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starbucks4ever (99.49)

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November 16, 2010 – Comments (12)

I've been predicting the crash of China for a while now, but the bubble has been refusing to burst. But fundamentals always win in the long run. Finally, this week, after a long period of irrationality, the first fishes floated belly up. 

All of a sudden the media realized that:

-Company earnings are often fictitious

-There are many Enrons among those Chinese high-fliers

-Inflation is on the rise, wiping out savings

-The real estate market is going to crash

-If China raises rates to combat inflation, that will be coup de grace for many real estate developers

-Exports can't be increased any more without provoking a trade war, but without export growth, the economic miracle will end immediately

-Dollar assets on the Chinese Central Bank's balance sheet are junk, these T-bonds are just a bit more scarce than sand in the Sahara. 

-The endless supply of cheap labor is going to end soon

-The commodity boom based on expectations of unlimited demand from China will now turn into bust, which, in turn, is crashing stocks of Chinese companies such as CNOOC. 

-And finally, despite QE2, these clueless jerks are again going to buy dollars because they don't have an independent economic science, and meanwhile the stock market has risen too far, too fast.

So, just as I said half a year ago, it's still the time to be a US supremacist. The Keynesian secret of America's success has not been deciphered by any Asian or European government, not even in Airstrip One (they have quite gone over to the Austerians), meaning that the US will continue to provide consumption services for the rest of the world for the foreseeable future. In the long run, this emerging market trouble is great news for American corporations. Meanwhile, we must retrench and regroup before the next rally. Too many mini-bubbles have formed at home. If S&P reaches 1150, the first bargains will begin to appear. At 1100 many valuations will become reasonable, and at 1050 the S&P will be a buy.

The bond market had a pullback recently, but I think it's temporary. Bernanke has just started buying and he will not stop anytime soon. Moreover, QE2 will not be the last one. 

Up with USD, up with US bonds, up with US virtual economy. Down with US real economy! Up with US stock market in the long term. Down with US market in the short term! Down with gold. Down with silver. Down with commodities. Down with emerging markets. Down with leveraged bulls. Down with leveraged bears. And down with CNBC, these clowns are always late to the game!

12 Comments – Post Your Own

#1) On November 16, 2010 at 12:18 PM, truthisntstupid (95.55) wrote:

Yay!  I would never invest in any Chinese stocks.

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#2) On November 16, 2010 at 12:35 PM, djemonk (< 20) wrote:

I've been suspecting the same thing.  I could never really decipher Chinese accounting, which is a giant red flag for me.

Good thinking!

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#3) On November 16, 2010 at 3:06 PM, rfaramir (30.52) wrote:

"Company earnings are often fictitious" There's a reason for the phrase caveat emptor, and the reason it's in Latin is that we've known it for a long, long time.

"Inflation is on the rise, wiping out savings" They are pegged to the dollar, so there is exactly as much inflation as we create. At least their gov't encourages the people to own gold to lessen the effect.

"The real estate market is going to crash" Not like ours. They apparently do not buy with leverage, but cash. They don't have much in the way of fixed costs for empty offices (owned, not rented, leased or taxed), so they keep them empty, ready for future use, like a warehouse full of any other useful commodity (aka a money).

"Exports can't be increased any more without provoking a trade war, but without export growth, the economic miracle will end immediately" They are transitioning to a more internal economy. No odds on whether it will be fast enough.

"Dollar assets on the Chinese Central Bank's balance sheet are junk, these T-bonds are just a bit more scarce than sand in the Sahara" True, but this hurts us both, not just them.

"The commodity boom based on expectations of unlimited demand from China will now turn into bust, which, in turn, is crashing stocks of Chinese companies such as CNOOC" Anyone counting on "unlimited demand" is a fool, yes. But my CNOOC is doing quite well thank you.

"And finally, despite QE2, these clueless jerks are again going to buy dollars because they don't have an independent economic science, and meanwhile the stock market has risen too far, too fast" Our Fed 'economists' are lapdogs, totally. Theirs are at least making noises at us for printing so much. They are buying less and less each time, and probably buying more and more gold.

"QE2 will not be the last one. Up with USD, up with US bonds" Say what??? (I removed a paragraph break here, but so what.) This is totally contradictory. Quantitative easing debases dollars and dollar-denominated bonds. Unless you just mean the short term, as treasuries are what Ben is buying with this newly minted paper, which sort of drives up the price temporarily. But long-term, more dollars means bonds are paid back with cheaper dollars, so the holders are ripped off, driving the price lower.

"Down with leveraged bulls. Down with leveraged bears" Agreed. While some will get lucky with timing, on average, leverage has to be right more than 50% of the time to cover the price of leverage, and this isn't Lake Wobegone where everyone is above average. 

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#4) On November 16, 2010 at 3:11 PM, RonChapmanJr (98.18) wrote:

I thought this post was about your oil shorts.  XOM still on the way to zero?

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#5) On November 16, 2010 at 3:16 PM, starbucks4ever (99.49) wrote:

#4,

I believe so. I'm amazed this pig has gone up so far. 

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#6) On November 16, 2010 at 6:59 PM, MichaelMolenaar (< 20) wrote:

I agree with your conclusions about China in the short run. If they ever get a better government (read: smaller and less corrupt) then I'd invest.

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#7) On November 16, 2010 at 7:26 PM, starbucks4ever (99.49) wrote:

#6,

Let it be big and corrupt, but let it at least be intelligent!

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#8) On November 16, 2010 at 11:25 PM, russiangambit (29.98) wrote:

> I've been suspecting the same thing.  I could never really decipher Chinese accounting, which is a giant red flag for me.

Honestly, can you decipher any other company earnings? Most big companies financial statement have a large dose of creative accounting in them, it is just a matter of degree.

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#9) On November 16, 2010 at 11:39 PM, russiangambit (29.98) wrote:

> And finally, despite QE2, these clueless jerks are again going to buy dollars because they don't have an independent economic science, and meanwhile the stock market has risen too far, too fast.

Chinese are stuck. You know not buying dollars is not really  choice for them. They have to buy dollars to keep their own currency low. However, they buy it with yuans, it costs them nothing to print yuans the same as it costs us nothing to print  dollars. It is just exchanging one paper for other paper, this is why fiat money is do dangerous and unstable, it is too easy to create.

Anyway , becuase the peg yuan to usd they share our monetary  policy and it is exremly inflationary for them since they don't have deflationary counterbalances like US collapsing housing market.

They brought this conundrum on themseves, for sure. But pragmtically thinking, let's assume I am chinese central banker hos do I get out of it? I have to unpeg yuan, but I have to do it slowly, I have to buy time and that means pushing US to slow down the expansion of monetary base. If China blows up it is bad for them , of course, but it is going to be very bad for the US too since China and US are conjoined.

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#10) On November 17, 2010 at 12:00 AM, starbucks4ever (99.49) wrote:

#9,

Good question. I would do the following 3 things: a) Buy SPY instead of treasuries, b) unpeg the yuan very FAST, revalue it by 200% overnight and switch the economy into domestic consumption mode within few weeks - even by government decree if necessary, and c) approach Tim Geithner from the Dept of the Treasury and express willingness to keep buying US debt securities, provided they will be indexed to the M3 money supply. By the way,  American depositors ought to do the same thing - the arithmetics of debt devaluation works independently of race :)

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#11) On November 17, 2010 at 2:41 AM, awallejr (79.94) wrote:

Please Zloj, one day you predict the market will hit 14,000, next blog you predict it will crash.  You are like Jim Cramer.  Say everything, this way you can always point to how you were "right." I told you to buy XOM at 58, last I looked even after yesterday's correction, it is 69.  Yup sucker sure will go bankrupt.

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#12) On November 17, 2010 at 9:10 AM, starbucks4ever (99.49) wrote:

#11,

It's not very often that you see the market at a local top or bottom. Most of the time you can safely say that we'll see higher AND lower valuations than today. When I say, we must pull back in the short term, that does not invalidate an earlier bullish call. If you ask me, I'd say we'll bottom around 1150 and rally from there, but investors as opposed to traders will probably find that entry point unacceptable - too expensive. Traders on the other hand could buy it and make the market do this crazy thing - rally to 14000.

The XOM trade is going OK so far.

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