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starbucks4ever (98.50)

Bursting of bubbles will continue, only someplace else

Recs

2

July 21, 2009 – Comments (11)

So the recession is over and bears are still staring in disbelief unable to comprehend what happened. But it was all very predicatable. As long as Asian creditors provided financing to Bernanke & Co to plug in every gaping hole, Bernanke & Co could speep peacefully. Can you drive your car off a cliff and still have a soft landing? Sure, it is very possible. All it takes is to convince just one person to stand under the cliff just as your car is landing on his head. And this is the real truth behind the Party's slogan "Yes we can".

As the V-shaped US recession draws to an end, the Asian economies now begin to emerge from the recession floating belly up. Their pig-headed leaders have yet to realize that the game is over, but it's all over for these countries. They just donated several trillion dollars to the US, having been talked into the quasi-Keynesian theories which they didn't understand properly. The US assets are now recovering, but these countries no longer have the money to purchase them. No wonder: all the money they had has just been used to inflate these assets. Even if these countries suddenly realized their mistake, unwinding their dollar position would now be extremely difficult - much harder than half a year ago. Hence my newfound bearish stance on China and others.

 

11 Comments – Post Your Own

#1) On July 21, 2009 at 9:55 PM, theHedgehog (< 20) wrote:

I'm not so sure there was ever another option for China.  I've said for several years that China has had no other option to buy US treasuries.

China embarked on the path of industrialization mostly by selling goods to the US at lower prices (mostly slave type labor costs) than what we could compete with.  Sure, they bought some technology and lots of raw materials with the USD they got (the government got, actually) but what else would they do with the other boatloads of the stuff?  They were keeping their wages low and paid in RMB, so there was nothing that their populace could buy with USD that they didn't have.  They (China) were already buying all the raw materials they could use; including stockpiling as much as they could and sinceUSD have no intrinsic value withing China, IOW (you can't buy a new dam or power plant using USD) so what to do? 

What do you do when you have a surplus of currency and there is nothing you need to buy?  Would it have done them any good to buy Euros or GBP or even JPY?  Not really other than as diversivication.  But, since the USD is considered as more stable than any of the rest, something needed to be done with those boatloads of USD that would continue to have them valued as USD.  The obvious answer is to buy US Treasuries, which they did. 

China's hands were shackled to the USD from the moment they started their industrialization movement.  Both sides benefited, so there's no point in China calling foul.

But, to be bearish on China?  I'm not so sure that's a good idea.  With the resurrection of the US consumer will come the resurrection of Chinese exports in volume, and the cycle will continue.

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#2) On July 21, 2009 at 10:19 PM, starbucks4ever (98.50) wrote:

What do you mean "there was no option"? There is always plenty of options. 

First, there was never any need to embark on the path of industrialization by selling goods to the US. A far better way to industrialize would be by selling goods to China. Second, when there is nothing your populace can buy with USD that they don't already have, this means you don't need USD and that makes you a fool for selling goods in exchange for something you don't need. Third, when you don't want to use money now, the obvious choice it to invest it. Fourth, there is nothing obvious about the "answer to buy US treasuries". One certainly has to have a very unconventional frame of mind to park his USD in the lousest asset available on the market, and right on the peak of the greatest bond bubble in history. 

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#3) On July 21, 2009 at 10:36 PM, theHedgehog (< 20) wrote:

First, there was never any need to embark on the path of industrialization by selling goods to the US.

This isn't going to be one of those "If I was God, I'd go back and do it this way" arguments, is it? 

A far better way to industrialize would be by selling goods to China.

But, that's not what happened, so let's us deal with reality, shall we? 

Second, when there is nothing your populace can buy with USD that they don't already have, this means you don't need USD and that makes you a fool for selling goods in exchange for something you don't need.

As already stated, they got technology and they got raw materials to build an industrial society to replace essentially a feudal farming system.  Why wouldn't that be a good plan?

Third, when you don't want to use money now, the obvious choice it to invest it.

OK, you've got  $35 Billions USD coming in every single month, what do you do?  What market can sustain that sort of investment without going into runaway inflation in anticipation of your investment?

Fourth, there is nothing obvious about the "answer to buy US treasuries".

If you can show me something else they could do with them, then I'll listen.  I'm not so certain you've really given appropriate thought to either what currency is or the sheer volume of money they have to dispose of, and yes, dispose is the right word.

One certainly has to have a very unconventional frame of mind to park his USD in the lousest asset available on the market, and right on the peak of the greatest bond bubble in history.

And yet, that's what they did, isn't it?  Unconventional, stupid, or perhaps they just didn't have another choice.  Don't get locked into the mindsed that a US dollar has some particular value.  Once it leaves our shores, it's just a piece of paper or an entry in a computer database.  It's a promise that it will have some value, but that value is the value of some goods in the US, not of goods in China.  Sure, there are some lesser countries who use USD as their currency, but that's beside the point.  And that point is that a currency has its greatest value when it returns home in some fashion or other.  If left somewhere else, it is essentially lost currency.

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#4) On July 21, 2009 at 10:52 PM, starbucks4ever (98.50) wrote:

"But, that's not what happened, so let's us deal with reality, shall we? "

It could happen this year if Chinese leaders were not so pig-headed.

"As already stated, they got technology and they got raw materials to build an industrial society to replace essentially a feudal farming system.  Why wouldn't that be a good plan?"

If they have a need for technology and row materials, then their USD should be used to buy technology and row materials.  

"OK, you've got  $35 Billions USD coming in every single month, what do you do?  What market can sustain that sort of investment without going into runaway inflation in anticipation of your investment?"

US stock market is currently valued at $10 trillion. 

"If you can show me something else they could do with them, then I'll listen. "

Buy Berkshire Hathaway, for crying out loud.

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#5) On July 21, 2009 at 11:03 PM, theHedgehog (< 20) wrote:

It could happen this year if Chinese leaders were not so pig-headed.

Yes, but let's stick with reality, OK?

Buy Berkshire Hathaway, for crying out loud.

Given the investment capital the Chinese have, BRK is peanuts.  BUT, more importantly, at this kind of money it's Not Liquid.  Let's remember that the reason we make an investment is that we expect to actually make money on it.  If we move the market appreciably (and $1T WILL move a market) then we'd better be very very careful both when we buy and when we sell.  We'd also better make sure that we own something that we can actually sell in a hurry, if we need to without getting a haircut down around the shoulders.  Buying out BRK in its entirety doesn't give us that.  What it does give us is a menagerie of companies that we'd then Have To Manage.  That wasn't our goal.  The goal is to have a fairly liquid investment that will at least not lose us too much money in the worst case, given the constraint that what we have to invest with is USD.

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#6) On July 21, 2009 at 11:29 PM, starbucks4ever (98.50) wrote:

"If we move the market appreciably (and $1T WILL move a market) then we'd better be very very careful both when we buy and when we sell."

Nobody is forcing you deploy $1T at a time. Now you deploy $100B and buy INTC. Six months later you deploy another $200B and buy BRK-A. A year later you deploy another $100B in Japan, for a change, and buy Toyota (and then the Japanese rack their brain how to dispose of your dollars). The next year you deploy another $100B and buy 1% of SPY index. This woun't double or triple the market valuation.

" We'd also better make sure that we own something that we can actually sell in a hurry, if we need to without getting a haircut down around the shoulders."

By that logic, nobody should ever buy a house regardless of the price.

"What it does give us is a menagerie of companies that we'd then Have To Manage. "

Why would you have to manage it? Is Warren doing a bad job managing BRK-A? 

"The goal is to have a fairly liquid investment"

After you have assembled an emergency fund for a rainy day (say, $200-300B), liquidity becomes a secondary priority.

"that will at least not lose us too much money in the worst case"

Unless you know how to wrest control of the printing press from Bernanke, treasuries are certain to lose you money even in the best case.

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#7) On July 22, 2009 at 12:04 AM, theHedgehog (< 20) wrote:

One more goal that I almost forgot:  The investment needs to be USD based, because the RMB is essentially pegged to the dollar.  Why so?  Because in order to keep the money mill going (USD in, cheap stuff out, USD in...) you must prevent the RMB from rising in value against the USD. 

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#8) On July 22, 2009 at 12:10 AM, starbucks4ever (98.50) wrote:

"you must prevent the RMB from rising in value against the USD"

Not true. If A charges $1 for his labor, and B charges 10 cents, then B gets the order. Then RMB quadruples, and now A charges $1 and B charges 40 cents. Guess who still gets the order?

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#9) On July 22, 2009 at 12:21 PM, theHedgehog (< 20) wrote:

"you must prevent the RMB from rising in value against the USD"

Not true. If A charges $1 for his labor, and B charges 10 cents, then B gets the order. Then RMB quadruples, and now A charges $1 and B charges 40 cents. Guess who still gets the order?

You're ignoring reality again. 

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#10) On July 23, 2009 at 4:35 AM, jhenry2307 (< 20) wrote:

Both trucks are car qualify for the Cash For Clunkers but not the motorcycles.

Jhenry
Blogger
www.cashforclunkersfacts.info
http://www.cashforclunkersfacts.info

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#11) On July 23, 2009 at 2:24 PM, starbucks4ever (98.50) wrote:

jhenry2307, you are on my ignore list.

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