Delusion Watch: 2/19/09

Economy could begin to recover in April, claims Gordon Brown Telegraph. Subhead: “The economy could begin to recover as early as April 2, Gordon Brown has signaled.”

If by “recover” one means “temporarily looks as if it is no longer getting worse,” even I might agree that is possible.

From Merrill Lynch’s Fund Manager Survey (dated 18 February, by Gary Baker and Michael Hartnett):

A jump in optimism on the Chinese economy (growth expectations leaped from -70% to -21%) and further policy ease led to a marked improvement in global economic sentiment. While 90% of investors think we are currently in a global recession only a net 6% see a weaker economy in the next 12 months (versus 24% last month and 60% in October).

Two things have driven the optimism about China, and they appear overblown. The first is the rise in lending. Michael Pettis reported that a lot of that was sham transactions created so that banks would meet government target. The second reason was that stock prices have rallied. Well, one analyst estimates a big chunk of the lending went into…..the stock market!

Analyst Andy Xie throws cold water on the Chinese rally, as reported in Bloomberg:

China’s stocks rally that’s made the Shanghai Composite Index the world’s best performer this year will falter as profits are “non-existent,” according to independent economist Andy Xie.

The Shanghai measure has gained 21 percent this year, the most among 90 global stock gauges tracked by Bloomberg. The index is valued at 17.4 times earnings, the most expensive among the so-called BRIC markets of Brazil, Russia, India and China.

The rally will run out of steam as “profits are non- existent and valuations are still expensive,” Xie, former chief Asian economist at Morgan Stanley, said in an interview yesterday. He correctly predicted in April 2007 that China’s stock market was a “bubble” and would burst….

“It’s a rampant practice,” said Xie. “Here you are borrowing at 1.5 percent and the stock market rises, so you put your money into stocks and hope to get out after making 20 percent.”

To their credit, the Merrill team drily noted, “February’s optimism must now be corroborated by global lead indicators in coming months to avoid investor disappointment.”

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  1. bg

    The few chinese I talk to do not seem as exuberant as their stock market supposes. There is a growing realization that their loss-making enterprises had value by nature of cheap capital, slave cheap labor, and a favorable trade regime. Money was easy, and it was not hard to appear profitable even with razor thin margins. So ponzi risks took hold, and are starting to unravel. All one needed was revenue, and for a decade revenue was purchased with exported deflation.

    We talk about our sociopathic CEOs, as if we are a puritan culture (we are). China is not a puritan culture, and has a long history of massive ventures gone awry. We now have a world with too many factories, too many bridges to nowhere and too many mcmansions.

    I love China, and think the world of many Chinese. I do think they are a rising force on the world stage. But they – more than us – need to come to terms with their own bubble.

  2. sjc

    If the government were to legalize marijuana, then all parties concerned would have a cover for their delusional ways. “Hey, it was the maryjane!”

  3. SocialismSucks

    How about the bigtime bloggers start calling out the New World Order lackeys?

    Gordon Brown is a slave to the NWO. Along with Greenspan, Mankiw, Roubini and anyone else who claims we must now destroy the free market in order to save the free market.

  4. bb

    GB is going to delay the general elections until the economy is on a clear recovery path as no one is as fit as him to fight crises of such magnitude except sarkozy.

  5. FairEconomist

    Yves, you’re not applying logic! Brown is saying that before April 2, it is totally impossible to get a recovery – and he’s probably right. After April 2 – it’s possible – but note, he doesn’t say likely. All true! Ah, spin.

  6. eh

    Gordon Brown — always good for a laugh. But sentiment will be part of any recovery, so you can’t blame him for trying to stoke it — most politicians aren’t good for much else.

    You can just hear Tony Blair saying ‘Whew, that was close!’.

  7. Anonymous

    to his credit, he never said which YEAR it would recover…

    April 2, 2010?
    April 2, 2011?
    April 2, 2020?

    he pretty much left it wide open…

  8. Yves Smith


    I suggest you read his quotes again. He is really is suggesting the economy could get going again starting in April. The language is almost deliberately misleading. Having a plan for recovery is not the same as having a recovery, but he is conflating those two things.

  9. Anonymous

    Andy Xie spent most of the last decade at Morgan Stanley, predicting hyper-inflation and a resulting hard landing for the Chinese economy. Never happened… and while I think he’s an intelligent analyst, he’s consistently had a pessimistic bias. I have a hard time taking his word as canon today.

  10. Glen

    Delusional; Had a presentation the other day from a major Australian bank who claim that, essentially, all will be good by the end of the year. WTF? I know news travels slow in this part of the world but really. I could only surmise that they have a tenuous grip on reality at best and need to drum up business before it really turns to crap.

  11. Anonymous

    @Glen, said… Delusional; Had a presentation the other day from a major Australian bank who claim that..

    ..their product also cleans drapes and upholstery too.


  12. DoctoRx


    I for one enjoy these shorter posts.

    A quibble: To a doctor, a delusion is an unshakable belief in something that is clearly untrue, despite overwhelming contrary evidence/no evidence in its favor.

    Re Gordon Brown, what the Telegraph reports re Gordon Brown does not appear to make him delusional. Similarly, the 94% of Chinese investors who do not see a weaker economy in the next 12 months may be over-optimistic, but considering that even 2% growth is still growth, how are they delusional? Perhaps they are merely optimistic or overoptimistic.

  13. Anonymous

    competitive devaluation alert.

    Russian Reserves Rise After Bank Buys Currency

    Russia’s international reserves increased last week as the central bank purchased foreign currency in a bid to temper the ruble’s gains.

    The world’s third-largest reserves stockpile added $3.1 billion to $386.6 billion, after falling $4.6 billion in the week to Feb. 6, Bank Rossii said in an e-mailed statement today.

    The central bank will buy and sell foreign currency as a way of ensuring the ruble stays within a 39 to 41 trading range against its dollar-euro basket, First Deputy Chairman Alexei Ulyukayev said this week, according to Reuters. After sliding 35 percent against the dollar since August, the ruble strengthened 4.3 percent last week, its biggest weekly advance versus the U.S. currency since December 1998.

    “Last week, we saw a dramatic correction of the ruble exchange rate, triggered by a squeeze of local liquidity that was provisioned by the central bank,” said Vladimir Osakovsky, a Moscow-based economist for UniCredit SpA, Italy’s largest bank. “As a result, we saw considerable profit-taking on the foreign exchange market and the central bank decided to stabilize the exchange rate” by buying about $4.3 billion dollars, he said.

  14. mxq

    Zero said…
    “Brown wasn’t drunk; it was the medication speaking.”

    …don’t forget his jet lag along with two glasses* of wine

    *and by “glasses” he means jugs of british sangria

  15. Jesse

    “If by “recover” one means “temporarily looks as if it is no longer getting worse,” even I might agree that is possible.”

    OMG Yves you are so funny! LOL

  16. michael

    I agree, if we have a horrendous crash in March, things could start to get slightly better in April.
    What a bonehead.

  17. Anonymous

    SocialismSucks said…

    How did you like the free market in Iraq run by Bush, Cheney, Rumsfeld?


  18. Anonymous

    How can money “go into” the stock market, as if that money comes out of the bank and then disappears into some magical black hole called “the stock market”???

    If I take money out of the bank and use it to buy stock then I pass my money over to the person who sold me the stock. No money has disappeared. Exactly the same amount of money remains free to be used in the system as would have been the case if I hadn’t “put my money into the stockmarket”.

  19. Juan

    Andy Xie’s comment that profits are “non-existent” reminded me of a 2006 China Economic Net article Are these profits or losses? that included such nuggets as:

    At the National Auditing Work Conference held at the end of 2005, Auditor General of the National Audit Office Li Jinhua said that a preliminary overhaul of 11 key SOEs such as the China National Petroleum Corp. and the State Grid Corp. of China revealed that gains and losses were not reported accurately and many SOEs made false reports of profits. Owing to weak internal control, especially the lack of effective checks and balances on the power of top executives, state assets were embezzled.
    Although enterprises supervised by the SASAC earned profits of 480 billion yuan in 2004, losses for the year stood at 350 billion yuan. According to insiders, these publicized losses were just the “tip of the iceberg.” Huge public budgetary funds are needed to make up these losses.

    No good reason in the present conjuncture to imagine that non-SOE profits have not been falling.

  20. whitetower

    Riiight: I’m sure “things will be better” by April, right at the time 1Q reports are being published.

  21. Anonymous

    bb: GB is going to delay the general elections until the economy is on a clear recovery path as no one is as fit as him to fight crises of such magnitude except sarkozy.

    I’d like to add Putin and Chavez to that list.

    Vinny GOLDberg
    PS — I’m in England now, and let me tell you, this place is a socialist hellhole of first degree…

  22. Anonymous

    LeeAnne: How did you like the free market in Iraq run by Bush, Cheney, Rumsfeld?

    Loved it! My Blackwater stock went through the roof… :)

    Vinny Goldberg

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