to see why they are excited. China combines size – 1.3 billion inhabitants – with tremendous growth prospects. Current income per capita is roughly one-tenth of U.S. levels. The People’s Republic also has a great track record. Over the past thirty years, China’s Gross Domestic Product has increased sixteen-fold.
So what’s the catch? The trouble is that China today exhibits many of the characteristics of great speculative manias. The aim of this paper is to describe the common features of some of the great historical bubbles and outline China’s current vulnerability.
Past manias and financial crises have shared many common characteristics. Below is an attempt to list ten aspects of great bubbles over the past three centuries.
1. Great investment debacles generally start out with a compelling growth story. This may be attached to some revolutionary new technology, such as railways in the nineteenth century, radio in the 1920s, or more recently the Internet. Even when the new technology is for real, prospective rates of growth may beexaggerated. Early growth spurts are commonly extrapolated into the distant future. ….
2. A blind faith in the competence of the authorities is another typical feature of a classic mania. In the 1920s, investors believed that the recently established Federal Reserve had brought an end to “boom and bust.” A similar argument was trotted out in the mid-1990s when it was widely believed that the Greenspan Fed had succeeded in taming the business cycle. The “New Paradigm” disappeared in the bear market of the new millennium. It was soon replaced with the “Great Moderation” thesis of Ben Bernanke, which suggested that high levels of mortgage debt made sense because monetary policymaking was so vastly improved. …
3. A general increase in investment is another leading indicator of financial distress. Capital is generally misspent during periods of euphoria. Only during the bust does the extent of the misallocation become clear. As the nineteenth century economist John Mills
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China: the coming costs of a superbubble
by ilene - March 23rd, 2010 9:28 pm
China: the coming costs of a superbubble
Courtesy of Vitaliy N. Katsenelson writing in the Christian Science Monitor
The world looks at China with envy. China’s economy grew 8.7 percent last year, while the world economy contracted by 2.2 percent. It seems that Chinese “Confucian capitalism” – a market economy powered by 1.3 billion people and guided by an authoritarian regime that can pull levers at will – is superior to our touchy-feely democracy and capitalism. But the grass on China’s side of the fence is not as green as it appears.
In fact, China’s defiance of the global recession is not a miracle – it’s a superbubble. When it deflates, it will spell big trouble for all of us.
To understand the Chinese economy, consider three distinct periods: “Late-stage growth obesity” (the decade prior to 2008); “You lie!” (the time of the financial crisis); and finally, “Steroids ’R’ Us” (from the end of the financial crisis to today).
Late-stage growth obesity
About a decade ago, the Chinese government chose a policy of growth at any cost. China’s leaders see strong gross domestic product (GDP) growth not just as bragging rights, but as essential for political survival and national stability.
Because China lacks the social safety net of the developed world, unemployed people aren’t just inconvenienced by the loss of their jobs, they starve; and hungry people don’t complain, they riot and cause political unrest.
See also: China’s Red Flags - A White Paper by GMO’s Edward Chancellor. H/tip Zero Hedge.
Richmond Fed: "Bubble? What Bubble?"
by ilene - February 2nd, 2010 12:59 pm
Courtesy of Tyler Durden
The latest out of the Richmond Fed is a joke of a paper that while analyzing the possibility that the entire stock market and dollar carry trade is one zero cost of capital-funded bubble, skips over this possibility and instead goes on to analyze the "factors that could contribute to a fundamentals-based explanation for the recent rally in certain risky asset markets." Spoiler alert: No bubble – it’s all based in sound reality.
In what is likely a first, the Fed quotes Nouriel Roubini:
The near zero nominal interest rate in the United States, jointly with the expansion of the Fed’s balance sheet, have created resources available to be lent. Some investors have taken advantage of those resources by borrowing in dollars at very low rates and investing in foreign assets, especially in emerging economies and commodities. The expected profits from this investment strategy have been magnified by the expectation of a weaker dollar: Once it comes time to pay off the dollar-denominated loans, the investors can repay them using dollars that are worth relatively less. In turn, this trading strategy – referred to as “shorting” the dollar – has itself contributed to the decline in the value of the dollar since investors must exchange dollars to purchase foreign-denominated assets.
In explaining what Roubini means to his intellectually subprime colleagues, Richmond Fed analyst Renne Courtois provides this enlightening narrative:
The argument of Roubini and others is that this represents a bubble because the emerging markets and commodities rallies are fueled by easy money and the carry trade, rather than economic fundamentals. Under this view, several likely factors could cause this asset bubble to burst. After appreciating during the height of the financial crisis, the dollar steadily declined for most of 2009 but eventually will likely stabilize at some point. Stabilization of the dollar would reduce returns for investors with short dollar positions. Additionally, economic recovery in the United States will raise expectations of an interest rate increase. This would cause the dollar to appreciate (since higher interest rates raise the expected return of dollar-denominated assets, all else equal), and thus cause significant losses for investors short on the dollar.
The Richmond Fed goes as far as refuting Bernanke’s recent claim that low interest rates have never, NEVER, been responsible for this arcane concept known…
GURU OUTLOOK: FELIX ZULAUF & THE SECULAR BEAR MARKET
by ilene - January 19th, 2010 2:19 pm
GURU OUTLOOK: FELIX ZULAUF & THE SECULAR BEAR MARKET
Courtesy of The Pragmatic Capitalist
This week’s Guru Outlook brings us the brilliance of Felix Zulauf. Zulauf is the founder of Zulauf Asset Management based in Switzerland and is well known for his appearances in Barron’s annual roundtable. Zulauf has nailed the secular bear market downturn and 2009 upturn about as well as anyone. More importantly, he has been nearly flawless in connecting the dots in the macro picture. From the de-leveraging cycle that led to the downturn to the government stimulus that led to the upturn – Zulauf has been remarkably prescient.
At the 2008 roundtable Zulauf recommended investors purchase gold and short stocks due to concerns with the consumer. He remained bearish throughout the year. At the 2009 roundtable Zulauf said stocks would bottom at some point in the second quarter after making a new 2009 low. He got aggressive and said stocks would rally after that. His recommendations to purchase oil, gold and emerging markets were home runs.
Zulauf’s macro outlook hasn’t changed all that much. He still believes the de-leveraging bear market cycle is with us and that we’re in the early stages. Zulauf sees a number of similarities with Japan and says the consumer is in the process of long-term balance sheet repair:
“we are in the early stages of a deleveraging process, which is marked by a shift from maximizing profits to minimizing debt. It is a multiyear process. The U.S. consumer is in bad shape, and the U.K. consumer is even worse.”
But Zulauf hasn’t turned bearish in the short-term yet. He says the markets have another 10% of upside before concerns over the end of the stimulus begin to weigh on the markets:
“Central bankers themselves are somewhat afraid of what they have been doing. Politicians are worried about public-sector debt. Therefore, the authorities will try to step away slowly from their stimulation efforts, because this policy isn’t sustainable. That’s the risk for the markets. The U.S. stock
market has enough momentum to rise another 10% or so. But the authorities will start leaning the other way as they see signs of economic growth in the first two quarters, and possibly a jump in inflation. That could push the market down.”
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Of Course Chinese Real Estate is a Bubble. Grow Up.
by ilene - January 18th, 2010 3:42 am
Of Course Chinese Real Estate is a Bubble. Grow Up.
Courtesy of The Reformed Broker, Joshua M Brown
Hey amnesiacs, I’ll help you out with your willful blindness re: speculative manias…
There IS, in fact, a property bubble in China, it is utterly undeniable. Close your eyes and repeat this phrase however many times it takes until you are able to sober up:
THIS TIME IT IS NOT DIFFERENT.
OK, hopefully, you will have cleared your mind enough to focus on the real question. We should not concern ourselves with disproving the obvious. Instead, we should be more focused on what the inevitable bursting of that bubble will mean for China’s economy and then by extension, everyone else’s.
In short, yes there is a bubble, but what will it mean when it pops?
First, I’ll address the pussyfooting around going on in the blogosphere. I’ll throw some factoids at you, you tell me it doesn’t read like a Dubai article from 2008 or a Malibu story from 2005 or (brace yo self) a report from Japan circa 1989.
- In Tianjin, a city two hours from Beijing, a developer is starting work on a vast project of luxury villas, built in clusters named after continents, which form the shape of a world map. (FT)
- Overinvestment – Total fixed investment jumped to an estimated 47% of GDP last year—ten points more than in Japan at its peak…in most developed countries it accounts for around 20% of GDP. (Economist)
- (There is a) 7-star hotel and indoor ski slope that are also part of the plans. (FT)
- Prices of new apartments in Beijing and Shanghai leapt by 50-60% during 2009. (Economist)
I could go on and on forever; we could talk about the overbuilding of Macau’s Cotai Strip, the fact that Chinese citizens are referring to themselves as "mortgage slaves" during protests, the massive overcapacity in the industrial sector, the things that college students are doing to afford housing and the gold rush of foreign money coming in to play the build-and-flip game…but you already know this stuff is going on.
Now of course, there are writers and analysts all over the world who will use increasingly arcane stats to obscure the mania and justify valuations. They will also try to bend your perception of…
China
by ilene - January 7th, 2010 11:19 pm
So is China the next best thing since sliced bread, or another bubble in the baking?
Contrarian Investor Sees Economic Crash in China
By DAVID BARBOZA, NY Times
See also
Zero Hedge’s China Begins Liquidity Tightening, As Bubble Threat Looms
While the domestic money printing syndicate refuses to accept the glaring reality that endless money printing causes unavoidable hyperinflation (the only question being when), China has decided it is time to start closing the spigot. Bloomberg reports that, "China’s central bank began to roll back its monetary stimulus for an economy poised to become the world’s second-biggest this year, seeking to reduce the danger of asset-price inflation after a record surge in credit. The People’s Bank of China yesterday sold three-month bills at a higher interest rate for the first time in 19 weeks." Ah the benefits of a planned economy: controlling the supply and the demand at the same time. And further, being pegged to the dollar, China receives all the secondary benefits of the Chairman’s endless dollar printing. Ain’t life grand in Beijing…
“It’s a signal toward the commercial banks, because the commercial banks allocate their lending at the
…
THE 5 REASONS GOLD IS IN A BUBBLE AND AT RISK OF SIGNIFICANT CORRECTION
by ilene - December 14th, 2009 5:05 pm
THE 5 REASONS GOLD IS IN A BUBBLE AND AT RISK OF SIGNIFICANT CORRECTION
Courtesy of The Pragmatic Capitalist
Nouriel Roubini recently published a report claiming that gold is now in a bubble and at significant risk of a major correction (an opinion I had when gold was 10% higher and continue to maintain). He says the bubble is being driven by 5 primary factors:
- Inflation concerns are driving up gold
prices as monetary policy exacerbates fears over the dollar. - A “massive wall of liquidity” is chasing asset prices.
- The carry
trade and diversification out of the USD. - Global supply of gold can’t keep pace with rising demand.
- Sovereign risk is again on the rise.
While these powerful trends are widely considered to continue in 2010 (and help boost gold prices further) Roubini is less optimistic. He sees 5 substantial risks that will keep gold from reaching the $2,000 price target many analysts (see the bullish outlook for gold here) and goldbugs have attached to the yellow metal:
- An unwind in the carry trade would be devastating for gold and the reflation trade.
- Central banks will be forced to implement an exit strategy soon.
- Any bout of economic weakness will send investors fleeing into dollars.
- Investors are chasing performance and causing a bubble in gold. All bubbles crash and this bubble in gold will be no different.
- Fifth, the effect of rising sovereign risk on gold prices is ambiguous, as the events of recent weeks suggest.
Roubini concludes that gold bugs are “wrong” to assume the price surge will continue. He says gold has no intrinsic value and is therefore not rising on fundamentals. Investors should be wary of chasing the yellow metal at this point.
Source: www.roubini.com
Risks Rising at the PBGC?
by Zero Hedge - November 14th, 2009 7:26 pm
Courtesy of Leo Kolivakis
Submitted by Leo Kolivakis, publisher of Pension Pulse.
Kim Dixon and John Crawley of Reuters report that weak companies are raising the risk for U.S. pension agency:
Weakness in the auto and airline industries, as well as retail and service sectors, has more than tripled the potential risk to the U.S. pension insurance system.
The Pension Benefit Guaranty Corporation (PBGC) on Friday said its potential exposure to future pension losses from financially weak companies had increased to about $168 billion in fiscal 2009 from $47 billion a year earlier.
It also reported a doubling of its deficit in the year that ended September 30, and said future shortfalls from retirement account defaults could be worse than forecast.
"Exposure to possible future terminations means that we could face much higher deficits in the future," Vincent Snowbarger, the agency’s acting director, said in a statement.
The agency, which insures pensions covering 44 million workers and retirees, said its annual deficit grew from $11.2 billion in fiscal 2008 to $22 billion in fiscal 2009.
The deficit figure was an improvement over mid-year projections as the agency’s balance sheet benefited from an improved economy and rebounding investments.
In addition, the government arranged for General Motors and Chrysler to maintain their major pension plans in bankruptcy.
The agency’s deficit is the difference between assets under its control and payout obligations. PBGC assets reflect the value of terminated plans.
"We won’t fail to meet our obligations to retirees, but ultimately we will need a long-term solution to stabilize the pension insurance program," Snowbarger said.
Companies with junk credit ratings are put on watch for pension plan troubles.
Automakers and their parts suppliers as well as airlines account for most of the risk. Service sector and retail companies are also a concern.
The PBGC this year has assumed responsibility for pension plans at auto parts supplier Delphi Corp, retailer Circuit City Stores, IndyMac Bank, Lehman Brothers Holdings Inc and textile maker Dan River Inc, among others.
The financial health of the company-funded agency has been a hot button topic in recent years as faltering companies, particularly airlines, shed pension obligations in bankruptcy.
The PBGC and pension experts say the agency has plenty of cash to make payments for the next decade or
…
Willem Buiter Apparently Does Not Like Gold, and Why
by ilene - November 11th, 2009 1:00 am
Jesse debates Willem H. Buiter on the subject of Gold. Willem H. Buiter is a Professor of European Political Economy, London School of Economics and Political Science, former chief economist of the EBRD, former member of the MPC, and adviser to international organisations, governments, central banks and private institutions. He writes the FT’s Maverecon blog. – Ilene
Willem Buiter Apparently Does Not Like Gold, and Why
Courtesy of Jesse’s Café Américain Dr. Willem Buiter of the London School of Economics, and advisor to the Bank of England, has written a somewhat astonishing broadsheet attacking of all things, gold.
I have enjoyed his writing in the past. And although he does tend to cultivate and relish the aura of eccentric maverick, it is generally appealing, and his writing has been pertinent and reasoned, if unconventional. That is what makes this latest piece so unusual. It is a diatribe, more emotional than factual, with gaping holes in theoretical underpinnings and historical example.
I suspect that commodities such as oil and gold are giving many western economists with official ties to government monetary committees a stomach ache these days. Perhaps this is just another manifestation of statists and financial engineers facing the music, as illustrated by the second piece of news from Mr. Buiter on the US dollar, from earlier this year.
Here are relevant excerpts from his essay, with my own reactions in italics.
Financial Times
Gold – a six thousand year-old bubble
By Willem Buiter
November 8, 2009 6:02pm
"Gold is unlike any other commodity. It is costly to extract from the earth and to refine to a reasonable degree of purity. It is costly to store."
This is inherent to its rarity. It is desirable because it is scarce and useful, and this requires greater protection against theft or accident. Euro notes are far more costly to store than the paper and ink which is used to make them, at least for now.
"It has no remaining uses as a producer good – equivalent or superior alternatives exist for all its industrial uses."
This is an absolute howler to anyone who cares to look into industrial metallurgy. Gold is one of the most malleable and ductile of metals, with excellent conductive properties, slightly less than silver but better than copper, and it is remarkably resistant to oxidation. It does not tarnish.
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
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