G3 Recap 5-19-11

Main Items:

  • US Initial Jobless Claims declined to 409k vs 420k expected and 434k previously.
  • Philly Fed declined to 3.9 in May vs 20 expected and 18.5 previously. While the New Orders index declined to 5.4 vs 18.8, employment increased to 22.1 vs 12.3. Much of the decline also appeared to come from decreases in the prices received and prices paid components.
  • US Existing Home Sales decreased to 5.05mm vs 5.2 expected and 5.1 previously
  • ECB said that it would not accept restructured Greek debt as collateral. Trichet reported walked out of a meeting hosted by Juncker that discussed “soft restructuring” for Greece. -FT


  • Spain sold 3.22 billion euros of 10- and 30-year government bonds on Thursday. The average yield on the ten-year bond was 5.395% vs 5.472% the last time. The average yield on the 30-year bond was 6.002% vs 5.875% last.
  • UK Retail Sales ex Auto Fuel rose 2.7% YoY in April vs 2.2% expected and 0.9% previously. CBI Trends data were also strong, with Orders improving to -2 vs -9 expected and -11 previously
  • Australian Consumer Inflation Expectations declined to 3.3% in May vs 3.5% previously.
  • Australian Weekly Wages rose 3.8% YoY as expected vs 3.9% previously


  • Chanos was on CNBC today pitching his bearish China view again. He said that “The really scary thing is if you do the numbers and they cut back on construction it’s not a slowdown, and they go negative real fast.” "The fact of the matter is if they hit the breaks really hard, the economy goes into reverse. It doesn’t slow," Chanos said. "Nobody will say that publicly because it’s unbelievable. But it happens to be the way the numbers work."

    He is right about the numbers. The makeup of Chinese GDP has increasingly shifted toward capital formation in recent years:

    But the contribution of Gross Capital formation growth to total nominal GDP growth has been even more skewed. In recent years Gross Capital Formation has been responsible for almost all of Chinese GDP growth:

    This reinforces the importance of monitoring Chinese money supply trends. A tighter than expected contraction will likely have some pretty serious repercussions. Of course, Chinese officials are aware of this, which means that they will be watching money and loan data closely as well. This actually increases the likelihood of excessively easy credit for too long.
    A final point: a Chinese contraction resulting from massive bad loans and a contraction of credit will mostly likely cause the Chinese government to use the only other easing option on the table: an RMB devaluation.

  • The Indian Government has hired trained monkeys to guard its buildings from other monkeys. The interesting thing is that the trained monkey apparently earns more than 80% of Indians. This begs the question of why the government doesn’t just hire cheaper human labor instead? An entertaining, if probably misreported story.


5 thoughts on “G3 Recap 5-19-11

  1. China is an interesting case. It epitomizes the East Asian development model, which essentially boils down to redistribution from the consumers to the producers by means of financial repression. This is a very fast way to develop, but it has two problems – first, it requires foreign demand for local goods to be present for a long time, second, it is unbalanced and, if left unchecked, the eventual re-balancing is extremely painful, as massive malinvestments blow out – as we have seen in Japan. Obviously the Chinese officials understand this and, for all I know, the Japanese example is taken very seriously in China (though they have actually copied most of their policies from South Korea rather than from Japan). The question is, will the officialdom be able to overcome the main lobbyists to try and re-balance the country top-down? The policy debate seems to be quite hot, even if its mostly under-the-carpet.

    If they are unable to re-balance intentionally – no question, there will be an eventual blow-out. Hard to know, when that will come, though. Many people have already been burned while trying to short China.

  2. how many of china’s millionaires (or billionaires) do not belong to the communist party in china? i think an educated guess would be a big fat zero.

    whilst it is relatively straight forward to identify bubbles, correctly predicting their demise is hard enough in a system with relatively open information and a political system that is generally laissez faire. in this case, we know there is mal-investment (preconditions, behavior and allocation of capital) but i am afraid that in china’s case, the bursting of the economic bubble may be the bursting of the (command) political system itself.

    1. That doesn’t really mean they are integrated into the government or something. They just have to become members of the party (if they aren’t already) when they get to a certain level of wealth and importance. It was the same in the Soviet Union – to get higher then certain level, you had to be a CPSU member. My grandma became one when she was promoted to the post of deputy director of a research institute. That didn’t mean she was let into the party officialdom or something.

      Besides, the party seems to be considerably less important in China, then it was in USSR. The real power rests with the government and extra-governmental commissions.

    1. Interesting, thanks. Guess I was wrong, their system is quite close to the Soviet one. Well, a bit better probably – at least they have some institutions that protect them from gerontocracy:)

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