naked capitalism

ndk says:

Potemkin bank recapitalization versus Potemkin stock market appreciation. While I’m not sure which is more pathetic, I would like to thank Nakagawa and Abe for making our leaderships look good by comparison.

We’re watching global margin compression in the wake of oversupply in a wide variety of industries, and profitability in China was never that good to begin with. I certainly believe they’ll see the worst of this economically, but also emerge in relatively good condition on the other side of the chasm.

Until then, remember the massive overhang of capacity dangling over almost every industry in the world right now. Whether it’s a desperate South Korean chipmaker or North American shale gas, pricing power and profits will have an extraordinarily difficult time getting off the mat any time soon.

ndk says:

The money was intended to reinflate. It seemed at least for now, it did reinflate.

I’ve got to disagree with you here, 12:08. We’ve become far too obsessed with the financial side of the economy and ignorant of the real side.

Supporting the equity value of corporations does nothing to directly increase demand in an economy. Nothing is purchased; nothing is consumed; nothing is built. Profits and revenues from operations don’t increase. At best, the corporation could issue more stock to take advantage of the artificially inflated share price.

The only other possible benefit to the real economy is through the psychological wealth effect. While that’s not negligible, it’s not efficient, and I have strong doubts that any government can so directly control the expectations and emotions of its citizens.

Anonymous says:

12:21 sounds like inflation to me. Increasing money supply while the economy stagnates has led to asset price appreciation and a commensurate drop in purchasing power. It seems our generation will be one that gets unceremoniously reminded that fiat currency is not a reliable measure of wealth.

Anonymous says:

NDK said:

“and I have strong doubts that any government can so directly control the expectations and emotions of its citizens”

But damn if they’re not going to try…again and again and again

The rebate checks in the US, the stimulus bill aimed at ‘helping Main Street and not rewarding Wall Street’, or in the more distant past the Japanese Government’s attempts not to stabilize the Nikkei, but to try to create a new bull market (1992-1996) when they unleashed the Postal Savings and Postal Insurance money into the stock market.

All failed, or are in the process of failing.

Though I doubt the Chinese Government’s intent was to prop up the stock market, they may be welcoming that bit of (perhaps temporary) serendipity. The danger is if the general public doubles down, and then the rug is pulled out a second time, leaving the 140,000,000 private stock investors burned yet again.

MyLessThanPrimeBeef says:

On the moral ladder, that is a couple of rungs higher than using government loans to pay yourselves bonuses.

Still, if nations keep this up, soon we will have 1 billion people on the planet out of work – the first billion unemployed global depression in history.

Anonymous says:

Really, if it’s a pump and dump in China, it will take another injection at 2X the previous amount to try and restart engines again.

In the meantime I suggest you withdraw enough cash to have on hand for at least a 30 day emergency.

Things ain’t look’in so good.

Expat says:

Given the news coming out of China and the performance of the Shanghai exchange, it seems pretty obvious to me that most Chinese cadres own shares. The stimulus money has directly stimulated share prices, avoiding all that mucking about with lending, investing and creating wealth.

Well, it means just one thing, folks. China is now a full-fledged capitalistic nation, following firmly the example set by America.

To paraphrase Coleridge, “FIRE, FIRE everywhere, nor any value to drink.”

Anonymous says:

I perceive there is a difference between banks actions where they have been strong armed into lending more money, and the government stimulus. Who are banks going to lend to into a downturn and why then are we surprised when accountancy tricks are used and the money ends up anywhere but where it was intended to go.

Cement and Iron ore prices though are beginning to rise a little as railway schemes get under way. I don’t think the stimulus package is anywhere near big enough to have a real affect other than to push up some commodity prices and cause problems outside of china. In other words it may be a good way to export unemployment back to the US.

My big concern at the moment is not Japan, Asia, China or Eastern Europe although all look to have the earmarks of delivering a black swan event, but Russia and the exposure of certain banks to it. With ruble devaluation continuing and reserves dwindling Russian banks have been using government money to speculate on currencies. Already there are rumours of some Russia banks seeking government intermediaries in refinancing certain loans with European banks. Meanwhile GDP has gone from 5.6 growth last summer to around 4 percent shrinkage during January with 800000 jobs lost in December. There are also rumours of deep government budget cuts and increases in some lending rates as the government tries to stabilise the currency. The worry is that further problems if not contained by the authorities could cause big write downs at some European banks, with German banks suspected of having a sizable stake in this pie, hence some of the recent declines in the Euro.

Donlast says:

The Chinese cadres and state company men are really incorrigible. They do this time and again – use public money and the company to play the market. That’s the Chinese way of capitalism. It is borne by the citizenry with an enduring patience because they do not expect anything else from government whether Emperor or Communit Czar. But the people are hard-working and entrepreneurial. Savings are high. Consumption is only 40% of GDP. International reserves are massive. China will make out for sure.

mxq says:

“The Chinese haven’t torched their banking system with toxic loans, and they’ve got huge surpluses to mobilize.”

Right. But, quid pro quo, they have torched/outsourced their consumption and productive investment capabilities.

As pettis once pointed out, saving is and always will be perceived as being more virtuous than spending. But in economics, things are only virtuous until a certain point is reached (equilibrium). The savings in china aren’t being properly converted into productive investments.

So where the west’s profligate spending has been an error of commission, Asian mercantilist savings have been in error of omission.

btw, there’s tons of info at the US china economic and security review commission, which is having a hearing today on the Sino-American economic relationship. Pettis and Roach (to name a few) have testimony posted.

Anonymous says:

Is China Pulling an Alan Greenspan

This is a good take on the same subject

http://www.fundmymutualfund.com/2009/02/is-china-pulling-alan-greenspan.html

VangelV says:

I see no reason why the Chinese can’t start to consume more of the products that they already make for Western markets. While it is obvious that many factories will have to close down that is not an unusual process for China. When I was there last March many of my contacts were pointing out that thousands of toy and textile factories had closed or were in the process of being closed as production was moved to cheaper jurisdictions like Vietnam.

If the government is going to offer cheap money it makes sense for the businesses to use it for their highest priority and most effective projects. That is unlikely to be investing in more capacity where none is needed.

We also have to keep in mind that China is expected to go through many corrections as it moves forward. I do not believe that anyone but the most naive of China bulls ever thought that the ride would be a smooth one. Eventually the Chinese will figure out that if they want to decouple from the West they need to bite the bullet and let the USD go down. One way to do that and still hedge their holdings would be to purchase large commodity producers and other non-financial companies that have plenty of long-term USD denominated debt on their books. After the dust settles the Chinese could find themselves with a lot of productive capital and infrastructure, large stakes in solid commodity producers that provide the inputs that their industries need and a well trained domestic workforce that can consume many of the products that Chinese factories are producing.

It certainly makes sense for the Chinese to think about putting themselves in a position to outbid the American consumer for goods and commodities in a world where resources are limited. This is particularly true in the energy markets, where depletion is running at 6-7%, production is running ahead of discoveries and investment is collapsing.