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Japanese Prime Minister To Step Down

  
Analysis, Economy, Education
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Ichiro Ozawa, secretary-general of Japanese Prime Minister Yukio Hatoyama’s party, asked Hatoyama to step down from his post, Yukio Ubukata, vice secretary- general of the party said in a TV Asahi program today. Ubukata said he expects both to resign before an upper house election next month. Hatoyama refused to resign during a meeting of senior party officials yesterday, Kyodo News reported.

As this action will likely lead to Yen weakness, and thus Euro strength, the most likely result will be a green close for the Nikkei, once again indicating that politically destabilizing fundamentals don’t matter to C++.

Updated at 7:20/2nd June/Baroda

The Four Main Parts of James Chanos’ China Argument

  
Analysis, Economy, Education, Video
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Note: The commentary that follows has been taken from Jim Chanos’ speech to a group of investors, on the subject of China’s economy.  The video of this speech can be viewed below.

 

 

 

 

 

 



Hedge fund manager Jim Chanos has generated some controversy over the past few months because he has had the temerity to argue that China is experiencing an asset bubble.  Skeptics argue that he misunderstands the nature of the Chinese economy.

There are four main parts to his argument:

•    GDP drives economic activity.
•    Local party bosses have an incentive to game the system
•    Real estate speculation
•    Overbuilding of industrial and commercial real estate

Let’s take these arguments one by one.

1) GDP drives economic activity

In most industrialized countries, GDP is what Chanos calls a residual: it is the result of economic activity.  But in China, GDP growth is seen as sacrosanct, and Beijing sets a GDP growth target every year.  Local party bosses act to ensure that they meet this target.

2) Local party bosses have an incentive to game the system

Since GDP growth is explicitly stated as a public policy, local political bosses have an incentive to make sure that they contribute to the country’s efforts to meet the GDP target growth rate.  In practice, this means that local municipalities can, for example, meet revenue targets by selling off land to developers.  Party bosses have an incentive to sell as much land as possible, regardless of whether doing so creates too much supply.

3) Real estate speculation

One of the main arguments advanced against Chanos’ China thesis is that real estate speculators in China have to have more equity than do their American counterparts. The implication is that China won’t suffer from a meltdown of real estate.  But this argument, while possibly correct, misses Chanos’ larger point.  Speculators in Beijing buy up multiple apartments, seeing them as a store of value, akin to commodities like gold or palladium.

Implicit in this practice is the notion that there is a greater fool down the line.  Treating real estate as a store of value, rather than an investment that produces real or imputed monthly cash flows in the form of rent defies economic logic. (more…)

China on ‘Treadmill to Hell’ Amid Bubble, Chanos Says

  
Analysis, Economy, Education, Politics
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April 8 (Bloomberg) — China’s property market is a bubble that may burst by as early as this year, according to hedge fund manager James Chanos.

The world’s third-biggest economy may need to keep up the pace of property investment because up to 60 percent of its gross domestic product relies on construction, said Chanos. The bubble may begin to “run its course” in late-2010 or 2011, he said in an interview on “The Charlie Rose Show” that will air on PBS and Bloomberg TV.

China is “on a treadmill to hell,” said Chanos, who said in January the nation is Dubai times a thousand. “They can’t afford to get off this heroin of property development. It is the only thing keeping the economic growth numbers growing.”

Property prices in China rose at the fastest pace in almost two years in February even after officials this year re-imposed a tax on homes sold within five years of their purchase to curb speculation and ordered banks to set aside more funds as reserves to cool lending. The boom in China’s real estate has fueled concern that China may face a collapse seen in Dubai that has hurt the ability of some of its companies to repay debt.

Since his January prediction, Chanos, the founder of Kynikos Associates Ltd, has been joined by Gloom, Doom & Boom publisher Marc Faber and Harvard University professor Kenneth Rogoff in warning of a potential crash in China’s property market. (more…)

Japans wants to beam solar from space

  
Economy, Education, Uncategorized
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solarspaceBy 2030, Japan hopes to build a solar station in space, that beams the energy back to Earth via lasers and microwaves. One wonders why they couldn’t just do this on Earth like Sunpower. Perhaps it’s because they don’t have enough land, or sunshine, or both.
Skydivers better get out of the way! And the Japanese may see roasted ducks dropping from the sky on a daily basis.

Read more here:

Greece 10-Year Bond Oversubscribed

  
Analysis, Economy, Education
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LONDON—The Greek government’s offering for a 10-year bond attracted around €14.5 billion ($19.86 billion) in bids and the books have closed, the head of the country’s debt-management agency said Thursday.

“We are very happy with the bid because the re-entry into the market is always challenging. It went very well,” Petros Christodoulou said. The government aimed to raise €5 billion from the offering but it was heavily oversubscribed.

The offering—timed to coincide with an improving market for Greek government debt in the wake of tough budget cuts announced a day earlier—is a move to help cover short-term funding gaps.

Lead managers are Barclays Capital, HSBC Holdings, National Bank of Greece, Nomura and Piraeus Bank SA, one of the lead managers on the deal said.

Adjusted price guidance for the new issue is now 3.00 percentage points over the benchmark risk-free mid-swaps rate, reflecting the market’s demand for a premium.

An issue size of €5 billion for Greece’s new 10-year bond “would be a good result” but not enough to fully cover Greece’s near-term funding needs, said UniCredit strategist Luca Cazzulani.

Greek bond yields in secondary markets moved up on the news. The yield spread between Greek 10-year government bonds over equivalent German government bonds widened to around 3.03 percentage points from Wednesday’s close at 2.92 percentage points.

The cost of insuring Greek sovereign debt against default also rose slightly. The price of Greece’s five-year sovereign credit default swaps increased to 3.05 percentage points, from 2.945 percentage points, representing a €10,500 increase in the annual cost of insuring €10 million of debt for five years.

Greece, the European Union’s most indebted country, will face its biggest challenge in April and May this year, when more than €20 billion of debt comes due for repayment. So far, Greece has raised €13.6 billion via the sale of Treasury bills and an €8 billion bond syndication, the Public Debt Management Agency said. Greece plans to issue a total of €54 billion in debt this year.

While Greece has been encouraged by its ability so far to raise funds from public markets, the cost of issuing new bonds remains high. The yield on 10-year Greek government bonds has risen to as high as 3.40 percentage points over equivalent German bunds, from low-double-digits before the start of the financial crisis.

Greece’s latest set of spending cuts and tax increases aims to cut the country’s gaping budget deficit by €4.8 billion or about 2% of gross domestic product, and follows pressure from the European Commission, the EU’s executive arm, which said last week that Greece’s previously announced measures weren’t tough enough.

Greek officials worry that its budget cuts won’t be enough to restore investor confidence in Greek debt unless the government receives detailed financial backing from the European Union.

Greek Finance Minister George Papaconstantinou said in Athens Wednesday that if Greece can’t rule out turning to the International Monetary Fund for assistance if Greece needs help and euro-zone partners won’t give it.

IMF financing would need approval by European countries on the IMF’s board. Most euro-zone governments have made clear they want a European solution to the Greek crisis rather than IMF intervention, to show the euro zone can handle its own problems.

Greece is rated A2 by Moody’s Investors Service and BBB+ by Standard & Poor’s Corp. and Fitch Ratings Inc.

Baltic Dry Index Slides 5% To 14 Month Low, 30th Consecutive Day Of Declines

  
Analysis, Economy, Education
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After slumping 4% yesterday to close at 2,127, the Baltic Dry has plunged yet another 5% today, to close just above 2,000 at 2,018. This is the lowest level for the index in 14 months since May 5 of 2009 when it last traded by 2,000 and a reason for all Chinese trade “resurgence” bulls to reevaluate their thesis. Did China outsmart everyone, with the Yuan “reval” coming at a time when planned foreign trade would be de minimis? In the meantime, this is bad news for Australia and Brazil, and especially the AUD and the BRL, but who cares about facts anymore.

From Reuters:

 
 

The Baltic Exchange’s main sea freight index .BADI, which tracks rates to ship dry commodities, fell to its lowest level in over 14 months on Wednesday as weak cargo activity continued to take its toll.

The index, which gauges the cost of shipping commodities including iron ore, cement, grain, coal and fertiliser, fell 5.12 percent, or 109 points, to 2,018 points in its 30th consecutive decline to remain at its lowest since May 5 last year when it fell below the key 2,000 point level.

A combination of slower iron ore activity, weaker coal imports into China and South America’s grains export season ending have put pressure on freight rates in recent weeks.

“Despite more incentive to buy spot iron ore, transactions are slow and most (Chinese) mills are reported to be destocking steel inventories and reducing production, putting continued downward pressure on the dry bulk freight market,” Arctic Securities said in a report.

Easing port congestion has also freed up vessels, adding a further drag on the overall dry freight market.

The Baltic’s capesize index .BACI fell percent 7.17 on Wednesday, while the panamax index .BPNI fell 5.02 percent.

More broadly, industry concerns over the pace of global economic recovery could hit shipping, given that about 90 percent of the world’s traded goods by volume are transported by sea.

EU, Germany deny Greek bailout plans

  
Analysis, Economy, Education
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just-say-no

Breaking News-ASR

The question of EU financial aid to debt-stricken Greece is marred by contradictory reports of a bailout. The European Commission and the German government both denied the existence of an alleged €20-25 billion bailout plan as an EU mission landed in Greece yesterday (22 February) to assess the country’s rescue plans.

A Commission official denied allegations that the EU is reviewing a bailout package for Greece to the tune of €20-25 billion after the Germany’s Der Spiegel magazine allegedly got hold of a paper from the country’s finance ministry detailing the terms of Berlin’s contribution.

The EU formalised its support for a Greek rescue, should the time come, at an EU summit two weeks ago, but member states refused to say how much a bailout could cost and how the money would be raised (EurActiv 17/02/10).

“Greece has not requested a single euro,” the Commission official told the press, rejecting claims that calculations of individual member states’ shares of a bailout were afoot.

German finance ministry denies ‘concrete plans’

Click here to read more

Japanese Public Debt 2X GDP With Deflation Threat

  
Analysis, Economy, Education
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In summary, Japan has “$9.5 Trillion in public debt”, 2x GDP (192% 2009 estimate, #2 behind Zimbabwe at 3x from CIA.gov) with threats of deflation and falling wages. This is after 2 lost deflationary decades and a loss of 75% on the NIKKEI index since 1990 (39,000 to 9,700 today, 1st chart below). The good news is, most of Japan’s public debt is held domestically in Japanese Yen. Some analysts believe US Treasuries could end up like Japanese Government Bonds (JGBs) and catch a bid even with hardcore reflationary policies (see David Rosenberg’s debate on March, 2010). What about the S&P, would it follow the NIKKEI’s footsteps in a deflationary environment?  Or is the US economic machine too strong for that to happen.A 75% drop in the S&P from the October 2007 peak would be around 400, which is David Tice’s S&P target. What are the odds. Paul Krugman had an op-ed in the New York Times today titled The Third Depression. Hopefully Gold and the S&P move in tandem from here if more $ printing is coming. The 10-Year US Treasury Note is trading at $122 resistance in an ascending triangle (Chart 2) and I’m going to see what happens with the $USD at its 50 day moving average tomorrow.


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