Posts filed under “Think Tank”

The Simple Math of Chinese Staggering growth

Chinese non-export economy grew 23% in June! Before you start googling for that number, let me warn you. You won’t find it. I’ve computed it using fifth grade math.

Here is what we know: exports constitute about 35% of the Chinese economy and they dropped over 20% in June, while the Chinese economy (GDP) grew 8%. So the “X” is the growth rate of 65% of Chinese non-export economy.

0.35 x (-20%) + 0.65 x (X%) = 8%. If you were to solve for X you get 23%.

Enough with math, let me put this number in perspective. Chinese non-export economy grew at 3 times the rate of their GDP. I only have two, very contradictory, explanations for this:

1) The Chinese government is lying through its teeth about its economic miracle growth. It has the incentives to interrogate economic data until it confesses to the party line numbers. This is very plausible, as for months, the Chinese government was showing positive GDP growth while its consumption of electricity was declining. Obviously this doesn’t make much sense. Also, China is not famous for production of intellectual type goods (i.e. software, creation of toxic financial products – that is our specialty) which scale a lot better and don’t require proportional electricity consumption to grow GDP. China makes stuff and to make stuff you need a lot of electricity. Also, even if the growth is completely driven by building high story buildings (even if they collapse), highways, schools – these activities still require a lot of electricity.

2) The numbers are real, the monetary base was up 28.5% in June (again if you can trust that number) and thus the quality of growth is horrible. I’ve discussed this scenario in great detail.

I hate to leave on open-ended note, but only time will tell what is actually going on in China.

P.S. I was not surprised to learn that Jeremy Grantham of GMO – a value investor for whom I have a tremendous respect is concerned about the future of Chinese economy as well.

Kindest Regards,

Vitaliy Katsenelson, CFA

Category: Markets, Think Tank

Fed member Yellen

Fed member Yellen in a speech on the US economy is covering all her bases. In the first part of the speech she is optimistic that growth will resume sometime this year due to an improvement in the capital markets, signs of stabilization in housing and consumer spending, a slowing rate of contraction in job…Read More

Category: MacroNotes

FINRA on Leveraged and Inverse ETFs

• FINRA is not happy with “Non-Traditional” (Leveraged and Inverse) Exchange-Traded Funds >

Category: Regulation, Think Tank

King Report: Don’t Overthink Light Volume Rallies

> We still maintain that one should not over-think things right now. This is a summer rally on very light volume in a questionable, at best, economic environment. And we are in the peak of vacation season. Yesterday, the usual late SPU gaming manufactured a rally. Sources said JPM bought 500 SPUs into the NYSE…Read More

Category: Think Tank

Conference Board Consumer Confidence

The July Conference Board Consumer Confidence # was 46.6, a touch weaker than the consensus of 49 and down from 49.3 in June. Both the Present Situation and Expectations fell. The answers to the labor market questions weighed down the # and reflects a still weakening environment. Those that said jobs were Plentiful fell almost…Read More

Category: MacroNotes

S&P/CaseShiller home price index

The May S&P/CaseShiller 20 city home price index fell 17.06% y/o/y, better than the forecasted drop of 17.9% and its the smallest fall since Aug ’08. The overall index had its first uptick since July ’06 (the month of its record high) m/o/m but is still down 32% from that record high. Y/o/Y declines continue…Read More

Category: MacroNotes

Breakfast with Dave

This week I offer something unusual for outside the Box, in that I agree on almost all points with my friend David Rosenberg, except he tells it so much better than your humble analyst. David was the former Chief Economist at the former Merrill Lynch (ah, Mother Merrill, we barely knew ye.) and is now Chief Economist at Gluskin Sheff + Associates Inc., which is one of Canada’s pre-eminent wealth management firms. Founded in 1984, they manage $4.4 billion. (For those who wonder, David left NYS to return home to Toronto. Much shorter commute time.) David looks at the recent stock market run-up, why he likes corporate bonds better than stocks, what is lagging with the consumer and a lot more. It is a very pithy read.

Have a good week, I am off to a beach in a few days, but there will be an e-letter this Friday. You are in good hands.

Your looking forward to reading with drinks with little umbrellas analyst,

John Mauldin, Editor
Outside the Box

Breakfast with Dave

by David A. Rosenberg


The Dow is coming off its best weekly performance since March 2000, and if memory serves us correctly, that month was marking the beginning of the end of the great bull market at that time. While the bear market rally has been of 1930 proportions, from our lens, that is what it remains and what is lacking in this extremely flashy runup in equity prices are: (i) leadership, (ii) quality, and (iii) volume. There were some very useful statistics in Barron’s (despite the fact that the headline in the ‘The Trader’ column is Why the Rally Should Keep Rolling … for Now):

  • The 50 smallest stocks have rebounded 17.2% from their nearby July 10th lows, outperforming the largest 50 stocks by 750 basis points.
  • The 50 most shorted stocks have rallied 17.6%, outperforming the 50 least shorted stocks by 880 basis points (over the same time frame).
  • The 50 stocks with the lowest analyst ratings have outperformed the 50 with the highest ratings by 380 basis points.
  • 85% of the market has already broken above their 50-day moving averages, which in some sense highlights an overbought market, but the other three factoids still attest to a low-quality rally, which is best left for traders and speculators. As tempting as it is to jump in, history is replete with examples of these sorts of short-covering rallies ending very quickly and with no advance notice from analysts, strategists or economists for that matter.

Let’s put aside the conventional wisdom that the stock market puts in its fundamental bottom 3-6 months ahead of the recession ending; it actually bottoms ahead of the economic recovery. That was the lesson of 2002 — recessions can end, but without a recovery there can be no sustainable bull market, though hopes can certainly bring on bouts of euphoric behaviour as we saw in the opening months of 2002 when the Nasdaq surged 45% and as we are seeing currently in the major averages. Japan is another great example. Its economy was out of recession 80% of the time in the 1990s and yet the lack of any sustainable recovery was largely behind its secular bear market. For a great reality check on the situation, have a read of Henry Kaufman’s piece on page 37 of Barron’s (A Long Road to Recovery). To wit:

“Some experts also expect the economy to get a boost from business inventory restocking. Maybe so, but most likely as a one-time event. Firms take on inventory if demand rises, if they expect higher prices and if they expect bottlenecks in the supply chain. But excess capacity is high, and there are no bottlenecks.”

We also believe that the current edition of BusinessWeek is a must-read — there were lots of good stuff in there this weekend, some of it following in Mr. Kaufman’s footsteps (page 14 — A Second Half Recovery Could be Fleeting). To wit:

“Will the upturn last? The question arises because the early stage of the recovery is going to be production-led, not demand-led … to keep the production rebound — and the recovery — going into 2010, overall spending will have to pick up, and that’s the big uncertainty given the headwinds facing consumers.”

There is no doubt that inventories have been pared back over the past four quarters at a record rate, and that the ISM customer inventory index is running at extremely tight levels. That said, the NFIB inventory plan index remains very weak, so what we have contributing to GDP in the third quarter is a mathematical boost to the economy from a lower rate of destocking; much of this in the auto sector. To actually move towards a sustainable inventory cycle, businesses will have to see final sales revive. What businesses have done is essentially recognize that the secular credit expansion has moved into reverse and the process of deleveraging in the consumer and financial sectors is ongoing. So, what companies have done in their re-assessments is to re-align their output schedules, order books and staffing requirements in the context that there will be a whole lot less credit to support any given level of production in the future.

What is very likely going to be missing going forward is the consumer because while it is the “back end” of the economy that helps bring recessions to an end as inventory withdrawal subsides, it is the “front end” that causes the expansion to endure — in normal cycles, that is. Historically, consumers end up adding 3.5 percentage points to real GDP growth in the first year of an economic renewal. As the economic editorial in BusinessWeek puts it, “this time, that’s most likely impossible.”

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Category: Think Tank

Woo time with the Chinese again

It is again no coincidence that US administration officials are wooing the Chinese during a week when the Treasury needs to sell more than $200b of debt. Any sell side Wall Street firm would love to have these sales people. Making their thoughts heard, a Chinese official said “we are concerned about the security of…Read More

Category: MacroNotes

Blue Chip Bull, or Thoughtful Contrarian?

Good Evening: As they have so many times in recent weeks, U.S. stocks were able to overcome some early bumpiness to finish higher on the day. Some earnings disappointments were responsible for this morning’s profit taking, but stronger sales of new homes powered the home building and financial sectors enough to lift the averages into…Read More

Category: Markets, Think Tank

Here’s the PDF of the letter, with text below. Signers are Alan Grayson, Ron Paul, Walter Jones, Brad Miller, Dan Lipinski, Elijah Cummings, Tom Perriello, Maxine Waters, Jackie Speier, and Maurice Hinchey. Federal Reserve letter on GS is here. >

Category: Federal Reserve, Think Tank