Saturday, December 6, 2008

China syndrome

Faber once wrote that one of the keys to his success was that he clipped articles and filed them away. He commented 'how many of you remember what you read yesterday?' He also suggested that a good glass of wine should accompany any involved reading material. In the spirit of learning from the masters I started this blog to not only 'clip articles' but also put to type the snarky mentality that kept the Anonymous Monetarist Family Trust fund out of danger these last few years.

For purposes of disclosure my short-term bucket is the native scrip whilst my long-term bucket ,established early this year, has been the yuan and the yen. I parted ways with the majority of my mongo yuan position on Friday (sadly) at a ~1% loss. My calculation earlier this year was that the only safe harbor were the 2 dominant Eastern currencies with the caveat that I've always been uncomfortable with shorting given that it is an asymmetrical trade and I am not, with my own funds, a trader.

My expectation is that the Chinese economic data for November that will start being released this Wednesday will be miserable.

Over the next two quarters, China will probably suffer a contraction. How China Inc. will report the numbers is anyone's guess but putting 'lipstick on a pig' with chinese characteristics will only go so far. The economic stimulus announced will not be able to take effect fast enough to offset the accelerated decline in both the export markets and the domestic real estate markets. China has a 'political risk' in the absence of a social convenant that will translate into a depreciation premium, be it through export tax rebates or a slight currency devaluation as they hunt madly for lipstick.

In short China is, much like America a century ago, in a boom and bust cycle, with the latter occurring now. Given the Yin-Yang relationship between China and the United States, we will export deflation with our increasing unemployment and decreasing GDP and they will export their bust back to the West in the form of further commodity declines.

Oil, copper, gold ... will continue to decline to absurd levels as their counterpart the bubble derivative scrip (Treasuries) ascends to even more absurd heights.

China accounted for the majority of the growth in the world economy last year.

Now the marginal buyer is undergoing a margin call.

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