If you want to know whether the China story is sustainable, consider this chart — then imagine what the US version of this looks like:

>

china-savings-vs-spending-rate
Chart Source: Merrill Lynch, “U.S. Economics, January 2009”

Category: Consumer Spending

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

86 Responses to “China Consumer Spending vs. Savings”

  1. Marcus Aurelius says:

    We’re getting schooled in basic economics and personal finance by (ostensible) communists. Who’d a’ thunk it?

  2. Chief Tomahawk says:

    Oh just wait until our credit card companies get loose over there… Maybe someday they too will have to pay off debt and have it counted as “savings”.

    What would a Capital One commercial be over there? Yet another Mongol attack?

  3. hr says:

    I suppose Merril has a US version of this chart?

  4. boogabooga1114 says:

    How is that savings rate calculated? I find it inconceivable that the the typical Chinese household is saving 50 percent of its income. They have taxes and mortgages like the rest of us, right?

    Is there a breakdown of the components of the savings?

  5. China, I love you

    @boogabooga1114 Says:

    They have very little that is why they save like crazy. They’re doing it for their kids really, and to start a biz etc.

    Savings are in lieu of a social safety net, bank loans, college loans, insurance etc. Plus they also like gold

    They are changing but it is slow. Let’s hope the moneychangers don’t get to them too quickly and get them too addicted to credit too soon

  6. Whammer says:

    These are charts that would drive Edward Tufte crazy — the basic message is distorted by the Y-axis starting at 32%.

    The actual message is astonishing, true. But the visuals are somewhat misleading.

  7. Marcus Aurelius says:

    boogabooga1114:

    I think the typical Chinese citizen is probably only 1 step beyond being a peasant (and less than one generation away). One room home with extended family. Those outside city centers, cook over fire, shit in a hole in the ground or a bucket.

    From the World bank:

    In 1985 average income in China was $293; in 2006 the average income is $2025.

    Here’s a good chart of specific job incomes, with compulsory deductions:

    http://www.worldsalaries.org/china.shtml

  8. danm says:

    boogabooga1114
    ————-
    When you don’t have a safety net, it’s amazing how much you’ll pad your nest egg.

    When your money comes from hard labor and not capital gains or credit, it’s amazing how tight you keep your purse strings.

  9. financial says:

    50% sounds a little high, but definitely not off the chart. Singapore, Hong Kong have historically have savings rates in excess of 40%, part of it via Provident Funds that oblige all employees to save a certain percentage of their gross income.

    But, savings are essential to societies that operate without a safety net, in Singapore when someone is sick he or she dips into its provident fund.

    Its an indication that people are worried, what is worse, is that people in these countries also save informally, Gold etc, which are not really calculated as part of the national savings numbers. The implication of Chinese GDP are worrying for if they start saving, then the domestic engine for growth in China will slow down dramatically from the 6% target for 2009…

  10. [...] under Economy ·Tagged China, consumption, credit, economic model, savings Barry Ritholz posted interesting charts on his blog with an even more interesting question. If you want to know whether the China story is [...]

  11. Transor Z says:

    Apples to lychees.

    US consumer spending is 20% of world GDP and PROC pop. is how many x US pop? (We’ll have a better answer w/ all the new census workers.)

    IOW, if the US savings rate is 2.5% we equal their per capita savings in real terms, no? Also have to factor in govt benefits, etc.

  12. km4 says:

    Marcus Aurelius @ at 11:42 am
    We’re getting schooled in basic economics and personal finance by (ostensible) communists. Who’d a’ thunk it?

    BINGO !

    The will be no return to ‘normal for US economy…..yes this is unprecedented but its reality folks !

    Why ?
    1) The projected budget deficit for 2009 is $2 trillion
    2) The debt-drowned United States debt is already 350 percent of G.D.P and rising fast !
    3) The Fed is now holding $10 Trillion of ‘assets’ ( mostly toxic ) transferred from too big to fail banks.
    4) Other countries are now buying less of our debt

    So what can most Americans look forward to ?
    a) for production businesses the wages of American workers will drop in order to compete
    b) We already know most service based businesses ( excluding legal, medical, financial, a few others ) don’t pay that well.
    c) can use your house as ATM machine
    d) tightening of credit

    Bottom line: 70% of US GDP historically driven by consumer spending is simply not sustainable going forward

    being frugal is the new black !

  13. donna says:

    I note the decline in the Clinton years, when our economy was actually truly productive.

    The entire Bush era as well as the Reagan-Bush years seem to have been built on fraud.

  14. PrahaPartizan says:

    I would interpret this chart regarding the Chinese economy to be identical to that produced by the Soviet Union under Stalin during the 5-Year Plans of the 1930s. Clearly the trend during the early period of the charts reflected a society generally increasing its savings but plowing a considerable portion of the growth being experienced into a higher standard of living for the whole society. The last fifteen years of the chart shows a forced savings program as the average living standard stagnates and income explodes. That’s what Stalin did with the Ukraine and agriculture in general for fifteen years to try to industrialize the Soviet Union on a forced march. Strange how Stalin’s program has been condemned and the Chinese policies praised, mostly by the right in the US.

  15. Marcus Aurelius says:

    Way OT, but you just have to see this:

    http://www.youtube.com/watch?v=PXlxBeAvsB8&eurl=http%3A%2F%2Fcrooksandliars%2Ecom%2F&feature=player_embedded

    Rep. Alan Grayson grills the Inspector General of the Fed (Elizabeth A. Coleman?). Dereliction of duty is the only accurate description of what this video shows. Un. Freekin’. Believeable.

    Grayson is really the only representative or Senator I’ve seen who is capable of cutting to the chase over the fuckery going on at the Fed. Kudos to him.

    BR: Please consider posting on this so we can rant and vent in an appropriate venue.

  16. cvienne says:

    @ Marcus Aurelius

    Good find!

    Besides the responses (or lack thereof)…I was amazed at the (squirming) body language…

    Clearly the government is going to start having to spend money on classroom sessions to teach “media” or “congressional oversight” response 101…Or their charades might fall apart in due time…

  17. Whammer says:

    @Marcus Aurelius,

    I’m starting to like this Grayson fellow:

    http://www.youtube.com/watch?v=Mj0JAfq4esk

  18. HCF says:

    @PrahaPartizan:
    > as the average living standard stagnates and income explodes.

    How is this possible unless inflation explodes at a higher rate than income? Have you been to China in the last 10-15 years? I can assure you that the living standard is MUCH better than it had been…

    HCF

  19. [...] original post here: China Consumer Spending vs. Savings Leave a comment | [...]

  20. ottnott says:

    To get a US graph that looks more like the China graph, the changes required would have to go far beyond a change in consumer behavior.

    My organization is purchasing some database subscriptions for a project on technology in China. The vendor’s literature includes the following blurb:
    “XXXX is part of the Institute of Scientific and Technical Information of China (ISTIC), a division of the Chinese Ministry of Science and technology.”

    When your government is in the for-profit business, with global sales reps, you can expect a different picture from what we have in the US.

    Here’s a page with some National Savings data to compare to the China data above: http://www.econstats.com/weo/V015.htm

    And here’s a graph showing major components of US Gross national savings (in $, not % of GDP): http://www.iii.org/financial2/savings/gns/

  21. Transor Z says:

    Need to modify my earlier response, which incorrectly assumed a 50% household savings rate in China. According to the St. Louis Fed, it’s around 25%. The 50% GDP figure includes public and private savings.

    http://research.stlouisfed.org/publications/iet/20080801/cover.pdf

    However, my basic point still stands about achieving comparable personal savings in real terms, because PROC nominal household income is only around 1/25 that of US households.

    The St. Louis Fed one-pager also mentions that consumer credit is less available in China, something borne out by recent figures I’ve seen.

  22. DL says:

    donna @ 12:44

    At some point, Obama’s got to “own” the economy, for better or worse. He can’t blame the other guys forever.

  23. The Curmudgeon says:

    “When your government is in the for-profit business, with global sales reps, you can expect a different picture from what we have in the US.”

    I get your point, but the picture changes daily for the US as our government gets further immersed in the business of ostensibly “for-profit” businesses.

    @MA: excellent video, thanks for the link.

    What Bloomberg report is he referring to regarding the Fed’s $9t off-balance sheet operations? I can’t pull it off the free site.

  24. BJW says:

    Give it a rest Donna.

  25. patfla says:

    Well in Japan one of the tricks (incentives) they used, say around 1955, was to operate upon what we both probably knew which is that the marginal propensity to save from out of a bonus as opposed to a weekly salary is much greater. So in the course of the Japanese establishment constructing the lifetime employment system (which is now dead) they’d give the average Japanese the same overall annual compensation. But with much more of it in, effectively, a guaranteed yearly bonus (as opposed to the winner-take-all selective-few bonuses on Wall St.). With this contributing to a large rise in the Japanese savings rate. Look at the pre WWII years in Japan – very low savings rate.

    At about the same time (or a little earlier) in the US, the fear among the politico-economic powers-that-be was of a post war impl0sion in consumption and production. Which had indeed been disastrously the case for the UK immediately following WWI. And hence (ok, not quite so simply) ‘US consumer society’ was created. Do you remember a US consumer society _prior to WWII_. Well, no.

    So anyway in China, in addition, at a grosser level, to non-benign neglect of the health care system which is a very obvious prod to the individual savings rate, the Chinese have also taken many cues from the Japanese as to subtler mechanisms you can build into your system so as to pump up personal savings. Reducing consumption. Which together with an artificially low exchange rate leads inevitably to a current account surplus. The possibly somewhat naive assumption that operates in this regard (current account surplus) is: I’m getting richer and you’re getting poorer.

    OK it’s true: the current account surplus also requires that you be intelligent and hard working. These though are necessary but not sufficient conditions.

    The beggar-your-neighbor stuff reminds me of a line I heard in the UK (I would have guessed this was France, but the no, the UK has more than its share of slimeballs as well).

    “It’s not sufficient simply to win. Others must also be seen to have lost”.

  26. matt says:

    These charts aren’t surprising, when you think about the big picture. The U.S. and other “debtor nations” have been running large, increasing external deficits for years and the natural counterpart that must accompany this is savings somewhere else in the world.

    The more interesting t0pic is the rising U.S. savings rate. To me, the implication of a rising U.S. savings rate means that the savings in the ROTW must decline, or global GDP will see a commensurate reduction.

  27. km4 says:

    Google Earth explains the financial crisis: http://bit.ly/Vhm1l (via Foreign Policy Journal)
    Green shoots? Not so much.

  28. gordo365 says:

    Remeber to consider what will hold china back over long run. 200M people live in cities that look like Los Angeles. 1,100M people live in rural conditions with annual income on par with rural Nigeria. Remeber Ross Perot “poor people don’t buy things…” They have “issues”.

  29. The Curmudgeon says:

    Thanks TZ. I read that article awhile back, but hadn’t heard the guarantees and such referred to as “off-balance-sheet” which of course they are, sorta like a Citi SIV, so the good representative did a fine job cutting through the bullshit.

    For example, in addition to the $5 trillion or so of GSE assets the Fed has underwritten in the residential mortgage markets, add in the $1.25 trillion of new MBS’s it is buying to juice the market.

    And of course, none of this is backed by anything other than the ability to print money, and the nuclear warheads standing ready to protect that ability. BHO better think twice about any disarmament talks.

  30. hopeImwrong says:

    Shorts have not capitulated.

  31. franklin411 says:

    @hope
    Agreed. They’re definitely frustrated, though. The data stubbornly refuses to go their way, and the average American is seeing improvement in their daily economic life. Panic ended in March, markets are stable, housing is stable, unemployment is stabilizing.

    If the bears capitulate (and that is by no means inevitable), we can reassess.

  32. DL says:

    hopeImwrong @ 1:59

    You think this rally’s being driven by short covering, more than by money coming off “the sidelines”…?

    I’m thinking more the latter.

  33. Mannwich says:

    Me-thinks most short-covering is over. This is “sidelines $$” coming from Treasurys to stocks. I could be wrong but I don’t think so.

    “Housing is stable? Unemployment stabilizing?’ Wow, I really have nothing to say.

  34. Transor Z says:

    Let’s not go to crazy town…

    1. Savings = deposits in PROC banks, soon to be the largest in the world — and all of the clout that leveraging those deposits entails. . . and no, it won’t be 30:1 ;)

    2. Leverage isn’t bad when there’s a reasonable expectation of future stability/growth in earnings. Credit the MSM for “building consumer confidence.”

    3. The low American savings rate is well-established to the point of truism. My econ profs decried the low American savings rate vis a vis the Japanese more than a generation ago.

    4. Like Gordo says above, PROC has “issues” to work through, though I suspect their government will be prime consumers of the “persistent surveillance” systems MEH has been commenting on lately. Remember that math, science and tech-trained people can be royal pains in the ass for TPTB, as commenters on this and other blogs are currently proving here in the “land of the free”. . . :)

  35. hopeImwrong says:

    I think sideline money would look cause higher volume. I could be wrong. But I think if the shorts really quit, the market would drop. The problem then is, shorts would all jump in and short to catch the trend, and even worse, the buy on dips crowd would be getting involved.

    Another big headwind to lower prices is the falling dollar. Maybe sidelines money is also coming in right now, even though that seems crazy to me.

    This is why I believe it will take an event (or series of events) to shake this trend loose and start a real correction.

  36. DL says:

    hopeImwrong @ 2:18

    “Another big headwind to lower prices is the falling dollar”.

    Maybe when crude oil gets to $65, someone will notice. At $75, even “banana Ben” will notice.

  37. dead hobo says:

    Look at a 5 year graph of the S&P to put this rally in perspective. Looking at the economy, there’s no reason to think this rally reflects it. In fact, a conspiracy minded soul might notice that the timing of the stress test results and the associated sale of common stock was quite lucky in that it is timed perfectly with a nice little bear market rally.

    Anyway, I think the rally will disperse as quickly as it appeared, but not until a lot of new common bank shares are issued. See you at 800? Lower?

  38. Bruce in Tn says:

    Oh, I hate to sound like Franklin’s Dutch Uncle (not really….giggle…) but I looked over those pesky economic numbers again today:

    http://www.rttnews.com/CorpInfo/EconomicCalendar.aspx

    5/8/09 10 am…

    Now how does that new orders to inventories thingy work again? In recoveries, the inventories are supposed to contract at a faster rate than orders, or how the sam hill does that work again….?

    looks suspiciously like sales contracted 50% faster than inventories….and didn’t orders fall another.9% this month?

    As Winnie-T- P might say,” Oh, bother…”

  39. Itiswhatitis says:

    The falling dollar is just the deflation trade. Nothing more, nothing less. If the market turns, the dollar rockets.

  40. dead hobo says:

    DL Says:
    May 8th, 2009 at 2:38 pm

    Maybe when crude oil gets to $65, someone will notice. At $75, even “banana Ben” will notice

    reply:
    ————-
    Nope, he still confuses oil pricing with supply and demand and not speculative and excessive capital flows. He’ll just ignore the effect in the cpi and the cost push inflation in the core. People who actually spend money won’t have the option to ignore it so easily. Nor will people who have goods and services for sale that are not directly connected to the sale of gas and oil products.

  41. “Another big headwind to lower prices is the falling dollar”.

    http://quotes.ino.com/chart/?s=NYBOT_DX&t=f

    no kidding..

  42. dead hobo says:

    News item:

    WASHINGTON (AP) — Fannie Mae issued a grave warning about its future on Friday, saying it needs $19 billion in additional government aid as job losses grow and risky loans made during the housing boom go bad at an unnerving pace.

    ———————————————–
    I guess they didn’t get the memo.

  43. cvienne says:

    What do you want to bet that we get a huge blowout in the final hour here taking the S&P to 934.85 (matching the January 6th high for ’09)…

  44. Bruce in Tn says:

    http://www.cnbc.com/id/30624782

    Big US Banks May Be Headed For Extinction—And Soon

    …this from, of all sources, CNBC….

    Just one comment. I’d like to see GS broken up. Period. No snark.

  45. dead hobo says:

    cvienne Says:
    May 8th, 2009 at 2:56 pm

    What do you want to bet that we get a huge blowout in the final hour here taking the S&P to 934.85 (matching the January 6th high for ‘09)…

    reply:
    ————–
    No bet. It’s probably part of the script.

  46. boogabooga1114 says:

    @danm, et al.

    I’ve heard the safety-net argument before, but I’m not sure it adds up. Even if you have no health insurance or pension, so you save like a demon, at some point people get sick or old and draw down that money. Even if an individual household in its prime working years were salting away 50 percent of its gross pay — that’s a far cry from an economy-wide savings rate.

    I’ve heard the Chinese Central Bank intercepts great buckets of money before its the consumer level, largely to buy dollars and maintain the exchange rate. I wonder how much of the aggregate savings is comes from that policy.

  47. I-Man says:

    Patient shorts have not capitulated because the underlying reasons for being short have not changed… and honestly, you have plenty of reasons to be short here regardless of if you are of the fundamental or technical persuasion. If it were easy to try to call tops then everyone would do it. Its not easy, it takes patience and discipline.

    If you’re a short that was early, it doesnt make any sense to close here at a loss, unless its your preference. Or I might add… your emotions. Again, it takes patience, discipline, and balls of steel to be a successful short seller… but more importantly, it takes solid and thoughtful postion sizing and risk management, practically the same thing in my book.

    I’d say the number one thing that trips up people when they short is how they size their positions, not where their stops are placed, or where they enter or exit a trade.

    There are obvious signs of topping out here across the board: QQQQ, SPY, DIA, and XLF… only question is when, not if. This whole super cycle parabolic stage of this rally is taking place right now. Disciplined longs would be selling into strength here. Certainly not opening long positions here. Its only the late comer longs and weaker shorts covering that are juicing this thing now. And thats usually your best sign of a top. But people forget these things. Happens over and over…

  48. cvienne says:

    @Bruce in Tn

    Did you notice on that same page was a link to a slideshow titled: “What does a trillion look like?”

    It’s an amusing slideshow…but what I’d like to see is some hacker that gets ahold of that link and attaches it to a site with a .jpg cartoon of some poor US taxpayer taking it up the keester…

    THAT’S WHAT A TRILLION looks like!

  49. Itiswhatitis says:

    The United States has a weak savings rate because we are taught to consume and enjoy materialistic pleasures at all costs. It also explains America’s sex,gun/violence addictions more than anything else as well. Are economy is built around it as well.

  50. cvienne says:

    @I-man

    AMEN brother…

    It’s the SIZING of your position that counts…Hey, I’m short…Have been all along…Heck, I’m prepared for this rally to extend up to 1050 and beyond if that’s where they want to take it…

    Take it back up to the “all time high” for all I freakin’ care…My time horizon is limitless, I don’t need to pull my capital out…

    So make it CHEAPER for me baby…Go on!

  51. cvienne says:

    What’s amusing to me is the notion that there will be a HECK OF A LOT of equities to dump at the top and a small door to get that through…

    Hard to say the same thing for the MOB trying to get IN when a real bottom occurs…

  52. SavetheWhales says:

    @I-Man: I have suggested that this rally could be driven by a negative feedback loop established on the ultra-short funds. As they get cheaper, people looking for the big score pile in. A little nudge on the underlying index and some ultra-short holders are forced to cover.

    In effect, the ultra-shorts become an amplifier and are fed by the willingness and ability of investors to lose money in positions.

    Perversely, the longer it goes and the “cheaper” the ultra-shorts get, the more money they attract.

    IMHO, only three events cause this rally to end:

    1. A set of multi-day news events like last fall that introduce substantial risk and volatility. Such a series of events would cause a bunch of money to be taken off the table.

    2. The ultra-shorts “burn” out and stop attracting more money.

    We all saw the moonshots on these ETFs last fall. If the rally begins to show any bit of weakness, people will jump in on the ultrashorts hoping for a payday. There very act provides a price cushion for the underlying index. A little nudge towards optimism and the negative amplifier starts again – having suckered in some more people.

    Under this hypothesis, this rally will behave nothing like rallies of the past. Under an ultra-short driven event, and outside of external news, this could go monotonically upwards until the ultra-shorts are burned out.

    Interestingly enough, a commenter replied earlier that this could tip over and do the same thing on the other side. I’m not sure about that, because there is substantial friction in the system and a bias towards “growth”.

  53. cvienne says:

    I’m no special person by any means (so my opinions and anecdotes are worth as much as anyone elses)…

    But while, I follow the markets and politics on a daily basis, I’d say that 90% of the people with which I interact with follow MARKETS to about a 10% degree and are “half interested” in politics…

    So this whole episode over the past two months of Wall St. & Pennsylvania Ave. trying to carry on, do tricks, and chase their tail, reminds me of what my dog (who is still a puppy) tends to do to try and get attention so I’ll come play with him…

    I’ve found the best way to “train” him is to IGNORE his antics…

  54. SavetheWhales says:

    You can see the near linear decay in FAZ when plotted on a log graph as in here:

    http://finance.yahoo.com/q/bc?s=FAZ&t=3m&l=on&z=l&q=l&c=

  55. DL says:

    dead hobo @ 2:47

    The point is, the Fed has got to stop this “quantitative easing” nonsense pretty soon.

    If the Fed has to slam on the brakes hard in 2011, Obama’s going to have a hard time getting re-elected.

  56. DL says:

    cvienne @ 3:07

    I was short, until it became obvious that the SPX was going to close above 875. At that point I had to get out. However, I’m ready to jump back in on the short side, as soon as the next decline gets underway. I just hope that the decline doesn’t all happen in one day.

  57. Transor Z says:

    @ Bruce:

    I’m calling a bottom on US citizen political impotence. I’m very heartened by some “chatter” I’ve seen/heard this week.

    Like George Carlin used to say, Americans are a warlike people. Expect to see a “War on Corruption” within the next couple of years.

    Where the economy is going to be I have no freaking idea.

  58. I-Man Says: May 8th, 2009 at 3:03 pm

    that’s the way it is~

    “It’s the SIZING of your position that counts”-cv, above.

    Risk Management has to be the Cornerstone, or your House will get blown away..

  59. cvienne says:

    @DL

    You see…I’m thinking that it might actually happen that way…A FLUSH…

    It really doesn’t matter to me…I’m willing to hold on to paper losses (with more powder on the sidelines)…

    I know this market is TECHNICALLY overbought at the moment, but the $$ may continue to put in ISN’T for a trade…

    I’m still thinking long term…

    Let’s see what happens in the next 2-3 quarters when earnings are reported…I have my mind set on $40-$45 earnings…Even if you put a 14x multiple on that, the S&P is only ‘worth’ 600…

    If I see $75 earnings 3 straight quarters (and greater profits to come)…I’ll get out, lick my wounds and concede defeat…

  60. leftback says:

    I-Man at 3:03 pm:

    Great post. Required reading for all. Thanks, your disciplined contrarian steely trading friend, LB.

  61. Tweakmeister says:

    This post really needs a proper definition of the personal savings rate. As defined by the US Department of Commerce, the “savings rate” measures the difference between Americans’ after-tax personal income and their expenditures…but doesn’t take into account the worth of homes and stock holdings – where many Americans have a significant portion of their net worth.

  62. I-Man says:

    @ Whales:

    That huge volume spike on your chart of FAZ tells me something. And where I’m inclined to agree with your negative feedback loop thesis, I’d be remiss to not mention that I happen to be long some FAZ right now… so obviously, I dont believe its going to zero. And actually, to me FAZ is just a vehicle to short the XLF, and a bit of an experiment for me to be honest. I’m actually interested to see how that triple lev works when the XLF breaks.

    But it very well could trade to zero before XLF breaks, thats certainly a possibility. Albeit an unlikely one IMO.

    It could always pull a DCR. :) Anyone remember that puppy from last year right before oil topped? Only difference is how actively traded FAZ is. Again, I point to that volume. That says something to me… and what it says is “capitulation”. It’s only when those hoping to catch an easy buck lose hope and bail that the real strong hands will come in and buy. I think you’re seeing that in some of the prints from late in todays tape.

    What a week huh homies? Congrats to the longs that stuck with the trend. Enjoy your profits if you took them today… I’d be more afraid to be long over the weekend than short… finally.

    Andy T: SPX 929… damn you’re good bro- I need to learn me some of that EW voodoo. Quick point out that resistance of the accelerated uptrend (broken on 4/20) still in play… and snugged up tight! I love it when my simple trendlines and your advanced EW analysis correlate. Nature’s beauty at work.

  63. ben22 says:

    A little OT but for all the Gold bulls, this might be worth watching:

    http://www.youtube.com/watch?v=4SG7XGcL7JE&feature=channel_page

  64. hopeImwrong says:

    I-man at 3:03pm. Thanks for the post.

  65. ben22 says:

    I-man,

    That was a good post at 3:03, however, I might add that if that’s the strategy and you are going to hold, probably best to use something like SH, instead of an ultra right?

  66. ben22 says:

    I-man,

    One more thing, if you start getting into EW, like I have, (though I’m no AT by a long shot) you’ll want to get a lot more short than whatever you already are at some point in the next two years.

  67. hopeImwrong says:

    On holding losses in leveraged ETF, especially volatile ones:

    1. The decay can kill you. There are many articles on this, so I won’t bore you.
    2. Therefore it is better to actually be short stocks (do not go long a short ETF) for longer term time horizons. Longer term is a few days in very volatile situations. Patient traders/investors beware.

    One example: Buy srs at 34.93 at the open on 21Apr09. Iyr is at 28.16 at the open on 21Apr09. If you hold until today, you are down 43.4% at the close. Iyr is up 22.8%. Not a bad correlation. If Iyr goes back to 28.16 (an 18.6% drop) for a break even round trip, SRS goes up 37.2% to 27.14. You are still down 22.3%. Iyr has to drop to $25 for you to break even. That’s another 11%. That is nothing to sneeze at when most traders worry about commissions as an expense.

    FAZ and FAS both started at $60 when they were introduced. Look where they are today.

    FAZ will give you triple % performance, but it will never get back to anywhere near its all time highs, and neither will SRS. I know a lot of you are aware of this, and I’m not talking to the better informed. I’m warning those who may not have don’t the research, and/or don’t yet know about the real risks of these products. There’s lots of risk in the market without having to worry about this leveraged ETF problem.

  68. I-Man says:

    @ ben:

    But there’s something so seductive about that leverage now isnt there? :) I struggle with leverage. Thats how I learned to size my positions small… it was a painful lesson. Couple of them actually.

    You are keen to point that out man, if I’m being totally honest (and doing my best to not give myself away as a cheap ass) I feel that I have more leeway in building a position with something thats 6 bucks a share as opposed to something thats 60 like a SKF for example. With the ultras I can commit less capital and not sacrifice leverage.

    I would endorse a SH trade for sure.

  69. dead hobo says:

    The economy is working against the nice little rally we are in at this time. I’m happy it’s here. It gives me confidence in the spirit of those who control funds for investment. Those fine people are amazing. They will chase the stars and sing while they are doing it. Deep down, they know the stars will reward them. Or, at least, some fee income will reward them if the stars don’t work out as hoped for.

    Fannie Mae has issues. The jobs market has issues unless you like the adventure of meeting new people while conducting the census. Lenders have massive issues that appear to be of less interest in the headlines. Consumers have big issues. I see Japan or less in our futures. We’ll get the the massive inflation later on that Japan never created after their bubble burst and their carry trade when full tilt boogie. Our cash is more powerful than theirs. China will just have to suck it up. Ha Ha, China. Loser.

    I bailed out at a decent place. I thought to myself … Markets could rise or fall tomorrow. If they go down, I will kick myself for losing out on a big rise. If they go up I will feel a little stupid, but not too stupid in that I know they will be back down to or past my sale point before too long. Thus … sell was the best strategy as I am certain buy and hold would have required me to make the same gain a 2nd time. I hate to make the same gain twice because I held too long. Plus, I will have cash when the idiots buying now will be stupified at the market fall out of nowhere and CNBC will be spinning for the next bubble.

    Shorts, don’t fear. It’s all air now. At some point the market always reflects the economy. Optimistic idiots and commission salesmen and their enablers (CNBC) always make things appear better than they are. But longs, take heart in the knowledge they will prop things back up at the first opportunity, and government programs such as the SLP will make things very profitable for the nimble trader for years to come. Non-nimble traders should look into bank CDs. Soon.

  70. Outlier says:

    I’ve got to admit that the ETF decay is a bit beyond my pay grade. Read all the articles and still don’t quite get it. One question though, is the issue really the leverage, the derivative instruments used to go short, or both? If it’s as much an issue of the way they go short (which I recall reading at least once) than SH is going to decay too, although maybe not as dramatically as say FAZ…

  71. Jhatta says:

    This chart is plausible. When you don’t have social welfare, unemployment benefit or health insurance, you need to save for the rainy day. Why I know that coz I’m an Asian.

  72. dead hobo says:

    I said

    China will just have to suck it up. Ha Ha, China. Loser.

    elaboration:
    ——————
    We use Animal House rules over here. You fucked up. You trusted us. Thanks for buying all the debt. Please come back.

  73. ben22 says:

    Outlier,

    this one makes it easy with some pretty charts:

    http://www.my10000dollars.com/etf-time-decay/

    @I-man,

    I hear you about sizing positions. SRS beat me down twice this year. I thought that strategy you shared yesterday or the day before on how to add to the position if it is working was a good idea.

  74. ben22 says:

    A few observations:

    I’ve been saying for a couple weeks that bullish levels should go back to October 2007 before this rally is over. Short term bulls have been week but it’s really picking up now.

    Daily sentiment tonight via trade-futures.com is now at 85% bulls, close to the 88% seen at the all time 10/07

    Funny,. we haven’t even re-traced 40% of the decline yet the optimism is close to where it was at the all time high. Isn’t that how bear market rallies are supposed to work? People are nuts.

    Mood is starting to be more weighted towards bulls this week but I still think has more to go. Two paper articles today that caught my eye:

    In the WSJ page C1:

    How the Stress Tests Stoppped the Market Bleeding

    USA Today

    Stocks could see a bull run on heels of bear market

    Plus all the Green shoots talk and “better than expected” when it’s awful news still. This site also has been an indicator, haven’t seen so many bullish people here in a while. Plus we got Franklin now. Maybe we’ll get a few more Franklin’s before this run is done.

    Now the extreme should slowly move to my world of retail FA’s also as they tell all the clients that things are o.k. and to get back in, that is, if they weren’t already holding on for dear life.

    Looks like a lot of resistance on the S&P at 943 or 968 though I might need some help on reading that one. For now I’m gonna stick to my call of 965-1000 before it’s over.

    this one is just a complete guess but I think yields on the long bonds trend down next week.

    Anyone have any thoughts on the US$, looks like the Euro has really broken out and all year the dollar moves opposite the DOW it seems.

  75. Pat G. says:

    I need to recheck my lineage and see if there’s some Chinese in there somewhere….. It’s not what you have but what you do with what you have. I read somewhere that the Chinese peasants were big buyers of precious metals.

  76. zinc says:

    Here goes, even though I have been warned against BUI (blogging under the influence)!

    The video of the incompetent female FED IG has really irked me. How long do incompetent females get a free ride. In my career, I have spent an inordinate amount of time supporting incompetent female bosses who have been rushed to the front to counter claims of discrimination.

    Q) Where has the 1 trillion dollars gone ?

    A) What do you mean ?

    what a f’n idiot.

  77. Pat G. says:

    @ zinc

    Incompetency knows no gender, age, ethnicity, educational or socio-economical gap.

  78. FromLori says:

    I made some jokes about China forcing their own people to buy their poison and lo and behold…

    http://www.telegraph.co.uk/news/newstopics/howaboutthat/5271376/Chinese-ordered-to-smoke-more-to-boost-economy.html

    Chinese leaders reckon that their economy is getting better, but the world’s is getting worse and will do so for some time.

    Their optimism about their own country is based on the supposed intelligent actions of the central government in the face of a recession and its quick action of putting more than $500 billion in stimulus into the financial system.

    The rest of the large nations around the world will not be so fortunate. According to Reuters, “The global financial crisis is still spreading and the world economy is going to get worse before getting better, China’s Vice Premier Wang Qishan said.”

    It is hard to see how that assessment could be correct. Even if the investment that China is making in its economy helps to temporarily boost factory production and consumer spending, China’s massive export machine must do well for the country’s GDP to maintain rapid growth.

    If Wang Qishan is right a recovery in Japan and the West is far off. That almost certainly means that these markets will be much smaller importers. Given China’s central position as the largest trading partner of a number of other large nations, it cannot sustain improvements in its own economy without a sustained recovery around the world.

    If China is right and the rest of the world is still falling apart, it is only a matter of time before that collapse overwhelms the benefits of China’s huge investment in its own economy.

    So in the end if you make nothing you will have nothing to save and something the charts do not show is the amounts of money they are saving or the fact that they have no safety nets like SSI, Social Security but then again of course our Social Security will most likely be imploding in 2010 so KA BOOM the whole world has been destroyed by crooks and the obamageddon is in their pocket.

  79. PrahaPartizan says:

    HCF, I am sure that the living standard in those portions of China you’ve visited have improved dramatically. I never said that they hadn’t. What about the regions inland from the coast, though? Many areas of Stalinist Soviet Union saw improvements in their living standards too, just as large swathes of the rest of society saw theirs drop pretty hard or stagnate. If you’re in the nomenklatura, you’ve got it made, just like in the US if you’re associated with the Wall Street finance crowd. If you’re on Main Street, you need to spell it Mean Street.

  80. PrahaPartizan says:

    Pat G. Says May 8th, 2009 at 8:16 pm
    “…I read somewhere that the Chinese peasants were big buyers of precious metals…”

    No, no, no. They’re not “buyers” of precious metals. They’re consumers of precious metals, as in ingestors of precious and heavy metals. Chinese peasants consumes lots of metals. It’s just that they consume them orally.

  81. [...] the Big Picture blog: If you want to know whether the China story is sustainable, consider this chart — then [...]

  82. PrahaPartizan,

    “Beijing (AFP) April 09, 2007
    China’s farmland is becoming increasingly polluted, with coal-dependent factories and polluted waterways causing billions of dollars in damages, state press reported Monday. Heavy metals contaminate 12 million tonnes of grains each year, leading to direct losses of more than 20 billion yuan (2.6 billion dollars), the China Daily said, citing the nation’s environmental watchdog.
    More than 10 million hectares (24.7 million acres), or 10 percent of China’s farming land, has been ruined, the paper said, citing other reports in the state-run press.

    China’s coal industry, which supplies about 70 percent of the nation’s energy needs, is having a major impact.
    More than two billion tonnes of coal is burnt each year, discharging around 2,000 tonnes of mercury into the environment.

    Much of the highly toxic heavy metal ultimately seeps into the soil, the paper said.

    Vegetables and fruit have also been polluted by excessive amounts of nitrate reaching the ground, it added.
    China’s rapid economic expansion over the past few decades has come at huge environmental cost.
    More than 70 percent of China’s waterways and 90 percent of its underground water are contaminated by pollution, according to previously released government figures, but the impact on soil has never been measured.
    To get an accurate picture, Chinese authorities are currently undertaking their first-ever national survey of soil pollution…”
    http://www.terradaily.com/reports/Farmland_Across_China_At_Risk_From_Pollution_999.html
    ~~
    “…The air smells acrid from squat gas burners that sit outside homes, melting wires to recover copper and cooking computer motherboards to release gold. Migrant workers in filthy clothing smash picture tubes by hand to recover glass and electronic parts, releasing as much as 3kg of lead dust.

    For five years, environmentalists and the media have highlighted the danger to Chinese workers who dismantle a large portion of the world’s junked electronics. Yet a visit to this small southeastern town regarded as the heartland of “e-waste” disposal shows little has improved. In fact, the problem is growing worse because of China’s own contribution.
    China now produces more than 910,000 tonnes of e-waste each year, said Jamie Choi, a toxics campaigner with Greenpeace China in Beijing. That adds up to roughly 5 million TV sets, 4 million refrigerators, 5 million washing machines, 10 million mobile phones and 5 million personal computers, Choi said.
    “Most e-waste in China comes from overseas, but the amount of domestic e-waste is on the rise,” he said.

    This ugly business is driven by pure economics. For the West, where safety rules drive up the cost of disposal, it is as much as 10 times cheaper to export the waste to developing countries. In China, poor migrants from the countryside willingly endure the health risks to earn a few yuan, exploited by profit-hungry entrepreneurs….”
    http://www.taipeitimes.com/News/editorials/archives/2007/11/20/2003388743

    but, you forget, China exports a huge quantity of Ag Produce to the U.S., and around the World..

    see: “…China produced one third of the world’s vegetable exports in 2000, and its acceptance in the WTO in December 2001 was expected to boost China’s share of international produce markets even higher. However, excessive and poorly regulated levels of pesticide residues in Chinese produce are threatening its agricultural exports to its biggest markets, Japan and the EU.
    The magnitude of the pesticide residue problem in China is illustrated by studies inside and outside of the country. In Yunnan province, residues of two highly toxic pesticides banned for use in vegetable production were found in 34% to 100% of vegetable samples taken by the local government in the years 1994-2001. Approximately 47% of domestic produce tested by the Chinese government in 2001 had pesticide residues above government standards. In Japan, pesticide residues in some samples of vegetables imported from China were up to four times the agreed-upon limits. This finding led Japan to impose much stricter controls on imports from China, and was largely responsible for a new amendment to strengthen the Japanese Ministry of Health’s policy on pesticide residues, set to take effect in April 2003…”
    ht tp://ww w.panna.org/node/1365

  83. danm says:

    How long do incompetent females get a free ride
    —————
    Until all 99 incompetent males for each female stop getting a free ride.

  84. Outlier says:

    @ben22

    big thanks for the link to http://www.my10000dollars.com/etf-time-decay/ that one led to the aha moment. Was overthinking it all. For those still messing with short and “leveraged” etfs, take the time and realized that outside of very specific circumstances these things are garbage hell bent on approaching zero… (or at least slowly decaying downward).

  85. [...] Related: China Consumer Spending vs. Savings [...]