Thursday January 26, 2006 - 11:49:22 GMT
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Black Swan Capital - www.blackswantrading.com
“Big Brother is watching you.”
Yup! There they go again. Another 9%-er in the bag! Well done boys!
Of course we are talking about China and the boys at the Politburo. They seem to have an amazing ability to grow their economy at 9%. It’s as if, well you know, it was “planned.”
We have also noticed a pattern. Right around Davos-lick-lick-time a major US corporation gets on its hands and knees and begs China to let them in—no matter China turns the internet into a security organ of the state apparatus. This year of course we have the illustrious Google. So high and mighty they are when the US government wants to take a peek, but all open and willing to sensor for the boys in China. After all, everyone loves China. They grow at 9% don’t you know.
Stratfor.com doesn’t love China. And they have the guts to say so. Here is a lead in to a very good piece on the China economic model from Stratfor that was sent to us by a friend [our emphasis]:
“…just like the phoenix, the idea of an inevitable Chinese juggernaut is a myth.
“Moreover, Western markets have been at least subconsciously aware of this for a decade. More than half of the $1.1 trillion in foreign direct investment that has flowed into China since 1995 has not been foreign at all, but money recirculated through tax havens by various local businessmen and governing officials looking to avoid taxation. Of the remainder, Western investment into China has remained startlingly constant at about $7 billion annually. Only Asian investors whose systems are often plagued (like Japan's) by similar problems of profitability or (like Indonesia's) outright collapse have been increasing their exposure in China.
“Once the numbers are broken down, it's clear that the reality of China does not live up to the hype. While it is true that growth rates have been extremely strong, growth does not necessarily equal health. China's core problem, the inability to allocate capital efficiently, is embedded in its development model. The goals of that model -- rapid urbanization, mass employment and maximization of capital flow -- have been met, but to the detriment of profitability and return on capital. In time, China is likely to find itself undone not only by its failures, but also by its successes.
Okay. We won’t likely see Stratfor hob-knobbing with the Chinese intelligentsia. And they have been “early” on their call for a Chinese slowdown. Or maybe they haven’t been “early.” As Orwell said, “Who controls the past controls the future: who controls the present controls the past.”
Needless to say, Stratfor’s view makes eminent sense to us. But that may not mean much. For we are known to babble incoherently at times (more than we’d care to admit), and lately, we’ve been babbling about parabolic curves and space shuttle launch trajectories…
Then after shorting copper again, and getting burned again, it shakes us from our catatonic-like state—losing money has a way of doing that.
Many moons ago, November 2004, we penned a pretty ugly piece for Asia Times online. I think the title ended up to be something subtle like: “The Coming Crash in China.” Anyway, although we’ve been “early” with that call, and may be totally wrong, we still believe China represents a classic Austrian school boom-bust cycle. Here are three paragraphs we wrote back on November of ’04, we cling to it still:
“What we have witnessed in China is not about efficient markets, rational investors, or bell curves, which represents the fairy tale land of financial theory. It’s about rank speculation on the part of the crowd, with the Peoples Bank of China and the US Fed acting in key supporting roles as accomplice.
“’The economy is not healthy enough wealthy enough for them. The resources they need for completion are not available. The resources they need must first be drawn from other enterprises. If the means had been available, then the credit expansion would not have been necessary to make the new projects appear possible.’ writes Ludwing von Mises.”
“…As much as we would like to believe China represents a rip roaring free market economy—the implication of a fawning financial press—the fact is China’s economy is still anywhere from 50-70% centrally planned. And we know centrally planned economies are prone to shortages and bottlenecks. They lack the flexibility to properly absorb and assimilate huge pools of investment. Thus, it spurs political corruption.”
There’s much talk about yuan revaluation of late. We saw much anticipation last year. The eminent international economists in our midst were talking numbers like 20% to 50% increase in the value of the yuan. What did we see, 3%?
One of our background themes, farther in the background than many others, is that China slows much more rapidly than expected. And such a slowdown would be a major boost for the US dollar, as funds rushed back home for safety.
Granted, we’ve been surprised how ingenious the boys from Bejing have been to keep the music playing. But now they gang must push growth into the hinterlands and reduce the massive waste of resources fostered by the “growth at all costs” strategy which ushered in the economic boom. It is a policy that is fraught with potential economic and political costs.
So maybe the big surprise this year that will put an end to the complacency many are warning about will flow from China. Or its 9% as far as the eye can see and keep on buying copper.
Black Swan Capital
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