The Daily Reckoning - The Perpetual Chinese Bubble Machine (Lynn Carpenter)

verfasst von Firmian, 27.11.2003, 21:51

-->The Perpetual Chinese Bubble Machine

The Daily Reckoning

London, England

Wednesday, 26 November 2003

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*** GDP grows faster than expected...

*** Gold down... dollar down...

*** Big day for IPOs... is it 2000 all over again?

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"Breathtaking!" they called it.

The news is being heralded on British TV this morning -
after jiggling the numbers, the U.S. economy was found to
have grown at an 8.2% rate during the 3rd quarter.

"The recovery really caught fire," said an economist with
UBS securities. Rejoice. Rejoice. The talking heads on
television were practically clinking champagne glasses; the
news was greeted with celebration, praise and admiration.
But last night, it came toward your editor's face like a
lemon pie.

"Didn't you hear the news," asked a bullish fund manager
with whom we were enjoying a drink."The U.S. economy grew
at more than 8% last quarter."

You and your fellow gloomsters don't know what you're
talking about, he probably wanted to add; you've lost a lot
of money.

"I bought Amazon.com a few years ago. It has gone up ever
since," he continued.

You see, dear reader, being a cranky 'prophet of doom and
gloom' is not always easy work. You have to bear the taunts
of young fund managers with more money than you have... and
more hair.

The subject inevitably turned to gold:

"If you wanted to invest in a commodity, why not buy
something with better prospects, such as copper or tin," he
asked."The problem with gold is that it is not
frangible... you can't break it down or use it up. A
commodity that never gets used up is not exactly a sure-
thing investment, if you know what I mean. Maybe they'll
find a commercial use for it some day. Then, it might be a
good investment. Until then, well..."

He did not need to complete his sentence. In a few words, he
had made the Case Against Gold such as it is. Gold is no
longer needed as money; paper works perfectly well. The U.S.
economy is growing at more than 8% per annum, for Pete's
sake. Who needs gold? And, as a pure commodity, gold is a
loser.

And yet, you editor does not buy tin. Nor bauxite. Nor lumps
of coal. He buys gold. He buys gold because he suspects that
the people controlling paper money today are not as smart as
they think they are... and no smarter than those who ran
paper money systems of the past (all of which failed... )

And he buys it because he suspects that there is a kind of
rough justice in the world - where people cannot get
anything they want, anytime they want it... but where people
get instead, more or less, what they have coming.

He buys gold because he believes it is more authentic
'money' than a piece of paper proclaimed money by the Bank
of England or the Department of the Treasury... and he
suspects that his kruggerands and gold Louies will have
value long after the Bank of England and the U.S. Treasury
cease to exist.

He buys gold because he has no way of knowing what lies
ahead. Maybe the dollar and the pound will be around for a
long, long time - without any link to gold. But he notices
that the longer people are able to borrow money... with no
unhappy consequences... the more money they borrow, and the
unhappier the consequences become.

And now over to Addison, with more news:

-------------

Addison Wiggin in Paris...

- Skyrocketing government spending... the plunging
dollar... an"engine" on fire...

- Forgive us. Yesterday, in commentary we were writing for
the UK edition of the Daily Reckoning, we mocked an analyst
at JP Morgan for accepting the U.S. government's GDP
figures. They claimed 7% annualized growth reported for June
to September. How wrong we were! The Conference Board has
now revised its Q3 numbers to put growth at 8.2% - the
highest rate in 20 years. Oh là là...

- Consumer confidence also hit a 12-month high in October.
Yet all the good news failed to ignite the markets."Stocks
flat despite data showing strong GDP growth," says the Wall
Street Journal. The lumps either didn't believe the
revision, or they've already priced it in."A classic 'buy
the rally, sell the news,'" writes Anna Troupe for Elliott
Wave.com. The Dow and S&P both rose, but slightly - 16 and
1.8 points, respectively. The Nasdaq slipped 4 points to
1,943.

-"Treasuries shrug off slew of strong data," remarks a
headline in the Financial Times. Demand for U.S. government
bonds stayed strong, pushing the 10-year benchmark's yield
down a skosh to 4.17%. Strangely enough, the U.S. numbers
withered demand for government bonds elsewhere in the world.
Prices fell in Japan, Euroland, and London. In Tokyo,
however, equity traders - fresh from a bank holiday - read
the revisions, caught the fever, and pushed the Nikkei back
up through 10,000.

- U.S. government bean-counters might be happy to report
incredible growth; global markets might be foolish enough to
take them at face value. But the dollar remains under
intense structural pressure... and seems destined for a
collapse. Hard. Fast. And soon.

- Your editors have been pondering for some time the
prospect that wanton profligacy inside the beltway would put
government debt at risk. You'll recall a couple weeks back
that Jim Bianco, of Bianco research, told us it would"never
happen." Such a move would put the modern financial system
at risk. Well, yeah, that's the point, we thought quietly to
ourselves at the time.

- But lo and behold: yesterday, Moody's warned the U.S. to
clean up its act. Rather,"Improve Finances," reports the
Financial Times, or else. It's all well and good to cut
taxes to put on a happy face for the world - and spending
money in the hands of the world's happiest consumers. But if
the U.S. wants to preserve an AAA rating on its bonds, says
Moody's, it will have to raise them again... or cut spending.
Ha!

- Our own bond sleuth, Dan Denning, has been following the
prospect of a U.S. credit downgrade with his proprietary BED
Spread indicator. This morning Dan reports:"Darned if the
BED Spread isn't just getting smaller and smaller each week.
Since we last looked at it, the yield on a basket of Uncle
Sam's debt rose slightly to 4.6% (as measured by the
government debt exchange traded fund GVT). On the other
hand, emerging market debt yields, as reflected by EMD, fell
under 9% this week to close at 8.99%.

-"The BED spread fell about 7% to 4.33." That's a
significant drop over last week's 22% decline. What does it
mean? Well, Moody's said it better than we can.

- Still, government hacks, wonks and policy weirdos appear
to be willing to do anything - even mortgage their children
- to keep the U.S. in the driver's seat of the"single-
engine world economy," as Stephen Roach calls it. The OECD,
for its part, appears to be willing to go along for the
ride. Predictions for 2004, due out today, but leaked to the
Italian newspaper La Repubblica over the weekend, show
European Union growth revised down from 2.4% to 1.9%... and
U.S. growth revised up from 4% to 4.2%.

- Beware, we say, like schoolchildren before an angry
principal, trying our best to muster up respect."Monetary,
as well as fiscal, policies," warned Marc Faber in a recent
issue of Strategic Investment,"are 'marvelously successful'
at stimulating consumption of cars [and other consumer
goods], but ineffective at stimulating production and net
capital formation. Imports meet the rising domestic demand
while net capital formation occurs not in the U.S. - but in
China and other low-cost production centers outside the
U.S."

- Indeed,"GDP [in China] is predicted to expand by 8.5% in
2003," writes Chris Bourke, editor of Profit Watch, a sister
publication published in London."Spend-happy consumers sent
sales roaring ahead by 10.2% - the fastest monthly growth
rate in two years. Telecommunications sales skyrocketed by
75%... car sales roared ahead by 48%... furniture sales
chalked up an impressive 40% gain..." [More Pao Mo
commentary from Lynn Carpenter, below... ]

- No coincidence, then, that the beltway bunglers, ignoring
distasteful lessons of history, resumed the"trade war"
yesterday. This time, they took aim at another Chinese
industry: Color TV sets. The Commerce Department ruled that
televisions from four Chinese firms were being sold in the
U.S. at less than 'fair value' and announced provisional
anti-dumping duties of 28% - 46% on their sets."U.S.
television makers and unions complained," reports CNN,"that
imports from China and Malaysia had mushroomed to 2.65
million sets a year in 2002 from 210,000 two years earlier."

- Curiously, no ruling was made against Malaysian
televisions.

-------------

Bill Bonner, back in London:

*** On the news of the fastest-growing economy in nearly 20
years... gold sold off 40 cents.

*** We cannot help but remark that the 8.2% growth in the
U.S. economy is mostly an increase in consumer spending. Few
new ways of earning extra money are being developed.
Instead, what is being encouraged are new ways of spending
it. Auto sales rose at a 25% rate in the 3rd quarter.
Residential construction went up at a 22% rate.

And where did the money come from? Largely from a tax cut.
The Feds cut taxes, thereby giving consumers the means to
spend more... while actually increasing government spending
at the same time. And thus did the economy grow at 8% - by
spending money no one actually had. If growth continues at
this rate, we will all soon go broke!

And we suspect we're not the only ones who've noticed. A
chart comparing gold to other commodities shows gold rising
at a steeper angle. Gold has little industrial usefulness.
And yet, in what appears to be a worldwide expansion, gold
is rising faster than useful resources. There must be others
who doubt that you can spend your way to prosperity... who
are suspicious of money you can create out of nothing... and
wonder about 'growth' that comes as a result of going ever
more deeply into debt...

These poor, lonely people... bearing the slings and arrows of
CNBC and fund managers as we do... how we feel for them!

*** It's just like the late '90s... even the IPOs are back.
"Four firms go public on busiest day for IPOs since 2000,"
the LA Times tells us.

But it's not exactly like the late '90s. Then, the U.S.
bubble was financed by overseas investors hoping for a good
return on their investments from new era technology. Today,
the Bubble has been reloaded by government. Tax cuts,
interest rate cuts, and foreign central bank buying of U.S.
debt - all have kept the debt bubble expanding. Glory
Hallelujah.

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The Daily Reckoning PRESENTS: Pao Mo in action... why China
is the"biggest opportunity we investors have ever seen,"
but still a beast to treat with caution...


THE PERPETUAL CHINESE BUBBLE MACHINE
by Lynn Carpenter

The last jerk who smirked and muttered,"those inscrutable
Chinese" aloud was probably acting in a 1940s Charlie Chan
movie.

The last person who thought it was probably a reporter.
Sometime this week.

Every time you catch a bit of news on China, that
inscrutable thing seems to ooze between the words... there's
that gee-whiz, tsk-tsk, head-shaking tone to it all. And
often, outrage.

Among investors, one half seems to think China is easy
pickings. The other half thinks it's, well, too inscrutable to
risk. Both are wrong.

Successful investors will need to understand how China
progresses. But it's not inscrutable. The Chinese do what
they do for a reason - and their reasons always make sense
in context.

Let me say it plainly. China is the biggest opportunity we
investors have ever seen. (I trust none of us is over 150
years old.) The last one that was this big and as likely to
stay at the top for a long time was a young country called
America.

But here's the deal: Right now, it's a bubble. Most of the
headline stocks are already priced to fall - in fact, if you
can name a Chinese stock off the top of your head, you
probably shouldn't invest in it.

Americans are getting their first chance to see a Chinese
bubble up close. Most of the investors who were caught in
the 1992 and 1994 Chinese stock crashes lived in Asia, not
America. Those crashes centered on China's state-owned
enterprises.

China began listing stocks in 1990. At first, it made it
easy for state-owned enterprises (SOEs) to go public. It was
much more difficult for China's newly developed private
companies to get a stock listing.

But who cared? Capitalists were so starry-eyed over the
noble experiment of"Commie" groups going honest that they
bought whatever they could willy-nilly. The theory-heads
egged them on, blathering about how getting government out
of business was so right.

Unfortunately, right ideas can make wrong investments. Those
who bought the rafts of new Chinese stocks bid some lousy
businesses up to levels that would make a dot-com tycoon
proud. With the same result.

Going forward, we have two kinds of investments coming our way
now. There are still many more SOEs coming to market. In
fact, until this July, the Shenzhen market had a three-year
freeze on IPO's. It was only SOEs coming to market.

China still has some 30,000 to 60,000 SOEs to manage, and it
would like to lift the burden of many of these from the
state's shoulders by continuing to privatize them. I would
be very cautious about investing in these without seeing
plenty of good data and a solid business plan.

Meanwhile, Chinese citizens who have started private
businesses from the ground up are eager to get their babies
to market, too. They are listing in China again, as well as
Hong Kong and the United States. These often make very good
investments while new. But these businesses are quickly bid
to the moon... you need to discover them early in the
process.

Understand this: China is intent on developing strong
businesses, but it is still reluctant to let private
enterprise go ahead too rashly. The Chinese Communist Party
cannot let business become so important that would threaten
governmental power and control. Capitalism is a tool, not a
religion here. The basic system is still socialist and will
be for a long time yet.

Also, with high unemployment, a number of credit-bloated
banks, a still-rudimentary commercial banking system and
difficult tax problems, China must keep tapping the brakes
and moderate its pace. It cannot afford enough boom to court
a bust. Any country would do the same if it foresaw the
problem.

And every time China reins in business, trade or public
opinion, it is going to catch a blast from the media. You
better just expect it and remember that this is a process,
this getting rich thing. It is not something a country does
seamlessly overnight.

Nevertheless, China's recent growth is impressive. For the
last three years, the global economy grew only 2% a
year... but China's expanded 8% a year, and should grow at
that pace for some time yet. How? The answer: exports.

China has what every country wants but not all can get:
growing exports. It took three things: a change in the
economic system with government's blessing, places and ways
to make trading easier and lots of workers willing to labor
cheaply. Capital and technical know-how go without saying.

The change in government had to come first. Under Deng
Xiaoping, former head of the Chinese Communist Party, China
slowly turned away from Maoism and decided that"to be rich
is glorious." By the way, the current head of the Party,
Jiang Zemin, was Deng's chosen successor. So the trends Deng
set in motion before he died in 1997 continue.

You as an investor should catch this important point about
China's fast-growing economy, though. As you know, when a
company is very small, it's easy for it to double sales.
When it sells a billion dollars worth of widgets a year and
has captured the top spot in its market, it's not so easy to
keep doubling.

We think of China as huge. And so it is in terms of its
size, population and world stature. But economically, in
1978 when China began to open to trade, it was very small,
given its size and resources. It is still well back of
"fully industrialized" status across the country.

China's average household income last year was $4,400.
That's low. If it were evenly spread, it would be low for
most people. But it's not. The average in the eastern cities
is three times as high as in the western provinces. Plus, an
estimated 150 million unemployed migrants from the poorer
west have traveled east. They hover around China's great
cities seeking jobs, any jobs. They work cheap.

And each time China closes down an SOE and throws it into
the private sector, people lose jobs. SOEs tend to have too
many workers. That's another reason China must go slowly in
privatizing. If it goes too fast, it will make
unemployment so bad it could topple the government.

Privatizing China's thousands of SOEs piled up the fuel for
China's expansion. It was finding a place to trade that set
it on fire.

In 1978, China decided to set up special zones within the
country to ease foreign trade and investment and allow
Chinese to develop their own businesses. The first five
special zones were created in 1980. By 1984, 14 more cities
joined the list. Then in 1985, China decided to expand the
network to include large swaths of the east coast and the
Yellow, Yangtze and Pearl River basins.

Westerners rushed in, knowing nothing. They found that one
day, all was well. Contracts were signed, money invested.
Then, suddenly, contracts were cancelled and sunk money was
lost.

That's when you started hearing the cries that China has no
rule of law. It's true, strictly speaking. China follows the
opposite system: the rule of men. A true system, but the two
don't mesh easily.

Europe followed a rule of men for much of its history, too.
Kings, queens and local nobles once had this same power
system. Power was a matter of the right connections, the
right alliances. In China as in an older Europe, laws may
exist, but whoever is in power gets to decide how and when
to apply them.

This is very important to China. A matter of dignity. It is
changing, but it is still key to doing business there. With
its larger role in international trade, China is accepting
the role of the written contract. But other, subtler points
to a rule of men persist and shape how things are done in
China. Where there is a rule of men, personal relationships
are extremely important.

Not all Western companies will succeed in China, and those
that do have learned how important it is to understand who
is due what. They realize that certain things are expected
in return for help... not necessarily a bribe as in other
countries, but a bit of recognition, an introduction, an
invitation, a courtesy... whatever.

The other point about a rule of men is the way it handles
change, as the people who hold power (now the Communist
party on down to any local officials) decide whether and when
to enforce it. One way to creep up on change is to hold back
the power. For instance, as we already saw with the
currency, officials might"overlook" taking more than
allowed outside the country. That way, things can change
without declaration. If they work, progress is made and the
laws may catch up later. If they don't, the law can suddenly
be enforced and those in power can quite honestly claim that
they never passed a bad policy and are only affirming the
way things have always been.

There's more change going on in China than the popular press
can even tell us. Much of it will continue to happen below
the radar.

But overall, China is an extremely attractive investment
now. It has joined the World Trade Organization, and it will
adopt rules and practices that foster smooth trade. Not
always smoothly, but eventually. Its politics will continue
to offend democratic sensibilities at times. But it
desperately needs money. And that makes the long-term outlook
for its development of more industry and trade is very
strong.

Not long ago, half China's GDP was spent covering the debts
of its inefficient and bankrupt SOEs. China can't afford to
go back. But you as an investor can't afford to neglect
China's history and culture, either. It will go forward in
its own fashion.


Regards,

Lynn Carpenter
For the Daily Reckoning

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gesamter Thread:

• The Daily Reckoning - The Perpetual Chinese Bubble Machine (Lynn Carpenter) - Firmian, 27.11.2003, 21:51
  • Bonner, Wiggin und Lynn Carpenter für Freunde der deutschen Sprache - Firmian, 27.11.2003, 21:55
  • Re: Frage zu Q3 GDP growth - Firmian, 27.11.2003, 22:13
    • Re: Antwortversuch - Cosa, 28.11.2003, 10:42