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Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Tuesday, June 03, 2014

China -- Big Red Dragon Getting Cranked Again

Well, there was a spell or two in recent years when the the central bank (PBOC) tried to
tamp down the monetary press. Cumulatively, it hit the overheated real estate sector recently.
Now the PBOC has the long term growth of its money M-2 back up near 20%. The economy --
real GDP plus inflation -- needs only about 10% growth to function decently, so the rest of
the money finds its way into the property market and all the credit specialties that are in one
way or anther collateralized by real estate. In the early part of the past decade when China was
still in its super growth phase, I figured the authorities could balance growth against debt well
enough that a big and terrible blowout would not arrive until well after 2020. I did not change
my thinking much even after the collapse of the stock market bubble, but the gov. under Hu
and Wen panicked during the deep global recession  of 2008 - 09. Money and debt have
exploded up even as real economic progress has decelerated. So, in just five years time, China
has created a potential economic catastrophe for itself and those who are dependent on China prospering.

The authorities have far reaching reform plans and perhaps with periodic relatively short term
bouts of tight money that shake out the property and credit markets, China can re-balance its
economy and achieve sounder but very much more modest growth. Since patriotism is the last
resort of scoundrels, nationalism and militarism may play a more prominent role in China's
future as the authorities nudge the economy toward a lower growth path. The US sees that
China is in deep shit with its economy now, and will need to focus far more on China's offensive
military capabilities as time goes on.

Here is a chart of the Shanghai exchange. SSEC Daily I watch it because it is a post - bubble
depressed market and once in a while there is a good trade as occurred in late 2012 when the
Fed's QE program kicked in. I think if investors believed China had a good shot at sustaining
real GDP growth at 7.5% as is so often discussed as an objective, the SSEC would trade
more in a range of 2400 - 2500. Given the trend of the SSEC and the number of trips down
to the 2000 area, players have a lower target in mind for China growth. In any event, since
the PBOC is again adding liquidity, upticks in the economy could provide a nice rally for
a few months.

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