What Did I Tell You? China's Banking System Needs Dollars And Many Emerging Markets Will Likely Experience The Same Outcome.
Below in italics is an excerpt from a post I put up six months ago. I'm sure very few read it because the post seemed obscure and irrelevant at the time so I am reposting a few paragraphs. It nows appears the outcome is starting to play out exactly as I wrote. One might consider that often obscure and seemingly irrelevant may be what is most important. (Remarks very relevant to today's post highlighted in red.)
I read a while ago that Julian Robertson (an investing legend) has made significant bets that the Chinese will not buy any more U.S. Treasuries if the U.S. government continues to spend with reckless abandon. And, that will force ten year Treasury bond rates higher in the U.S. I disagree with Robertson's logic. As I have written, there is no plausible argument that China is going to overtly attempt harm to the economy most responsible for its exports and growing wealth. Or, as I have written, more appropriately their perceived wealth. There needs to be an impetus for a change in policy to occur on either side. China isn't going to upset the U.S. relationship that literally keeps the communist government in power by providing jobs and social stability. China and the U.S. are benefiting from an unstable and transitory equilibrium. I wrote elsewhere back in 2006 that I viewed this relationship as a possible Nash Equilibrium. This will not be interrupted as long as both parties are achieving perceived benefits that outweigh any costs of change. The only question remains what will occur first to break the equilibrium.
I do agree with the potential for an outcome similar to Robertson's position. But under completely different circumstances. In other words, as China's financial and economic problems become exposed, and they will, China will likely need dollars to prop up their financial system and their economy. Exactly during a time when dollar supply will likely start diminishing. And possibly significantly. (Dollar strength hasn't developed yet but rather than this pointing to my analysis being faulty, the dollar cycle appears to be in slow motion and hasn't run its course. Fundamentals are still lining up for what I believe will be a dollar rally regardless of the emotions of dollar bears, fears of hyperinflation by many or any government policy responses.) Where will the Chinese government get these dollars? Why yes indeed. Their accumulated U.S. Treasury reserves. What would that do to the bond market? Likely spike Treasury rates as Robertson predicts but under a completely different scenario.
If you didn't read the above post, you can go back and read it in its entirety by typing Julian Robertson in the Google search box on the right side of the blog.
At the time, that post probably sounded like I was speaking in tongues and likely generated little, if any interest. While everyone in the world is focused on U.S. housing, if you truly understand economics, you know housing cannot be the cause of the crisis we are now seeing. In other words, housing is an ignoratio elenchi. Don't get me wrong, the housing issue is very real with measurable impact. But, as I have written time and again, it is a symptom.
I wrote back in 2006 that I expected housing stocks to bottom in the first half of 2008. And, housing stocks have indeed held a bottom from the first half of the year. Some have bottomed as of January and some later. That is now up to nine months of a sustained low while the rest of the market has been cratering. I'm much less confident that bottom will hold because of other data that has unfolded since that original forecast but so far it has. That said, the reality is housing does not cause banking crises nor can housing cause major recessions or what we are seeing. Housing is what most every economist, media outlet and blogger is focusing on because it is what they understand not because they are right.
It's interesting to watch the tree of self-deceit grow. It starts with one story then another then another. All emanating from the initial seedling. That seedling is now a grand Redwood. Given humanity's propensity to mimicry and group-think, how often have you ever known a complex topic to be predicted and completely understood by nearly anyone and everyone in the media, in politics and on Wall Street? To blame housing for this crisis as Secretary Paulson did as recently as Monday seems logical because it is obvious to the entire world. Yet, it is ignoratio elenchi as is most every other position we hear out of the media and Wall Street over the last few decades. Because we see these logical fallacies everywhere, I suspect most everyone, be it bull or bear, are on the wrong side of the major risks associated with this cycle. A few bearish examples we have never subscribed to on here are those telling us to invest our money outside of dollar-denominated assets due to the impending collapse of the U.S. Or, that we are going to see a twenty to thirty year bull market in commodities. (Bull market is higher highs and higher lows.) Or, that the next century is the Asian century. Or, that housing or the debt related to it is going to cause a depression. Or that the dollar is going to zero because the U.S. is imploding. Or that the Fed is printing money. Or that Alan Greenspan caused this mess by lowering rates in 2001. Or that the gold standard is the only form of honest money and we must return to it. Or, or, or. Those are just samples of logical fallacies held by almost every bear. And, I could run down a similar list of logical fallacies on the bullish side as well.
The reality is most positions are not grounded in truth. They are based in emotion or lies of the mind. It's fine to be bearish when the time calls for it but being bearish for the wrong reasons are why most bears miss the majority of bull markets. At least that position protects one's capital. Ditto with the thought processes of bulls unable to accept a bear market is upon us as opposed to day dreaming that we are in a mid-cycle slow down. By the time they decide to sell, losses are often catastrophic. My overall point is that many positions are lies of the mind. And, so it goes.
So, what am I leading up to? If you haven't already done so, you might want to start thinking about root causes for the events unfolding. This problem definition is the basis for any problem resolution. The Fed's efforts to save the banking system, while necessary, are not addressing the underlying root causes of this environment. We will never come out on the other side of this environment until A.), Market forces have stabilized on their own, B.), Society, business and government move to ameliorate some of the root causes or C.), A combination of A.) & B.). I believe A.) clearly involves the highest risk. And, that we are headed down that track as I write this. On that note, seemingly almost hidden from view the New York Times wrote last week that China's central bank is running out of money. And, if you know what is going on in the Chinese economy, you know that is a very, very, very important data point. Exponentially more important than if that were happening to the U.S. central bank. And, what else is the Times reporting? Basically that the Chinese government's only source of money is dollars held in U.S. Treasuries. Exactly what I wrote could happen in the prior post above. I mean exactly. Wait till the hot money really wakes up to how worthless the Yuan really is. But, China has massive foreign exchange reserves. Hmmm. So you say.
Of course, the alternative is the Chinese government could just print more Yuan. But, then that will only make the size of their bust even larger. And, will ultimately require the need for even more dollars. More dollars they won't be able to afford. Does this sound familiar? Maybe a little like my prior remarks about what brought down the Soviet Union? You probably didn't pay much attention to that post either. You were probably like.......WTF? Why is this guy talking about the fall of the Soviet Union? If I wrote everything in one post, there would be no story to tell. And, I like telling stories. Even more than Wall Street. But, the difference is mine are real. Now I am delving into other topics I had outlined before the New York Times so ungraciously interrupted my posting schedule.
It is quite likely the transitory equilibrium between China and the U.S. is nearing an end. But, it was such a beautiful marriage. Dick and Jane were so happy. I'm sorry to see it end. Who gets the dog?
Now we shall watch the outcomes and consequences unfold as market forces attempt to find a new equilibrium - most likely with the help of the "state(s)". The reality is the world is very likely to see a substantial uptick in the need for dollars and the market is going to make them pay - the market loves to punish past sins and paying more for dollars is just what the doctor ordered. I read everywhere that the dollar rally is not based on fundamentals or is based in a conspiratorial notion that governments are secretly propping up the deadbeat currency. Sorry dollar bears but the dollar ain't dead yet. Maybe in the ICU but not dead. Ignoratio elenchi is alive and well.
In closing, I want to remind you of a few topics we have talked about often while Wall Street was basking in their wondrous creation - the synchronized global bull market. Topics that included anticipated economic and social volatility, especially in China and emerging markets and an expected rise in nationalism and the dangers associated with it. More on that in a relatively unusual post I'll get up soon.
I read a while ago that Julian Robertson (an investing legend) has made significant bets that the Chinese will not buy any more U.S. Treasuries if the U.S. government continues to spend with reckless abandon. And, that will force ten year Treasury bond rates higher in the U.S. I disagree with Robertson's logic. As I have written, there is no plausible argument that China is going to overtly attempt harm to the economy most responsible for its exports and growing wealth. Or, as I have written, more appropriately their perceived wealth. There needs to be an impetus for a change in policy to occur on either side. China isn't going to upset the U.S. relationship that literally keeps the communist government in power by providing jobs and social stability. China and the U.S. are benefiting from an unstable and transitory equilibrium. I wrote elsewhere back in 2006 that I viewed this relationship as a possible Nash Equilibrium. This will not be interrupted as long as both parties are achieving perceived benefits that outweigh any costs of change. The only question remains what will occur first to break the equilibrium.
I do agree with the potential for an outcome similar to Robertson's position. But under completely different circumstances. In other words, as China's financial and economic problems become exposed, and they will, China will likely need dollars to prop up their financial system and their economy. Exactly during a time when dollar supply will likely start diminishing. And possibly significantly. (Dollar strength hasn't developed yet but rather than this pointing to my analysis being faulty, the dollar cycle appears to be in slow motion and hasn't run its course. Fundamentals are still lining up for what I believe will be a dollar rally regardless of the emotions of dollar bears, fears of hyperinflation by many or any government policy responses.) Where will the Chinese government get these dollars? Why yes indeed. Their accumulated U.S. Treasury reserves. What would that do to the bond market? Likely spike Treasury rates as Robertson predicts but under a completely different scenario.
If you didn't read the above post, you can go back and read it in its entirety by typing Julian Robertson in the Google search box on the right side of the blog.
At the time, that post probably sounded like I was speaking in tongues and likely generated little, if any interest. While everyone in the world is focused on U.S. housing, if you truly understand economics, you know housing cannot be the cause of the crisis we are now seeing. In other words, housing is an ignoratio elenchi. Don't get me wrong, the housing issue is very real with measurable impact. But, as I have written time and again, it is a symptom.
I wrote back in 2006 that I expected housing stocks to bottom in the first half of 2008. And, housing stocks have indeed held a bottom from the first half of the year. Some have bottomed as of January and some later. That is now up to nine months of a sustained low while the rest of the market has been cratering. I'm much less confident that bottom will hold because of other data that has unfolded since that original forecast but so far it has. That said, the reality is housing does not cause banking crises nor can housing cause major recessions or what we are seeing. Housing is what most every economist, media outlet and blogger is focusing on because it is what they understand not because they are right.
It's interesting to watch the tree of self-deceit grow. It starts with one story then another then another. All emanating from the initial seedling. That seedling is now a grand Redwood. Given humanity's propensity to mimicry and group-think, how often have you ever known a complex topic to be predicted and completely understood by nearly anyone and everyone in the media, in politics and on Wall Street? To blame housing for this crisis as Secretary Paulson did as recently as Monday seems logical because it is obvious to the entire world. Yet, it is ignoratio elenchi as is most every other position we hear out of the media and Wall Street over the last few decades. Because we see these logical fallacies everywhere, I suspect most everyone, be it bull or bear, are on the wrong side of the major risks associated with this cycle. A few bearish examples we have never subscribed to on here are those telling us to invest our money outside of dollar-denominated assets due to the impending collapse of the U.S. Or, that we are going to see a twenty to thirty year bull market in commodities. (Bull market is higher highs and higher lows.) Or, that the next century is the Asian century. Or, that housing or the debt related to it is going to cause a depression. Or that the dollar is going to zero because the U.S. is imploding. Or that the Fed is printing money. Or that Alan Greenspan caused this mess by lowering rates in 2001. Or that the gold standard is the only form of honest money and we must return to it. Or, or, or. Those are just samples of logical fallacies held by almost every bear. And, I could run down a similar list of logical fallacies on the bullish side as well.
The reality is most positions are not grounded in truth. They are based in emotion or lies of the mind. It's fine to be bearish when the time calls for it but being bearish for the wrong reasons are why most bears miss the majority of bull markets. At least that position protects one's capital. Ditto with the thought processes of bulls unable to accept a bear market is upon us as opposed to day dreaming that we are in a mid-cycle slow down. By the time they decide to sell, losses are often catastrophic. My overall point is that many positions are lies of the mind. And, so it goes.
So, what am I leading up to? If you haven't already done so, you might want to start thinking about root causes for the events unfolding. This problem definition is the basis for any problem resolution. The Fed's efforts to save the banking system, while necessary, are not addressing the underlying root causes of this environment. We will never come out on the other side of this environment until A.), Market forces have stabilized on their own, B.), Society, business and government move to ameliorate some of the root causes or C.), A combination of A.) & B.). I believe A.) clearly involves the highest risk. And, that we are headed down that track as I write this. On that note, seemingly almost hidden from view the New York Times wrote last week that China's central bank is running out of money. And, if you know what is going on in the Chinese economy, you know that is a very, very, very important data point. Exponentially more important than if that were happening to the U.S. central bank. And, what else is the Times reporting? Basically that the Chinese government's only source of money is dollars held in U.S. Treasuries. Exactly what I wrote could happen in the prior post above. I mean exactly. Wait till the hot money really wakes up to how worthless the Yuan really is. But, China has massive foreign exchange reserves. Hmmm. So you say.
Of course, the alternative is the Chinese government could just print more Yuan. But, then that will only make the size of their bust even larger. And, will ultimately require the need for even more dollars. More dollars they won't be able to afford. Does this sound familiar? Maybe a little like my prior remarks about what brought down the Soviet Union? You probably didn't pay much attention to that post either. You were probably like.......WTF? Why is this guy talking about the fall of the Soviet Union? If I wrote everything in one post, there would be no story to tell. And, I like telling stories. Even more than Wall Street. But, the difference is mine are real. Now I am delving into other topics I had outlined before the New York Times so ungraciously interrupted my posting schedule.
It is quite likely the transitory equilibrium between China and the U.S. is nearing an end. But, it was such a beautiful marriage. Dick and Jane were so happy. I'm sorry to see it end. Who gets the dog?
Now we shall watch the outcomes and consequences unfold as market forces attempt to find a new equilibrium - most likely with the help of the "state(s)". The reality is the world is very likely to see a substantial uptick in the need for dollars and the market is going to make them pay - the market loves to punish past sins and paying more for dollars is just what the doctor ordered. I read everywhere that the dollar rally is not based on fundamentals or is based in a conspiratorial notion that governments are secretly propping up the deadbeat currency. Sorry dollar bears but the dollar ain't dead yet. Maybe in the ICU but not dead. Ignoratio elenchi is alive and well.
In closing, I want to remind you of a few topics we have talked about often while Wall Street was basking in their wondrous creation - the synchronized global bull market. Topics that included anticipated economic and social volatility, especially in China and emerging markets and an expected rise in nationalism and the dangers associated with it. More on that in a relatively unusual post I'll get up soon.
<< Home