It must be Chinabollox

Wednesday, June 01, 2011

May gone. June arrives and, to be honest, TMM are baffled.

So far May 2011 has been uncannily like May 2010 and if we were to follow that roadmap we should soon be moving our attention from European woes to concerns over US growth, which steadily builds to deflation worries and more QE. So far we are running to plan. In the US data is consistently surprising to the downside and in Europe it looks like policy makers are trying to re-implement the STFU policy that worked so well last summer. The lack of official comment has meant the European market has caught the Australian disease of reacting to anything said by a man in a mac - the journalist. Yesterday was a WSJfest and today opened up with a trawl of badly read German newspapers. The related market moves have been remarkable. If anyone were wishing to move markets there could be harder ways than writing an article for "Der Hamburger Sandwich Weekly" on how the IMF is planning to invade Greece disguised as the Portuguese fishing fleet to steal the Greek firstborns to be enslaved in German sandwich shops in lieu of bailout funds - then wait for the resulting selective cut'n'pasting in sales land to cause mayhem.

But with Europe and the US suffering obvious slow downs why are equities doing so well? Why is Euro perking up? Why is Gold coming off as USD falls elsewhere on gloom? The only thing we can think of is that there are two functions. Firstly, the invulnerability now felt by real money who have weathered a catalogue of otherwise disastrous calamities. And secondly, the old favourite of Voldermort and friends being the buyer of last resort of everything. And we mean EVERYTHING.

Now call us cynical, but pinning all your hopes on previous lucky bullet dodging and the China story is a little rash. For one, fortune may favour the brave, but in markets "brave" is only a whisker away from "dead". But more worrying is that we really don't think that China is capable of assuming the position to support the world just now.

Take the Reuters story that $463bn of local government financing vehicle debt would have to be written down or otherwise managed away to China's asset management companies (AMCs). TMM find this amusing because this is the old China banking trick - banks give dud loans to AMCs, so the AMCs can buy the banks' dud loan portfolios. Think Maiden Lane with a fortune cookie at the end. It's not even robbing Peter to pay Paul - it's Paul the schizophrenic junkie robbing from Paul the schizophrenic accountant's wallet. Nonetheless, it is worth trying, as it worked in 1998 when the rest of the economy grew fast enough to cover the idiocy of the State Owned Enterprises (SOE) so all were none the wiser.

The problem now is that those loans to AMCs are still a problem and TMM aren't sure where the next equity injection is going to come from for these banks, given that they can't re-IPO without a nationalization. So, TMM reckon we're about to see a lot of dilution of Chinese bank shareholders. Otherwise the local governments that get their funding from the central government, which is in turn dependent upon SOE dividends, are going to need some alternate sources of revenues (property taxes are already being mooted to be rolled out beyond Shanghai).

One would normally think that new taxes + massive loan losses = stocks down, but in the bizzare world we live in that does not seem to be happening. TMM are puzzled and wonder if this Reuters story of a writedown could be a leak from the CBRC to put pressure on other parts of the government in the leadup to a power transition. Either that or everyone has tuned out to anything that sounds like Jim Chanos.

TMM are enormously frustrated that after a massive balance sheet recession in the US, as well as parts of Eastern Europe and arguably a good chunk of the Eurozone, economics departments of banks do not do credit analysis. It seems that the great and the good (including the US Ex-investment bank) are taking the view that looking into this seriously is beneath them just like the last few major blowups, so TMM really appreciate the work done by the few exceptions (ANZ and Stan Chart) in providing real economic insight, rather than yet another absurdly overfitted PMI or initial claims model.

So all in all, TMM are not buying this "risk on" mood and think that praying to the great God Voldermort to save the world is like a European cucumber farmer hoping that no one checks what he's been doing with his produce.

Posted by Polemic at 11:31 AM  


...cucumber farmer hoping that no one checks what he's been doing with his produce.

More that it doesn't fall under the purview of the Hamburg health department peripheral hawks.

Charles Butler said...
1:07 PM  

These days Treasuries are apparently risky assets?

Anonymous said...
1:51 PM  

Fantastic post ;)

Very little analysis seeing this scam for what it is. Most of the sycophants on the sell side argued that it was an opportunity to buy the large Chinese banks...They may well rally in the near term, but I would expect foreign shareholders to experience more cucumber action before the story is over... As for the European Ponzi scheme...hmmm

Skippy said...
2:10 PM  

Thanks TMM, especially for the last two days. Better to preserve capital, not a riendly market for conservative INVESTORS.

Anonymous said...
2:41 PM  


Anonymous said...
2:41 PM  

I don't usually read Standard Chartered research (I'm a LO equities guy)-- can you tell me wat I should ask my salesman to subscribe me to?

Anonymous said...
3:43 PM  

Anon. 3.43 email nemo and i and we'll try and help.

Polemic said...
4:34 PM  

QE3 - here we come
repeat n times

This explains all the "illogical" market action in recent days

When there is a potentially unlimited amout of paper money at hand, valuations of tangible assets can go wild.

Welcome to Peter Schiff world!

Belektron said...
4:39 PM  

After Yesterday close, I was going to write in that the charts were using our balls to paint all over town,then I remembered your ISM number coming out today....thanks TMM,now I can afford to replace the couple reams of paper I've procured from the unemployment job agency macro-reasearchlab.

As you were............

FX said...
5:30 PM  

Was the lack of a bid at noon a sign of real money throwing in the towel? The timing would be pretty bizarre (after a four-day rally), but every down day I can remember this year saw a meaningful bid somewhere between 11 and 1. Somebody called it quits today.

QE3 anyone?

Anonymous said...
7:34 PM  

Congrats, TMM, on a great call - we all saw the 2.9x handle on the 10y today. You read it here first, folks....

Leftback said...
8:12 PM  

Hoping for a QE3 before the QE2 has docked would seem to smack of desperation. Believe it or not, there were once markets and economies without QE, and one should be prepared for such an eventuality. In any case, we are headed into QE lite for the summer.

Leftback said...
8:15 PM  

hey pol, you and nemo have been reading reading too much red capitalism from those 2 charlatans howie and walters, or maybe you are them? To me it's more JBTFD mentality, investor sentiments have not changed a bit the last 3 months - bulls have big balls and wimps have pussies. Anyway if you are "smart" enough to see the similarities with 2010, why won't the market? The bond market is already front running QE2 or whatever shit it will be called - buy bonds before the fed annouces the next bliztkrieg, sell when the Fed stars buying.

Anonymous said...
11:17 PM  

Anon, we've been balls long bonds (to a person, I think) for a while now and selling spoos. FX has been irritating but owning the 10 at <3% going into the Thunderdome debt limit showdown seems.... punchy. Suffice to say we don't love equities but being still super dooper long bonds here strikes us as a bit greedy for now.

And as for Howie and Walters - not sure how they are Charlatans - their book is a nice history for those who weren't around for the last decade or so. If you'd taken part in the last auctions out of the AMCs and seen the underwriting standards and docs you'd see that de minimis haircuts are way too optimistic based on historical experience.

Nemo Incognito said...
1:23 AM  

great post once again... the month end melt up on tuesday really took me for a shocker, especially considering almost every eco release was bad

Yesterday's releases were even worse

Equities are on a different planet. Spoos should be around 1250 now and then we should be arguing what type of impact the slowdown will have on corporate profits. Instead it seems like everyone is holding long, fearful they will miss the next rally if they sell

abee crombie said...
12:59 PM  

"miss the next rally if they sell"

That sounds like a working definition of greed to me.

Anonymous said...
1:40 PM  

Spanish minister sucks cucumber ...

And she had to swallow.

shtove said...
6:21 PM  

Hope it was the seedless variety...

Leftback said...
7:18 PM  

Why hasn't copper budged further if the slowdown is as dramatic as proclaimed? If anything I believe we are seeing capitulation action, whether it be flash crashes in high yield bond etf's or put:call ratios hitting levels of Oct 2008.

Anonymous said...
12:05 AM  

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