Is China a bubble?

Last week i got a lot of stories that China is a bubble or will become one soon.
Chris Watling had one and also John Mauldin in its weekly column Out of the Box told by the Russian Vitaliy Katsenelson from het Casey Report (in http://www.businessinsider.com/shadow-over-asia-2010-11) his as usual pessimistic thoughts about tremendous Chines bubbles.

The Russian had three good reasons why everything will go wrong in China ("the only question is when"): the way too big credit growth of 29% that makes plausible a big part of that will be classified as misinvestments over some years (that is why China will do evrything to limit credit growth to 15% next year; once 29% is mo problem after a weak year, but several years is dangerous); the second reason is the over speculation in real estate that has made houses unaffordable. In the chart you see that a house in Shanghai or Bejing costs 12 or 15 times the average yearly income and in total China it is 9 times, even more than the 7 times of Japan in 1990 (N.B.: it is not just to judge affordability with the two most expensive cities; that is the same houses in the US are unaffrdable because they are so expensive in Manhattan and San Francisco,(the VS and China are much bigger than these two expensive cities)). Also last years for everu Chinese should be constructed 25 square feet commercial real estate. The vacancies are high. Renting of apartments doesn't make sense by the way, the value as rented is much lower than vacant and so vacant real estate gives better returns than rented real estate at current negative real interest rates.
The third reason is that government determines investments. In history that hasn't gone well for a long time. The free market, the invisible hand, should determine investments.

Watling has about the same reasons, but doesn't see the bubble bursting that soon. Investments are 45% of the GDP, that is too much and guarantees malinvestments, especially in infrastructure and real estate.
Consumer debts rose a 10% of GDP, that is going too fast.
The local government is for the financing of its spending way too dependent from selling land to speculators/ developing the real estate by its own constructors at abig profit (that is not so different in other countries, most local governments don't have other tricks to get some money).

Both compare the growth of China with that in Japan, thee Sowjet Union and the Asian tigers.
Watling cites Krugman in his study about Asia in 1994. In the fifties the growth in the Sowjet Union was tremendous (especialy according to their statistics). That was then reason enough for plenty of scientists to forecast that in the seventies the Sowjet economy would surpass that of the US. A central governed state should produce better growth people thought then and now for China. That leads the pessimistss now to the conclusion China will never surpass the US [N.B.: that is ridiculous, in dollar terms is the Chinese growth at least 10% higher than in US (5% real GDP and 5% because of higher inflation in China combined with a stronger yuan)].

China is growing about 10% each year since 1979. Before 1979 Japan did about the same after 1950 until 1990 and for example Taiwan and South Korea did that from 1960 until 1997. After that period the growth was much lower: about zero in Japan, but still about 4% in South Korea and Taiwan.
That probably also will happen with China: 40 years after 1979 is 2019. After every about ten years China had a big crisis (credit crisis 2008, Asian crisis 1998, Tienanmin in 1988, end of cultural revolution in 1978, famine 1957/8 etc). After 1978 China recovered easily. After 2019 that could become much more difficult.

For the time being China has a long road to go to converge to the prosperity of for example Korea in 1997. For that you need huge investments, also in infrastructure, so that is not so bubbly yet. The prices of houses in the chart are for houses only buyers, this is the upper middle class and higher, can afford, so for incomes that are substantially higher than average. The wages are rising 10 to 15% in the coming years, so houses are not clearly too expensive. The houses that were built were too much only for high incomes. Fortunately te Chinese government will build a tremendous lot of new cheap houses for the lower incomes (so China still needs steel and copper, even when they maybe will build less expensive houses). That acceleration will lead to an overbuilt situation in Chinese houses, but it will last several years 98?) to get the housing crash.
A centrally planned economy can be excellent in the convergency process to the whealth of the West. When you are there or almost there it becomes much more difficult, see Japan after 1990. But it is still possible: see Singapore that in thecoming decades will become much richer than the US or Europe (at current policies).
A Singapore, that probably will prove to be too difficult for China, China is too big for that and is not stable enough (outer provinces), the government will continue to try to decide everything what will not work after some (Minsky) moment (that is a strong view: China will undergo that after some time near about 2019). China can become easily a lot richer for the time being (fortunately) (and that probably will be true for many emerging markets). The coast of China was during centuries the richest part of the planet. That can happen again.

Gold Overbought?

On the dutch site IEX Cees Smit had a worrying chart about the gold price: according to his twindicator the gold price has gone down too much below the twindicator support level.
There is so much uncertainty in the world and central banks are printing money in astronimical amounts and still the gold price seems vulnerable.
Several other commodity price charts suddenly have bad charts. They are probably overbought. There was too much speculation on hogher prices because of QE27 of the Fed, signs that economic growth in the world is accelerating and weakness of the dollar.
Because of all the Irish doom and the coming attacks on Spain the euro will be weak and the dollar will be strong as safe haven. That strength of the dollar should be negatie for the gold price and other commodity prices.
All the disasters of today didn't cause a spike in the gold price. That indicates gold and silver are overbought.
BCA is careful with gold, because the gold silver rate has fallen below 50 and now gold and silver are too expensive because of that.
Negative for gold is also that economists are writing less panicky about QE2, it will be not that inflationary (more stories to follow).

Still it is difficult to remain negative about the gold price for a longer period when real short interest rates are so much lower than 2% for an extended period as the Fed promises. The uncertainty about Spain is favourable for the gold price and the growing preference of many Emerging Markets for a bigger part gold in their currency reserves will help. But watching what the gold prices does now could be prudent.

Super cycle: China more important than US and China together in 2030

Standard Chartered extrapolated the growth of the countries in the world to 2030 according to their own expectations. They are 2,5% growth for the US and Europe and 6,9% for China and 9,3% for India.
From 2010 to 2030 the world GDP in $ will rise tremendously, it will be five times bigger than today.
Standard Chartered is afraid they calclulate not enough growth for India, 12% is possible when the red tape goes down structurally and when they continue to invest lots and lots in infrastructure as they suddenly are doing now (they have seen the success of China by doing this).
The growth for the US is a bit too low I think, 3% is definitely possible until 2030 and maybe 3,5% also. For Europe 2% should be already quite an achievement given the much worse demography of Europe than that of the US.

The estimates for 2030 are also very difficult because of the expected rise of the currencies of China and India in real terms. That can be more than now is calculated or less. The results for 2030 are higher than tou normallty see because a rise of value of the currencies is supposed, what most forecasters don't take into account.

Based on the assumptions of Standard Chartered you see that the size of the Chinese economy in 2030 is almost as big as that of the US and Europe together (and that with that favourable 2,5% growth expectation for Europe and that cautious forecast of 6,9% for China). India could be in 2030 almost as big as the US (that is more optimistic than I have ever seen before).
Japan will become pretty unimportant in 2030 (still they will get 1% growth despite the decline of the population).
(picture of Harry Camp at story about China from Ferguson in WSJ)

Off To The Mall: ISM hopes On Santa

The retail sales are the most important indicator for growth in the US. It leads a bit ISM orders. At the end of 2008 and at the beginning of 2009 the retail sales fell too far below trend and a recovery had to start. Then the retail sales moved too far above trend in 2010 and a correction started that was finished in the third quarter. That correction was overhyped and the New Normals told a double dip was unavoidable. The trend of the retail sales is marginally rising. For a stronger trend car sales must go up further (is improving already), the housing market should recover more convincing (H2 2011?) and employment growth must be clearly stronger (also H2 2011).
To get a strong/ stronger ISM the Christmas sales must be better than last year. Friday is Black Friday and there is the big test for retail sales. Prices are slashed eve n more than in previous years.

The front page of Barrons (see picture) had: Off To The Mall. Jacqueline Doherty wrote an optimistic story about the growth of consumption in the US. The consumer credit is back again at normal levels versus income and consumption is no longer lower because of that. She cites Paulsen of Wells Fargo (he could be a very good member of my club of optimists). The consensus sees a rise of 2.3% for the Christmas sales, but Paulsen thinks it will be 3.5-4%. And in 2011 the American economy will grow about 4%, as also Clifton from Strategas says (and he saw 2009 and 2010 excellently). Clifton says the Bush tax cuts will be extended for at least a year and because of that consumption growth will not be hit as hard as the consensus thinks.
Doherty also takes into account what the New Normals are saying: deleveraging will continue for several years, this is an unstoppable process especially because net assets are still 23% below the 2006 levels.
The New Normals had good reasons why the American consumer should change from a grasshopper to an ant, but that doesn’t seem the case. People that sent the key of their house start consuming again and buying on credit if possible.
Dohety’s article gives losts of arguments why the Christmas sales and consumption growth will be good. Saving will not go up now employment is growing again, consumer debt is back to normal levels, interest rates are so low, the amount of defaulting consumers is going down rapidly. Credit card companies send 3 times as much mails as previous year to get a credit card. Starbucks saw 5% more traffic and 8% higher spending.
That all makes it plausible that the lines for Macy’s etc will grow, but that’s unfortunately also true for food stamps. In total that is leading to more consumption, but the distribution could be a lot more just.

Good News November 19

o Chinese equities went down a bit on the 0.5% hike of needed reserves for banks, but at the end of the day the market recovered and closed higher. There are stil lots of fears about Chinese monetary tightening (and not buying of Treasuries).
o In Japan more people start to believe it is going reasonably well in the US and that there is a growing appetite for buying Toyotas (+1.6% today) and that the yen will remain pretty stable. Also it is possible that Japanese get more confidence that the bank of Japan will buy enough equities and J-reits(BOJ’s Moromoto told that buying equitiess etc is a strong option for the BOJ). Japan is now that cheap that KKR wants to buy Japanese companies.
o IMF said that investors overestimated the probability of defaults of PIGS.
o Trichet disturbed markets, especially PIGS, by saying he could hike rates before the ECB still is doing liquidity support programs.
o The war about rare earth elements between China and Japan seems to be over, the Chinese will restart next week the exports.
o The momentum of GLI, Goldman Sachs leading indicators for growth in the world impoved further (see chart), especially driven by the US. Only the Baltic Dry Index is falling further.
o The number of according the survey of AAII has declined considerably (see chart Bianco). The sentiment had become too optimistic about QE2 and is correcting fast to normal levels. That should not be too bad for equities.

Core CPI too low for fed

The analysis of Tilton (GS) puts question marks behind my expectation for a marginal rise of US core CPI based on higher rents. The three main trends (see chart) force this: rents are going up almost nothing, goods deflation will be back and srvice inflation will go down.
Rents will rise only a little bit (less than I thought), the service inflation will decline (I agreed already, but ISM Prices non manufacturing suggests something else) and goods deflation will be back in town, but not hugely (you will get more deflationary good prices than I thought). Cars, tobacco and apparel caused the big rise of the core goods inflation past year. For cars and tobacco (+30%) these tremendous price inflation will not return.

So the conclusion is clear: core CPI will be too low for the Fed.

Benderly thinks the trend of the core CPI is now 1%, higher than the current core CPI because the cyclical part (LUPAT) has gone down too much. I agree, but the trend of LUPAT is down, even while in the short run it will go up (see chart Benderly).

The American Dream Is Alife, also in India

This story is sent to me by a collaegue form the English The Independent, but you see it at many places, also in India (they also dream about this). The comment was he had chosen the wrong profession, even while he was nerdish enough.

Independent: Talent tug of war makes Silicon a happy valley
2010-11-13 05:22:06.107 GMT

By Guy Adams

As web giants fight over executive geeks, bonuses are booming. Guy Adams reports

CHRISTMAS CAME early this year at Mountain View, the sunny "campus" near Palo Alto, California, that is Google's global headquarters. On Wednesday, the firm's CEO, Eric Schmidt, emailed all of his 23,300 employees with a piece of happy news: they'd each be getting a 10 per cent pay rise in the New Year, along with a seasonal bonus of $1,000 (617).

"We believe we have the best employees in the world. Period. The brightest, most capable group of this size ever assembled," he declared. "It's why I'm excited to come to work every day - and I'm sure you feel the same way. We want to make sure that you feel rewarded for your hard work."

If Heineken made bosses, they'd probably come in the shape of Schmidt, a captain of industry who knows exactly what makes his workforce tick.
That sort of cash will, after all, buy an awful lot of trendy T-shirts and Apple gadgets for the bright young things at the heart of every Silicon Valley success story.

It will not change lives, however. And therein lies the problem with Schmidt's extravagant gesture. As a sop to stem a trickle of talent which has been leaving the firm that Does No Evil for smaller rivals such as Facebook and Twitter, or edgy new start-ups, it looked like a sign of weakness.

In America's tech capital, cold hard cash isn't usually thrown around by companies wanting to keep top staff. Instead, they tout free meals and yoga lessons. If money must be a carrot, then it usually comes via stock options.

Lately though, Silicon Valley has become the setting for an arms race every bit as vulgar as that fought among the pin-striped elite of Wall Street. A flood of new start-ups, combined with the expansion of bigger firms has sparked a war for talented employees. And with demand trumping supply, Google is increasingly seen as part of the dusty establishment.

"The market is frothing and new companies are being created faster than the people who can develop them," says Paul Daversa, whose eponymous firm is one of the tech industry's top headhunting outfits.
"It's a firestorm out there, and talented people looking for creativity and innovation and technical advancement seem to believe that instead of Google, they must go to a cool start-up. It's a problem for them."

Despite the grim wider US economy, job listings in Silicon Valley are up 69 per cent from last year. Seed funding has increased by a factor of ten, reflecting the fact that - in contrast to the tech- bubble of the late 1990s - most internet firms have now worked out how to extract revenue from the medium.

You can see the results of this boom in Palo Alto's buoyant property market. Twitter just signed a lease for 200,000 square feet of new office space. Zynga, the social gaming giant, just added 270,000 more.
Google is recruiting 200 new employees each month. Facebook hopes to double its 2,000-strong payroll by 2013.

The hot commodity is software engineers. Tales of excess abound.
Graduates with a decent computer science degree from MiT or Berkeley, the Oxbridge of US engineering schools, can expect to earn $120,000 in their first year after graduation.

After that, the sky's the limit. Techcrunch, the Silicon Valley news site, this week reported that a staff engineer at Google was given $3.5m in company shares to ignore an overture from Facebook's HR department. One of his more junior colleagues, on a salary of $150,000, was offered a 15 percent rise and a $500,000 bonus to remain... but still decided to jump ship.

The incidents come during a wider landgrab by Facebook, which is aggressively courting Google's top talent. At least200 of Mark Zuckerberg's employees came from the search engine, including Bret Taylor, who is now his CTO and Lars Rasmussen, co-founder of Google Maps who rubbed salt into the wound of his departure by telling
reporters: "The energy [at Facebook] is just amazing, whereas it can be very challenging to be working in a company the size of Google."

Matthew Papakipos, the engineer in charge of Google Chrome, joined Facebook in the summer, along with Android boss Erick Tseng, and sales chief David Fischer. In an audacious move, Facebook even managed to poach Josef Desimone, its rival firm's executive chef. Mark Zuckerberg was persuaded to pursue him after falling in love with his hot dogs.

Just one poor soul is not sharing in this gold rush. He, or she, is the unfortunate staffer who leaked Eric Schmidt's memo this week to Business Insider and Fortune magazine. A day later, Google announced, curtly, that the employee in question had been terminated. These may be happy days in Silicon Valley, but they don't want to rub our faces in it.

[US Outlook, Business, page 55]

BRET TAYLOR

The co-creator of Google Maps left to start his own company - which Facebook bought for $50m

JOSEF DESIMONE

Facebook even poached Google's top chef - Zuckerberg can't get enough of his hot dogs

ERICK TSENG

Google's top mobile apps developer moved to take over Facebook's smartphone operation

LARS RASMUSSEN

Facebook founder Mark Zuckerberg hired the engineer after Google dumped Wave, his pet project

MATTHEW PAPAKIPOS

The mastermind behind Google Chrome was tempted away by Facebook earlier this year

The Very Good News of November 18

o The equity markets of Japan and China were up today (before the good news in the US). Materials did well again on the higher commodity prices ex steel and people are less afraid for the price controls. Fear for monetary tightening in China went down considerably after the explanation that interest hikes were not necessary when you had price controls; hikes are difficult when you almost peg the yuan at the dollar and QE2 continues). So the rice of the chinese equity market was an underreaction to the good news.
The a touch lower yen(the Japanese minister of economic affairs Kaieda told that the yen had not gone down enough) even against the euro helped Japanese equities including the financials. Maybe it is a late reaction on the good Q3 GDP growth in Japan. Or maybe it is just the buying of the laggards, what of course also is favourable for financials, even while in the past quarter hedge funds have done their utmost to get rid of financials.
o Copper was up almost 2% and seems to attack its all time highs again. Dr. Copper is not that ill as eralier this week was feared.
o Bonds have quite ugly charts last weeks. They go down pause a bit with some recovery and go down again. Losing support levels again and again. 30 year euro swap rate was again 3.24%, quite favourable for the (Dutch) pension funds. equities show the opposite of bonds, their charts are solid, resilient. Support levels rise. Many pauses with small retrenchament and then it goes up again.
o The central bank of Ireland expects support packages of tens of billions euro’s, now the irish government has yet to capitulate. China is salivating to buy Irish bonds at 8%+.
o The most important US retailers say that retail sales in November are up and better than they had indicated before.
o OECD was lowering its growth expectations for the world in 2011 from 4.5 naar 4.2%, but sees 4.6% growth in 2012. That are big numbers and it is not pointing to a double dip or a delayed double dip.
o Growth Taiwan 9,8% (8,4% was expected) in Q3. Singapore expects 15% in 2010.
o Initial claims in US 439,000, a touch better than expected. The trend is improving, but too slowly for the Fed.
* Phillyfed was +22, way better than expected and pointing to a strong number for the ISM, while after the bad Empire state numbers there was a lot of fear the ISm should go down considerable. The Philly Fed is way more important for forecasting the ISM than the Empire State survey.

So the news is very good: China not hiking rates or will hike not much in the coming quarters, world economic growth improving as copper prices indicate, Japan not falling further in a black hole, Ireland crisis going in the right direction and strength of ISM in US confirmed by strong Phillyfed and retail sales.

American pension funds will invest more in emerging markets and hedge funds

Deutsche Bank held under a big number of US pension funds a poll what asset categories will be expanded in 2011 (or sold).(with $1200B assets).
The bull market for emerging Markets should continue. Also hedge funds can enjoy a lot more money in 2011 (you don't know what you get in a hedge fund, but they promise to deliver absolute returns and that is what is en vogue). Also private equity can enjoy better times.
For US equities the prospects are not so good and also long Trashuries are not popular, but Treasuries will get support from Solvency II.
Remarkable is that gold is becoming less popular and commodities more popular, while the diversifying properties of gold are the last quarters hugely better than for commodities (they follow Chinese equities).

Maps of prejudices

Tsvetkov makes this kind of maps and you can find them at http://alphadesigner.com/project-mapping-stereotypes.html. This Bulgarian has made maps of Europe (and South America) where you can see the prejudices about the countries according to the US, the Vatican etc. These prejudice maps are quite popular. He has now also made world maps, the world accoring to the Americans. Europe is enlarged because you have so many small countries.

Good News November 17

o Barron’s tells about the rebirth of the bond vigilantes. They don't take it any longer, that low real rates and low inflation expectations. Because of that QE2 will be less inflationary.
o The IPO of GM. It is going to be a hype. They will sell 30% more than initially thought (478 million shares)and also against a higher price.
o The politicians are making progress to support Ireland, more precise its banks, with € 100 billion (of Eurozone, UK and IMF (IMF is postulated by several countries, also by the Dutch minister Jan Kees de Jager)). They have sent a Plunge Protection team of EC, ECB and IMF to the Celtic Tiger to see how much the Irish banks need. The Irish government tries to guarantee the senior debts of the banks for 100%, in a try to limit the damage of the Merkel crash (she wants a haircut for the bondholders). Until now Ireland has not yet succumbed but they will, it is difficult to resist agreed opinions told by our Jan Kees. If ireland accepts the support for its banks, the Portuguese banks probably soon will follow to diminish the addiction for ECB money. Photo of Bianco of Irish Star.
o Kerninflatie VS 0, lager dan gedacht. Dit is (samen met de slechte cijfers over de huizenmarkt) steun in de rug voor de Fed om straffeloos voor $600 miljard Sinterklaas te spelen.
o Warren Buffett vindt QE2 gevaarlijk, maar voorspelt dat de VS er over 4-5 jaar veel en veel beter voorstaat

The Super Cycle (1) and the growth of the Middle Class

Standard Chartered had a voluminous story about the super cycle on the long run (152 pages). Included are several interesting chapters and charts.
Standard Charted has extrapolated the current existent trends cautiously for 20 years. By doing so you see tremendous changes in the world: the West will be totally passed by China and (in this period not totally0 India. You still become surprised by the numbers after 20 year, even while you know very well of the trends that china and India and many other Emerging Markets do what their name suggests.

The division of Standard Chartered agrees well with ours concerning what the good and bad times are if you make that division according to growth above or below average. That is not in agreement with whatare good times for equities, but is is in agreementwith what are good times for the man on the street in the world (=not only the US and the UK).
The economic growth is high in our propserity and recession scenario (recession for profit margins not for labour income).
The by Standard Chartered forecast growth after 2000 can become even higher, according to us the avarage growth will be higher than in the period 1949-1965 (because of the fast growing weight of emerging markets with their hig growth).

The most important driver behind the changes is the rise of the middle class in the world (they change the world dynamism, not the very poor and the very rich). Standard Chartered divides the world North america, Latin America, Africa below Sahel, Middle east + North Africa, Europe, Pacific (India , China, Japan and rest world). You see the tremenedous growth in asia pacific and the relative stability in the rest of the world. The percentage growth in Africa is big, but the absolute growth is low because of the low starting point.
Maybe Standard Chartered is a bit too pessimistic, but in general the growth of the middle class is the best indicator for the growth dynamics in the world.

Good News November 16

China’s LEI (Leading Economic Indicator) index rose for the 5th month (+0.6% to 150.8), suggesting that "the economy is likely to expand steadily through early 2011 (Bloomberg)." Inflation worries still growing, food price control could arrive.
German ZEW rose more than expected
More belief that China is buying hard assets instead of US Treasuries. Japan also.
Insurance of Ireland a bit less expensive (chart Bianco) (Well, Austria dealt a new blow to Greece, so the crisis is not yet finished)
Attack of GOP on Fed continues, Fed should no longer emphasize on employment, only on inflation. Not good news but could lead to exaggerate pessimism about QE2 or fear of republicans the Fed will manage to get unemployment rate below 7% at the end of 2012 (=Obama re-elected) as Yellen of Fed more or less promised today.
India - Leaders in New Delhi see that the best way to staunch inflows of hot money may be to allow the rupee to appreciate – FT
The strange combination that equities, bonds and commodities mobve in the same direction continues..
Business travel rebounded in Sept – IATA – The IATA said business travel rose 12.1% YoY but remained below pre-recession levels
Companies rush to sell debt; blue chip companies growing nervous about sustainability of low Treasury yields....the FT says “the recent rise in yields has poked some of the fence sitters into activity”. This has been the busiest Nov on record for debt sales according to the FT. http://bit.ly/cYKCGl (also chart Bianco)

update four year cycle

I think we are in phase EF since the end of August. That is the recovery since the first equity correction DE since the (great) recession has ended.
The fase EF lasted on avarage 18 weeks. End of August until January should be normal. It can last somewhat longer, especially because the current four year cycle went too fast. In that pace is GH finished far before the president elections and ended at he end of 2011. (average of FG 26 weeks, GH 23 weeks), so very harmful for the chances of Obama to be reelected.
FG can last very long as was the case in the previous four year cycle.
The stroty of the high net demand for equities is so strong that it is difficult to believe EF will be finished in December 2010.
Another indication that EF can last longer: For quite some time the S&P500 follows the path of six years ago (see chart). When you extrapolates the comparisosn with 2004/5 the top F will arrive in March 2011. That can be the case but then EF will have lasted long. In 2004 you had a pause of about two months in EF with some stabilisation/ decline of the markets. Such a pause can occur now again.

The Coppock indicator is together with the S&P500 divided by its four year average in the upper chart. The Coppock gives some indiaction where you are on the four year cycle. The Coppock goes up just after A and becomes then less negative. Just after D the Coppock reaches his summit. After that it declines but remains positive and a horizontal trend starts just after F. When the Coppock becomes negative, that is an indication you are in Jl. So we are after D, but probably before F.

Good News November 15

o Economic growth in Japan over Q3 surprised to the upside with 3.9% (2.5% expected) because of export growth and ending of subsidies for buying of cars,so growth will fall back in Q4 to 0% or lower. the yoy growth in Japan is now already for some quarters about 4%, not bad for a country where the population is declining.
o In the last hour the Chinese markets recovered strongly.
o Irish crisis will diminish when Ireland gets European support for its banks.
o US Retail sales strong because of car sales:+1,2% (*12 to make it yoy creates a big number) and except cars and gas it was still a good 0.4% (enough for some banks to think about GDP growth above 2.5% in US).
o Mislav Matejka, the excellent strategist of JP Morgan for European equities, repeated his optimism for equities in the next 6-12 months (but after that period he is pretty negative). He has the same arguments as Garthwaite below plus the credit market is open again for corporates.
o Garthwaite of CS had 10 reasons why equities should go up. QE2 is underestimated. Equities are cheap, 20% at current credit spreads; economic growth momentum is world wide improving verbetert, M&A will grow substantially, profit growth of 10-15% in 2011 in US, investors (pension funds, insurers) are too little positioned for inflation and too much for deflation. Only inflation above 4% is bad for equities, 1-
-4% is seen as good for equities etc.
o Goldman Sachs is becoming somewhat more positive about economic growth in the US. Consumption seems to grow a bit faster on lower savings and better income growth, non residential investments and exports; the fear for tax increases is going downnow probably (most of) the Bush tax cuts will extended. Inventories are negative for Q4 growth.
o Republican action groups want the FED to stop with QE2. The Fed will continue (of course), but the probability that QE2 growth will not be excessive is improving. The declining estimated size of QE2 is causing yields to rise. The Tea party has become powerful. Let us hope they don't force protectiomism (charts of Telegraph (UK) and Hein de Kort (FD)). For the time being it causes higher bond yields what is favourable for pension premiums and helps for lower valuations of pension liabilities.

Barron's: people too afraid for rising bond yields and not afraid for equities

the most emailed article of the investment journal Barrons was: In Love With Stocks Again. Steve Sears demonstrates that equity investors are falling asleep. In a vry short period the risk premium of equities has evaporated if you take for that the difference between the pricing of puts and calls (puts no longer way too expensive compared to calls, see chart part skew). Also the implied volatility (CBOE volatility VIX) has gone down to rather low levels. Also the buying of the number of puts versus calls has gone down(differently than in the Netherlands, but that is closer to the Euro periphery than for Americans). Sears interpretes that positively that equities love equities again, but normally you must take this kind of articles as a contrarian indicator.

In e.g. the article Double Hex they are very pessimistic (fortunately) about the coming monetary tightening in China, the vanishing of profit margins on steel and the slowing down of growth in Germany and the rest of Europe on the high euro.

The most curious article was: "Why higher bond yields aren't bad for bonds".
I dont know what can be worse for bonds on the short run than than higher bond yields. The writer of the article knows that higher yields mean lower prices, but he remains in love with bonds. Preferrably long dated municipality bonds. But also credits, especially high yield (with exception of the worst C ratings, something I agree with him) is his first choice.
The writer is right that when the rise of bond yields goes only very slowly or about as fast as implied by the yield curve, that a rise of bond yields is favourable for long term bond investors (and certainly for pension funds that calculate its liabilities at current (swap or bond) yields).
But he supposes yields will go up because economic growth will recover(he prefers high yield). If that is the case, then the Fed will stop with QE2 and people will worry about exit2. Chartists already see higher lows in bond yields and around April we had much higher bond yields than now. Bond yields can easily surpass the April highs when the market doesn't see QE3 arriving. In that case bond yields will rise much faster than the yield curve priced in and bond investors will regret they haven't invested in equities (or for the prudent ones in convertibles). So, buying bonds because you see rising bond yields is utterly nonsense.

Gold, silver or Dow Jones?

The chart of intelligent bear (http://home.earthlink.net/~intelligentbear/com-dow-au.htm) shows the Dow Jones divided by the gold price over a long period with its trend. In the long run the Dow Jones goes up more than the gold price and you also gets dividends. So on the very long run you can better invest in the Dow Jones than in gold. But you have decades that gold is better. Since 2000 the Dow Jones is in a free fall versus the gold price. That fll can maybe stop at a level of 5 (so at a Dow Jones of 12,000 that could be a gold price of 2,400).
When the inflationary forces become as big as around 1980 the gold price can even go higher. For the time being that is very unlikely because of the high unemployment rate, the high productivity growth and the emphasis on cost reductions.
Bernanke has to introduce a QE3 to get gold prices above $2000 per ounce, I think.

Because of the start of phase two of monetary easing, QE2, there is tremendous attention for commodity prices, especially gold and silver.
The gold price should have left phase two of the Minsky cycle, after which he explosive rise should occur. That could happen now when you compare it with other big bubbels (see chart). According to these theories the gold price can rise tremendously, but fundamentally we are already too high and when the Minsky moment will occur then the gold price will fall below current levels. Investing in gold is very risky and only a good advice when Bernanke goes on and on with quantitative easing and doesn't hike rates (as will happen when the unemployment rate declines enough).

The silver price is rising faster than the gold price. Especially last week was a record week, individuals bought for 523 ton silver with ETF's. Silver has all kind of industrial uses and very popular for coins. When Bernanke manages to accelerate the growth in the world causing higher inflation normally the silver price will rise more than the gold price.

The Bank Credit Analyst thinks the gold price has risen too much and you should switch from copper to oil.
That is very well possible but the coming months silver could bubble the most. So take care, gold is a dangerous investment and silver is even much more dangerous (and so could be rewarding).

The not so good news of November 12 or maybe the Merkel crash is over?

oAngela Merkel follows the path of Paulson/ Fed in 2008 where egregious promises about support were completely destroyed by announcements that sharehldser should suffer, then that tier 1 bond holders must be punished and then that all bond holders must lose almost everything of threatened banks/ countries. At the end too big to fail will be tried by a spectatcular bankruptcy of now maybe Greece and/or Portugal and/or Ireland. Spain and Italy are luckily not that easy to speculate down to ashes, but also for them the Merkel carsh is not a Goldilocks scenario for them. That is why new solidarity must be shown by expensive help to recover some of the lost trust in the PIIGS. In the VS mocht Bernanke was to the rescue with QE1. The ECB has now to buy much more than in previous month of PIIGS government bonds (they did start buying at nice levels when big haircuts can be avoided). Several European banks have to be saved by dumping of too dangerous government bonds in supra national pools (or in case of Germany in their own special funds; that is why German banks have been get rid of many bad loans).
o The euro broke down through 1,37 versus the dollar to 1,36, what chartists brought to the conclusion that the structural trend of the euro versus the dollar is not up (the dollar is not a one way road down to zero against the euro despite QE2).
o The Chinese equity market fell more than 5% on a delayed wake up call about the bad inflation numbers. They make an interest hike unavoidable and other not nice things of the Peoples Bank of China. Also was the market down because of the Merkel crash with the growed worries on the Euro perphery, Cisco’s thoughts about an uncertain future. We need to hear first what the measures are to fight inflation and speculation in Chinese real estate (not good for steel compnaies like Arcelor Mittal) and the official hike, then Chinese equities can go up again.
o Korea could not recover from its flash crash in the last minute of Nov 11(thanks to a big sell order of Deutsche Bank that maybe will be punished for that). This is bad for the confidence of investors in Asia: not only in the US, but also in Asia suddenly without any bad news the market can go down tremendously.
o The Baltic Dry Index is going down, through chart technical barriers, not a good sign for the growth of the world trade.
o Real estate investors were shocked by a survey in IPE that because of Solvency II 74% of the insurers in Europe will revise its investment policy for real estate (read: lower their % invested in real estate).
o Technical correction in the US looms because the % of equitioes above th 50 days average fell below 80%. The prudent investors wait (or sell) until that number has declined to 20-40% above 50 days average before they buy (back).

I thnnk you must not become too bearish on all bad news of e.g. above.
1. 6-9 billion QE2 buying by the Fed (POMO) every day from now on has led to the proverb: a POMO a day keeps the bear market away. On Novemebr 12 the Fed started with buying of $7.2B and will not stop for the time being, only around Thankgivingsday is will be less. (see pictures where Bernanke begs and prays for a success of QE2 and the summary of Ritholtz from The Big Picture of Bernanke's explanation of QE2 on October 16, sending implied inflation up further as you could guess)
2. The Irish crisis is now at long last frontpage news(for example the Dutch Financieel Dagblad opened with: Irisih crisis contagious and the other headings were almost as sad: hospitals fear financial disaster; (insureres) falling between two world; notaries more often in default). Brokers are starting again to inundate us with conference calls like: European Periphery Meltdown. European leaders know they were stupid with their declarations on October 29 (and October 18 and..) so thhey definitely will come to the rescue (85% of Irish bonds is held abroad, so Gemeny/UK will do their best to do something nice for Ireland. All those rumours about € 80 B + support will be not totally false.
3. Technically is not everything bad: the call/ put rate of the Dutch equity market (see chart of Tostrams) is discounting already quite some pessimism for the short run. Numbers are of November 11 and on November 12 the decline probably will have continued. Then you are at levels where you saw in the past months nice recoveries.
4. Morgan Stanley was enthousiastic about Intel, also because of their new Sandy Bridge chips (good for making charts and videosand better than what Nvidia and AMD seem to have). The ICT Revolution is still powerfully going on. Cisco -16% is exaggerated, analysts should have seen that Cisco was not a miracle.

good news November 11

o Moody’s upgraded the credit rating of China and hing Kong to AA3 (while their Chinese antipodes did the opposite with US debt). This was one of the reasons why the Chinese equity market rose, the higher inflation on 4.4% was not so bad
. Because the collateral for Ireland as postulated by LCH is found the 10 year bond yields can decline now (temporarily?) from the current 8.9%.
o The equity markets of the PIG(S) are doing amazingly well given all te disasters since )ctober 18. The non financials have improved their balance sheets since 2009. That was seen before in Emerging Markets where currencies became worthless and corporates learned how to survive that and PIGS can do the same.
o The American Conference Board knows now also: in their official forecast for economic growth until 2020 they see more growth in the world than in 2000-2010 because of Emerging markets with their potential growth of 6.3%.
o Deutsche Bank sees consumption growth coming back on improved credit growth (see chart)in US
o A team of the White House tries by destructing sacrosant posts as social security, lower taxes for the middle class and lower defence spending the next ten years to save cumulative $ 4 000 billion (via 3000 billion less spending). In the proposed pace the government deficit will be gone in 2037 in the US(!). Chart of Robosaurus from Business Insider how you handle all those hot potatoes. Because this team cannot work with a robosaurus their plans don't have any chance of success.

Deutsche Bank sees S&P500 of 1500+

Deutsche Bank (Chadha c.s.) think US equities are cheap at a PE of 14.2 and deserve a PE of 16.4 based on current low credit rates versus operational profits/ share price.
Stronger for a higher S&P500 is their story that net demand for equities will improve. There is a strong correlation of equity returns with net demand (see figure 7)
Net demand was bad: equity fund flows were negative and net buybacks were also negative because of forced new issuances of financials while M&A were negligible. (see figure 6)
Both net buybacks as equity fund flows will improve substantially (see figure 16). Net buybacks are already quite high.

good news November 10

* U.S. initial unemployment claims down (key barometer for growth in the fourth quarter and approximately indicating 2.5% growth now).
* Japanese stock market friendly in story that Japanese (and Chinese) banks don’t need so much do for Basel III as initially feared. Also they are less worried about too strong yen.
* There is a theme developing you should buy laggards (Japan and financials).
* ING plans and figures were better than expected. Allianz also was not that bad.
* Philippine exports last month grew by 46% over the previous year. For decades, the growth of the Philippines fell behind that of Asia (in 1945 it was almost the richest country in Asia), but now at least have the trend of improving growth numbers.
* Deutsche Bank had a positive and believable story of why the S & P 500 next year should go to 1500 +.
* High prices for rare metals have accompanied create new investment in Kazakhstan, Kyrgyzstan and Greenland.

* ASR showed that air freight transport after some weakening is improving again, a leading indicator for stronger growth in the world (see picture).

The spell of Nasdaq following Nikkei broken

In March 2000 a sorceress(Meg Whitney ? to become over 121 months governor of California?) casted a spell over the Nasdaq causing the dot.com bubble to burst after Nasdaq's mojo seemed to be sold on ebay: Nasdaq thou shall follow the path of the Nikkei with a leg of 121 months.

And thus it came to pass. Until the powerful magician Bernanke at the end of August on the Jackson Hole conference broke the spell. With enough hundreds of billions of dollars, maybe trillions it seems to happen: the market has its greed back. The correlation Nasdaq / Nikkei is broken. Howard Simons van Bianco Research saw it (see chart). He wants 2.8% higher prices to be definitive, but you can already see that is stockmarket no longer is following the Japan scenario.

N.B.1 Japan started with QE1 in March 2001.
N.B.2: When Bernake proves to be not such a good magician and the equity markets starts again to follow the Nasdaq / Nikkei scenario (=double dip arriving), the equity markets wil go down tremendously.

QE2 and the path of Arthus

The chart shows the economic growth of the US according to several models/ theories.

In the long run the US economy followed the path of the law of Okun: the growth was about equal to 3% plus two times the decline of the unemployment rate, so structurally 3%.
Since the credit crisis is the US economy more and more deviating from the 3% path of Okun.
The economy is growing according to the best path of Arthus, the guru of Natixis. He is more or less a supporther of the New Normal theory. The loss of growth according to the Okun path is permanent he says and you will see no convergence to the Okun path in the coming few years. That is because of deleveraging the consumption cannot faster than income (something that in the past happened after every recession and that caused higher growth than 3%.
Even with the best path of Arthus the Fed cann't live, that forbids their mandate (and triggers impeachmeant of bernanke over some time). If the US economy continues to follow the path of Arthus the unemployment rate will not decline (but stabilise)enough reason for Obama to fire Bernanke, but than he has to be quick because he cannot be reelected on the path of Arthus.

So the Fed had to do something else thean normal, somthing that makes it possible to get the moderate V Bernanke path. That is why the Fed has to print tons of money even while there is not much danger for a recession in the coming quarters. Those hundreds of billions must restore confidence by blowing up the stock market, easing financial conditions so business get more credit and mortgages are easier to get also.
Obama will start to mr. nice guy for the republicans (as also Clinton did) and extend the Bsh tax cuts for at least one, probably two years, making the moderateV Bernanke path now the most probable path

good news November 9

o Greece could easily get money at an auction ( € 360 million) for 26 weeks paper.
o Good numbers of Barclays, diminishing fears about the financial position Also some Spanish and Italian banks went up.
o Financials are doing better last week, see break out of e.g. Philadelphia bank index (but no way they are at the April level, what many other sectors have managed). Pessimists say now their easy way to outperform equity indexec is destoyed by underweight of financials. See chart of Strategas.
o Theme of buying hard assets because governments want it found followers in Japan (advice to corprorates: buy assets abroad now the yen is so high).
o More and more positive news about extension of the extension of Bush tax cuts. Extension of one or two years is almost a done deal, also for the rich (maybe the democrats can limit it to poor fellows earning less than $ 1 million a year).
o Popularity of Obama is rising again, with 4% to 47% (approval rate according to Gallop) since the mid term elections last week. This is a leading indicator for the US consumer confidence.
o Growth car sales of China is accelerating again: +27% yoy in October versus + 19% in September.

Until now the financials didn't really participate in the equity rally. People were worried how you can get a nice without financials.These worriesare vanishing (but can return because of worries about Greece, Ireland,Spain or Portugal.

Shame on me: Dylan Grice (2)

To my (and hendrik Jan's) surprise also Dylan Grice called his column last Friday something with shame (Shame On Me). Hendrik Jan touched an open nerv with is remark that Dylan Grice has lost his bearishness on Emerging Markets.
In his Friday column Grice wittingly described how the humans are quite inventive for over a 50.000 years without needing quantitative easing.
I utterly agree with him that productivity growth is the most important for economic growth and that crying about deleveraging is not that important when you want to explain economic growth % (but of course, Grice wanted to tell the opposite, that we are lost for quite some time because of deleveraging; but now he wanted to divert the attention to put the shame on the Fed because of QE2 what will be a success I think).
Grice makes plausible in his charts based on valuations according to the Shiller-PE's that you should not expect too much of equities in the coming years (valuation are not good enough according to him, but I'm quite satisfied with current valuations).
But then he gives the expected returns of the most important emerging markets, the Bric's. And suddenly you see lots of optimism. So it is not yet clear what has happened with Dylan Grice, maybe he is indeed a fraud as he describes himself and is he no longer a bear on everything, since he is writing something positive on emerging markets for the second time.

good news November 8

*The Bank of Japan has called the first amount of risky assets like equities they will buy (Y 150B) on the newly created Vegas accounts.
* The Chinese equity market rose further on polls that the economic growth is improving again.
*US executives are increasing their optimism about profits in the future at a record amount.
* WSJ: individuals have started to buy equities again
* German exports rebounded strongly in September. Nominal exports rose 3.1%m/m and are up 18.5%q/q saar in 3Q10.
* Chinese President Hu Jintao said on Sunday his country will back Portugal's efforts to deal with the world financial crisis, but stopped short of vowing to buy Portuguese debt; that said, sources have revealed that Chinese investors did participate in Portugal debt auctions recently – Reuters
*JPM started to become more optimistic in its latest Global Data Watch: The tide is turning.
* GE’s CEO Jeff Immelt said he sees the company’s business in India growing at 30% a year. Reuters
* Air France said passenger traffic rose 3.1% in Oct and cargo traffic saw a 6.4% rise.
* Absolute Strategy Researcg: a notable bounce in positive revenues stories is suggesting that the corporate story is not simply about cost cutting. (see their chart)
*Positive story of Morgan Stanley (Sense and sensibility): 10Plausible default does not mean likely default. 2)Deus ex machina. The key here is: i) that there exist creditors willing to fund weaker governments on an ongoing basis (the IMF, the EFSF and its eventual successor); but also, crucially, ii) that these creditors are willing to do so at a ‘sensible’ interest rate. We think that the incentives to do so are strong enough to overcome obstacles
* Neelie Kroes will disentangle the European Union's jumbled online economy. And bring uniformity in the European digital copyrights according to WSJ
* NY FED: Total household delinquency rates declined for the second consecutive quarter in this third quarter of 2010. As of Sept. 30, 11.1% of outstanding debt was in some stage of delinquency, compared to 11.4% on June 30.
*Senior Loan Officers Survey: banks eased standards for lending (but they have still very tight standards, but it is a huge improvement that the banks are not only tightening less (that is already good for growth) but are already easing standards.
Also demand for loans is no longer falling.

Barron's sees China buying hard assets, not Treasuries

The most emailed article of Barron's was about China: China's sure bet (http://online.barrons.com/article/SB50001424052970203281504575590290564950892.html?mod=BOL_article_full_popview#articleTabs_panel_article%3D1).
The aricle shows the changing prefeences of China for hard assets instead of Tresuries. That shift is going on for years, but seems to be accelerating. For years and years economistst think that the investment preferences of the excess currency reserves of Emerging Markets goes more and more in the direction of the most riskless investment, US Treasuries. Indeed, that seemed to be the case, but Houston, we have a problem: China is believing more and more in hard assets (equity participations and commodities). That is especially disastrous for the US. In our book we have showed a chart that the US for decades had a current account deficit and still had a net income stream from abroad to the US. On the investments abroad (of multinationals) a high income was received. The foreigners invested almost everything in treasuries with their paltry rate of return. The net result was that the higher amount of investments of abroad in the US generated less return than the US got from his multi nationals etc. So it was no problem at all for the US to have a big current account deficit for decades. As long as the foreigners were too afraid to buy anaything else tha Treasuries the Us had a field day. Because of the too big demand the yields on Treasuries went down too much so everybody became more scared and bought even more Treasuries at the benefit of the US with lots of windfall profits.

So now China is no longer believing that you should no longer take any risk and invest everything in treasuries. The forced buying of China of US assets because of the big curent account surpluses (that is by definition true: a current account surplus with the US leads to a forced buying of US assets that China can't get rid of, only the price can fluctuate of those assets) is going less and less to treasuries. The Chines prefer to buy hard assets. That is not only very clever because it has a higher return but is also seen ore and more as less risky since the Us is indulging in more and more QE2.
China cannot escape to increase its US assets as long as they have a current account surplus. But how you invest that surplus that is what China can influence. When that preference changes from Treasuries to more risky investments (maybe they are less risky when QE2 goes too far) then that could have big consequences: better prices for risky assets and lower prices for Treasuries (=higher bond yields).

China is an example for many countries. Many people say China is very cleverly expanding its influence with clever investments. They want to copy the policies of China even more than the investment policy of Warren Buffett. That means more countries will invest their current account surpluses more in hard assets and less in treasuries. Japan seems to be a loyal buyer of Treasuries, but also wants to take more risk (buying Japanese equities). By the way Japan can pauze for years with buying of Treasuries, so you can't build on japanese buying of Treasuries.

So all in all you can see lots of clouds in the sky for Treasuries when the Fed stops buying Treasuries at any price.

QE2 explained well by Bernanke

Banzai (zerohedge) sees quantitative easing QE2 as new disaster and hopes taht we will get a cover of Time that could be explained as a contrary indicator.
The resistence against QE2 is huge and there is a seemingly never ending wave of new stories that the world will perish and that we will end up in an inflationary hell.

Still the markets reacted favourable om the gospel of QE2 while almost nothing new news was added by the Fed.

Jim Bianco thinks that the clear and loud explanation of Bernanke in the Washington Post explains the favourable reaction of the markets:
"This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion".

So the Bernanke put is now really formalised.

I think the positive reaction of asia did help the markets also. Asia/ Latin America (!) cry wolf and want promises of the US that they will not continue with more QE2, but in their heart they know better. When they really want to export so much to the US they must carry the losses like a man on their dollar currency reserves.

Will QE2 become a kind of Titanic as more and more people believe? Defintively not when that QE2 is not becoming too big. $600 billion is almost nothing for the size of the US economy and will not lead to a measurable rise of the inflation.
The balance sheet of the Fed will then remain smaller than that of the ECB and that bigger balance sheet is not yet leading to hyperinflation in Europe. When QE2 will rsie above $1500-2000 billion, then I start to believe you will see somewhat higher inflation because of too much QE2. However, i think that $600 billion will be about enough to get the economy growing fast enough to get lower unemployment rates. So we are going more into the direction of Goldilocks than Weimar.