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Sunday, January 03, 2010

2010 - The Year Of Reckoning

I'm sorry I haven't been posting, and unless more catastrophe ensues I will be posting more regularly over the next month. Saturday TechnoBuddha and I spent at SuperDoc's office trying to establish a real network. We were not able to do it, because he doesn't have his server software and in the checking process I discovered that his backup procedure (which SuperDoc executes faithfully) was not in fact backing up to external media.

After a hell-for-leather inventory of every machine in the office, we discovered that none of the floppies work and most of the CD/DVD drives aren't much good either. I sucked some dust out of some of the computers which were about to expire, and succeeded in generating the first real external backups in years. I can only assume that divine providence was watching over SuperDoc, because he would have lost everything if one machine went down. Words just freakin' failed me. That machine and the hard drives are at least 5 years old.

I am thinking I am going to have to put in a new server and make that the domain controller. I'm trying to figure out the cheapest way to go. Contrary to rhetoric emanating from Washington, most doctors aren't making much, and I am sure SuperDoc isn't either.

But on to more global topics. I have been watching Singapore stats closely, and they have been declining all fall. Their page is down for scheduled maintenance right now, but Bloomberg is reporting that GDP contracted 6.8% in the fourth quarter (annualized). Still, the earlier rebound was good enough that YoY was a 3.5% gain (helped by the cliff-diving exercise in 2008).

Singapore usually leads much of Asia. I think Singapore will return to growth, but I am very suspicious of claims that Asia is going to see a big rebound in 2010. India has epic food inflation going on, and the partially election-fueled steps which provided a hefty interim stimulus to its economy are going to be fading. I expect India to grow in 2010 because it has high internal domestic growth (exports JUST turned positive), but they have some real fiscal problems of their own they have to confront, and in reality food inflation is cutting into part of their internal economy.

China is in a frank bubble. It's really bad - I don't even know if the government is able to check it without producing a disaster. That is the problem with fostering bubbles - they eat up the underlying production growth and adaptation, and when the bubble pops the basic economy is in worse shape than it would have been, plus you are dealing with the bad debt and crashing incomes. It's a nasty recipe for economic problems. China is no exception as this Bloomberg article details. Because many companies have gotten into it, this is a good diagnosis:
Once the bubble pops, our economic growth will stop,” warns Yi Xianrong, a researcher at the Chinese Academy of Social Sciences’ Finance Research Center. On Dec. 27, China Premier Wen Jiabao told news agency Xinhua that “property prices have risen too quickly.” He pledged a crackdown on speculators.
Chinese consumers, fearing inflation will return and outstrip the tiny interest they earn on their savings, have pursued property ever more aggressively. Companies in the chemical, steel, textile, and shoe industries have started up property divisions too: The chance of a quick return is much higher than in their primary business.

“When you sit down with a table of businessmen, the story is usually how they got lucky from a piece of land,” says Andy Xie, an independent economist who once worked in Hong Kong as Morgan Stanley’s top Asia analyst. “No one talks about their factories making money these days.”
That pretty much says it all - money and human capital has been diverted away from the real economy to go into real estate, and much more money has gone into high-end real estate than into more marketable affordable homes. Anyone who watched the bubble in the US unfold will understand it intuitively.

Anyway, I am thinking the bubble will start to erode in late 2010 and really pop in 2011. There is also a probable element of corruption in this; local governments own the land and are profiting by its sale. So they will continue to pump desperately and I think it will die a hard lingering death at different times in different places. It will die - these things are always Ponzi schemes.

Korea is doing well. It is helped by car sales, it has some strengthening internal demand as they get off the bottom, and it is helped along by the Chinese bubble:
Exports to China, the biggest buyer of South Korean goods, surged 74.4 percent in the first 20 days of December, today’s report showed. Shipments to the U.S. rose 8.7 percent and shipments to Europe gained 49.4 percent over the same period.
I am guessing that Korea will maintain strong growth until China hits the wall, and then it will experience another round of economic doldrums. Indonesia is doing well, although it has potential problems with inflation and oil prices. However Indonesia has profited from some of the Chinese problems, so I think it can continue on.

A lot depends on the timing of the Chinese implosion. In terms of China's real economy, the sooner the better. In terms of 2010 growth in Asia, it would be better to have a delay and have them stretch it out into 2011.

Next, Europe and North America.


We are so on the same page here.

I offer the following quote from "CNN: Will the China property bubble pop?" dated December 30, 2009.

New home-owner Crystal Zhang remains optimistic of her investment. "The bubble won't burst," she said, citing measures that Beijing introduced recently to prevent a U.S.-style crash in home prices. "Whenever the bubble is about to burst, there will be measures taken to stop it.

The same exact thing was said of their stock market heading into the Olympics. No way the government would let the market crash. It would look so bad. So what happened? The stock market crashed of course.
Mark and MOM, I agree about the bubble. The question is how the Chinese people will react when the regime loses the "mandate of heaven". Historically, they haven't reacted well. Large scale internal unrest in China will have unpleasant spillover on all of their neighbors.

Watching China and US business in China over the last 20 years has been watching the triumph of myth over history. As someone who knows a smattering of Chinese history, it has been easier to predict what would happen by looking back at past dynasties and their political and economic relations with the outside world than by listening to the mythspinners.

That's about what I figured--we've got nine months or so before China pops, and we get another round of chaos.

I've no clue what that's going to look like in the U.S., though. The fundamental dynamic is deflation, of course, but what will that look like after being transformed through the China-dollar link?

Perhaps it's time to think about how China's dollar peg really works.

BTW, I'll hopefully get some info this week on natural gas infrastructure construction, now that the holidays are over. I've got a couple of inquiries out.
Kudos for helping SuperDoc's computer restore problem. (It's a restore problem, not a backup problem!)
John - the mandarins died and were replaced by party apparatchiks, and then those apparatchiks became corrupt. So it's back to the local mandarins again.

History ALWAYS repeats itself unless peoples change themselves, and it is very, very hard to change.

China has done well with the same SORT of strategy before, because they had a high underlying rate of growth and so they could pump money in to infrastructure until growth resumed at a rate sufficient to cover their bad loans, etc, with structural export growth and industrial growth. But that structural rate of growth is slowing naturally, and they can't do this again.

If the structural rate of growth were still there, this bubble would have natural curbs and wouldn't have gotten so far off the ground. The key for China now is to move more money into worker welfare so that they start growing internal demand from a broader base, and they haven't really managed to do that.
Neil - well, the dollar peg is used to keep the Chinese manufacturers competitive. As a greater percentage of world demand is generated from ex-dollar sources, they may be able to break that link.

That leaves them vulnerable. In a lot of ways the Fed is playing chicken with the dollar and the Chinese.
Neil - I would love any info you can get on the NG infrastructure.

Mark - Oh, I believe they'll try. But just like here, or Ireland in the late stages, or Spain, or Dubai, the demand in some areas is sustained by people buying homes for investment and not for use, and the money for that is increasingly coming from real estate rather than business profits. That is the point at which it becomes very hard to curb a bubble.

So there is some chance that the Chinese can run this out for six more months than I think, but when it falls, it will have an inexorability about the toppling process.

Do you really think that U.S. demand for Chinese goods will fall so far, or worldwide demand will rise so much, in the next 2 years? I'm not sure I see it--even if aggregate worldwide demand rises, I'm not sure how much that increases demand for Chinese goods specifically. Not every country has a Wal-Mart, and many of them have very effective stealthy trade barriers.
Neil - no. I don't think China will get out of this without crashing. I think they may be able to tinker with their crash date about six months.

The previous times when they have done this, they were doing so at a time when China was able to pick up manufacturing for a world economy at a very fast pace. No more.
MOM, their bureaucrats and merchants have been operating in the same ways for about 3000 years now, with only brief interruptions when a new dynasty first consolidates power. (Generally, it's easier to purge corrupt, crooked, or incompetent folk at those times, so for a brief span they get better economic and governmental performance. Then the corruption gets into the new power structure and they revert to historical norms.)

What's hilarious is how American business has fantasized about breaking into the Chinese internal markets for the last 180 years, with no signs of ever waking up to the reality of dealing with Chinese society. Each generation has dreamed the same futile dreams.
WSJ- My inclination is that nobody's going to make dollar one in China, but there is an alternative historical interpretation. There is a historical precedent for gaining access to China's internal markets, at least on a short-term basis.

When the dynasty loses power to the local mandarins, traditionally the coastal regions go their separate ways and are amenable to two-way trade with outsiders--or are not strong enough to prevent it. Think about the Opium War. The last time this happened, the U.S. was not powerful enough to force their way into an enclave arrangement, but the Yankee traders nibbled at the edges a bit (and the wealth they brought back to Boston helped create the ascendancy of the Northeastern elites which has lasted to this day). If, as seems possible, the current Chinese dynasty is beginning its degenerate phase, the multi-nationals doing business in China are in a position to benefit from any similar arrangements which are forced on the Chinese.
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