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EJ
06-14-07, 11:24 PM
http://www.itulip.com/images/greenspanMirror.jpgGreenspan vs Greenspan

Most investors are comfortable considering asset bubbles as excesses of stupid investors, greedy CEOs, over-paid bankers. After a bubble is over, a few appointed sacrificial lambs are slaughtered, such as Goldman Sachs analyst Abby Joseph Cohen (http://www.itulip.com/awards.htm#Cohen) after the stock bubble and National Association of Realtors Chief Economist David Lereah (http://bp0.blogger.com/_SfxDExxUukY/Rmv4WTzO-rI/AAAAAAAAAEE/uRifOFMHL2w/s1600-h/housing_bellwether.JPG) after the housing bubble.

Few are as keen to explore the idea that an asset bubble is a kind of racket start to finish. Your average Joe on the street suspects as much, as when his central banker tells him "bubbles are only perceptible after the fact (http://www.itulip.com/index_old.html)" at the top of a historic stock market bubble, and eight years later, when the same now ex-central banker is out on the book and lecture circuit, bubbles become more easily perceptible and he warns of the potential for a crash in China's inflated stock market (http://www.iht.com/articles/2007/05/27/business/bxatm.php). Joe becomes even more curious when the same central banker suggests Joe take out an ARM when interest rates are at a 40 year low (http://www.usatoday.com/money/economy/fed/2004-02-23-greenspan-debt_x.htm). What? Joe thinks. Does he think interest rates are going to stay near 40 year lows for the term of a 30 year mortgage? Joe's suspicions are further aroused when a little more than three years later the same ex-central banker at a conference says he is surprised that interest rates have remained so low for so long (http://www.bloomberg.com/apps/news?pid=20601087&sid=aDqyyP0SlMoM&refer=home), as if he’d expected them to rise all along.

All this "inconsistency" as Martin Mayer politely put it in our interview with him (http://www.itulip.com/forums/showthread.php?p=10077#poststop), gives the average Joe the sense that the trusted guardians of the financial system not only do not behave as independently as one might expect, but appear at times to be on the sales team trying to pawn the latest over-priced financial product on him, public or private. Not good for the system in the long run, if you ask me. A disaster already except for Joe’s amnesia; Joe seems to retain the painful memory of his last fleecing for about six months, after which he can be reloaded with the promise of a new quick road to riches.

The price drops are a big surprise to Maryland homeowner Rick Boardman. When the tech bubble went bust in 2000, Boardman took his money out of the stock market and put it in something he thought would be safer, real estate. “We thought it was a good investment, but also something we could enjoy and might change our lifestyle too,” says Boardman.

He and his wife bought 20 acres of valuable waterfront property in Maryland confident it would turn an easy profit. Boardman remembers the summer of 2000 as a time when "everything was just boom, boom, boom, especially on the eastern shore.”

Boardman built two homes; one to sell, which would finance the other, his dream home. But the $2 million home has been on the market for over a year, and Boardman can’t make the mortgage payments anymore. Work on his dream home stopped. “What was our dream has become a financial nightmare. Our goal now is just to get out with something to pay off the debt,” says Boardman. “We’ve come to the absolute end of the road.” Mortgage Mess: Foreclosures On The Rise (CNBC) (http://www.cnbc.com/id/19226970)
Speaking of pawning overpriced product off onto suckers, Greenspan said today that despite the recent spike in Treasury yields caused by weakness in the market, he is not worried that China is going to dump treasuries and crash the US bond market and dollar. Will China be reluctant to sell treasuries because the U.S. is such a good investment? No. He explained that China will not sell treasuries because China does not have anyone to sell them to (http://news.yahoo.com/s/nm/20070612/bs_nm/usa_economy_greenspan_dc_1).

Proving once again that playing Joe for a sucker is only part of the game. The USA sometimes plays entire nations for suckers. For those who have forgotten the Guidotti-Greenspan rule.
Opening the Fistfuls of Treasury Bills (http://economistsview.typepad.com/economistsview/2006/04/opening_the_fis.html)
April 29, 2006 (economistsview.typepad.com)

Altogether, by the count of the International Monetary Fund, international reserves held by developing countries doubled in just three years, reaching $2.9 trillion at the end of 2005, equivalent to almost one-third of their total gross domestic product. Much of this money is languishing at low rates of return in American government bonds.

There is a logic to this investment strategy, unprofitable as it is. The Treasury bond binge by China is part of a policy of exchange-rate management to keep the value of its currency competitive against the dollar ... For most other developing nations, these reserves are simply insurance against financial disaster. A long list of developing countries have experienced devastating crises in the last 15 years: Mexico in 1994; Thailand, Indonesia and other Asian countries in 1997; Russia in 1998; Brazil in 1999; and Argentina in 2002.

The crises followed a more or less standard path. Investors pulled money out of the country; the country ran out of foreign currency and devalued its own currency; if it had a lot of short-term foreign debt, it defaulted; and interest rates soared.

As the dust settled over the ruins of many former "emerging" economies, a new creed took hold among policy makers in the developing world: Pile up as much foreign exchange as possible.

These days, many poor countries are guided by what is known as the Guidotti-Greenspan rule — named after Pablo Guidotti, a former Argentine finance official, and Alan Greenspan, who called for developing countries to amass enough foreign reserves to cover all their foreign debt coming due within the next year.
Whether duping Joe or Wen, eventually neither gambit is going to work out for the USA.

jk
06-15-07, 06:03 AM
The Treasury bond binge by China is part of a policy of exchange-rate management to keep the value of its currency competitive against the dollar ... For most other developing nations, these reserves are simply insurance against financial disaster. A long list of developing countries have experienced devastating crises in the last 15 years: Mexico in 1994; Thailand, Indonesia and other Asian countries in 1997; Russia in 1998; Brazil in 1999; and Argentina in 2002.

The crises followed a more or less standard path. Investors pulled money out of the country; the country ran out of foreign currency and devalued its own currency; if it had a lot of short-term foreign debt, it defaulted; and interest rates soared.

As the dust settled over the ruins of many former "emerging" economies, a new creed took hold among policy makers in the developing world: Pile up as much foreign exchange as possible.
of course the crises were based on those countries having deficits, whereas now they have surpluses. unfortunately for them as deficit generators, they did not have the option of printing more of their own currencies to pay off their debts. those debts were denominated in dollars. the fact that the u.s.'s debts are denominated in dollars is what prevents a similar crisis from hitting the u.s. the real problems will arise when foreign lenders demand that any bonds they buy be denominated in some non-dollar currency.

in the meantime, whenever i contemplate the chinese dollar-bond hoard i recall the japanese purchases of rockefeller center and the pebble beach golf course, at the height of the japanese bubble. the japanese, it turned out, bought their properties for overly high prices. the chinese, it will turn out, have paid highly for their dollars. the japanese, however, were brought down not by overpaying for a few trophy properties, but by blowing up their own property and stock market bubble. the chinese stock market bubble is smaller in comparison to the overall size of their economy, but i wonder if anyone anywhere has a good feel for the level of risk embedded in the broad chinese economy.

EJ
06-15-07, 08:32 AM
of course the crises were based on those countries having deficits, whereas now they have surpluses. unfortunately for them as deficit generators, they did not have the option of printing more of their own currencies to pay off their debts. those debts were denominated in dollars. the fact that the u.s.'s debts are denominated in dollars is what prevents a similar crisis from hitting the u.s. the real problems will arise when foreign lenders demand that any bonds they buy be denominated in some non-dollar currency.

in the meantime, whenever i contemplate the chinese dollar-bond hoard i recall the japanese purchases of rockefeller center and the pebble beach golf course, at the height of the japanese bubble. the japanese, it turned out, bought their properties for overly high prices. the chinese, it will turn out, have paid highly for their dollars. the japanese, however, were brought down not by overpaying for a few trophy properties, but by blowing up their own property and stock market bubble. the chinese stock market bubble is smaller in comparison to the overall size of their economy, but i wonder if anyone anywhere has a good feel for the level of risk embedded in the broad chinese economy.

That is an excellent question. We have several contacts based in China that can help us understand what's really going on.

One is James Fallows of the Atlantic Monthly with whom we communicate regularly. He did the best job of anyone covering the Japanese bubble in the late 1980s when he lived in Tokyo with his family to cover Japan for the Atlantic. He was probably the only consistent and reliable source of doubt that Japan was about to overtake the US, as was commonly reported hysterically in the US press at the time.

I met Jim and his wife at a Intel event in CA a number of years ago when I was running Bluesocket and he was interviewing Andy Grove. (Intel Capital was an investor in BSI.) We've been in touch ever since.

Jim has the cover story of the current month's issue of the Atlantic. It begins...
China Makes, The World Takes (http://www.theatlantic.com/doc/200707/shenzhen)

Half the time I have spent in China I have spent in factories. At least that’s how it feels—and it’s a feeling I sought. The factories where more than 100 million Chinese men and women toil, and from which cameras, clothes, and every other sort of ware flow out to the world, are to me the most startling and intense aspect of today’s China. For now, they are also the most important. They are startling above all in their scale. I was prepared for the skyline of Shanghai and its 240-mph Maglev train to the airport, and for the nonstop construction, dust, and bustle of Beijing. Every account of modern China mentions them. But I had no concept of the sweep of what has become the world’s manufacturing center: the Pearl River Delta of Guangdong province (the old Canton region), just north of Hong Kong. That one province might have a manufacturing workforce larger than America’s. Statistics from China are largely guesses, but Guangdong’s population is around 90 million. If even one-fifth of its people hold manufacturing jobs, as seems likely in big cities, that would be 18 million—versus 14 million in the entire United States.
Requires a subscription. I will post some excerpts later.

What Jim has told me is that China is nothing at all like Japan during it's bubble. The biggest difference is government. The Japanese, like most capitalist democracies, has a central bank which exerts its influence on the economy by means of controlling the money supply and interest rates. China, of course, has a central bank, too, but has a broader range of economic policy tools than any other capitalist nation, except perhaps Singapore. Imagine if in addition to the BoJ, the Japanese government had also controlled everything from the flow of labor from the countryside to the cities, and thus labor costs, to what the masses read, hear, and see and thus believe about various assets, from stocks to real estate. The Japanese banking system was intertwined with the mafia. The Chinese banking system is intertwined with government. Japan's largest corporations are structured similarly to US companies. The Chinese government has majority ownership of 32 of the 33 largest companies in China.

Another contact is a friend who grew up in China, but was educated in the US, and ran the subsidiary of another company I ran for a while.

Another contact is a friend who set up the Chinese arm of a US venture capital firm.

Jim Rogers, whom we interview from time to time, is moving to Singapore and will continue to give us his perspective.

Michael Hudson, whom we will interview again, is consulting to the Chinese government on monetary policy. Within constraints he may be under due to confidentiality, he will have an interesting perspective for us as well.

Among these contacts we'll develop a clear picture of what is really going on in China.

don
06-15-07, 11:28 AM
"A disaster already except for Joe’s amnesia; Joe seems to retain the painful memory of his last fleecing for about six months, after which he can be reloaded with the promise of a new quick road to riches."

I've agreed with Vidal's phrase the United States of Amnesia for years, with the caveat that many Joe and Jane Sixpacks are desperate not to be cashed out of the so-called middleclass, which often looks from the outside like pure amnesia.

Mega
06-16-07, 07:43 AM
Here in Blighty we have a chap called "Will Hutton". Great guy written a number of books:- The State we in"..............and now his latest on China "The writting is on the wall".

Did you know China has to make 23 million jobs a year just to keep her employment levels steady.

Any way:-http://search.bbc.co.uk/cgi-bin/search/results.pl?q=will+Hutton&tab=av&edition=d&recipe=all&start=1&scope=all

To watch this BBC video go to the link, you should find yourself on page 1, the video your looking for in in the centre on the bottom row.

Cheers
Mike