Archive for May, 2009

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Third turning point for silver

Sunday, May 31st, 2009

Today, we will continue on the topic of silver investment. This article will form part of a series on silver. In this series, we will explain why we believe silver is going to be a great investment in the coming years, probably even better than gold. As we travel along this series, we will collate the articles in a guide, Why silver will be a better investment than gold in the coming years?.

Previously, in What determines the gold-silver ratio?, we talked about the current and average historic ratio between gold and silver. Today, we will talk about what’s happening in the silver investment market..

By the early 1960s, silver price had risen to US$1.29, due to monetary inflation. At that time, coins in the US had silver in them. At that price, the value of silver content was approximately equalled to the face value of coins. But as monetary inflation continued, Gresham’s Law kicked in- it became more and more profitable to melt the coins and sell the silver for a profit in the spot market, which means silver coins were disappearing from circulation. Hence, the US government began selling silver from its then 3.5 billion ounces stockpile to keep its price down. Eventually, the government removed the silver from coins. As we wrote in Artificially undervalued coins: government interference cripple the free market,

This is exactly a repeat of what happened in the 1960s when the US government made it illegal to melt silver coins. The fact that the underlying value of a coin far exceeds its face value proves that there is a serious underlying problem in the monetary system.

As a result, the public became net buyers of silver in the 1960s.

In 1979, as silver price rose rapidly, the public became net buyers of silver for the second time in history, causing silver to explode to above US$50.

In 2006, the public became net buyers of silver again. As the CPM Group Silver Yearbook reported in 2007,

Last year and this year represent major turning points in the silver market years in which a tectonic shift in the silver investment demand occurs the likes of which are very rare. Specifically, investors shifted from being net sellers of silver into the market from 1990 through 2005, to being net buyers of silver in 2006.

This is the third turning point in the history of silver.

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Posted in Silver | 4 Comments »

Now is the time to implement asymmetric payoff strategy?

Thursday, May 28th, 2009

A couple of years ago, when it was still a raging bull market, we wrote this guide, How to profit from a stock market crash?. In that guide, we gave a thorough treatment on the correct and safe way to profit from a possible price crash in the context of a bull market. The way to do it is to implement a trading strategy that carries an asymmetric pay-off. An asymmetric pay-off strategy is one that, as we said before in How to take advantage of an impending crash- Part 4: asymmetric payoff,

First, you structure your bet in the market such that if you lose the bet, your loss is very tiny, but if you win, your gain is very massive. Next, you bet that the market will crash within a specific period of time. If you lose that bet, place another bet for the next period of time. You do this repeatedly until the day of the Black Swan event when your profit overwhelmingly overshadows your accumulated small losses.

Obviously, the disadvantage of this strategy is that it requires fortitude to absorb small losses indefinitely while waiting for a highly rewarding final vindication in the end.

Today may be another ripe time to set up up such a strategy for aggressive traders. As this news report opined,

Apparently, Wall Street has factored all bad news into stocks. Is that a good sign, or should investors be worried if something unexpected really happens?

The market is putting itself in a position that negative surprises are no more. It may be true, but then again, Black Swans can still be lurking. We had listed two possible Black Swans in Two major Black Swans looming ahead for the global economy and one more in Is this a bear market rally or a turning point?. These Black Swans can potentially introduce another round of panic in the financial markets. For Australia, we see another possible trigger for panic- the Australian banking system (see How safe are Australian banks?).

If you are an aggressive Black Swan trader, now is the time to sharpen your tools.

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Posted in Looking Forward | No Comments »

Credit growth in Australia- a portent of something?

Wednesday, May 27th, 2009

Today, we will show you a graph:

Year-on-year credit growth till March 2009

This graph shows the year-on-year credit growth in Australia from January 2000 to March 2009. As you can see, after credit growth peaked in January 2008 at 17.28%, it declined to 5.17% in March 2009. As you can see from the graph, the decline is pretty steep.

In a highly indebted nation like Australia, credit growth is what keeps the economy ticking. Such a rapid deceleration in credit growth will have a serious impact on the economy.

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Posted in Economics/Finance, Market Observations | 13 Comments »

Preserving jobs at all costs leads to economic stagnation

Sunday, May 24th, 2009

In Australia, one of the common political slogans we hear is “Jobs! Jobs! Jobs!” The objective of any politician to win votes is to find ways to create and preserve jobs, either through direct government stimulus spending or subsidies. In this respect, politicians here will have much to admire Japan. It is a country where the culture of lifetime employment is alive and well, with the government playing a major role in preserving it.

But, government interventions to preserve jobs as a sole end have a price to pay. To understand why, let’s revisit Are governments mad with ?stimulating??,

As long as the structural problems are not dealt with, the economic slump will not end. As we quoted Wilhelm R?pk?s 1936 economic classic at Overproduction or mis-configuration of production? in January 2008,

It is an indisputable fact that a general slump, which does not permit of the scale of production reached in the boom being maintained, sets in during the crisis, and it is equally indisputable that this general slump is the result of the total demand suddenly falling behind the total supply. But let us make sure what this means and what it does not mean. Under no circumstances can it mean that the cause of the general slump is to be sought in the fact that production has outstripped consumption and that too many of all goods at once are being produced.

The root of the global economic crisis is the structural imbalance between production, consumption, and real capital investment. Government policies to preserve jobs as a sole end without plans to address the structural imbalance will undermine the future competitiveness of the nation.  As this article showed an example from Japan,

When the sheet metal orders coming into his small business, High Metal, fell by half last October, it never occurred to Masaaki Taruki to lay off his workers.

Instead, he set about brainstorming new projects to occupy them. An indoor vegetable garden? A handicrafts workshop?

Because of government subsidies, Mr. Taruki in the last three months installed rows of parsley, watercress and other plants, using factory space that has been empty since the company disposed of unused machinery. High Metal?s staff tend the sprouts religiously, topping up the water supply, adding fertilizer and adjusting the fluorescent lights.

When sales at the machinery maker Shinano Kogyo in central Japan plunged some 70 percent late last year, the company started dispatching its idle workers to sweep the streets and pick up trash in the wider community, while remaining on the payroll.

Such workers’ paradise in Japan must be the dream of politicians. But there’s a nightmare to such a dream,

Companies slash wages, which reduces consumer spending. Businesses become more reluctant to take on new recruits, shutting young people out of the labor force. And productivity plummets, hurting Japan?s competitiveness in an increasingly aggressive international market.

?By helping to maintain excess employment, you face the risk of keeping alive businesses that are no longer competitive, and perhaps whose productive era is over,? said Hisashi Yamada, an economist at the Japan Research Institute, a private research group in Tokyo. ?This could hurt employment in the long run. What you need is more structural change.?

Very unfortunately, in the context of an economic downturn, maintaining employment, and promoting structural change in the economy are opposing goals in the short-term. Structural changes involve creative destruction, which results in loss of jobs and rising unemployment. In countries with excessive private debt levels (e.g. US, UK, Australia, Spain, Ireland, etc), such changes are so painful that any long-term benefits for the economy are currently incomprehensible. But without structural changes, the economy cannot remain competitive and return to a sustainable growth path. If a country loses its competitive edge, the standard of living of its citizens will decline.

In Japan, the result of such lack of courage is economic stagnation for 15-16 years. Today, Japan has fallen into a depression that is the worst since the Great Depression.

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Posted in Market Observations | 15 Comments »

What determines the gold-silver ratio?

Thursday, May 21st, 2009

Our loyal readers will know that we wrote extensively on gold. In contrast, we seldom mention silver. So, we will be devoting some time on silver in the coming days.

First, as we wrote in A brief history of silver and bimetallism, both gold and silver functioned as money in most of history. Historically, each unit of gold were priced as 12 units of silver on average. There were variations across different regions and time period. For example, in Ming Dynasty China, the gold/silver exchange rate was 1:4 while in ancient Egypt, it was 1:1. But overall, the ratio was 1:12. As we wrote in The behaviour of silver and gold prices,

During the 20th century, the ratio was at an average of around 1:47, from a low point 1:38 in 1910 and 1:101 in 1990. Currently, it is at a ratio of 1:49 [March 2008].

Today, the ratio is at 1:66. It even reached past 1:70 recently.

Gold and silver prices track each other very closely. As we wrote in The behaviour of silver and gold prices,

Since 2001, silver and gold prices have been consistently moving together at a correlation of 0.98 (0.00 means completely no correlation and 1.00 means perfect correlation). Though they tend to track each other, the ratio between them tends to vary.

So, why did the ratio moved from 1:47 in March 2008 to 1:66 today?

To understand why, we must first understand the nature of silver. Silver is viewed as a monetary asset in the same way as gold. From this perspective, both gold and silver are monetary relics from the past. But for silver, it has broken from the past. Unlike gold, silver has much more industrial use. In fact, it is said that silver is the indispensable metal as scientific discoveries in the 1960s saw the widespread industrial applications of silver. Here are some examples of silver usage: batteries, bearings, biocides, brazing catalysts, coins, electrical conductors, electronics, electroplating, jewellery, medical equipment, mirrors, reflective coatings, photography, silverware, solar energy cells, soldering and water purification.

The short-term correlation between gold and silver prices are due to the market’s view of  both of them as monetary asset. But the variations in their exchange ratio are probably due to the industrial demand for silver. This is most obvious in the second half of 2008. As the global economy fell off the cliff in that year, industrial demand collapsed, driving base metals and asset prices to the floor. At the same time, the gold-silver ratio shot up. Over the past couple of months, the ratio drifted downwards.

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Posted in Silver | 2 Comments »

Will China fall under popular revolt?

Wednesday, May 20th, 2009

There is no doubt that the Global Financial Crisis (GFC) has hit China very hard. As reported in China’s Way Forward,

Idle factories, moored container ships, widespread bankruptcies, massive migration back to the hinterlands, strangely clean air?the signs of depression are everywhere in China. Because it makes so many of the goods the world isn?t buying now, China stands to be worse hit than the rest of the world ?just as America was during the Depression, when it was the world?s sweatshop.

There is a school of thought that believes that if the Chinese government is not able to maintain economic growth, then the government will lose legitimacy in the eyes of the people and there will be political upheaval as a result. The extreme views in this school of thought even envisage the break-up of China by comparing it with the Soviet Union. As that article says,

Its unspoken premise is that average Chinese people just barely tolerate the social bargain the government now offers?limited freedom, potentially unlimited wealth. So if the regime ever falls short on its material promises, the deal will be off and people will rebel.

But as this article noted, this school of thought do not understand the cultural and political reality of modern China. In the 20th century, China suffered civil wars, foreign invasions, tyranny, human-induced starvation (Mao’s Great Leap Forward). It was only more than 30 years ago that the brutal Cultural Revolution ended. To put it simply, the tremendous sufferings of the Chinese people are still recent memories. As one Chinese businessman said during a documentary TV interview, the prosperity of today’s China seems like a dream to him as it was only recently that he was living in relative poverty.

No doubt, the wealth gap in China has much to be reduced and there are many endemic issues yet to be solved (e.g. inequality, corruption, uneven economic growth, environment, pollution, lack of political freedom, etc). But relative to what the Chinese people had to endure during their recent past, their lives have improved tremendously. As that article said,

People doing routine jobs have been through great hardships and dramatic swings of fate. Last year I interviewed a party official in Shanxi province who was laying out his regional-development plans. Every 10 or 15 minutes, he would stop and say (through an interpreter), ?Do you understand? If it had not been for Deng Xiaoping, I would be behind an ox in a field right now. I would not be sitting here wearing a necktie and talking to a foreigner.? Or, ?Do you understand how different this is? My mother has bound feet!? A scholar I know in Beijing once offhandedly remarked that he had developed self-confidence when learning that he could survive for four years as a teenager on a labor gang during the Cultural Revolution. People in their teens and 20s were not on the labor gangs?kids today!?but they have heard the stories.

From this perspective, the ‘economic depression’ caused by the GFC is hardly worth a mention compared to the sufferings even 30 years ago. Despite the discontent and protests of many Chinese, the object of their fury is usually not against the ‘system.’ As that article said,

But when people complain, it is usually about those crooked bosses, reporters, mayors, or bureaucrats?not about the system or its rulers. Principled protests against the system and its repression certainly do exist, as with the daring ?Charter 08? petition for civil liberties signed by more than 300 intellectuals late last year. But that is not the norm.

…

Perhaps these workers are missing the big picture, but for now they generally act as if they expect the national system to protect them against lapses at the local level.

Thus, if the Chinese economy still has much room to deteriorate, we doubt there will be any mass revolts that will fracture China.

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Posted in Geopolitics & Politics, Looking Forward | 16 Comments »

Is this a bear market rally or a turning point?

Sunday, May 17th, 2009

The global stock market has been rallying for the past couple of months already. There have been talks of “green shoots” of economic recovery. There are hopes that China’s stimulus spending will bring out renewed demand for Australian commodities. Already, there are reports of record Chinese demand for commodities (see China on buying spree).

We heard of many retail investors piling into the stock market, not wanting to miss out in the turning point. Since the stock market tends to be a leading indicator of future economic activity, many are seduced by the idea that this rally is predicting a turning point in the global economy. Unfortunately, as with many cliché ideas, this is only half-true. This is an example of a mental pitfall called lazy induction (see Mental pitfall: Lazy Induction).

To be more precise, the stock market anticipates but not predicts turning points. What this means is that economic recoveries are followed from recoveries in the stock market, but a stock market rally does not necessarily indicate an economic recovery. A very good example will be the number of bear market rallies in the chart of the Dow Jones from 1929 at Bear market rally on the works?.

Now, let’s take a read at what Marc Faber says about this rally in his latest market commentrary:

The economic news in the world is hardly getting any better, but the rate of economic contraction has slowed down somewhat as the  governments? stimulus packages begin to have some impact and as some replacement demand is starting to support consumption. However, to talk  already now about a sustainable economic recovery seems premature because whereas some sectors (autos) and regions may be stabilizing, others are still in a steep decline.

The global economy are declining, but the speed of decline is not as fast as the second half of 2008. Therefore, this stock market rally is anticipating that this reduction in speed is a turning point.

The next question to ask is this: will the stock market be lower or higher in 2010? Even Marc Faber admitted not knowing the answer to this question. Indeed, it is certainly possible to see another bout of breathtaking crash that can rival the panic of 2008. There can be many possible triggers for that, including:

  1. Collapse of a major European bank. Many big European banks lent so much money to Eastern Europe that their asset books are even bigger in size than the GDP of some European nations! Meanwhile, many Eastern European economies are in serious trouble, which means there will be many gigantic bad debts floating around. The European Union is an economic union but not a political union. Therefore, the European Central Bank (ECB) does not have the same level of authority and political support as the US Federal Reserve. Individual nations using the Euro as their currency cannot simply print money to bail out their financial system because they have surrendered their economic sovereignty to an intra-national authority. To do that, there can be a situation whereby taxpayers of say, Germany, are asked to bail out the taxpayers of say, Spain. Politically, this is too much to ask. Therefore, if a banking crisis is to hit Europe, the political deadlock can result in another panic in financial markets.
  2. Swine flu
  3. Collapse of Pakistan

At the same time, governments are already embarking in massive money printing (quantitative easing), stimulus and bailouts spree. As we said before in Marc Faber vs Steve Keen in inflation/deflation debate- Part 2: Marc Faber?s view,

… while the deflationary pressures will continue, it can be slowed down via unconventional monetary policies (see ?Bernankeism and hyper-inflation?), gigantic fiscal policies, bailouts and even government fraud. The result will be a long drawn out affair, akin to a grinding trench warfare and a war of attrition on the real economy as credit contraction (IOU destruction) collide head on with money printing, massive government spending, stimulus and bailouts.

If government pumps so much money into the financial system, it is only a matter of time before asset prices rise again, not because of improving economic outlook but because of the sheer weight of money. The problem will be massive consumer price inflation once the Global Financial Crisis (GFC) is over, which is a problem for the next generation to solve. The outcome will be what we wrote in Zimbabwe: Best Performing Stock Market in 2007?.

In any case, no matter what happens, the peak of economic boom in 2006/2007 is over and will not be back soon. Investors who are expecting that will be disappointed.

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Posted in Looking Forward, Market Observations | 8 Comments »

Why do some black box strategies that ‘worked,’ stop working when you use it?

Thursday, May 14th, 2009

Let’s imagine you come across an online advertisement that tries to sell you a ‘secret’ trading technique that brought investors untold returns over the past, say 20 (or 30 or 40 or whatever) years. That technique is based on complex black-box algorithm that involves processing huge amount of data. The underlying message from the advertisement is that since this technique is successful over so many years, it is one that ‘works.’ That advertisement may show you past trading records and perhaps even back-tests of that technique.

Impressive isn’t it?

How was the ‘secret’ trading technique derived? Such advertisements will usually claim that the ‘soundness’ of the techniques are based on studying the market over a long time and ‘proven’ by the ‘stellar’ performance of the technique. But in reality, such ‘proofs’ are an illusion. Let’s turn to the Chapter 1 commentary of Benjamin Graham’s The Intelligent Investor:

?If you look at a large quantity of data long enough, a huge number of patterns will emerge?if only by chance. By random luck alone, the companies that produce above-average stock returns will have plenty of things in common. But unless those factors cause the stocks to outperform, they can?t be used to predict future returns.

This is the basic thesis of Nassim Nicholas Taleb’s book, Fooled by Randomness. Therefore, buyers beware!

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Posted in Investor Education | 6 Comments »

When will the next bull market for commodities arrive?

Tuesday, May 12th, 2009

Following from what we wrote at Does the major Chinese economic slowdown signify the end of the commodities boom?, what is our view on the long-term prices of commodities? To understand our view, you will have to follow our explanations below…

No doubt, the global financial markets have experienced a serious bout of price deflation for financial assets and commodities (except US Treasury bonds), especially in the second half of 2008. So far, government stimulus, bailouts, rescues and money printing are minuscule compared to the overwhelming tide of de-leveraging. It has been said that a value of US$33 trillion was wiped out from the global financial markets. So far, government interventions had only forked out at around a few trillions of dollars at most. These numbers are not meant to be accurate, so please do not quote us on that. The point is, compared to the amount of ‘wealth’ lost in the financial asset markets, government injections of money so far are just a small fraction of what was lost. If you include the coming de-leveraging by consumers in the real-economy, then the outlook for the economy and asset prices is even bleaker. Having said that, if governments continue to inject even more money unceasingly, it’s only a matter of time reflation will occur. Indeed, the current rally in commodities and stock prices shows that reflation is working for now.

So, while asset (and commodity) prices are deflating at such unprecedented speed, what will happen to real physical investments in the real economy? Such volatility in prices will make it very difficult for businesses to engage in long-term real capital investments. Using the mining executive as an example in Real economy suffers while financial markets stuff around with prices,

For example, place yourself in the position of a mining company executive today. Commodity prices are falling precipitously over the past few months as the global economy is staring into a possible depression. At the same time, you know that China and India is still going to demand lots of commodities in the very long run in the coming decades. Besides knowing these two basic facts, there will still be great uncertainty in prices as the forces of deflation and inflation battles each other for supremacy, regardless of which forces will eventually win. Will we even be using US dollars to calibrate prices in the future? Who knows? In such an indeterminate environment, it is clear that many more mining projects will have to be shelved. Some have to be abandoned. You may be scratching your head, wondering whether to push forward your project plans.

As we have already seen in various news reports, mining companies are already losing mining, closing down their mines, laying off staffs, cutting production and so on. These will result in lower productive capacity in the long-term. Since the mining business is very capital intensive, it is not easy to ramp up production at a flick of the switch.

Now, let’s turn our eyes at China. As we explained before in Does the major Chinese economic slowdown signify the end of the commodities boom?, a major economic correction for China does not spell the end of Chinese economic growth. Eventually, they will recover and consume resources hungrily again (see Example of a secular trend- commodities and the upcoming rise of a potential superpower).

The question is, when will China recover? Will it happen within our life-time? Some reckon it’s a matter of waiting a couple of years. Others are more sceptical. But let’s assume that a Chinese recovery will happen in a few years time. At the same time, with the long-term productive capacity of mining companies severely impaired by the effects of the credit crunch, what will happen to commodity prices?

Please note that this does NOT mean that commodity prices will surge soon. Rather, this credit crisis is setting the stage for a new commodity bull market from a very low base. The question is, are the current prices near the low base? Or is there more deflation in prices to come?

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Posted in Commodities, Looking Forward | 12 Comments »

Will Chinese economic pick-up save Australia?

Sunday, May 10th, 2009

Recently, one of our readers wrote in to ask,

I wonder if you could share your views on the short and long term impact of the current economic circumstances on major mines such as Roxby Downs in SA, which has the world’s largest deposit of uranium oxide, copper, gold and silver.  There still seems to be conjecture as to whether the major expansion of that particular mine will proceed, of which much  reliance on the local economy has been placed.  In recent times, many staff have been laid off due to the cut in production.

Do you feel there will be any circumstances which will see mines like this one pick up again, and what timeframe may this occur?  I have read previous comments that China will begin stockpiling commodities again  now that the prices are low, however I also read yesterday that their economy has been shrinking at a rapid rate of recent times.

I also know several people who own investment properties in mining  towns.  Do you think it could be wise for those people to get out while they can, or is the medium-long term picture rosy for mining town economies?

First, we must again stress that we are not providing investment advice here. Thus, we cannot advice whether this stock or that property in whatever village is a good investment or not. All we provide here are general opinions.

Now, back to our reader’s question. Essentially, this query was about when and whether China will restore itself to the gangbusters economic growth of 2007 to restart the commodities boom again. That in turn will provide hope for Australia’s economy to recover sooner.Let us take a look at base metal prices below:

5 Year GFMS Base Metal Index

As you can see, base metal prices made a double peak in 2007 and the first half of 2008. Then it crashed to a record low in around January 2009 before making a slight recovery since then.

The first question to ask ourselves is this: When prices hit the record highs in 2007/2008, were they primarily driven by real demand from China or by speculative forces? This question reminds us of an article (“Who is to blame for surging food and oil prices?”) we wrote 12 months ago,

So, let?s say a passer-by told you that petrol price had doubled more than 2 ½ times over the past 2 years, would you laugh at the passer-by? ?Yeah right!? you may say. ?Where?s the queue and rationing??

The crash of 2008 makes it clear that it was speculative forces (abetted by monetary inflation) that drove prices to such bubbly high levels. But isn’t China going to grow to a super power and thus, require colossal amount of commodities? As we wrote 14 months ago in “Example of a secular trend- commodities and the upcoming rise of a potential superpower”,

Armed with the understanding from our previous article, Understanding secular vs cyclical, you can see that the rise of China (and India, Russia, etc) that we just described is a secular trend. Thus, the demand for commodities that supports this secular trend must also follow a secular trend too.

But does that automatically mean that commodity prices will go up and up for ever and ever for a very long period of time? From the short-term bubble in metal prices in 2006, it is obvious that there are many speculators who misapplied the commodity super-cycle theory to the extreme.

…

Sure, commodity prices can even correct 50% in the short to medium term, but do not let the cyclical sub-trends cloud your understanding of the underlying secular trend.

Let’s take a look at Australia. There is no doubt that Australia benefited greatly from the lead up to the bubbly prices of 2007/2008. The bubbly prices brought in huge amount of revenue for Australia’s mining companies. So, property in mining towns sky-rocketed. But that new found prosperity had a dark side- debt. Many mining companies borrowed deeply to fund expansions and developments. In order for such high level of debt to be a winning strategy, the bubbly prices have to be maintained. The crash of 2008 exposed these debt-laden mining companies to be swimming naked (we wouldn’t name names here, but you know at least a couple of big names).

Sure, as we said before in “Example of a secular trend- commodities and the upcoming rise of a potential superpower” and “The Problem that can throw us back into the age of horse-drawn carriages”, the secular growth of giant nations like China and India will mean that the demand for the earth’s resources will have to grow tremendously over the decades.

One of the most important virtues required of an investor is patience. The secular growth of China/India will not occur overnight because it is a trend that will take decades to mature fully. The problem is that many investors/mining companies are so leveraged to the secular growth of China/India that the mighty boom has to occur overnight to make windfall gains. But, as we explained before in “Answer to quiz: error in long-term gearing,” if that does not happen, they can be wiped out in the interim,

The problem is that asset prices do not go up in a straight line. This is especially true if the investor bought the asset at bubble prices (e.g. before the panic of 2008). In the short-run, asset prices can suffer major correction. During bubble prices, when the risk of a major correction is at its highest and investors? optimism at its peak, applying this logical error on one?s investment can result in devastating losses. When the price correction occurs, losses are magnified and the investor?s equity can get wiped out. Then subsequently, when asset prices recover, the investor will not have the equity to take advantage of the upswing. Even if the investor has the equity to take advantage of the upswing, so much capital had already been lost that the overall return in nominal terms can still be negative.

Even if no leverage is involved, buying at bubbly prices will mean that your patience has to be tested significantly. So, the next question is, how long do we have to wait? As we wrote before (in January 2008) in “Can China really ?de-couple? from a US recession?“

The needs of the Chinese consumption economy are different from the US consumption economy. Some Chinese are rich. But some other parts of China are unbelievably poor. Wealth distribution in China is rather uneven and there are still many pressing social and environmental issues to be solved. Currently, the Chinese export economy is tooled towards US consumption. To re-tool and re-configure the Chinese economy towards its domestic needs requires a period of adjustment in which capitals are destroyed and built.

Also, consider the sober warning from a Chinese government economist at “China won’t see quick recovery: govt economist”,

Fan added that China still suffered from excess capacity in some industries, meaning that some obsolete production capacity should start to be phased out starting from this quarter, a process he said could take several years.

The process would be painful, but necessary, he said.

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Posted in Looking Forward, Market Observations | No Comments »

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