Just like clockwork, the major analysts (like MER) are coming out with their macro calls, replete with charts showing the China hard landing story I was telling about six to nine months ago. Only problem is that China, the emerging markets and many commodities are already down 30% or more. Not to be outdone, now Morgan Stanley lowers its 2012 oil target from a bubbly $130 to $100 (I presume this is Brent Sea oil). I am amazed at how these Captain Obvious “analysts” do nothing more than state the obvious, and rather late at that. Seems the challenge with being early picking a top are temporary 5 to 10% losses, but the problem with being obvious is suffering more along the lines of 30% plus losses. I’ll take the former.
China has three major problems, wasteful slash and burn economic actors/gamblers, inflation, and holding too many Old Maid Cards (US Treasuries and agencies) . On the inflation, as long as the central banks don’t quickly let the crack up boom (CUB) right back out the bag, things are much better especially of late (see third chart: JJG grains). If this can pass through quickly at least riots and revolution might be postponed. I will be posting general comments about the set up for inflation separately.
I do think there was cyclical double ordering (Inflation Causing Boom, then Bust) and hoarding (Farming Sector: History Repeats Itself) back in the spring, and that is being disgorged. This economic dynamic is important to understand. QE3 will do little to encourage the double ordering that has already occurred, but rehoarding and CUB trades are another story. I was writing throughout the first half that the Chinese low wage export model was severely impacted and shipments were way off. I even felt that the box loads coming into West Coast ports was old inventory and billing scams. As a personal observation I strongly feel the Chinese goods in the US today are rock bottom in quality. I have seen no reporting on this, but I’m convinced of it.
At the time, I attributed this mostly to inflation pressures, much more so than weak American or European demand. I think western demand for cheap products is permanent and really one of the things that keeps the tires from falling off. The only problem was the Chinese could no longer afford to sell cheap. Now there are numerous reports out of China that enterprises have collapsed leaving huge debts. This is also under reported in the West, but hereis a story out of China that’s important to read, even if poorly translated to English. I think that has been happening by degree all year and is only now being reported (but mostly in China). Apparently, firms were kept afloat during this period by engaging in usury-like rates (called Lao Gao). In fact, in China, this is being referred to as the ” Lao Gao (usury) crisis.”
The other part of this exquisite timing is that it sets up the hedge fund complex for lots of redemptions. The deadline for holders is Sept. 30 and then the Boyz — who have been heavy into the China growth story and commodities and under severe pressure to hang on — get to meet redemptions to boot. Can anyone say “margin call”? As I have been reporting, Aunt Millie has been abandoning US domestic funds, but hung in with her emerging market mutual funds. To me, this is setting up the perfect wash-out scenario. There’s a lot to cover, so I’ll be back with Part II at Actionables with more detail how we should process and position for this going forward. If anyone cares to dialogue on this post in the meantime, I’m eager to participate and get your thoughts.