Alibaba Is the Canary in China’s Coal Mine – BloombergView 09-01-15

Salient to Investors:

William Pesek writes:

Alibaba’s shares slide with each new report of middle-class Chinese raising cash and delaying spending. Alibaba’s $166 billion market cap exceeds the annual output of many countries.

The Chinese economy will weaken further: domestic and external demand is sliding along with the stock market. China will experience a negative wealth effect as stocks fall. Mass austerity has only just begun. Most Chinese under 50 only know annual growth of above 10%.  Sentiment will plunge as more and more mainland Chinese sense that the economy’s and stock market’s troubles are beyond the government.

The conventional wisdom is that few mainland Chinese own stocks, but it said the same about Americans in the late 1990s.

Beijing appears to have given up trying to save the market. Directing banks to buy shares, turning off half the market, loosening curbs on margin trading, suspending IPOs, letting stock speculators put up houses as collateral, are all signs of desperation.

Wang Tao at UBS said risks are to the downside despite policy efforts.

Morgan Stanley lowered its forecast for 2015 Japanese growth to 0.5% from 1%.

Glenn Stevens at Reserve Bank of Australia warned of downside risks associated with developments in China.

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Mapping Fallout From ‘Black Monday’: Who Was Hardest Hit? – Foreign Polict 08-24-15

Salient to Investors:

Bill Bishop at Sinocism said:

  • China’s stock market has historically been irrelevant both to the domestic Chinese economy and the global economy.
  • China has tarnished its reputation with its bungled response to its stock market plunge.

Damien Ma at the Paulson Institute said it is premature to conclude the Chinese economy is in a major crisis, but key is how China stabilizes the real economy and pushes through economic reforms.

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Birinyi’s S&P 3200 Call – Bull From A 30-Year Bull – David Stockman’s Contra Corner 08-05-15

Salient to Investors:

David Stockman writes:

Laszlo Birinyi says S&P 3200 will be reached by 2017 because there is no reason it cannot keep rising. Since first meeting Birinyi in 1986, I do not ever recall when he was not bullish on equities. His call is wrong because the central bank fed 30-year bull run is over.

The S&P 500 Index’s inflation-adjusted gain of 6.2% per annum since January 1986 compares to only a 2.2% annual gain in real GDP and therefore is unsustainable – two more decades at this spread and the stock market’s capitalization would be several hundred times larger than GDP. From 1956 through the eve of the Greenspan Fed, the Index’s inflation-adjusted gain rose by only 1% per year; while US GDP grew at 3.5% per annum, or 60% more than during the last thirty years.

From 1956-1986, real median family income rose from $36,000 to $60,000, or at 1.7% annually, but has risen less than $4,000 since, at only 0.2% per year. The reason the stock market has gained over the last 30 years in the midst of decelerating real GDP growth and stagnating family incomes is because the Fed’s balance sheet has expanded 22 times, or 11.5% per annum nominal, 9.2% real, and 4 times the growth rate of real output.

During this bull market run, household, business, financial and government debt outstanding has risen $50 trillion, versus only a $13 trillion gain in GDP. In the 100 years prior to 1971, debt rose at 1.5 times GDP growth in real terms: since then it has risen at 3.5 times real growth up to the financial crisis. This huge growth of debt and leverage has come despite the household savings rate declining since 1971, thus has not been funded from honest savings but from fiat credit. This would have caused consumer inflation but for China, the oil exporters and the Asia including Japan buying US dollars by printing huge amounts of their own money, thereby inflating their own currencies and suppressing their exchange rates, and flooding the world with artificially cheap goods. The tidal wave of wage compression flattened labor costs in the developed market tradeable goods industries and spilled over onto their suppliers.

In a world of honest money and credit funded from real savers, China’s exports could not have risen 40 times in less than 3 decades, or at 17% annually – China would have run out of capital to build cheap factories and would have suffered soaring exchange rate increases long ago.

East Asian central bank printing presses recycled the Fed’s monetary inflation back into US financial asset inflation, fueling a massive increase in stock market speculation, LBOs, stock buybacks, and M&A, and the real reason why US stock market capitalization has risen from 60% of GDP from Greenspan’s appointment to 200% today. The true rate of US productivity gain since the late 1980s is a small fraction of pre-1986 levels.

ZIRP, QE, and the Greenspan/Bernanke/Yellen “put” fuel a cycle of debt funded speculation that drives asset prices ever higher, which then become the collateral for an even bigger credit-funded bid for financial assets.

Since 1986, the sum of the market value of equities and credit market debt outstanding has risen from $12 billion to $93 trillion. This bubble cannot continue because the central banks have reached the limits of money printing.  When the Fed begins normalization later this fall, they cannot reverse course because a new round of massive balance sheet expansion would be a repudiation of the last 20-years of Fed policy and trigger a collapse of confidence and selling panic.

China built the biggest pyramid of credit and speculation in history – from a few hundred billion of domestic credit in the early 1990s to $28 trillion today – but capital is now fleeing, upwards of $800 billion in the last year alone. China’s central bank is having to sell its dollar liabilities and shrink the renminbi supply in order to keep its exchange rate from collapsing. The world’s central banks lack the firepower to keep inflating the global financial bubble.

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Market Manipulation Goes Global – Project-Syndicate 07-27-15

Salient to Investors:

Stephen Roach at Yale writes:

Market manipulation a la China is now standard operating procedure in policy circles around the world – the West just dresses up their manipulation in different clothes.

QE is essentially an aggressive effort to manipulate asset prices: whether it has succeeded is debatable along with central banks’ unsubstantiated claim that things would have been much worse had they not pursued QE.

China appears less focused on systemic risks to the real economy because wealth effects are significantly smaller in China, where private consumption is 36% of GDP, half that in more wealth-dependent economies like the US. By keeping its benchmark rate well above zero, the PBOC is better positioned than other central banks to maintain control over monetary policy and avoid the open-ended liquidity that is so addictive for frothy markets. China’s targeted equity-specific actions minimize the risk of financial contagion caused by liquidity spillovers into other asset markets.

Nearly 90% of the 12-month surge in the CSI 300 was concentrated in the 7 months following the Shanghai-Hong Kong Connect in November 2014, so speculators had little time to let the capital gains sink in. The likelihood of forced deleveraging of margin calls underscores the potential for a further slide once full trading resumes. The development of stable equity and bond markets is a high priority in China’s effort to promote a more diversified business-funding platform, so the equity collapse calls that effort into serious question.

Time and again, regulators, policymakers, and political leaders have condoned market excesses, a growth elixir when labor income is under constant global pressure. These bubbles always burst and the false prosperity is exposed.

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Capital exodus from China reaches $800bn as crisis deepens – The Telegraph 07-24-15

Salient to Investors:

China’s day of reckoning is delayed again as it is reverts to credit stimulus after attempts to engineer a stock market boom have failed. Economic growth will accelerate over the next few months, giving global commodity markets a brief reprieve.

Robin Brooks at Goldman Sachs estimates that capital outflows reached a record $224 billion in Q2 2015. Charles Dumas at Lombard Street Research says capital outflows reached $800 billion over the past year.

The Dutch CPB’s world trade index shows that shipping volumes have been negative in 4 of the past 5 months which is extremely rare and usually implies a global recession.

China suspended half the shares traded in Shanghai and Shenzhen, halted new floats, pressured 300 corporations into buying back their own shares, and hunted down short sellers. Caixin says the China Securities Finance Corporation owns an estimated $200 billion of Chinese stocks and has authority to buy a further $500 billion if necessary to prop up the market. Michael Pettis at Peking University says brute force has done the trick as equities have recovered.

Xi Jinping’s 2013 pledge to let market forces play the decisive role in the economy is broken and his failure to see through this reform strategy is fatal for China’s economy.

In 2012, the World Bank and China’s Development Research Center warned that China’s 30-yr growth model was obsolete and that the low-hanging fruit of state-driven industrialization had been picked.

Capital Economics, Oxford Economics, and Lombard Street Research say China’s true economic growth rate is currently below 4%.

China produced more cement between 2011 and 2013 than the US in the entire 20th century.

China’s ratio of private credit to GDP has jumped sixfold to 160% of GDP since 2007, and far beyond any safe level for a developing economy.

Adam Slater at Oxford Economics says easing measures since late 2014 have not kept pace with tightening conditions and if China wants to quickly ease monetary conditions, then exchange rate depreciation would be the obvious way to go. However this would anger Washington and risk a beggar-thy-neighbor currency war across Asia.


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What does China’s stock market crash tell us? – BBC 07-22-15

Salient to Investors:

Linda Yueh at Oxford University said:

  • The Chinese stock market is not very important to ordinary Chinese because at most only 50 million households invest in it, and they average less than 10 to 15% of their assets.
  • Retail investors follow the herd so volatility is endemic in the Chinese stock market. The Chinese stock market is still up on the year so could as easily rise further as fall further.

Dong Tao at Credit Suisse said:

  • Chinese government was complicit in the rising speculation in China’s stock market.
  • The Chinese economy depends more on bank lending than most developed economies so when the banks refused to lend over the last 3 years the government encouraged retail investors: however this diverted money from the real economy and back into the stock market.
  • Beijing cannot intervene in the market forever.

Kerry Brown at the University of Sydney said:

  • China is really defending making Shanghai the financial center of the future and the stock market the heart of China’s economic reforms. China wants to be an aspirational economy, not just the world’s sweatshop. China can tolerate the market collapsing, but not the idea that one of its keys to becoming an aspirational economy does not work.
  • The market collapse is not a massive blow, but raises many questions. Socialism with Chinese characteristics is a paradox.

Ning Wang at Arizona State University said:

  • The Chinese financial sector is one of the weakest links in their economy, and is still badly controlled by the government.
  • Since Mao, the role of the state has declined a lot, and consistently. More than 85% of Chinese believe they will be better off under a market economy and so endorse it. The game is not over and hopefully the Chinese government will learn from this.
  • A modern market economy needs the state to creates rules that are at least transparent and in line with the way the market works itself.

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Urgent Warning: 6 Signs the Great Crash Is Upon Us! – David Stockman’s Contra Corner -7-16-15

Salient to Investors:

Harry Dent writes:

  • All the signs point to the end of the global bubble. The greatest trigger will be the bursting of the massive, unprecedented China bubble. China’s stock market loss of 35% in less than 30 days signals its stock bubble has peaked: a drop of 30% to 40% in short order is a clear sign of the first wave down in a major bust and the greatest sign that the next great global crash is imminent.
  • China’s stock market will bounce in the coming weeks and then crash again, with real estate and its economy to follow.
  • The Greek default proves that endless quantitative easing idiocy has proved unable to create sustainable long-term recoveries in highly indebted developed countries with poor demographic trends. Greece did the wrong thing by again kicking the can a little further down the road.
  • US stocks could be the last major market to make a new high before rolling over.
  • Oil prices will fall, killing the fracking industry, a $1 trillion investment with $600 billion of junk bonds and leveraged loans – much larger than Greece.
  • Emerging markets have led the global slowdown and are about to break to the downside out of a 4-month trading range.
  • Long-term rates for sovereign and Treasury bonds are rising despite governments stimulating and guaranteeing their economies. Rising long-term, risk-free rates hurt stock valuations and real estate even harder due to higher mortgage costs.
  • Gold will continue to fall but will have a minor bounce.

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Billionaire Paul Singer: China Crash Is ‘Way Bigger Than Subprime’ – Bloomberg Business 07-15-15

Salient to Investors:

Paul Singer at Elliott Management said China’s debt-fueled stock market crash is way bigger than the US subprime mortgage crisis but may not be enough to cause a global financial market meltdown.

Bill Ackman at Pershing Square Capital Mgmt said China is a bigger global threat than Greece by far, their stock market looks worse than the US in 2007, and China’s lack of transparency and questionable economic statistics are concerning.

Jeffrey Gundlach at DoubleLine Capital said China’s stock market compares with the US Nasdaq in 1999, 2000, and is far too volatile and murky to invest in.

Mary Erdoes at JPMorgan Asset Mgmt said China’s equities markets are completely disassociated with their economy. 25 years of 7 percent growth seen by no other country, including the US.

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Fareed Zakaria GPS – CNN 07-12-15

Salient to Investors:

Fareed Zakaria said:

  • The Economist says Connecticut bankrolls the weaker states in America: 5% of their GDP over the last 20 years has been net income transfers to states like Mississippi and Alabama.
  • Allen Cooperman says the nuclear deal will only take Iran from 2 months away from breakout to 3 months.
  • Bloomberg says the Shanghai index mirrors the Dow Jones near the beginning of the Great Depression.
  • The Shanghai index is still up 90% over the last year, despite the recent collapse.
  • Gavekal Dragonomics says 5% to 10% of China’s households have stocks vs. 50% percent in the US.
  • Economists say China’s intervention in its stock market screams of panic.
  • The Guardian sees a ridiculous government overreaction, and says there have been up to 1.4 million new investors per week, many of which are novices. Ruchir Sharma at Morgan Stanley says 2/3 of new investors in China’s stock market have no high school degree, and even rural farmers have established their own stock exchanges.
  • Italy has the most UNESCO world heritage sites, 51, followed by China with 48, and then Spain, France and Germany. The US is tenth with 23 sites.

Jonathan Powell said:

  • Historical conflicts like Afghanistan have ended only through negotiations and not military victory.
  • Terrorism reflects an underlying political problem that almost always needs to be addressed politically.
  • Governments usually wait too long to negotiate with terrorists because they wrongly believe that one last military push will put them on the defensive – little evidence to show this works.
  • ISIS is successful largely because it has attracted disempowered Sunnis in Iraq and Syria.

Ken Rogoff at Harvard said:

  • The Greek referendum, which Paul Krugman urged them to do, was very irresponsible and was spitting in the Germans’ face. Never default on a debt when somebody is still giving you money.
  • If you cancelled all Greek debt, they is still a need to close a 10% gap of GDP in their deficit. Greece cooked their books and lied about their debt and deficit. The necessary changes have to come from within Greece, which has shown little will in wanting to become a modern European state. Greece needs to write down the debt more.
  • Everybody made very optimistic projections of Greek growth, including the IMF and the Europeans.
  • Things are looking better because what doesn’t kill you makes you stronger. Europe could handle a Greek exit, though the political fallout is very unpredictable.

Rana Faroohar at TIME and CNN said:

  • The German public never believed the Greeks would reform and wants to let them go this time.
  • Greece is not a Lehman-like moment so we will not see major international dominos toppling. But it does threaten the political integrity of Europe, with questions next about Portugal, Spain, Italy, though not right away. China creates a new Greece every 6 weeks.
  • Europe’s core, with Germany at the center, is very strong. Germany is incredibly competitive. France could be more competitive by making relatively easy changes. Europe needs one integrative fiscal policy.
  • The European economy is looking a lot better than the politics. The concern is if other nations stir up more trouble in the periphery should Europe be perceived as being unable to get its own house in order.

Zanny Minton Beddoes at The Economist said:

  • The Greek problem has moved from the realm of economics into politics. Many people in northern Europe, not just the Germans, think a Greece exit is better, while France and Italy are very keen to keep the Greeks in. The German Finance Minister wants the Greeks out.  However Merkel will in the end want to keep them in because she does not want to be the chancellor who presides over the breakup of the euro.
  • The US has a much more fiscally integrated system than Europe. Europe created a single currency without creating the economic integration and the fiscal integration that was necessary for that to survive. Europeans are champions at kicking the can down the road.
  • Greece should have written the debt down in 2010 instead if kicking the can down the road. But Greece is no longer the systemic, immediate problem to Europe that it was a few years ago, so a Greek exit would not wreck the euro overnight, but would become a real problem again.
  • The US is looking stronger. The European economy is not great but not that bad, and in many ways improving. 

Joe Cirincione at Ploughshares Fund said:

  • A nuclear deal with Iran is almost certain, likely tomorrow. Most of the serious, big issues have been settled. The deal lengthens the breakout time to at least a year to make the material for at least for one weapon.
  • There will be inspections of Iranian military facilities. Prohibiting arms in or out won’t be lifted right away. Sanctions will remain on the ballistic missile program and for their terrorism and human rights violations. 

Karim Sadjadpour at the Carnegie Endowment for International Peace said:

  • A nuclear deal is likely.  Iran is experiencing a perfect storm economically, with sanctions on top of a collapse in oil prices on top of sustaining the Assad regime in Syria.
  • The Iranian supreme leader has control over the main institutions in Iran, but is not an absolute dictator like Mao was. 2500 years of Persian civilization makes the current isolated Iran an anomaly of history and geography, but 36 years of the Islamic Republic raises concern that a nuclear deal could empower hard-line forces in the short-term. 

Watch the video at or read the full transcript at

Trina Drops as Japan Outlook Sinks Chinese Solar Makers – Bloomberg 10-01-14

Salient to Investors:

  • Concern is growing that a potential change in Japan’s incentives for clean energy may lower demand from the world’s second-largest solar market, amid a glut of panels.
  • Gordon Johnson at Axiom Capital Mgmt said all of the Chinese module companies rely heavily on Japan. He is concerned about the new Trina convertible note and ADR offerings because they are using equity investors to finance the build-out of solar farms amid uncertain demand.

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