Technology, not China cripple manufacturing jobd

I am sure people can find specific instances China through corruption has unfairly decimated a company of sector of us manufacturing.   But I do firmly agree the overall trend and driver has always been manufacturing.   China has only accelerated economic pressure to us manufacturing to lower production costs, resulting in job loss overall.   This video dies a great job of doing a drive by summary.  #marchoftherobots

China, the elephant in the room

This is one of those occasions being right isn't great.  I did predict in 2008 that the forces of China on USA labor would make cost of living higher while suppressing wages, mission accomplished!

I posted many times since then how China would NOT save the world economy.  Here we are in 2016 and many people are arriving at this conclusion now.   The uncertainty this brings is unprecedented in such a large global economy.  We have all reaped the benefits of cheap Chinese products.  Pretty sure every electronic item I own ows 80% or more of the parts from China.

Ran across some videos today. the first one is excellent to bring to attention the demographic miracle is over.  It touches on the age problem briefly, but I have covered this many times before. The one child per couple law has dwarfed the demographics so much, the old will clearly outnumber the young for decades to come.

Also moving forward I see robotic manufacturing and small custom manufacturing exploding back into local economies, as I covered before in MarchOfTheRobots

Second video touches on the Panama papers, and how Chinese are exporting their wealth to safety.

I still think USA may want China and Russia to take a greater part in the current currency system so they can share greater pain when it is replaced as I posted in "The Hard Road must be taken".

Full route in gold before it gets good

Who knows, maybe the bottom is in.  But I fear a full routing of gold and we won't see a bottom until December-January 2015 finally.

Hopefully we get a nice bounce for a couple of weeks before the routing resumes.  For a really good objective look at gold and miner charting see chartfreak post here.

Gold is being politicized, and with politics comes games.  China is trying to get into the gold game in a big way, and I believe its part of their mult-fork strategy to take away USA as the global currency, signing deals with UK, French and German Corps, Russia, Brazil, Australia, Canada, Argintena, South Korea, Singapore-Malasia , UAE-Saudi Arabia (limited trade), and of all things Bitcoin!   

With such high stakes I can't imagine that we have a smooth ride ahead in any market.

In the next 3 months, I really have no clue about gold, I could easily believe it hits 990 an ounce before the bottom is in, and GDX hit 16 bucks.  Or its quite possible we are near the low and its a great time to buy.

With politics comes games, and with games you can't trust anything.  The US dollar has been the world currency for quite a while, and as the graph below shows, it isn't that crazy that the world will seek a change.

I am for Crypto-Currency to be the next world currency, meaning no country has it.  But I suspect we'll have to go through the pain of China attempting to take the world currency first, then later after that fails go to Crypto.  that could take a decade or so!

Eh, if only the worl operated effeciantly and just jumped to the end game :)

So your on your own through December, I really can't imagine 'knowing' the bottom is in until then.

Welcome New Reader

You will see text hyperlinks throughout posts, please link through for more information.

Welcome new reader, my name is Mike Murphy, Software Architect and arm chair global financial watcher.

Back in August 2006, while talking to my friend John Chinnock, came to realize that the entire financial markets where based on a ponzi-scheme of subprime mortgages and off-balance sheet derivatives.   Since then I was obsessed with reading ever aspect of the global economic forces at work, up until about 2013, as you can see by looking at my posting activity.

One of the reasons I have posted less is in my minds eye, I grasp enough to personally satisfy my own curiosity of the pressures on the global economic system.   I hope to someday boil down all the information into a concise summary.  For now, here is my short-sweet version.

**UPDATE** Skip all the summary below and read future of employment Post (click).  While below are all important and factors, the reality that affects you most is your ability to be employed.

The world faces unprecedented challenges today, the most critical being peak oil.  Fossil fuels are the reason why we have the lifestyle we have today in the west.  Fossil fuels took about 400 million years of sunshine on plant life to create, and mankind will take about 200 years to burn.  That release of stored energy has created the incredible world we live in today.  Peak Oil basically means that the era of cheap fuel is over.  I urge you to watch the 58 minute video below to indoctrinate you on the many resource challenges we face today.

The world is facing epic deflationary forces driven by technology, except monetary policy which is helping hide the financial strain. As of this writing I believe stock market valuations are precarious at best, partially inflated due to monetary policy.  However, after living through the last few years I have come to realize that investing depends on laws, or lack of laws to determine valuations.   Given reasonable expectations of maintaining sane law enforcement in the USA,  a reversion to the mean is historically likely.   For an ample discussion on this, please see the third video below, starting at 50 minutes in.   An independent indicator for longer term investing that you can read more about here, I do apply this to other stocks and ETF's as an indicator.  The jump the shark moment will be if US Treasuries break the downtrend of last 40 years.

If you think China is somehow going to pull the global economy, I for one don't believe it.  I have posted much about the China ponzi scheme, and with Jim Chanos providing an excellent job in his 2013 synopsis below on China's troubles.  Even if somehow China is wildly successful it would result is substantial cuts to western lifestyles due to resource redistribution.

I do believe in crypto-currencies, a great place to start is my series on money, and what I wrote back in 2011 the ideal form of money.  I think crytpo-currencies are a manifest-ion of what I described back in 2011, and I am lightly following bitcoin and 100 other crypto currencies as they develop.  And I have great hope for the new economy that is brewing with latest manufacturing revolution. But for the old generation I see deflation for decades as robotics and technology sheds millions of more jobs.  Its a generational shift, bad for the older employees, good for latest smart students out of college.

As of June 2014 I do think Gold Miners are a good buy, however due to all the issues above I am nervous about them as a longer term play.  ( GDX at 24 dollars)

For more information, if you care to research, my old new reader post is here.  If you browse my old posts keep this in mind,  the world is changing as I am, which affects viewpoints over time.  Posts in 2008 are likely to be significantly different than my current view.

I highly recommend the first two videos as a must watch.

Headwinds ahead

China is NOT the answer

Market Investing June 2014

The Hard Road MUST Be Taken

My readers know what I believe is at stake over the next few years is the global dysfunctional financial system, and there is only one way out, the USD must lose it's status as the global currency reserve.

I have been thinking of crypto-currencies for a while, and I am starting to think the best way out is for a virtual currency (doesn't have to be bitcoin) must become the standard-bearer of currencies, the new global reserve currency.  What MUST happen is USA, Japan, Europe, hopefully (but likely not) China, and Russia agree to disagree, that NONE of them can take over for the USA as global reserve currency.  That only a NEUTRAL reserve currency none of them control must be the standard bearer.
Then all currencies will trade freely against each other against the standard.

That is the only way out for the old currency system to survive to the new one.  For the USD reserve currency is becoming a problem mathematically and politically for the world.

Unfortunately, I have learned the hard lesson since 2006, that when I make certain observations, the world refuses to acknowledge the new realities.   Stupid world ;)
I now understand this is the way it must be.
The current system is run by politics, and political decisions must appease those who most influence those decision makers.  So when a new reality hurts the them,  they basically instruct the politicians to RESIST making the right changes.  In fairness to the politicians, most probably have zero clue what to do is right vs wrong, and they just go along with the flow.   No one person can know what is right for all angles of their current job responsibilities.
When it comes to Global Currency reserve, we are asking those in decision making positions to make decisions that are PERFECT and have best outcome for USA, and the entire world!
I have never met a person who makes perfect decisions, much less at the complexity level of a multi-trillion dollar global economy.

So back on point, now that I am convinced this currency system is headed for a fundamental change, and even though I see a potential way out that would minimize damage, this of course is NOT the way the world will go.   The decision makers will fight tooth and nail to keep the existing fiat system, no matter the collateral damage on everyone.  Therefore I expect between now and 2017 the most un-fun economic atmosphere I will ever have the displeasure to experience. :(   Doesn't mean life won't be fun, for as things change, it does tend to be gradual, I do not expect a sudden currency crisis of epic proportions.
That can't happen until many other events transpire first, starting with stock market volatility, which I believe is next up.  See my next post for why.

What I think may happen is China and Russia want to take over the fiat currency system, and if USA is smart, they will let them!  I know that seems insane to say, but once they get the old system under their control, USA will be free to adopt an alternate system, hopefully one based on virtual currencies. In a weird way, the USA may know this system cannot sustain, and best let someone else hold that bag as it terminates.  The old system is based on demographics, cheap oil, and dependency of the world to agree USD as a value standard. (I need to make a new post, will update link here)The termination of the fiat currency and rise of virtual currencies as dominate winner may take a decade, but should begin in earnest by 2017.

Global Currencies Showing Strain

We are starting to see the countries run into currency problems.  I have written for years how this should start between 2013-2017 culminating probably around 2017.  I have been amazed how well the system has been able to hold itself together despite the challenges the global banking system has had.

Greece would have lead the world on this front, but since it is part of the Euro, instead of currency problems they have been rewarded for years on end high unemployment and low wages.  With 45% below poverty line, its a powder keg.

Venezuela is having severe issues, with reports of toilet paper shortages,   The antics of the government are amazing.  Many of the knee jerk reactions of price control and government annexing merchants who refuse to sell goods at a loss is par for the course.  What amazes me more is this tactic never works, so it must be good to do yet again.

Argentina is also having currency problems, with yet again many government antics taking place.  Argentina has had their currency collapse quite a few times in the last 70 years.  You'd think that they would have figured out how to handle it better by now.  Government BANNING imports and IRON FIST for merchants who refuse to sell goods at a loss.   50% internet tax, food price fixing, etc. Good luck with that!

Ukraine has imposed a 6 day waiting period for foreign currency purchases with additional capitol controls instituted.    When I read this what I see is the super rich in that country will continue to drain their wealth out of the country while the common person remains TRAPPED with their devaluing money.  This gives the rich more time to exit with more of their wealth preserved.  When such actions are taken, everyone in that country should apply to exchange money since they have no clue what 6 days will look like.

Brazil and Russia are having their interest rates rise for cost of government bonds and they don't like it.  The solution? Don't hold bond auctions!   While in some aspects this is reasonable, if you don't issue debt over time the debt should become scarce, lowering the premium.  But without me doing any research, I am going to take a wild guess those countries did not unilaterally cut spending to match this action.  Assuming I am correct, they are going to need to auction off bonds to pay people at some point.  Or they can follow USA central bank and simply have their central bank buy their bonds.  In any event, I hardly think world opinion for bond games like america can do will go over well for those currencies.  Rising rates = potential currency run.

Turkey currency the lira has been devaluing quickly under currency fears.  That has in turn lead to yet again, capital flight.  Imagine that, those who can move wealth out to safety, do.  This has sparked a real estate sale in Turkey.  Once these things light, its pretty hard to put out.

Europe Union under the Euro has been and continues to be a challenge.  Spain, Portugal, and Italy have very challenged economies.  Greece's debt is NOT the worst as a percent of GDP in Europe, I put a nice graph at end of this post to show how the debt monster is starting to turn it's head.

China bank HSBC for a short period was instituting capital controls to restrict money flow.  That was quickly overturned once it hit mainstream media to avoid a panic.  This is a tell.  Why did they do this? Because there are issues that people are trying to 'help' by slowing the flow of money.  It doesn't matter they overturned it, there is something not right.

Bottom line people is this is not normal, we are entering the phase I stated in Global Currency Shakedown, Round 4 begins in October that things continue to move along nicely for the next phase of this now 5 1/2 year crisis.  I believe gold will fare well early, but I am starting to realize the end game is we all go to crypto currencies like Bitcoin.  I have started to open accounts and move money as an experiment into Bitcoin and Litecoin and start familiarizing myself with crypto currencies.  I stated back in Jan 2011 in post 'power to the people' that the best thing for the world is to go to crypto currencies.  There are now 83 crypto currencies and growing, there will be winners and losers.  I can't see how Bitcoin loses in the near term so for the short term one of the safer places. I'll do a post on this in more detail later, I highly recommend you listen to this podcast.  Thanks to Mike C for the link!

The Great Unwinding is starting in 2014

In Sept 2008-March 2009 the world decided to double down on all problems and have the world banks and governments go all in to prevent an epic economic collapse.  For now, I'll steer clear of political debate if this should have occurred, lets assume the world was better off to act.

What I can say for certainty is what brought the economic catastrophe was NOT corrected, and this is the greatest sin since March 2009.  The world pissed away about 5 years that could have been used to fix the social economic order, instead we doubled, tripled down.     In hindsight, maybe thats all the world is capable of doing, keeping the same dance a moving until the song must change.

So here we are, lets take a look of signs of the Great Unwinding is starting to happen.

1) Countries currencies are destabilizing, with Argentina and Venezuela leading the way, Turkey looking to follow.
2) Greece after years of oppression is ready for fundamental change its only a matter of demographics as 45% hit below poverty line.
3) Various stock markets are hitting into trouble as Brazil plummets, US market hitting resistance,
4) HSBC, a very large Chinese Bank, is restricting withdrawals, not a sign of financial confidence for what is supposedly a global economic leading country....
5) US is bracing for a fundamental shift in retail, to last for potentially a decade of employment decline.
6) Banks in Germany, France, Spain, and others face a 1 trillion dollar reserve shortfall.
7) Back in 2008 I posted how China and India would squeeze USA of resources, with Oil as a key concern.  China is positioning to secure oil globally while USA uses local, temporary, fraking to cover the shortfall.
8) Global tensions are mounting, with various points of contention that could cause a catalyst for global tensions to flare, right now Japan and China are key contenders for sparking escalation.
9) In general, currency volatility is higher so far in 2014, with it expected to continue....
10) Gold on verge of possible break out, while not a sign of doom, it may be an indicator of economic sentiment change.


So while none of above really proves anything, we are opening 2014 with a heck of a bang!

Gold Breakout soon - India is BACK!

My thesis for gold has always been about demand, not currency gold bugs.  Gold as a currency is as insane as it gets, and I am not a supporter.

The thesis was and is, as India and China get richer, the 2.5 billion people there will consume more resources & gold.  In addition, ALL RESOURCES will get constricted as the USA, a vast consumer of resources, gets pinched with inflation on resource prices.  I choose gold simply because it seems like a more direct play, and it does have the 'bonus' of gold bugs behind it.

Well today my friend John sent me an email about how India is moving to lift Gold import restrictions.  India placed these restrictions back in September 2013 in post 'Gold has anything changed'.

The irony is gold was falling, not rising in price when India did this, and China immediately picked up the gold buying slack preventing gold from falling significantly farther.

Once this comes to pass, I have a hard time seeing how gold can go down in price the next 11 months.  Everyone should be well positioned now in ETF's GDX & GDXJ

Global Currency Shakedown, Round 4 about to begin

Back in 2006, with my help of friend John, realized that the US economic structure was based on financial fraud through mortgage securitization.
Bill Clinton signed into law the routing of the glass-stegall act, put into place to separate 'gambling' from bank deposits.  George W routed the FBI department staffing down to a couple of people to investigate the trillion dollar mortgage industry.  In the late years of George W administration the final bubble was being blown, resulting in 2008-2009 financial crash.

In August 2008 I started this blog as an outlet on my rantings to everyone I could meet on the pending economic impact.  Little did I know how close it was.

In the turmoil of then, the natural outcome would have been a deflationary collapse that was stopped by a couple of drastic measures.  First, the government went on a no-holds barred deficit spending campaign to soften the blow to the economy.  Second, mark to market accounting in place since the Great Depression to valuate companies was suspended, as it is to this day.

Some purists would say both of these acts where not appropriate and that capitalist forces should have played out naturally.  I am not one of those people.  Yes, that is an option, and maybe it was the best one that should have been followed.   But I can see why dramatic steps was taken to prevent a global economic collapse, as it was perceived at the time.

What I am against is all of the drastic steps WITHOUT meaningful reform.  That is, 'fixing' of what was broke.  We have chosen to take the worst path, appeasement without follow through on reform.

The market has hit an all time high today.  Did you hear the bell?  My friend John has said there is no bell that goes off warning everyone that the market has hit a multi-year high followed by a market collapse.  Basically, there is no warning.

I am NOT predicting a market collapse per-say.  I am predicting that we are into phase 4 of this mutli-year global economic refactoring.

Phase 1 was the incredible loose regulation and promotion of securitization of trillions of dollars providing the market collapse in 2008-2009.  There are many other factors at work, such as derivatives in the 100's of trillions, but safe to say all the games in phase 1, lead to phase 2, 2008-2009 collapse.

This lead to phase 3, appeasement into 2013.  I realized that appeasement was the route and not cleaning house in 2010, and changed my stance that the market may not collapse per-say, simply be dwarfed by lack of law and raw financial meddling.

We are soon to enter phase 4, appeasement failing.  There is no amount of appeasement that can fix the system, without taking strong steps to fix the heart of the problems.

We have India's Rupee under duress, with India taking draconian steps to curb gold imports.  Mish is calling for a possible Rupee collapse as food inflation hits 18% per year!
We have various countries in Europe, such as Italy, Spain, Greece simply upping the ante on financial gains, buying weeks, months, maybe years, but not decades as they exhaust every  'new legal' option.
We have countries like France, promoting job creation without even bothering to talk to the companies involved in so-called creation plans.  And for what? a few double digit jobs?  That is worth lying about?
Japan is leading the world on the demographic catastrophe that awaits us all in an economic system that at its core foundation is based on ever increasing demand.

We have China continuing to try to transform it's economy into a consumer-global based powerhouse to replace the USA.  In the process, the information about the Chinese economy is safely in the unreliable fantasy zone.  China has HUGE potential, but who can understand their true standings?  At best, it is a hail mary hope that may come to save the world?

Back in march 2011, once I realized the world would NOT fix any core issues, but simply appease, the timeline for 'disaster' shifted from short term (2010-2012) to longer term (2013-2017).

Well, we are here, sad to say.  I don't expect fireworks until 2014, but it could happen next week.
The world dances around the US dollar, and that dance is starting to show it's age.  All is needed is enough people to lose faith in the dance to start the next phase of the crisis, global currency shakedown.

Best I can say is diversify, with a chunk in cash ready to move.  The USD I CANNOT envision any sudden moves down in value for YEARS to come, so it is once again the safest play....until its not! :)

March of the Robots, Deflation for decades

Many economic blogs for years have called for US Dollar inflation.  This has not materialized as a general event.  I have covered this on the blog before.  Credit = Money, and Credit is not expanding like it did into 2007.   High unemployment stagnates wages.   And as I have called for since 2008 natural resources would creep up in cost over time due to global resource competition.  Specifically as India and China grow wealthier, they will consume a larger chunk of the resource pie.

Another deflationary force is Technology.  Every year less people can do more work.  Technology does create new jobs, but typically for higher education at the expense of lower skilled workers.  The wages are higher, but there are net fewer jobs.

I am a techie, I love tech.  I am not suggesting the world follow the Amish.
But I see technology efficiencies now biting into the technology world.  The area of growth for jobs is now also becoming a victim of the success of itself.

Pure capitalists state that if we freed the economy from the shackles of all government intervention, that the market will find optimal balance.     I question if that balance can ever equal full employment again.
People use history to project future events.  The capitalist 1800's and 1900's that yielded the middle class and a booming economy is not the same backdrop we face today.

The Western Baby boomers are aging, the younger generation have endured a decade of stagnant jobs.
And technology marches on.

What I think is happening is a shift in who is employable.   If you look at the industrial revolution, people shifted from agriculture to the urban centers to staff factories.   Those who did not adapt may have had to experience lower wage jobs in the fields relative to the new industry wages.

I think that is what we are starting to see now, the efficiencies of technology reaching deep into the economy to 'raise' the bar.   I have a couple of items for you to consider.

First, there is robotics.  This industrial industry has for the last decade taken a chunk out of the large manufacturing jobs.   Consider this, Apple is moving some manufacturing BACK to the USA from abroad.   Termed reshoring work.  But instead of 1,000s of factory workers, it is expected TOTAL employment, including the receptionist, to be 200.  Why? Automation.

Baxter, a robot targeting SMALL companies to replace 'expensive' workers at 9 bucks an hour is being marketed for a total of 22K per Robot.  In 18 months you can expect this robot to do much more than today, and every 18 months thereafter.  Dare I say the price will also steadily be reduced.
It isn't out of the question in 6 or 8 years that the Robot be under 10K. In a decade every McDonalds will have 2 people and rest robots running the operations.

Combine above trends with IT trends of eliminating IT datacenters and consolidating on the cloud, and we have massive deflationary forces at work.

Now for a quick higher level view of job facts.  Mish posted two images below about the US labor force over the last five years.  Considering the US government is spending 3.4 Trillion of a 15 trillion economy each year, the US is barely treading water.  Dare I say the forces I quote are hard to keep at bay. Simply look at industries hardest hit.  Those that can be automated or outsourced.

What does this amount to?  Well we are in interesting times in the years ahead.   There will be explosive new companies with tremendous growth as new areas continue to unfold.  Society is a bell curve of capability, and the bar for new jobs will continue to be raised.  I expect an ever increasing higher REAL unemployment rate. (if you don't ignore those who give up trying to work)  There will be continued deflationary forces between baby boomers retiring, technology, and overall unemployment.  And I still think natural resource contention as China kick starts their consumer economy along with India.

I do have optimism, to read that post, click here!

Rare Earths

I posted before about my enthusiasm for Rare earth metals.  Since then, much has changed in market prices, collapsing with the economic downturn.

That is a huge issue with natural resources, when economy is picking up, even moderately, resource stocks are fan-tastic.  The moment stocks lose momentum, stock prices can easily be cut by 50% in months.

I am still bullish on Rare earth metals long term for a few reasons.
1) The materials cannot be fabricated by alternate methods.  Companies may say they can, but at what cost of R&D?  Too much compared to just using whats available.
2) China produces 90% of rare earth supply to the world, but has 30% of the rare earth resources
    That gives too much power to China over such a key resources, I expect China to abuse this position.
    The net result of abuse will be at some point, higher prices and competitors entering market.
    It is the competitors I have interest in.
3) New tech, new materials will likely come from exotic materials.   These materials have not been used in earnest until recently.  

As for item 2, ran across article of China tightening rare earth production, and a desire to make production tightly government controlled.  Production has been cut this week to force prices higher.  While I don't expect a price jump immediately, this bolsters for item 2.

Jim Chanos and China Economics

This video is a few weeks old, but great to watch.
Jim Chanos talks frankly about China and how their miracle growth isn't there.

I recommend a watch, click here.

Jim Crammer spars with Chanos on china

Market Cycles

My friend John, a professional securities trader, has recently become bearish enough to put a toe into shorting the market, for near term.  He views the market movements after QE1, QE2, different than current after QE3.  The market movement difference now has encouraged him to take a bearish stance on the market.

If you read the news, there is plenty of bearish news to back up this view.  Fedex shipping is down, which can be compared to GDP forecasting, California sales tax revenue declined 20% YOY in August,  IMF chief warns of US financial issues in short, medium, and long term, Eurozone is seeing steepest contraction since 2009, Japan exports contract 3rd month in a row and China PMI contracts, Toronto home sales decline 64 percent (due to law change).
Pile on the Euro news with Greece, France, and Spain seeing Neo-Nazi fractions rising threatening those countries status quo.

Now lets look at the opposite view, there is plenty to find, but I am quoting the top two from my perspective. The Federal Reserve bank believes QE3 will help the US economy, as QE1 and QE2 did in the marketplace.

My favorite market watcher Gary of Smart Money tracker is calling for a "near term" bottom with market reversal.  Gary isn't the sort to make super long term predictions like the year ahead, he watches cycles to see next move.

So what is next?  A market fall of significance is always in the cards, especially if you look at history now or in the Great Depression.  (currency wars occurred back then too)  I am mixed, while I don't think in the year ahead we will see 30% market gains, it is possible the market finds a dead range of +10% and -10%.  My inner voice tells me the market is very weak and going to implode, but then again, I have heard that voice a few times in the last few years.

A conservative stance is probably in order, and on any strength, I may continue to lighten to be nimble.

China Financial Ponzi Schemes

Mish over at Global Economic Analysis reports on China's shadow banking collapse.
This was easy to see by anyone paying attention years ago as China ramped up mal-investment on a scale never seen before.  I have reports some of it, click here for past items.

Recommend reading Mish's article titled "China's Shadow Banking System Collapses Exposing Numerous Ponzi Schemes; Implosion Reaches Critical Mass" and all the sub-articles.

Quote from Bloomberg Article that I found interesting, give a snapshot of the deflationary forces they face:


Only 3 percent of those companies are able to get bank loans, according to Citic Securities Co. (6030), the nation’s biggest publicly traded brokerage, with underground lending by family, friends and acquaintances largely funding the rest.
As growth from low-cost labor and productivity gains from adapting technologies developed abroad lose steam, China’s future expansion must rely more on an efficient distribution of capital, as well as on increased innovation and the development of service industries, the World Bank wrote in “China 2030,” a report published in February.
Tamping down underground lending as the economy cools poses risks, said Fred Hu, a Beijing-based economist and former greater China chairman at Goldman Sachs Group Inc.
“Shadow banking is much vilified, but without it the Chinese economy would have had a hard landing long ago,” Hu said. “The issue here is how to legitimize the sector and make it more transparent to reduce some of the potential downside risks, but not to shut it down. If the government were to try, that would do terrible damage to the economy.”

A recent video of Jim Chanos, my favorite investor deflationist.

Canary in Coal Mine - Japan

I have posted before that when Japan's economy becomes unmanageable, it will be the canary in the coal mine for the USA.   Sure Greece, Ireland, Spain, Portugal, Iceland, and others can be viewed as warnings.  But most of those countries have centuries of history of periodic economic resets.  Japan however is a different story, it is regarded as a conservative society and as the picture of stability.

So if Japan goes south, America better hear that message.

Yesterday Japan's Sovereign debt was downgraded

Fitch Ratings cut Japan's long-term foreign currency rating by two levels from AA to A plus, the fifth highest investment grade. It cut the more important local currency rating by one notch from AA minus to A plus. Both were given a negative outlook. - Reuters

Japan faces what most western countries face and China faces, a demographic nightmare.  See my post "Demographics is driver for economic growth", where I have a couple of odd suggestions on solutions.

There is a strong possibility the deal with China made in 2011 to buy US bonds directly was partially done to prolong America's ability to avoid a bond run.  However, I also believe that corruption never wins, and will delay the eventual same result.

Interesting times.

USA Circumvents Bond Markets for China

It is very evident by the actions by the US government since 2008 that preserving capitalism is not at the priority list.

International accounting standards were changed in 2009, as it remains today, with mark to fantasy accounting.

The Federal Reserve bank outwardly admits manipulation of capital markets to achieve it's goals.

It is now discovered that since June 2011 China has been given ability to circumvent open trading of US bonds and allowed a "direct bid" with the US for bonds.

This is new, and I am unsure if bad, but my gut says bad.  Why? Anytime there is large transactions without transparency it leads to corruption.   A liquid bond market where all US bonds are traded openly is less prone to manipulation.

All of this has become necessary as the system is no longer regarded as a system of respect, but of changing process to serve not the people, but the minority self interests.  In effect, the system is breaking.  Another hint of corruption is we find out about this in May 2012, and not June 2011.  Wonder why it wasn't proudly announced coupled with a transparent published trading record........

I am adding this to my series "Financial Ground Zero" of events that will lead up to the final event with US Financial and Currency system.

Thirty story building made in 15 days video

I have knocked China a bit on the fraudulent construction and real estate valuations.  For a country so large, and so populous, it only stands to reason that with massive influx of construction, would be massive gains in construction productivity.

The video below is a great illustration how truely efficient the Chinese have become at construction, not only in ability to create in record time, but to make energy efficient buildings.

With such capability and so much land, I wonder how anyone thought real estate prices would continue to go up forever.  If 30 story buildings can be created every 15 days by one company!  I have to imagine China has 1,000 companies just like this, creating new buildings at an amazing pace.

How bad off is China?

Jim Chanos, my favorite investor, spoke of a statistic I cannot correlate.
He stated that if you look at the "implicit" debt obligation  is 200% of China's GDP.
Notice Chanos did not provide the same analogy for the US.

Both videos a great watch.

Most disturbing video I have seen in years

As I have repeated, China is not the world economic savior of the world in the near future.  I  think there will be a revolution of sorts in China, and the rebirth may be a rival for world leader.  Apparently a Mish reader hopes so.

Mish posted this video, and has other chinese readers who vouch for what it represents.

The first driver in the video didn't come down, but tried to kill the little girl instead, because he knew that killing someone in an accident would probably involve a lump sum and maybe sometime in the prison, whereas being responsible for her medical bills would mean bankrupting his family. The legal system, which is enacted by and for the governing elites, is inefficient (at best) and corrupted, especially any level of governments are involved (and they are involved in almost everything). From their own observations, many people lose hope; many turn cynical; and even more just become numb. Avoiding uncertainty at all cost is not a bad strategy to protect oneself.

A media friend of ours who lives in Shanghai calls the current time in China "The Carnival before the Judgement Day". And indeed tension if built up inside and I won't be surprised it hits a wall soon. Unlike many more patriotic Chinese, I do not want China to become a new world power soon - at least not in the current form. The still growing economy is the only legitimacy left for this system to maintain in power, and I am actually hoping for an economic hard landing in China if that's what takes to wake people up to challenge the status quo for the better.

Click the link above for the full Mish article, and video.  It's moments like this that remind me how quickly and low people will sink once the conditions for self preservation surmount moral decency.

China is imploding

As I have posted before, China's near term over-extension of credit makes them NOT the saviour of the world economy.  Building cities that no one lives in does not lead to a solid foundation for an economy.

I have featured Jim Chanos before.  He is back in the news, some good clips to watch.

At the end, Jim throws down the true issue, are we a fair, capitalist system or a broken financial system that rewards the money risk takers and punishes the average person.  Jim, its the latter.