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When we left China last night, it was all shits and giggles that bad news is great news and a Chinese stimulus plan will be here any minute to save the day. Having realized the sad fact that is not going to happen (as we explained here most recently) and the specter of banks runs looming, this evening’s session has seen property developer stocks tumble – retracing all of last night’s losses – the Yuan plunges by the most in a week back above 6.2150. Copper is holding in for now at the magic $300 level but corporate bond prices are falling once again (worst run in 4 months).
The Yuan is dumping at its fastest rate in a week…erasing all the hope-strewn gains from yesterday
Property Developers are taking it on the chin…
And it’s no wonder, as Bloomberg notes…
Chinese developers’ gross margins declined by a weighted average 294 bps last year.
Most developers have forecast a recovery. Further declines in prices could present a threat.
Chinese developers that have reported 2013 results have set an average 2014 sales growth target of 16%, about half last year’s 30% rate. This is likely recognition of a need for better inventory management and of a more challenging sales environment. Developers will also probably curb construction because of slowdowns in some tier two and three cities.
Longfor Properties summed up the attitude among major Chinese and Hong Kong property developers in its company filings… .“In 2014, the Group’s key operating focus will be inventory clearance and cost control… For the coming 6-12 months period, we wil strive to reduce the leve of unsold inventory, hereby gradually improving our sale through rate.”
But apart from that… China’s fixed and the world economy will be back to normal as soon as the US weather clears up…
Remember these two charts?
From November 2012, The Chinese Credit Bubble – Full Frontal:
And from November 2013, “How China’s Stunning $15 Trillion In New Liquidity Blew Bernanke’s QE Out Of The Water”
It seems people are starting to listen, and not a moment too soon: as of December 31, China’s corporate debt just hit a record $12 trillion. From Reuters:
China’s corporate debt has hit record levels and is likely to accelerate a wave of domestic restructuring and trigger more defaults, as credit repayment problems rise.
Chinese non-financial companies held total outstanding bank borrowing and bond debt of about $12 trillion at the end of last year – equal to over 120 percent of GDP – according to Standard & Poor’s estimates.
Growth in Chinese company debt has been unprecedented. A Thomson Reuters analysis of 945 listed medium and large non-financial firms showed total debt soared by more than 260 percent, from 1.82 trillion yuan ($298.4 billion) to 4.74 trillion yuan ($777.3 billion), between December 2008 and September 2013.
While a credit crisis isn’t expected anytime soon, analysts say companies in China’s most leveraged sectors, such as machinery, shipping, construction and steel, are selling assets and undertaking mergers to avoid defaulting on their borrowings.
More defaults are expected, said Christopher Lee, managing director for Greater China corporates at Standard and Poor’s Rating Services in Hong Kong. “Borrowing costs already are going up due to tightened liquidity,” he said. “There will be a greater differentiation and discrimination of risk and lending going forward.”
And then there was the worst capital misallocation in history:
Exacerbating China’s corporate troubles has been the questionable use of 4 trillion yuan in stimulus that Beijing pumped into the economy following the onset of the global financial crisis in 2008, explained Lee of Standard & Poor’s.
“Many companies invested heavily into competitive and low-return projects because funding was readily available,” he said. “These investments aren’t doing well and are making little contribution to profitability.”
Of course, there is also this:
What happens next as the Chinese perfect debt storm is finally unleashed? Read this for the upcoming next steps: ‘”The Pig In The Python Is About To Be Expelled”: A Walk Thru Of China’s Hard Landing, And The Upcoming Global Harder Reset “
Several hours ago, and a day after the latest truce lasted about a few minutes before the the shooting returned and resulted in the bloodiest day of Ukraine’s protests so far, there was hope that the situation in Ukraine may finally be getting resolved, when Ukraine’s President Viktor Yanukovich announced plans for early elections in a series of concessions to his pro-European opponents. As Reuters reported earlier, Russian-backed Yanukovich, under pressure to quit from mass demonstrations in central Kiev, promised a national unity government and constitutional change to reduce his powers, as well as the presidential polls. He made the announcement in a statement on the presidential website without waiting for a signed agreement with opposition leaders after at least 77 people were killed in the worst violence since Ukraine became independent 22 years ago. This comes in the aftermath of S&P’s announcement overnight that the Ukraine will default in absence of favorable changes.
So is this the favorable change that everyone has been expecting. Nope.
First, it was Russia’s turn to remind everyone that it is Russia’s decision whether or not it will allow the nations that has the bulk of its European gas pipelines crossing its territory to leave its sphere of influence. To wit, Russia announced that it plans to wait before issuing additional financial support to Ukraine’s govt under $15b package, FinMin Anton Siluanov says in interview in Hong Kong, adding that Ukraine’s central bank may be wasting intl reserves defending hryvnia. Almos as if Russia would like the Ukraine to become insolvent and thus even more dependent on its good graces.
And then it was Europe’s turn. As WSJ reported, Polish Prime Minister Donald Tusk told reporters that “A lack of credibility will hang over all negotiations with Yanukovych’s participation. It seems the atmosphere in Kiev, especially after the death of so many people, may prompt the people in the Maidan to say: ‘We won’t discuss anything anymore with Yanukovych’.… The situation is changing so dramatically that this [deal] doesn’t necessarily need to be accepted by the Maidan, which considering thousands of people there make it the main reference point in Ukraine. … It’s too early for optimistic conclusions.”
He also said Poland’s efforts in Ukraine are an “investment in our security.” “It seems an increasing number of Poles understand that for a secure Poland an independent Ukraine is needed,” he said.
“It would be naive to assume Yanukovych has any good will—there’s nothing behind him but the wall. I don’t know anyone in the world who could say he trusts President Yanukovych. …
“I understand people in the Maidan who say ‘We don’t trust this man’ and that his departure is a condition for this deal. Those people need to be understood—bodies of people killed the other night are still there.
“But in order not to jeopardize this effort, in spite of myself I’m saying: ‘President Yanukovych should be at the table.’”
It was unclear as of this moment whether Yanukovich was at the table but what is clear is the following:
- UKRAINE PACT SIGNING DELAYED, WSJ SAYS, CITING DIPLOMATS
- GERMAN, POLISH MINISTERS RETURN TO MEETING W/UKRAINE PRESIDENT
Did they take him out?
And some more details from Dow Jones:
- Signing of Anticrisis Pact in Ukraine Delayed — Diplomats and Officials
- Ukraine Opposition Leaders, EU Diplomats in Talks With Protesters on Pact Terms
- Polish PM Tusk: Some Protesters Seeking Immediate Yanukovych Resignation
- Poland’s Tusk: “There’s Nothing Behind (Yanukovych) but the Wall”
- Poland’s Tusk: “In Spite of Myself, I’m Saying Yanukovych Should Be at the Table”
In other words, no deal, as the confusion and escalation will go on, until either a CIA-installed, pro-Western puppet government is installed (with the aid of said West of course – see Victoria Nuland leaked phone conversation), or until the Ukraine taps out and demands unconditional help from Putin.
At this point there does not appear to be a middle ground.
Ukrainian lawmakers scuffle in the country’s Parliament after the speaker
delayed debate on a resolution to reduce the powers of President Viktor
Yanukovych. – Reuters
» Report: Japan Secretly Developing Nuclear Weapons Alex Jones’ Infowars: There’s a war on for your mind!
Tokyo begins arms build-up in response to East China Sea tension
Paul Joseph Watson
February 18, 2014
Asia Weekly, a Hong Kong-based news outlet, is reporting that Japan is secretly developing a nuclear weapons program in response to increasing hostilities with China over the East China Sea dispute.
According to the report, paraphrased by the Want China Times, “With the capability to build at least 2,000 nuclear warheads, Japan has recently demanded the United States return 300 kilograms of plutonium. A Japanese military analyst told Yazhou Zhoukan that Washington has paid close attention to the potential development of nuclear weapons in Japan.”
Asia Weekly, known as Yazhou Zhoukan, is a popular Chinese-language platform with a 20 year publishing history.
The article notes that Mitsubishi, Hitachi and Toshiba all possess expertise in the area of nuclear energy and along with 200 other small companies could all be called upon to kickstart a nuclear weapons program. Japan already has over 40 tonnes of plutonium in its possession.
Influential voices like Major General Yoshiaki Yano of the Japan Ground Self-Defense Force are also calling on Tokyo to adjust its nuclear policy.
The story arrives hot on the heels of reports that China is extremely concerned about Japan’s initial resistance at handing back weapons-grade plutonium to the United States which was bought back in the 1960′s for research purposes but has the potential to be turned into 50 nuclear bombs.
Earlier this year, Prime Minister Shinzo Abe announced that within the next six years Japan would revise its pacifist constitution, which limits its military activities to self-defense.
Tensions over China’s declaration of an air defense zone over the disputed Senkaku Islands have continued to simmer, with three Chinese ships sailing through the region on Monday in another show of aggression.
A deluge of aggressive rhetoric has emerged out of official Communist Party organs in recent months directed against the United States, including discussion about China’s ability to attack U.S. military bases in the Western Pacific, as well as a lengthy editorial which appeared in Chinese state media explaining how the Chinese military’s current reformation process was part of a move by President Xi Jinping to prepare the People’s Liberation Army for war.
Last month, Chinese state media reported that Beijing’s new hypersonic missile vehicle is primarily designed to target U.S. aircraft carriers. Last year, China reportedly sunk a mock U.S. aircraft carrier utilizing the DF-21D anti-ship missile, dubbed the “carrier killer,” during a wargame which took place in the Gobi Desert.
This article was posted: Tuesday, February 18, 2014 at 9:59 am
While the eyes of the world were focused on the now infamous “Credit Equals Gold #1” Chinese wealth management product – it’s imminent default and last-minute bailout by ‘investors’ unknown – thecoal industry in China continued to collapse (as we noted here). We noted at the time how bailing out current high-yield product investors would merely amplify the problems down the line and it seems that Chinese authorities have heard that message. As Reuters reports, a high-yield investment product backed by a loan to a debt-ridden coal company failed to repay investors when it matured last Friday, state media reported on Wednesday.
A high-yield investment product backed by a loan to a debt-ridden coal company failed to repay investors when it matured last Friday, state media reported on Wednesday, in the latest sign of financial stress in China’s shadow bank sector.
“It matured on Feb. 7, but CCB passed on an announcement from Jilin Trust saying ‘We currently can’t be certain when (Liansheng) funds will be returned,'” the official Shanghai Securities News quoted an unnamed investor in the trust product as saying.
Though the maturity date has already passed, producing a technical default, Jilin Trust appears to be working to recover investor funds.
“Restructuring isn’t bankruptcy. As far as we know, there is no problem with the firm’s assets. The firm is in negotiations with investors,” the paper quoted an unnamed Jilin Trust official as saying.
Backed by China’s 2nd largest lender China Construction Bank (note we discussed the largest shadow-bank here), the product is as follows:
The fourth tranche of Jilin Trust’s product is name “Songhua River #77 Shanxi Opulent Blessing Project” raised 289 million yuan from investors in February 2012, promising a 9.8% yield – we will see if this technical default results in actual losses for investors.
backed by a coal-industry loan to Shanxi Liansheng Energy Co Ltd…
Shares of China’s biggest listed coal producers have dropped to their lowest valuations on record as falling fuel prices make it harder to repay debt.
China’s coal industry is “dead,” said Laban Yu, a Jefferies Group LLC analyst in Hong Kong with an underperform rating on all three stocks. “There are 10,000 producers in China. A lot of them are taking on debt. It gets harder and harder to service debts when coal prices keep falling.
and the risk of more defaults is not going away – in fact will onkly get worse in the next 3 months!!
For those who have forgotten, below is a quick schematic of what a WMP looks like:
“There is an unresolved self-contradiction in China’s current policies: restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years.”
The “eerie resemblances” – as Soros previously noted – to the US in 2008 have profound consequences for China and the world – nowhere is that more dangerously exposed (just as in the US) than in the Chinese shadow banking sector as explained above.
The bottom-line is that China seems to be testing the reaction of markets to small ‘technical’ defaults (such as this one)…
Technical defaults caused by repayment delays have occurred before, but market watchers say that China’s shadow bank sector is still waiting for a precedent-setting default in which investors are forced to absorb substantial losses.
Such an event could shatter the widespread assumption that even high-yielding investments carry an implicit guarantee from state banks. But Jilin Trust is apparently still looking for ways to recover investors’ funds.
The question is – doe s the PBOC really think that desparate borrowers will stop borrowing – and contract the size of the shadow-banking system reining in the out of control credit creation (and its subprime-like consequences)…
…borrowers are facing rising pressures for loan repayments in an environment of overcapacity and unprofitable investments. Unable to generate cash to service their loans, they have to turn to the shadow-banking sector for credit and avoid default. The result is an explosive growth of the size of the shadow-banking sector (now conservatively estimated to account for 20-30 percent of GDP).
Understandably, the PBOC does not look upon the shadow banking sector favorably. Since shadow-banking sector gets its short-term liquidity mainly through interbanking loans, the PBOC thought that it could put a painful squeeze on this sector through reducing liquidity. Apparently, the PBOC underestimated the effects of its measure. Largely because Chinese borrowers tend to cross-guarantee each other’s debt, squeezing even a relatively small number of borrowers could produce a cascade of default. The reaction in the credit market was thus almost instant and frightening. Borrowers facing imminent default are willing to borrow at any rate while banks with money are unwilling to loan it out no matter how attractive the terms are.
Should this situation continue, China’s real economy would suffer a nasty shock. Chain default would produce a paralyzing effect on economic activities even though there is no run on the banks. Clearly, this is not a prospect the CCP’s top leadership relishes.
So the PBOC’s efforts are merely exacerbating the situation for the worst companies…
However, this just hit the wire…
- *CHINA BANS BOND TRADE BETWEEN PROPRIETARY, WMP ACCOUNTS
Which sounds ominously like the PBOC won;t allow banks to bail their own WMP investors out and take the risky crap back on their off-balance-sheet books… i.e. The PBOC wants real defaults… not ‘technical’ defaults
The Canadian economy is rolling over and their recent jobs situation is worse than the US (and it’s always cold weather-y up there?!) but the last great pillar of the ‘recovery’ in Canada is perhaps about to get crushed. As the WSJ noted recently, Canada’s housing market is the most expensive in the world (60% over-valued by historical standards) and one simple reason explains it – Canada has been very open to foreign investors, which means that in an age of unprecedented global liquidity cash-rich wealthy individuals who are looking for places to park their excess funds can do so in its housing market. Until now… As SCMP reports, Canada’s government has announced that it is scrapping its controversial investor visa scheme, which has allowed waves of rich Hongkongers and mainland Chinese to immigrate since 1986. Soft landing?
Deutsche Banks’s house-price-to-rent index says Canada has the most expensive housing market in the world – 60% over-valued…
“Canada, for example, is very open to foreign investors, which means that in an age of unprecedented global liquidity cash-rich wealthy individuals who are looking for places to park their excess funds can do so in its housing market far more easily than in Japan, with its closed system. ”
As it’s home price index hardly missed a beat while the US plunged… (different scales but point is to illustrate drastic difference when financial crisis started – and where the liquidity went…)
Canada’s government has announced that it is scrapping its controversial investor visa scheme, which has allowed waves of rich Hongkongers and mainland Chinese to immigrate since 1986.
The surprise announcement was made in Finance Minister Jim Flaherty’s budget, which was delivered to parliament in Ottawa on Tuesday afternoon local time. Tens of thousands of Chinese millionaires in the queue will reportedly have their applications scrapped and their application fees returned.
The decision came less than a week after the South China Morning Post published a series of investigative reports into the controversial 28-year-old scheme.
The Post revealed how the scheme spun out of control when Canada’s Hong Kong consulate was overwhelmed by a massive influx of applications from mainland millionaires.Applications to the scheme were frozen in 2012 as a result, as immigration staff struggled to clear the backlog.
“In recent years, significant progress has been made to better align the immigration system with Canada’s economic needs. The current immigrant investor program stands out as an exception to this success,” Flaherty’s budget papers said.
“For decades, it has significantly undervalued Canadian permanent residence, providing a pathway to Canadian citizenship in exchange for a guaranteed loan that is significantly less than our peer countries require,” it read.
Under the scheme, would-be migrants worth a minimum of C$1.6 million (HK$11.3 million) loaned the government C$800,000 interest free for a period of five years. The simplicity and low relative cost of the risk-free scheme made it the world’s most popular wealth migration program.
A parallel investor migration scheme run by Quebec still remains open. Many Chinese migrants use the alternative scheme to get into Canada via the French-speaking province and then move elsewhere in Canada. The federal government has previously pledged to crack down on what it said was a fraudulent practice.
Flaherty also announced yesterday the scrapping of a smaller economic migration scheme for entrepreneurs.
All told, 59,000 investor applicants and 7,000 entrepreneurs will have their applications returned, Postmedia News reported. Seventy per cent of the backlog, as of last January, was Chinese, suggesting more than 46,000 mainlanders will be affected by yesterday’s announcements.
The Immigrant Investor Program, which has brought about 185,000 migrants to Canada, was instrumental in facilitating an exodus of rich Hongkongers in the wake of the 1989 Tiananmen massacre and in the run-up to the handover. More than 30,000 Hongkongers immigrated using the scheme, though SAR applications have dwindled since 1997.
So, the Canadian government is looking a liquidity-splooging gift-horse in the mouth and saying “no, thanks” – an impressive decision to take given the potential weakness in the real economy… we’ll see how long it takes for the decision to be unwound or altered…
The bailing out of the much-watched ‘Credit equals Gold #1’ wealth management product and safe liquidity-strewn (CNY375 billion from the PBOC) survival of the lunar new year liquidity crunch has many believing the worst is over. Though we discussed this fallacy in great depth here, the following chart of the total collapse in the largest Chinese coal producers says this is far from over. Trading at or below book values, investors are clearly signaling concerns about the quality of assets summed up perfectly by one local analyst – China’s coal industry (whose loans back a massive amount of the wealth management products) is “dead.”
Shares of China’s biggest listed coal producers have dropped to their lowest valuations on record as falling fuel prices make it harder to repay debt.
Bloomberg’s chart above tracks the price-to-book ratio of China Shenhua Energy Co., China Coal Energy Co. and Yanzhou Coal Mining Co. Both China Coal and Yanzhou Coal trade below the value of their net assets, while Shenhua Energy has fallen to about 1 times book. The lower panel shows the CSI 300 Index’s energy gauge traded at a record discount to the MSCI All-Country World Energy Index last month.
Slowing economic growth and efforts to boost use of alternative fuels have dragged down coal prices in China, the world’s biggest producer and consumer of the fuel. The nation’s banking regulator ordered its regional offices to increase scrutiny of credit risks in the coal-mining industry, two people with knowledge of the matter said last month, signaling government concern about possible defaults.
China’s coal industry is “dead,” said Laban Yu, a Jefferies Group LLC analyst in Hong Kong with an underperform rating on all three stocks. “There are 10,000 producers in China. A lot of them are taking on debt. It gets harder and harder to service debts when coal prices keep falling.”
China Coal warned Jan. 24 that 2013 net income will probably drop as much as 65 percent from a year earlier. The second-largest producer had 50 billion yuan ($8.3 billion) of net debt at the end of last year, from net cash of 6 billion yuan in 2011, according to a Barclays Plc note last month. The stock has tumbled 82 percent from its 2008 peak.
Declines in Shenhua, the listed unit of China’s No. 1 coal producer, have erased $178 billion of market value since the stock peaked in 2007 — equivalent to the value of Bank of America Corp. Yanzhou Coal, the fourth largest, has dropped 80 percent from its 2011 high.
So, in summary, the PBOC had to bailout a ‘small’ wealth management product due to fears of contagion, which merely amplifies the future problems, and investors are pricing coal companies (which back a vast amount of shadow bank facilities) for major problems ahead… and the PBC had to pump CNY 375 billion in last week just to prop up the banks through the new year…
But apart from that – yeah, China’s credit crisis must be over because US equities are up for 3 days…
HONG KONG—Those in Hong Kong who favor increasing democracy are worried that the city’s freedom of the press is in jeopardy, as a faction in the Chinese Communist Party (CCP) has increasingly been using Hong Kong’s media outlets to spread propaganda.
Pan-democrats—the legislators of different parties united in their goal of bringing democracy to Hong Kong—raised a motion in the Legislative Council on Jan. 22 to defend the freedom of the press in Hong Kong, and it passed by 35 votes.
Civic Party head Alan Leung, who initiated the motion, said that a recent spate of events in Hong Kong show that the freedom of the press is threatened.
Leung said that it started with Hong Kong newspaper South China Morning Post, which began supporting the CCP when Wang Xiangwei from the China Daily paper was appointed first as the Post’s deputy editor, and then as its editor-in-chief.
This was followed in September 2011 by the unusual assignment of Hong Kong Administrative Officer Roy Tang Yun-kwong, who had no previous experience in broadcasting, to oversee the operation of Radio Television Hong Kong (RTHK).
After that, in May 2012 Hong Kong Chief Executive Leung Chun-ying sent a legal letter threatening the Hong Kong Economic Journal. In November 2013 Commercial Radio Hong Kong’s outspoken host Lee Wai-ling was forcefully transferred, and then this January Ming Pao’s chief editor was replaced with a known CCP supporter.
Neo Democrats Party member Gary Fan said that Hong Kong media have mostly turned “red.” For example, ATV World, Sing Pao, South China Morning Post, and Sing Tao have been enlisted to support the CCP through commercial or political interests, Fan said.
Some semi-official mainland Chinese television channels such as Phoenix Television and One TV have set up branches in Hong Kong, Fan added. Local media have been depleted, and the days of Hong Kong’s freedom of the press are numbered, he said.
Civic Party and Legislative Council member Kwok Ka-ki described the situation as someone behind the scenes “buying up the Hong Kong media one by one, then burning them out one by one.”
China specialist Chen Zhong pointed out that when the CCP used advertising to exert pressure on am730 and Apple Daily, this showed that it is very difficult nowadays for conventional Hong Kong media to survive without funds from the CCP.
These Hong Kong media must follow the directives of the CCP on critical issues and impose self-censorship in reportage, and the terms they use are increasingly in line with the CCP’s official media, Chen said.
Chen Zhong told the Epoch Times that currently the Jiang Zemin-Bo Xilai faction of the CCP is heavily involved in running Hong Kong’s media. Jiang Zemin is a former head of the CCP and had intended for Bo Xilai to assure his faction’s continued predominance in the Party, until CCP head Hu Jintao managed to take down Bo.
The Jiang faction has lost its high-profile media platform in mainland China, where the only mouthpiece remaining to them is the Global Times. Therefore they use the Hong Kong media they bought earlier to discharge propaganda and create confusion.
For instance, he said, many Hong Kong media reported on the recent New York press conference held by Chen Guangbiao, a Chinese billionaire supported by the Jiang faction. In the conference, Chen Guangbiao attempted to reignite the Tiananmen “self-immolation” hoax created by the Jiang faction in 2001 to justify its persecute of practitioners of the spiritual discipline Falun Gong.
Chen Zhong said that the truth about this hoax has become common knowledge in China, and mainland Chinese media chose not to report on the press conference. However, one-sided coverage of the event was reported in the Jiang faction’s favor by several Hong Kong media, including Sing Tao, The Standard, Ming Pao, Oriental Daily, Sing Pao, Apple Daily, and RTHK. Chen Zhong said this reporting showed the media had lost their conscience.
Jimmy Lai, the boss of Apple Daily, told RTHK that Ming Pao’s former chief editor, Kevin Lau Chun-to, was already very “cooperative” with the CCP. However, Lau was still removed, which Jimmy Lai found puzzling.
According to Chen Zhong’s analysis, Lau was a victim of the duel between factions. Chen said that Lau is a Hong Kong local who does not understand the complexity of the CCP’s politics and the frictions between different factions. This caused him to shift grounds recently in Ming Pao’s reporting, which led to the Jiang faction being dissatisfied.
Under Kevin Lau, Ming Pao supported the Leung government of Hong Kong, legislator Raymond Wong Yuk-man said in the Legislative Council on Jan. 22. Those who do not comply with the requirements of the CCP cannot survive the purge, even if they help with minor criticisms, Wong said.
The media at Hong Kong, Wong added, has become the propaganda department of Beijing.
International media such as the Washington Times have reported on the relationship between Ming Pao owner Tiong Hiew King and the CCP. When Bo Xilai was in power, the city of Chongqing pumped an annual investment of tens of millions into a newspaper under Tiong’s control, the Singapore-based, Chinese-language United Morning Paper.
United Morning Paper runs a special column dedicated to drumming up support for Bo. Asia Weekly, another media outlet controlled by Tiong, was the first to propose the Bo Xilai-supported “Chongqing model,” criticized Bo’s rival Wang Yang, ridiculed former CCP head Hu Jintao, and opposed current CCP head Xi Jinping, who heads the faction that opposes Jiang and Bo.
The liaison between Bo Xilai and the United Morning Paper was reportedly facilitated by Chong Tien-siong, who is now the new editor candidate of Ming Pao.
Translated by Y.K. Lu. Written in English by Sally Appert.
Marc Faber Warns “Insiders Are Selling Like Crazy… Short US Stocks, Buy Treasuries & Gold” | Zero Hedge
Beginning by disavowing Mario Gabelli of any belief that rising stock prices help ‘most’ people (“Fed data suggests half the US population has seen a 40% drop in wealth since 2007“), Marc Faber discusses his increasingly imminent fears of the markets in this recent Barron’s interview.
Quoting Hussman as a caveat, “The problem with bubbles is that they force one to decide whether to look like an idiot before the peak, or an idiot after the peak. There’s no calling the top,” Faber warns there are a lot of questions about the quality of earnings (from buybacks to unfunded pensions) but “statistics show that company insiders are selling their shares like crazy.”
His first recommendation – short the Russell 2000, buy 10-year US Treasuries (“there will be no magnificent US recovery”), and miners and adds “own physical gold because the old system will implode. Those who own paper assets are doomed.”
Faber: This morning, I said most people don’t benefit from rising stock prices. This handsome young man on my left said I was incorrect. [Gabelli starts preening.] Yet, here are some statistics from Gallup’s annual economy and personal-finance survey on the percentage of U.S. adults invested in the market. The survey, whose results were published in May, asks whether respondents personally or jointly with a spouse have any money invested in the market, either in individual stock accounts, stock mutual funds, self-directed 401(k) retirement accounts, or individual retirement accounts.Only 52% responded positively.
Gabelli: They didn’t ask about company-sponsored 401(k)s, so it is a faulty question.
Faber: An analysis of Federal Reserve data suggests that half the U.S. population has seen a 40% decrease in wealth since 2007.
In Reminiscences of a Stock Operator [a fictionalized account of the trader Jesse Livermore that has become a Wall Street classic], Livermore said, “It never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight.” Here’s another thought from John Hussmann of the Hussmann Funds: “The problem with bubbles is that they force one to decide whether to look like an idiot before the peak, or an idiot after the peak. There’s no calling the top, and most of the signals that have been most historically useful for that purpose have been blaring red since late 2011.”
I am negative about U.S. stocks, and the Russell 2000 in particular. Regarding Abby’s energy recommendation, this is one of the few sectors with insider buying. In other sectors, statistics show that company insiders are selling their shares like crazy, and companies are buying like crazy.
Zulauf: These are the same people.
Faber: Precisely. Looking at 10-year annualized returns for U.S. stocks, the Value Line arithmetic index has risen 11% a year. The Standard & Poor’s 600 and the Nasdaq 100 have each risen 9.4% a year. In other words, the market hasn’t done badly. Sentiment figures are extremely bullish, and valuations are on the high side.
But there are a lot of questions about earnings, both because of stock buybacks and unfunded pension liabilities. How can companies have rising earnings, yet not provision sufficiently for their pension funds?
Good question. Where are you leading us with your musings?
Faber: What I recommend to clients and what I do with my own portfolio aren’t always the same. That said, my first recommendation is to short the Russell 2000. You can use the iShares Russell 2000 exchange-traded fund [IWM]. Small stocks have outperformed large stocks significantly in the past few years.
Next, I would buy 10-year Treasury notes, because I don’t believe in this magnificent U.S. economic recovery. The U.S. is going to turn down, and bond yields are going to fall. Abby just gave me a good idea. She is long the iShares MSCI Mexico Capped ETF, so I will go short.
What are you doing with your own money?
Faber: I have a lot of cash, and I bought Treasury bonds.
Faber: I have no faith in paper money, period. Next, insider buying is also high in gold shares. Gold has massively underperformed relative to the S&P 500 and the Russell 2000. Maybe the price will go down some from here, but individual investors and my fellow panelists and Barron’s editors ought to own some gold. About 20% of my net worth is in gold. I don’t even value it in my portfolio. What goes down, I don’t value.
Which stocks are you recommending?
Faber: I recommend the Market Vectors Junior Gold Miners ETF [GDXJ], although I don’t own it. I own physical gold because the old system will implode. Those who own paper assets are doomed.
Zulauf: Can you put the time frame on the implosion?
Faber: Let’s enjoy dinner tonight. Maybe it will happen tomorrow.
There is a colossal bubble in assets. When central banks print money, all assets go up. When they pull back, we could see deflation in asset prices but a pickup in consumer prices and the cost of living. Still, you have to own some assets. Hutchison Port Holdings Trust yields about 7%. It owns several ports in Hong Kong and China, which isn’t a good business right now. When the economy slows, the dividend might be cut to 5% or so. Many Singapore real-estate investment trusts have corrected meaningfully, and now yield 5% to 6%. They aren’t terrific investments because property prices could fall. But if you have a negative view of the world, and you think trade will contract, property prices will fall, and the yield on the 10-year Treasury will drop, a REIT like Hutchison is a relatively attractive investment.
Faber: The outlook for property in Asia isn’t bad because a lot of Europeans realize they will need to leave Europe for tax reasons. They can live in Singapore and be taxed at a much lower rate. Even if China grows by only 3% or 4%, it is better than Europe. People are moving up the economic ladder in Asia and into the middle class.
Are you bullish on India?
Faber: I am on the board of the oldest India fund [the India Capital fund]. The macroeconomic outlook for India isn’t good, but an election is coming, and the market always rallies into elections.The leading candidate is pro-business. He is speaking before huge crowds.
In dollar terms, the Indian market is still down about 40% from the peak, because the currency has weakened. In the 1970s, stock market indexes performed poorly and stock-picking came to the fore. Asia could be like that now. It is a huge region, and you have to invest by company. Some Indian companies will do well, and others poorly. Some people made 40% on their investments in China last year, but the benchmark index did poorly.
I like Vietnam. The economy has had its troubles, and the market has seen a big decline. I want you to visualize Vietnam. [Stands up, walks to a nearby wall, and begins to draw a map of Vietnam with his hands.] Here’s Saigon, or Ho Chi Minh City, the border with China, and the Mekong River. And here in the middle, on the coast, is Da Nang.
Faber: I recommend shorting the Turkish lira. I had an experience in Turkey that led me to believe that some families are above the law. When I see that in an emerging economy, it makes me careful about investing.