A few thoughts by UBS’ Magnusson on the Chinese imploding miracle. Via Macro business.
One way or another, China is going to rebalance. The question is whether it occurs in an orderly fashion with the investment side of the economy slowing to a rate less than the growth in GDP, but still growing. Or whether it happens in the context of a sharp decline in investment, with more alarming economic and political consequences that will cut across the economy.
After two decades of unparalleled economic success, we believe China now needs a reform programme on a scale similar to that adopted 30 years ago. Without it, a heavily investment-centric and credit-intensive economic model could soon become unstable, and later stall in a middle income trap. There’s only so much labour transfer from rural areas to urban factories. There’s a limit to how high the investment share of GDP can go. Rapid population ageing is chipping away at Chinese growth. The exceptional impact of accession to the WTO a decade ago is fading. And the significant, direct role of the government, state banks and SOEs in the economy as agents of economic policy, and owners and providers of heavy investment and infrastructure may no longer be appropriate as the economy becomes richer, more complex, and in need of greater competition and innovation.
Guest post by Peter Tchir.
I just can’t talk about QE anymore. In a few hours we will know what we get and I don’t think anything is going to happen between now and then to change my view. My base case remains that the Fed delivers an incredibly dovish statement and may even introduce some “targeting” but will not have a big full balance sheet expansion at this stage.
I think large QE is reasonably built in, so the risk/reward remains biased to the downside, which is why it may be time to think about a few things that may hit the markets.
Risks to Europe
This summer basically proved you cannot have a “black swan” event when everyone is expecting a “black swan” event. The expectations were so low, and the market positioned so bearishly, that almost any action could spark a massive rally. We got that “almost any action” and the vicious short covering rally (I prefer re-coupling rally) began.
Now the market seems almost too complacent. Delays of implementation have been the kiss of death for past European market rebounds and here we are in the middle of delays. Spain should ask for the money while it is still available. The ECB may waiver. Other countries may challenge the ESM. We don’t know what the situation will look like in a month or two. I am pretty sure that once the ECB starts buying bonds the program will grow large enough that Europe will continue to buy more bonds rather than take losses on existing purchases. The slippery slope will do all the work, but Europe needs to get on that slippery slope.
This US recovery is very different from previous post recession climbs. Marc Chandler, global head of currency strategy at Brown Brothers Harriman, explains to Long View columnist John Authers what is unusual this time, why the Federal Reserve might decide to turbocharge employment with a third round of monetary stimulus or quantitative easing (QE3), and the effect it would have on the dollar.
Video click here.
A few comments by Patrick Chovanec on the Chinese Economy.
On Aug. 3, the owner of Chengxing Solar Company leapt from the sixth floor of his office building in Jinhua, China. Li Fei killed himself after his company was unable to repay a $3 million bank loan it had guaranteed for another Chinese solar company that defaulted. One local financial newspaper called Li’s suicide “a sign of the imminent collapse facing the Chinese photovoltaic industry” due to overcapacity and mounting debts.
President Barack Obama has held up China’s investments in green energy and high-speed rail as examples of the kind of state-led industrial policy that America should be emulating. The real lesson is precisely the opposite. State subsidies have spawned dozens of Chinese Solyndras that are now on the verge of collapse.
Guest post by Doug Short.
Here is a follow-up on my monthly valuation updates. When I started including the Crestmont P/E updates in my monthly valuation reporting, I developed a scatter graph to illustrate the correlation between the Crestmont P/E and inflation.
My monthly valuation updates of the P/E10 ratio (Is the Stock Market Cheap?) have not included a comparable scatter graph, so I spent some time today crafting the first chart below. I’ve included some key highlights: 1) the extreme overvaluation of the Tech Bubble, 2) the valuations since the start of last recession, 3) the average P/E10 and 4) where we are today.