Archive for December, 2007

I don’t read the Economist much. I think of it as a Time Magazine for the mid-brow transnational elite: a crystallization of conventional wisdom, and therefore a powerful contrary indicator.

But sometimes, they are right. Their latest article on China, “Flashing Red,” is an excellent layman’s summary of why investing in China is so insane.

THE scene on the trading floor of the Shanghai Stock Exchange appears to be strikingly out of character for a market that is on fire. Situated in an iconic square building at the heart of Shanghai’s costly new financial district, it has a vast trading floor filled with orderly rows of obsolete, box-like terminals. Clustered in one corner are a dozen clerks, heads resting on desks, dozing peacefully.

On a purely objective level, the lack of activity on the exchange is the result of trading becoming fully electronic. But why, then, does the trading floor exist at all? A rather more worrying interpretation of the Potemkin village set-up is that it does speak of something more than merely a shift to electronic trading. The Shanghai market itself is a kind of façade—not really a market, at least in the Western sense where prices are set by broad forces of supply and demand, but rather a place where China’s government can provide the appearance of a modern economy, complete with a signature statement of modern finance and business: an equity exchange.

The result is an odd trading venue where companies are tied to shares but the shares do not carry genuine ownership rights, such as the authority to determine management (often directly controlled by the central government) or dividends. And, perhaps most importantly, it is not a trading venue where people believe shares are as likely to go down as to go up. Currently, they believe they can only go up.

This confidence has its roots in a spate of initial public offerings of government-controlled companies, each of which was deliberately priced to leap on opening day. Wealth made from flipping offerings proved to be contagious, particularly given the lack of alternatives. With few exceptions, China bans its citizens from investing abroad. At home, the choice is between savings accounts paying less than inflation or real estate with uncertain property rights.

The flood of money into shares has pushed stock prices so high that even China’s remarkable growth cannot justify them: 65 times trailing earnings on the Shanghai exchange in October 2007, and 75 times earnings on the exchange in Shenzhen, which caters to smaller companies. The valuations are even more jarring because earnings are often inflated by corporate investment in the stockmarket, a circular logic that can just as easily come unwound. Similar distortions are also rife throughout the balance sheets of public Chinese companies as a result of recently adopted accounting rules that require assets to be revalued at prevailing prices, though the markets to set prices, for example in real-estate holdings and exotic securities, often do not exist.

In a normal stockmarket, speculators can deflate bubbles by shorting shares. That is illegal in China. In a normal stockmarket, investors can reap large rewards by having their investments bought in a heavily fought acquisition. In China, an acquisition must survive central planning (and often doesn’t). Most of all, in normal markets, share prices are based on how a substantial amount of the shares in a company trade. In China, shares in many of the benchmark companies are held by the company or the government and do not trade. Prices are determined by just a few shares being batted back and forth.

If only a few shares are determining the overall valuation, it means only a few people need change their opinions for the market to unwind. Normally, a counter-balancing force for a sudden panic comes from contrarian-minded investors who believe an objective understanding of information provides a reason to buy shares as their prices become more reasonable. Put simply, crashing prices are an opportunity, not just a problem. But finding objectivity in the Chinese market is no easy task because information disclosure is wretched. Companies, and the investment banks that coddle them, distribute information to favoured investors but not to the market at large. For its part, the Chinese government broadly abets this process, granting selective permission to favoured foreigners wanting to invest.

These insiders are comforting friends for China to have, but they are insidious forces for a genuine market. Instead, China needs disinterested outsiders—and insiders—free to do research, free to buy and free to sell. Yet the market in China has become an example of moral hazard gone wild. Historically, this is not uncommon. Markets work in nasty ways and countries frequently try to control them. Critics are faulted for misunderstanding the local “culture” or for missing the crucial fact that this time, really, is different. And then, inevitably, there is a crash.

Couldn’t have said it better myself.

The point about the government owning most companies on the Exchanges is crucial. I can’t remember how many times I read that PetroChina was a “$1 trillion company,” “double the size of ExxonMobil.” 2 percent of PetroChina shares were capitalized at $20 billion on the day of the IPO; that doesn’t mean that the other 98 percent, which is locked up in one form or another by the government, is or was ever worth 49 * 20bn = $980 billion.

But I guess that would have gotten in the way of a lot of “great” headlines.

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Onward hip-hop soldiers

I was watching the trip-hop “The Way I Are” music video, and I wandered to the song’s Wikipedia entry because I have wondered what 3 English footballers could possibly have to do with an American rap/ hip-hop song. (There were 3 UK footballers in the video.) I didn’t get an answer to that question, but I did find out how incredibly popular this song has been around the world.

Most of my cultural “notes” ooze pessimism. But this song exemplifies how American culture, for all its faults and sludge, has wiped the floor in the global cultural marketplace. I think American cultural dominance is sad, because I think American culture is pretty much garbage.

But, assuming the Wikipedia entry is correct, this American hip-hop song was stunningly the #1 single for at least 1 week in countries as different as: Australia, Bulgaria, Cyprus, Denmark, Estonia, Ireland, Israel, Norway, Poland, Slovakia, Turkey, the UK, and of course the United States.

It was also the #2 or #3 single in Belgium, the Netherlands, France, Switzerland, and Hungary.

That is profound soft power.

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I need to figure out how to widen the main column of the page (this one). I wish I didn’t have to squish these graphs so much.

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[in translation]This is how it was …

A female student was bicycling down the right side of the street on her way back to the dormitory, and a Buick vehicle came along in the same direction. The two vastly different vehicles collided with each other, and the bicycle left a scratch of 20 to 30 millimeters on the car.

At that time, the female car owner got out of the vehicle angrily and demanded an apology from the student. Furthermore, an apology was not good enough because there had to be payment for damages. So the student called her teacher for assistance. By this time, many students had gathered around the scene and one of them asked the car owner: “Where do you come from? Why are you on our school campus?”

The woman said something that was provocative: “If I produce my identification document, you should be scared to death.”

So the students began to confront the car owner while refusing to listen to the police. The police pulled the car owner aside and began a discussion. But the elder brother of the car owner has shown up with some friends. They talked tough and they began shoving the students around! The students were infuriated and there was physical contact. But since the car owner is female, the students restrained themselves.

Then a male student tried to make scratch marks on the car. The brother of the car owner assaulted him and they also demanded that the police take him in. According to rumors, the male students was severely injured (note: it was very chaotic at the time).

Then we called 120 (note: emergency medical service) and an ambulance came to take the injured male student away. The elder brother of the car owner saw trouble coming and quietly sneaked away. This became the focus of the story later on.

The woman was trapped. Her mother came. Although the mother was an elderly lady, she was just as unreasonable and barbaric. The campus security guards also came. But we chased them away. Then the security director came, and the students asked; “How did a car without a permit enter campus? What do you guys do for a living?”

A teacher showed up and promised that the chancellor will be here.

Before the chancellor could arrive, the students demanded that the car owner turn over the person who conducted the physical assault on the male student. That would be the elder brother of the car owner. But the car owner refused to say a word.

Then the security guards showed up again. We started cursing and yelling, and called them a bunch of pigs. Someone said that the security guards were letting outsiders without student ID’s come and go in the university. We now have proof that a vehicle without a permit could come and go on university campus. The security guards were speechless and they could only glare at us. At that moment, someone began to assault the car. First, they broke the windshield glass. Then they yanked out the registration plate.

A teacher came to mediate, but he was told to scram. The security guards tried to stop the vandalism, but the students would not budge and held them off. A teacher then said that the chancellor would come in ten minutes. We stood and counted ten minutes. He did not show up, and so we started to assault the car again. The police tried to stop us, but the students pushed them out. There was some physical contact. One police officer was hit and left holding his head in his hands. The police did not come back again.

The teachers who tried to intercede were dragged off. We asked the people on the other side to disperse, and then we overturned the car. The female car owner tried to stop us, but we dragged her off by force. The car was overturned and the chancellor still had not shown up.

Someone there said that he was from the Student Affairs Office, but the students told him to scram (and that applied to the teachers, security guards and police officers).

Then we broke all the windows on the car and nearly ripped the car doors out. It was quite a scene. But the car was solidly built as the front window never came off.

A student leader jumped on the car and tried to speak, but we couldn’t hear what he was saying. On one hand, his voice had gone hoarse from all the yelling. On the other hand, too many other people were yelling.

Then we Nankai University students got together and sang our school song! When the school song is sung, all Nankai people are united. Back then, the Japanese military bombed our campus but they could not destroy our unity!!! So this city bum couldn’t count for anything!!!!

Finally, Chancellor Zhang Jing appeared and promised:

1. The students will not be pursued for responsibility
2. Traffic within the campus will be improved
3. The instigator will be pursued in accordance with the law.


I have always said that the current Chinese system will unravel from either currency revaluation (better, but unlikely), or from inflation-driven unrest (very likely). The Chinese status quo is totally unsustainable, and I believe it will only be brought down by force.

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Pakistan: Stores Opening In Karachi
December 29, 2007 1532 GMT
More people are appearing on the streets, and stores are beginning to open in Karachi, Pakistan, a Stratfor source in the city reported Dec. 29. The situation is getting back to normal, the source said.

Pakistan will be fine, as long as the government settles on a reasonable explanation for the assassination instead of Pakistan’s equivalent of the ‘single bullet theory.’

Karachi is the beating heart of Sindh, the Bhutto clan’s home province, which has seen the highest levels of unrest.

The Pakistani army and Rangers have held back the flood, for now.

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Car bomb hits busy Baghdad market

At least 14 people have been killed in a car bombing at a busy market in the Iraqi capital, Baghdad, police and hospital officials have said.

At least 64 people were wounded in the explosion, which happened at about 1300 (1000 GMT) in a square crowded with shoppers after Friday prayers.

A police spokesman said the dead were all civilians, including at least one woman and a child.

The wounded were being treated at four hospitals, a medical official said.

The attack took place in Tayaran Square, the scene of other deadly bomb attacks in the past two and a half years.

It lies in a predominantly Shia quarter of the city, which makes it the target of Sunni extremists.

Meanwhile, US military officials reported that coalition forces had killed five insurgents and detained 14 suspects, during operations targeting al-Qaeda in central and northern Iraq.

US officials say violence has been reduced by 60% in Iraq although bombings and other attacks are still frequent.

This one probably was engineered by the Sunnis, considering the two bombs that shredded Sunnis the other day.

The NIE has signaled that the United States is done. Iran and her proxies are going for broke. The American-backed Sunnis will bomb back.

(Thank you, Gen. Hayden. No doubt you are fulfilling “the CIA’s social contract with the American people” by removing the one weapon — a significant probability of conventional escalation — which could have deterred Iran.)

It’s important to remember whose hands are dirty, as Iran reels in southern Iraq. Unless Petraeus all but orders the Sunnis to ‘cut down the tall trees’ and preemptively cleanse Shiites, the NIE lost the war, and Petraeus’s work has been undone.

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Plunging MZM = bullish. MZM has been historically high, and is now dropping rapidly.

Plunging commercial lending ( = TOTCI) = bearish. Commercial credit is also at a secular extreme — although the 2001-04 plunge was also a secular extreme.

The dollar has tanked a lot in recent days, which implies that MZM is falling with it (more so than the graph suggests, because MZM data is about 2 weeks old). The dollar is at $1.47/euro again, and 112 yen per dollar instead of 114.5 or so. So the dollar is once again pretty weak. I previously thought it would strengthen dramatically, as the disparity between MZM and USD converged, to the benefit of general asset prices and the value of the dollar.

But that doesn’t seem to be happening … and probably won’t, until the US trade deficit is below 2.5% of GDP. The most recent figures clocked in at 5.1 percent, but dropping.

The sterling has tanked along with the dollar. All of the sudden nobody wants to invest in the UK anymore. Its budget deficit is about 3.5% of GDP, and its trade deficit is even bigger than the United States’.

I wonder if the forex market is pricing in a seismic shift in the yuan/dollar relationship by knocking DTWEXM out of line with MZM until the yuan revalues. The US trade deficit ex-oil is overwhelmingly centered on China, which means it won’t come down as long as the yuan remains unconvertible. And as long as China continues its bull(####) market, commodities will keep going up, so the US deficit will, if anything, increase. But as the dollar goes down, the yuan will come down with it, and continue exacerbating the problem.

In the PBOC’s “dollar sterilization” procedure, as I understand it, dollars are handed over to the central bank in exchange for yuan, at what is basically a state-set rate. Those yuan are not useful outside of China, so China has what amounts to a domestic inflation glut, in line with its accumulated foreign exchange surplus (its “savings glut”). Only massive, systematic rioting will force Beijing to change their ways, and nobody is convinced that that will happen until after the Olympic Games.

Gold, however, is still rising at a blistering rate. I’m surprised the “GOLD AT 28-YEAR HIGH” canard hasn’t been plastered all over the headlines by now. I guess that will come over the weekend and Monday after everybody has gotten the point about Bhutto.


EUR-USD 1.4706 0.0080 0.55
USD-JPY 112.9300 -0.8055 -0.71
GBP-USD 1.9919 -0.0042 -0.21


Oil 96.72 0.10 0.10
Gold 842.70 10.90 1.31
Natural Gas 7.23 0.03 0.42

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Now this is a great idea. Much as Buffett exasperates me, this is what makes him a great businessman.

MBIA, Ambac Fall as Buffett Starts Up Bond Insurance Business
By Christine Richard and Josh P. Hamilton

Dec. 28 (Bloomberg) — MBIA Inc. and Ambac Financial Group Inc., the two largest bond insurers, fell in New York Stock Exchange trading after billionaire investor Warren Buffett said he plans to start a rival company to guarantee municipal debt.

MBIA, based in Armonk, New York, fell as much as 10 percent and Ambac dropped 7.8 percent. Buffett, chairman of Omaha, Nebraska-based Berkshire Hathaway Inc., told the Wall Street Journal his bond insurer opens for business today in New York State. David Neustadt, a spokesman for the New York State Insurance Department, said Berkshire will receive a license by Dec. 31.

Buffett, who said in October he was looking for investments to absorb $45 billion of cash, is challenging the bond insurers as they struggle to retain the AAA credit ratings that allow them to guarantee $1.2 trillion of municipal bonds. The rankings of MBIA, Ambac and other so-called monolines are under scrutiny amid concern they don’t have enough capital relative to the debt they insure.

“The monolines are hurting so now is a good time for Buffett to be getting into the market,” said Matthew Maxwell, a London-based credit analyst at Calyon, the investment banking unit of Credit Agricole SA. “Investors might feel more comfortable investing in bonds insured by Buffett than those backed by an insurer with the legacy of the credit crisis hanging over them.”

Buffett, 77, told the newspaper that Berkshire Hathaway Assurance Corp. will also seek permission to operate in California, Puerto Rico, Texas, Illinois and Florida. New York’s request was processed in about a month, Neustadt said.

Berkshire spokeswoman Jackie Wilson and Buffett’s assistant Debbie Bosanek didn’t immediately return calls seeking comment. Calls to Liz James, a spokeswoman for MBIA, and Peter Poillon, a spokesman for Ambac, also weren’t returned.

Shares Drop

MBIA, down 70 percent this year, fell $2.25 to $20.02 at 9:53 a.m. in New York. Ambac, down 67 percent, dropped $1.93 to $27.21. Buffett’s decision also indicates he is unlikely to bail out any of the bond insurers.

Berkshire Hathaway has AAA ratings from Fitch Ratings, Moody’s Investors Service and Standard & Poor’s and its guarantee would enable municipal bond issuers to cut the cost of financing everything from hospitals to schools to sports stadiums. Berkshire Hathaway also is the largest investor in Moody’s Corp., with a 19 percent stake as of Sept. 30.

“If Berkshire Hathaway Assurance knocks on the door of a municipal official, they all know who Warren Buffett is and they all know that the other major players in this business are suddenly suspect,” said Frank Betz, who helps manage $800 million, including Berkshire shares, at Carret Zane Capital Management in Warren, New Jersey. “It is such vintage Warren Buffett.”

Raising Capital

MBIA, as well as Ambac and FGIC Corp. of New York, are trying to convince Moody’s, Fitch and S&P that they deserve to keep their top ratings.

Fitch has given MBIA and Ambac less than six weeks to raise $1 billion each or face losing their AAA ratings. Moody’s and S&P earlier month placed MBIA’s ranking on negative outlook. MBIA on Dec. 10 said it will get $1 billion from private-equity firm Warburg Pincus LLC to bolster its capital and Ambac took out reinsurance on $29 billion of securities it guarantees.

“MBIA and Ambac are probably going to be able to get through this and raise the capital needed to retain their AAA ratings,” said Rob Haines an analyst at CreditSights Inc. in New York. “But it hurts them.”

`Mass Destruction’

Bonds sold by state governments make up about 33 percent of the insurance premiums collected by MBIA, the biggest of the monolines, and 50 percent of revenue for No. 2 competitor Ambac.

The companies stumbled as they expanded beyond municipal securities into structured finance such as collateralized debt obligations, which package pools of bonds and loans and slice them into separate pieces. The insurers guarantee about $1.2 trillion of structured finance debt.

Buffett, who has described derivatives as “financial weapons of mass destruction,” told the Journal he will focus on insuring municipal debt rather than CDOs.

“They’re not seeing deterioration in the muni book,” Haines said. “All the real risk is in the structured book, which Buffett won’t have.”

New York-based monoline ACA Capital Holdings Inc. is struggling to stave off delinquency proceedings after the value of the CDOs it guaranteed plunged. S&P cut ACA’s rating by 12 levels to CCC after the company posted a $1.04 billion third- quarter loss.

ACA Financial Guaranty Corp., a unit of ACA Capital, said this week it will seek approval from the Maryland Insurance Administration before pledging or assigning assets or paying dividends.

Smelling Opportunity

Buffett has profited in the past from turmoil in the insurance business. Berkshire’s after-tax profit from insurance underwriting soared to $2.5 billion last year from $27 million in 2005 after providing insurance coverage for coastal properties vulnerable to storms as some premiums quadrupled because of record U.S. hurricane losses.

“If Buffett smells an opportunity, his track record suggests there is one,” said Georg Grodzki, head of credit research at London-based Legal & General Group Plc. “Buffett seems to believe the market is viable and the bond insurer has a future.”

Berkshire typically gets half its profit from its insurance units. The company also today said it agreed to buy the reinsurance unit of ING Groep NV for about 300 million euros ($440 million), the biggest Dutch financial-services company said in a statement today.

Berkshire’s Class A stock reached a record $151,650 a share on Dec. 11, having surged 25 percent this year. The shares rose $1,400 to $139,200 today.

“Be fearful when others are greedy, and be greedy when others are fearful,” the billionaire chairman told Berkshire shareholders in his 2006 annual report released in March. “Appropriate prices don’t guarantee profits in any given year, but inappropriate prices most certainly guarantee eventual losses.”

Great for the monoline industry as a whole. Terrible news for Ambac and MBIA, though.

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The Bhutto assassination has obscured my ability to figure out what else is going on in the world. Too much noise in the spectrum.

Nobody knows what will happen in Pakistan until patterns emerge among the disparate rioting throughout the country, which will take a couple of days to discern, at the very least. I wish people would be intellectually honest and shove the armchair quarterbacking in the meantime.

Look at today’s Buzztracker distribution of top location mentions throughout the blogosphere:

Today’s Top Locations

30 percent of all city mentions (within the blogosphere covered by Buzztracker, which should be the vast majority) are: Rawalpindi, Karachi, Islamabad, and Peshawar. Come on.

Here’s what it was 4 days ago:

Today’s Top Locations

Important things are happening outside of Pakistan, but I can’t sift through the noise and find out what those things are.

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I have long believed that strategic success is achieved not by making extraordinary calculations in ordinary times, but rather by making ordinary calculations in extraordinary times. So while the world mourns Bhutto, here’s my icy assessment.

Bhutto was a terrible PM of Pakistan. She was Pakistan’s Yeltsin — a kleptarch whose “reforms” made for a great media narrative among her obliging sycophants in the Western press, but which served only as a smokescreen as her clique plundered Pakistan.

Bhutto was effectively “the Saudi candidate,” airdropped to exploit the fissure among secular Pakistani elites over the constitutional crisis triggered when Chief Justice Chaudhry bucked Musharraf.

Musharraf has been the Pakistani equivalent of Vladimir Putin — a former special ops (ok, Putin was KGB, but it’s close enough) officer as comfortable as he was adept at deciding life and death in the blink of an eye. He has become obscenely wealthy, but ordinary Pakistanis never had it better than they did under Musharraf. In the meantime, Musharraf has proven himself the most talented geo-politician since Chiang Kai-shek. Thanks to Musharraf, Pakistan’s political and economic heft in the region have increased significantly, even as Pakistan has been riven with internal divisions and one axis of the war on terror runs through Islamabad. Pakistan is paying the piper now, but these crises would not have erupted had Bhutto stayed away.

Bhutto would not have been able to hold Pakistan together. It’s a very dark day for Pakistan, but not because Bhutto’s dead — rather, because Bhutto’s provocations will metastasize into a much deadlier eruption, catalyzed by her death.

In practical terms, it will be wind at the back of the anti-Musharraf rebels within the ISI, as well as the jihadist proxies which the ISI used to control, but which have now united and turned their guns on Islamabad.

Basically, Bhutto bet that Musharraf would protect her, because he could not afford an exponential increase in Pakistani unrest. Musharraf took the bet. Bhutto has been proven wrong; it remains to be seen if Musharraf will be proven right.

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Bhutto assassinated

Pakistan: Bhutto’s Assassination


Top Pakistani opposition leader Benazir Bhutto was assassinated Dec. 27, and unrest has already begun across the country.


Top Pakistani opposition leader Benazir Bhutto was assassinated Dec 27. Reports of rioting and arson are coming in from all across the country, with most of the unrest occurring in the Sindh and Punjab provinces.

Bhutto’s death eliminates the largest opposition figure in the country. Bhutto’s Pakistan People’s Party (PPP) has a presence in all four provinces in Pakistan. Her death is also is a major blow to the PPP, which the Bhutto dynasty has led since the party’s inception in 1966. No one in the dynasty is ready to step in to take the PPP reins. Thus, the party is now likely to weaken, and with every other party only being strong in one or (at best) two provinces, political fragmentation is likely to follow. Nawaz Sharif’s Pakistani Muslim League-Nawaz is the next largest party; other parties are very small and region-specific. The crisis of governance currently seen in Pakistan’s Pashtun areas could spread to other parts of the country and lead to clashes between groups.

Bhutto’s absence gives the establishment forces an opportunity to strengthen their hold on power. But it is unlikely that the establishment will reap any benefits; Bhutto’s death will exponentially exacerbate the existing state of political unrest because the blame will fall on Pakistani President Pervez Musharraf’s regime.

This situation benefits the Taliban and al Qaeda and their supporters who would want Pakistan’s security forces to be busy containing political unrest and violence rather than performing counter-jihadist operations focused on northwestern Pakistan. The unrest could reach a point at which army chief Gen. Ashfaq Kayani steps in and imposes martial law. Unless Kayani is able to work out an arrangement with civilian groups, martial law could complicate the situation.

Musharraf is going to get the blame, even though 1) he probably didn’t have anything to do with it, and 2) he’s now living his worst nightmare, and 3) Bhutto did not take any steps to improve her security after a first assassination attempt.

Musharraf and Kayani are in huge trouble.

More …

December 27, 2007 | 1602 GMT

A source in Karachi, Pakistan, told Stratfor on Dec. 27 that everything in the city has shut down in the wake of opposition leader and former Pakistani Prime Minister Benazir Bhutto’s assassination. Cars reportedly are on fire all over the city, even in the quiet residential areas where such events normally do not occur. Even journalists in Karachi are staying off the streets, and people have had to abandon their cars and walk home because of the burning cars in the streets. The source was not aware of any military presence in the streets of the city.

The source added that rumors are flying about a civil war in Pakistan; some Sindhis in the town of Sheikhapura have been shouting in the streets, calling for separation from Pakistan.

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Michael Pettis is the best China-centric theoretical-finance commentator I have come across in the no-fees blogosphere. He has posted another good article, which focuses on the PBOC’s latest interest-rate adjustment.

For the sixth time this year the People’s Bank of China raised interest rates, which was not a surprise. The PBoC raised its 1-year benchmark lending rates by 18 bps to 7.47%. Changes in deposit rates were a little more complex. The 1-year benchmark deposit rate went up by 27 bps to 4.14%, the 6-month deposit rate rose 36 bps to 3.78%, and the 3-month deposit rates rose 45 bps to 3.33%.

The PBOC actually cut the deposit rates on current deposits by 9 bps to 0.72%, from 0.81%. The PBoC statement accompanying the hike claimed that the move “will guide more money into short-term time deposits to help consumers better handle rising prices while maintaining enough liquidity.” I think here the concern is that a lot of money has been held in current deposits in order to take advantage of IPOs, and as huge amounts of money flow from current deposits to brokerage accounts, they cause spikes in sort-term rates that really hurt the smaller banks. By encouraging depositors to tie up their money, the PBoC may hope that it reduces the amount of IPO oversubscriptions.

Overall it is pretty clear that the PBoC is trying to encourage savers from withdrawing deposits – with CPI inflation over the past four months averaging over 6%, depositors have to be very unhappy with the return they are getting on their savings. I am not sure about the exact mix of deposits, so I don’t know what the interest spread is, but the spread between one-year deposits and one-year loans has narrowed by 9 basis points (I think altogether it has narrowed by 27 basis points this year, but I have to check). Banks rely on the interest spread for 85-90% of their profits, so the continued squeezing of the spread, along with the ten minimum reserve hikes this year, should have two impacts: it will put serious pressure on bank profitability next year, and it will create strong incentives for bankers to lengthen loan maturities.

There may be problems with China’s strategy. On their website the PBoC argued that “This adjustment will be beneficial in preventing the rapidly growing economy from turning to overheating, and prevent the structural rise in prices from becoming clear inflation.” If raising the deposit rates is intended to fight inflation and prevent overheating, I imagine that it would do so by constraining consumption. However constraining consumption will also mean constraining import growth, which of course means adding further upward pressure on the trade surplus, and so further upward pressure on money creation as the PBoC monetizes these inflows.

In addition it is pretty clear that these increases in interest rates cannot help but make speculative inflows even more profitable – even if the dollar-RMB “arbitrage”, as some argue, is not the main reason for speculative inflows.

A lot rides on which model for explaining inflation and overheating is the correct one. If it is excessive lending and temporary food price increase that have caused the two, and if rising inflationary expectations are the main concern, then the current strategy may be the right one to combat the problem. Restraining spending and calming inflation expectations should do the trick.

If, however, the fundamental problem is the lack of monetary policy caused by the currency regime, then these solutions will only make things worse. Anything that encourages inflows through the current or capital account will simply make the PBoC’s job of managing the domestic money supply even more difficult and will exacerbate the overheating and inflation problems. We may find ourselves in a vicious cycle.

As goes China, so goes commodities. As gold and oil climb to dizzying new highs, never forget that. It’s a lot safer, imho, to bet on base or precious metals, than it is to bet on China.

I would even buy Japan before I’d buy China–although I believe the China bubble has some months to run yet. Japan is the inverse of commodities, so it would make a decent hedge for a major gold bet. However, Japan will continue to stagnate until it drastically increases market transparency and cracks down on rogue bureaucracies. In the fall, Japan’s building authority basically froze the real estate and construction market by imposing unbelievably onerous requirements upon builders. Japanese housing starts plunged to a 40-year low, and the directive probably cost Japan over half a percentage point of GDP this year. There is no reason to make your investment hostage to that kind of behavior.

Anyway, the toothlessness of these PBOC moves show how completely they have lost control of monetary policy, in my opinion. Nobody’s behavior is going to be influenced because they are getting .72% instead of .81% on a short term RMB deposit.

Pettis also notes that a severe drought is gripping China. The peasants are not going to have a very happy 2008 Olympics.

Droughts and inflation

By Michael Pettis

A few weeks ago I saw a report that China had suffered its worst drought in recent times. The dates and details were a little vague, so I tabled the article and decided at some point I wanted to find out a little more about it. Today both Bloomberg and the South China Morning Post have articles about the drought.


Bloomberg stares its piece by saying: “China’s most severe drought in a decade is expanding throughout the country, threatening the normally humid areas along the southern coast.” I searched for more news on China Daily and found a whole slew of articles. Parts of China are suffering their worst drought since the early 1950s, about 400,000 hectares of crops have already been damaged this year, and the State Flood Control and Drought Relief Headquarters reports that 37.4 million tons of grain will be lost. China Daily adds: “In recent times, drought has been striking more areas of the country with greater frequency. It had extended from the north and western regions to the south and eastern areas, worsening water supply conditions for both agriculture and industry.”


On the other hand, the country seems to be making good preparations for the spring festival. Zeng Liying, the deputy director of the State Grain Administration, said on the agency’s website that “China has stored enough grain to fully meet market demand.” She also said, somewhat surprisingly to me given the other news, that “The country’s grain harvest is expected to exceed 500 million tons this year, rising for the fourth consecutive year.”


Not surprisingly food and grain consumption shoots up during the annual spring festival, and I would guess that the government will do what it can to restrain price increases because it will want a happy festival. If that means using up grain stocks to depress prices temporarily, it will help in the short term, which is fine if Chinese inflation really is just a temporary food problem. In that case fighting inflationary expectations will be the government’s main task, and using up food stocks to depress prices will be a successful strategy.


If inflation is really a monetary problem, however, or if continued drought drives food prices up over a longer period, trying to restrain price increases in the short term may cause more trouble later in 2008 after the festival. With food prices around the world rising too, I continue to believe that inflation next year is going to shock on the up side. As an aside, the government this week promised to double its fertile-sow subsidy to farmers. It will also spend additional money to support large-scale pig production. I assume that this means that they are concerned that pig-rearing is growing as fast as they had hoped. I think the government and most other forecasts for CPI inflation in 2008 are in 3.8-4.5% range (I need to check, so please don’t accept these numbers uncritically). I think it will be much higher.

Coincidentally, I notice this article from the Financial Times:

Double challenge to Beijing orthodoxy

By Mure Dickie and Jamil Anderlini in Beijing

Published: December 26 2007 19:22 | Last updated: December 26 2007 19:22

In two highly unusual public challenges to core tenets of Communist rule in China, an academic has announced the launch of a democratic opposition party and farmers in four provinces have claimed ownership of land seized by local authorities.

Former Nanjing university professor Guo Quan on Wednesday claimed his “New Democracy party” enjoyed widespread backing for its goal of ending Communist “one-party dictatorship” and introducing multi-party elections. “We must join the global trend,” Mr Guo said. “China must move toward a democratic system.”

Separately, farmers in the provinces of Heilongjiang, Shaanxi, Jiangsu and the city of Tianjin have announced on the internet that they have reclaimed collective land from the government and redistributed it.

Collective land ownership is one of the foundations of the Communist state. But one of the main sources of unrest in China in recent years has been the seizure of land that is then sold to developers who often work with officials to make huge profits.

Authorities have already detained at least eight of the activists behind the internet statements, people familiar with the situation said on Wednesday.

China routinely detains or jails people whom officials judge to pose a threat to Communist party rule and has dealt harshly with past attempts to set up opposition groups.

In 1998 authorities detained dozens of people involved in setting up the “China Democracy party”. Some of its main organisers were sentenced to more than 10 years in jail.

This month’s land claims break new ground by appearing to be co-ordinated across widely separated regions of the country and by being based on presumed individual property rights.

On December 16, police in the northern province of Shaanxi detained Zhang Sanmin, Cheng Sizhong and Xi Xinji on suspicion of incitement to overthrow the state. The detentions came four days after they posted an open letter on the internet claiming to have asserted rights over 10,000 hectares of land in the name of 70,000 farmers.

That action came less than a week after the detention of Yu Changwu, leader of a group in the north-eastern province of Heilongjiang that claimed to represent 40,000 peasants in the reclamation of 100,000 ha of land.

In the eastern province of Jiangsu, two young couples were under effective house arrest after joining a group that asserted ownership of land confiscated by local officials to build hotels, discos and restaurants.

A fourth group in the northern port of Tianjin staked a claim on behalf of more than 8,000 people for 60 ha taken by officials for development.

The announcement of the new party and the land claims follows the release last month by a provincial government adviser, Wang Zhaojun, of a sweeping open letter indicting the nation’s entire political system.

Is King Kong waking up?

(Supposedly King Kong was symbolic of the commie-sympathizing underclass… yes, I’m a tool)

As a final end note, a former professor of mine (who is very well connected with the Chinese elite) said that he believed Beijing was behind the 2005 Shandong “mass incident.” Beijing has shown a pattern of using the combination of rural riots and very attentive media to make a move on a “rebellious” province and centralize power at the expense of the provincial governments, which collectively hold much more de facto power than Beijing does.

With media reports, especially apparently coordinated roll-outs such as this, you can never apply too many grains of salt …

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Malaysia has signed a $16 billion energy deal to develop two Iranian natural gas fields.

Mike Feldman, the other uber-commenter of this blog, says that the people who depend on George Soros for dinner and who must toe the CIA line to have a prayer of decent future earnings say The Think Tank Consensus is that the CIA “wants to let this play out for another couple of years.” Is Iran supposed to become less bold now that the Malaysians have given them $16 billion to hold hostage? What are these people snorting?

The Iranians have grotesque amounts of money in Dubai, and the money they have in Iran itself has been more than sufficient for Iran to go toe-to-toe with the United States. More foreign investment will make the regime less assertive? Are you kidding me, Stratfor? Are you kidding me, CIA? (Of course CIA is kidding; the entire agency is a joke. Except, of course, when it comes to smuggling coke.)

Can’t anybody play this game?

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Oil and gold are now at “real” highs. $99 oil and $839 gold were achieved with a dollar that was 4-5% weaker than today’s dollar.


EUR-USD 1.4502 0.0098 0.68
USD-JPY 114.0600 -0.0800 -0.07
GBP-USD 1.9834 0.0046 0.24


Oil 96.33 2.20 2.34
Gold 825.60 9.10 1.11
Natural Gas 7.00 -0.02 -0.33

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Japan fights back with 60-point master plan

By Ambrose Evans-Pritchard

Last Updated: 9:58pm GMT 25/12/2007

Japan has launched its biggest financial shake-up in a decade to regain lost business from London and meet the fast-rising challenge of Shanghai.

A sweeping package of 60 measures will give special tax exemptions to hedge funds, and allow companies to make simplified disclosures in English rather than Japanese.

It will tear down the archaic barrier between banking and broking, which is widely blamed for relegating Japan to backwater status, without the system of universal banking now prevalent in the US and Europe.

Japan’s Financial Services Authority said the “entire government” would be harnessed to push through the master plan, aimed at turning Tokyo into the financial hub of Asia and broadening the country’s economic base away from manufacturing. Officials have openly stated that the model is London. They plan their own “Canary Wharf” of shimmering towers in an enclave of Tokyo.

Japan remains the world’s biggest creditor nation with some $2.5 trillion (£1.3 trillion) in net foreign assets and a massive $19 trillion pool of domestic savings and household assets, the world’s biggest stash of private wealth. Yet it has almost completely lost its footing as a major money centre.

At the end of the 1980s, the Tokyo Stock Exchange (TSE) briefly encompassed a third of global stock market assets. It has been in relative decline ever since, losing out to all the rising hubs in Asia and the Gulf, as well as London.

Just one Chinese company has listed on the TSE, compared to more than 100 on the London Stock Exchange. Total foreign listings in Tokyo have dwindled from 125 in 1990 to 25 today.

The new package will go to the Japanese parliament early next year. The plan aims to break down the hidden barriers in Japan’s cosy boardroom structure and open the system to a blast of fresh air.

Exchanges will be able to trade a much broader range of stocks, bonds, derivatives and commodity futures. Banks and insurance companies will be allowed to deal in almost any global instrument, from Sharia-compliant bonds and carbon emissions derivatives.

The government has already made it easier for foreign companies to use their stock when taking over Japanese groups, a move designed to set off a burst of consolidation and to force management to treat shareholders with greater respect. The old system of cross-shareholding has already broken down, falling from 50pc of all holdings in 1990 to near 15pc now.

The latest changes come amid growing angst that Japan is being left behind by globalisation, despite the country’s formidable success as an exporter of cars and high-tech goods.

If there’s any country that’s capable of a sudden and total about-face when it’s beyond urgent, Japan is that country.

However, they aren’t facing a major depression or similarly catalyzing situation. They are drifting. The institutional forces that caused Japan to obviously, aimlessly drift for 20 years cannot be wished away with a well-advertised policy proposal. I am dubious that this will come to much, but it bears watching.

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According to the BBC,

More than 30 people have been killed and scores injured in suicide bombings in northern Iraq.

A car bomber killed more than 20 people when he was stopped by police and local militias in Baiji, about 250km (155 miles) north of Baghdad.

Later, a suicide bomber killed 10 people in Baquba, at the funeral of a father and son who were part of a Sunni group allied to US forces.

A number of Sunni tribal militias have turned against al-Qaeda.

They are credited with pushing back al-Qaeda in areas where they had been operating with relative freedom.

US officials say this has helped reduce attacks in Iraq by 60% since June.

But neighbourhood patrols have increasingly come under attack from Sunni radicals.

In Baiji, the bomb hit people queuing to buy gas cylinders in a residential area. Women and children were reported to be among those killed.

Witnesses said the attack there targeted a security checkpoint on a road leading to a residential compound housing employees of the Northern Oil Company.

Calm shattered

Baiji, a mostly Sunni area in Salahuddin province, has been relatively quiet in the past two years and the presence of the militias could explain why it is being targeted once more by suicide bombers, says the BBC’s Jo Floto in Baghdad.

At least 19 people were killed and dozens wounded in two car bomb attacks there in October.

The suicide blasts targeted the town’s police chief and a tribal leader, Thamer Ibrahim Atallah, a senior member of the Salahuddin Awakening Council.

In Tuesday’s attack at the funeral in Baquba, the capital of the restive Diyala province 60km (35 miles) north of Baghdad, the bomber, wearing a vest packed with explosives, also wounded 21 members of the local militia, police said.

Police said the father and son who were being buried had mistakenly been killed by US troops.

The US military has only said its troops killed two “armed individuals”.

I think the Shiites did it, with Iran’s encouragement. Iran knows the NIE for what it is–unconditional surrender–and they are going to make the most of it. Iraqi Sunnis have been mercilessly liquidating al Qaeda in Iraq more effectively than the Americans ever could, because they are now confident of American support and patronage. Of course, it’s possible that al Qaeda finally wormed its way through the discerning eyes of anti-AQ Sunnis thoroughly enough to pull off two spectacular bombings far apart, but I doubt it. Instead, I think Iranian-backed Shia militias are flexing their muscles, courtesy of the NIE’s signal of weakness from the US policy establishment.

The CIA has either 1) done nothing but undermine the rest of the executive branch for the past five years; or much more flatteringly 2) with or without the Soros nonprofits constellation, it has fomented massive unrest throughout the CIS, Serbia, Venezuela, and Burma, exactly along the lines of the template of Gene Sharp’s “bible of the color revolutions” From Dictatorship to Democracy. In the process it has turned Putin from a mildly liberal and pro-American, if Machiavellian neutral, into America’s number-one enemy. The CIA has done more damage to US foreign policy than any other single agency in the United States government–especially if, as I strongly suspect, Hayden was the official who treasonously leaked the details of the SWIFT program to the New York Times. (He was confirmed to head the CIA one month before the SWIFT leaked, and the program was privy to top secret security clearances only.)

The color revolution movement has proven itself an abject failure, and after the Burmese experiment I doubt that template will ever be used again; but the Dictatorship to Democracy “soft power” adherents still run the CIA, and as the NIE hijacking showed, they place their ideology ahead of loyalty to the government, not to mention policy execution by every other branch of the US government.

In any case I am shockedshocked! — to see Iran taking advantage (probably) of the obvious “soft civil war” within the US policy establishment.

Update: Right on cue, the CIA is once again “blaming” the Bush Administration for torturing certified al-Qaeda terrorist Abu Zubaydah. You can’t make this stuff up. The one known incidence in the past four years, in which the CIA measurably aided national security, happened only because Cheney or Addington probably stuck smoldering needles under the CIA’s fingernails. Naturally, the CIA itself had nothing to do with it:

CIA chief to drag White House into torture cover-up storm

THE CIA chief who ordered the destruction of secret videotapes recording the harsh interrogation of two top Al-Qaeda suspects has indicated he may seek immunity from prosecution in exchange for testifying before the House intelligence committee.

Jose Rodriguez, former head of the CIA’s clandestine service, is determined not to become the fall guy in the controversy over the CIA’s use of torture, according to intelligence sources.

It has emerged that at least four White House staff were approached for advice about the tapes, including David Addington, a senior aide to Dick Cheney, the vice-president, but none has admitted to recommending their destruction.

Vincent Cannistraro, former head of counterterrorism at the CIA, said it was impossible for Rodriguez to have acted on his own: “If everybody was against the decision, why in the world would Jose Rodriguez – one of the most cautious men I have ever met – have gone ahead and destroyed them?”

The tapes recorded the interrogations of Abu Zubaydah and Abd al-Rahim al-Nashiri, two suspected Al-Qaeda leaders, over hundreds of hours while they were held in secret “ghost” prisons. According to testimony from a former CIA officer, Zubaydah was subjected to waterboarding, a form of torture that simulates drowning, and “broke” after 35 seconds. He is believed to have been interrogated in Thailand. The tapes were destroyed in 2005. Both men are now held in Guantanamo Bay.

The House intelligence committee has subpoenaed Rodriguez to appear for a hearing on January 16. Last week the CIA began opening its files to congressional investigators. Silvestre Reyes, a Democrat who is chairing the committee, has said he was “not looking for scapegoats” – a hint to Rodriguez that he would like him to talk.

Reyes is not looking for Democratic scapegoats, nor CIA scapegoats.

The Republican Party is certifiably stupid enough to deserve it, though. They are getting so gamed. They just have no clue what’s going on.

It’s just another reason why working for the current GOP elite is self-evidently a waste of any productive, honorable man’s time.

You wonder what the tipping point will be before a powerful pro-Bush security specialist organization such as Greystone finds success in quietly encouraging Langley officials to commit suicide. A government as integral to global affairs as America’s cannot long “function” like this, and there are too many organizations with far too much to lose for the CIA to be reincarnated as a 60’s-era version of J. Edgar Hoover’s FBI, always spying and manipulating the political process to its own political ends, undercutting the entire rest of the executive branch.

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I hope this Robert Novak article puts the final nail in the coffin of Stratfor’s “the NIE was all part of a Bush geopolitical master plan” theory. (Another discussion thread, of varying degrees of quality, can be found here.)

If Friedman doesn’t change his line on the NIE pretty soon, we will have to start marking him down as either too stubborn to admit a mistake, or too politicized to be reliable.

Subverting Bush at Langley

By Robert Novak
Outrage over the CIA’s destruction of interrogation tapes is but one element of the distress about the agency by Republican intelligence watchdogs in Congress. “It is acting as though it is autonomous, not accountable to anyone,” Rep. Peter Hoekstra, ranking Republican on the House Intelligence Committee, told me. That is his mildest language about the CIA. In carefully selected adjectives, Hoekstra calls it “incompetent, arrogant and political.

Chairman Silvestre Reyes and other Intelligence Committee Democrats join Hoekstra in demanding investigation of the tape destruction in the face of the administration’s resistance, but the Republicans stand alone in protesting the CIA’s defiant undermining of President Bush. In its clean bill of health for Iran on nuclear weapons development, the agency acted as an independent policymaker rather than an adviser. It has withheld from nearly all members of Congress information on the Israeli bombing of Syria. The U.S. intelligence community decides on its own what information the public shall learn.

The CIA’s contempt for the president was demonstrated during his 2004 re-election campaign when a senior intelligence officer, Paul R. Pillar, made off-the-record speeches around the country criticizing the invasion of Iraq. On Sept. 24, 2004, three days before my column exposed Pillar’s activity, former Rep. Porter Goss arrived at Langley as Bush’s hand-picked CIA. Goss had resigned from Congress to accept Bush’s mandate to clean up the CIA. But Bush buckled under fire from the old boys at Langley and their Democratic supporters in Congress, and Goss was sacked in May 2006.

Goss’ successor, Gen. Michael V. Hayden, restored the status quo at the CIA and nurtured relations with congressional Democrats in preparation for their coming majority status.

There is no partisan divide on congressional outrage over the CIA’s destruction of tapes showing interrogation of terrorism detainees. Hoekstra agrees with Reyes that the Bush administration has made a big mistake refusing to let officials testify in the impending investigation.

Republicans also complain that the National Intelligence Estimate concluding that Iran has shut down its nuclear weapons program was a case of the CIA flying solo, not part of the administration team. Donald M. Kerr, principal deputy director of national intelligence, on Dec. 3 “took responsibility for what portions of the NIE Key Judgments were to be declassified.” In a Dec. 10 article for the Wall Street Journal, Hoekstra and Democratic Rep. Jane Harman (a senior Intelligence Committee member) wrote that the new NIE “does not explain why the 2005 NIE came to the opposite conclusion or what factors could drive Iran to ‘restart’ its nuclear-weapons program.” (Six days later on “Fox News Sunday,” Harman called the NIE “the best work product they’ve produced.”)

Hoekstra is also at odds with Hayden over CIA refusal to reveal what it knows about the Sept. 6 Israeli bombing of Syria’s nuclear complex. Only chairmen and ranking minority members of the intelligence committees, plus members of the congressional leadership, have been briefed. Other members of Congress, including Intelligence Committee members, were excluded. The intelligence authorization bill, passed by the House and awaiting final action in the Senate, blocks most of the CIA’s funding “until each member of the congressional intelligence committees has been fully informed with respect to intelligence” about the Syria bombing.

In a June 21 address to the Society for Historians of American Foreign Relations, Hayden unveiled “CIA’s social contract with the American people.” Hoekstra’s explanation: “The CIA is rejecting accountability to the administration or Congress, saying it can go straight to the people.”

My only question is why it was such “a big mistake” for Bush to refuse to allow the torture testimony. That whole issue has been total smoke and mirrors, and its timing was extremely, suspiciously coincident with CIA incompetence being at the top of the national discourse. The Bush Administration is probably just squashing the issue so that the CIA can’t continue using it to divert and manipulate the public eye. At the very least, the Bush Adminstration knows l’affaire Kiriakou is a total non-story.

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Treasuries Decline as Rising U.S. Stocks Reduce Appeal of Debt
By Deborah Finestone

Dec. 24 (Bloomberg) — Treasury notes fell as U.S. stock indexes gained, reducing investor interest in the safety of government debt.

Equities rose as Merrill Lynch & Co. sold most of its commercial finance business to General Electric Co. Treasuries are poised for their best year since 2002 on expectations the Federal Reserve will keep cutting interest rates next year to stop a housing meltdown from triggering a recession.

“Stocks have a little bit of a positive tone,” said Andrew Brenner, co-head of structured products in New York at MF Global Ltd. “It’s been a pretty good year and I don’t think Treasuries can sustain it.”

The yield on the two-year note increased 3 basis points to 3.22 percent at 12:10 p.m. in New York, according to bond broker Cantor Fitzgerald LP. The price of the 3 1/8 percent security due November 2009 declined 2/32, or 63 cents per $1,000 face amount, to 99 26/32.

The yield on three-month bills rose 35 basis points to 3.32 percent, the biggest increase since Aug. 21, as demand for the safety of short-term government debt lessened. The government auctioned $20 billion of three-month bills today to yield 3.28 percent.

The Securities Industry and Financial Markets Association recommended trading of Treasuries close at 2 p.m. New York time and stay shut tomorrow in Japan, the U.K. and the U.S. for Christmas. U.S. exchanges, including the New York Stock Exchange, will close at 1 p.m.

The Standard & Poor’s 500 Index rose 0.6 percent to 1,493.60.

Two-year note yields and the S&P 500 have moved in the same direction most of the time in the past week. They had a correlation coefficient of 0.96 in the past week, compared with 0.48 in the last year. A coefficient of 1 would indicate that yields and stocks always move in the same direction.

Best Since 2002

An index of Treasury securities returned 8.2 percent in 2007, the most since 2002, according to data compiled by Merrill Lynch. Investors sought the relative safety of government debt as the collapse of the U.S. subprime-mortgage market caused at least $80 billion in writedowns and losses at the world’s biggest banks and securities firms, including Citigroup Inc. and UBS AG.

The Fed cut its target rate for overnight loans between banks by 1 percentage point this year to 4.25 percent. U.S. and European central banks also added money to the financial system to try to revive bank lending.

Fed funds futures contracts on the Chicago Board of Trade show there is a 76 percent chance the Fed will cut the rate to 4 percent in January and a 35 percent chance of another quarter- point reduction at its second meeting next year in March.

Three-Month Libor

The three-month London interbank offered rate for borrowing in dollars, or Libor, dropped for a 13th day to 4.84 percent, the lowest since March 2006. The decline indicates banks are becoming more willing to lend to each other. Demand for cash tends to increase at year-end as banks adjust their books.

“The central banks have alleviated some of the credit crisis we’ve been seeing,” said George Adell, a fixed-income strategist at Philadelphia-based Commerce Capital Markets. “It’s a step in the right direction.”

Libor is 59 basis points above the Fed’s lending target. From 1998 to the onset of the subprime crisis in August, the median gap was 19 basis points.

The TED spread that shows the gap between Libor and three- month bills narrowed for a third day to 1.5 percentage points, the smallest gap since Nov. 14. It was less than half a percentage point before the credit markets froze up in August.

Notes may also be pressured as the Treasury Department plans to sell $22 billion of two-year Treasuries on Dec. 26 and $13 billion of five-year securities the following day.

That’s a huge move … keep watching elasticity of stock changes with respect to movements in the bond market. Given the weak response of the stock market to the exodus of money from Treasuries, I would have expected either commodities to rise more or the the dollar to fall, but neither has happened.


(Go here if “MZM” and associated monetary terminology leaves you confused)

The FRB’s data is about 2 weeks behind (except for “DTWEXM,” which is good to the last day’s dollar close).

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The Thaksin restoration

Thaksin Shinawatra will be returning to Thailand.

After the Thai military overthrew Thaksin’s government, Thaksin’s colossal wealth — almost certainly higher than the stated $2 billion or so — continued to fund Thailand’s political opposition. The military had vowed to restore democracy within a relatively short time frame, and now they’re stuck with the outcome.

Thaksin’s proxy party has significantly exceeded expectations, to the point that it will be able to form a stable coalition government (although it didn’t achieve an outright majority). The Thai military, which has made bloodless coups an art form, will be extremely unhappy with this outcome.

The Thai military’s domestic political situation is very similar to the US situation in Iraq, actually. It is guaranteed to lose the incrementalist political-infighting game. Its trump card is the credible threat of a massive conventional escalation, kind of like the American threat of bombing Iran into the Stone Age once Iranian proxies start winning too much in Iraq.

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So Barry Ritholtz has also noticed the rising trend of economists who embarrass their profession via “provocative” “studies” which fly in the face of real world experience.

Much of investing relates to mathematics and the application of statistics. Markets are statistical data generating machines, and that data can be sliced and diced in a myriad of ways. We always pay close attention whenever we see an interesting application — or misapplication — of quantitative data that may be instructive or applicable to investing.

So I was particularly intrigued by a study in today’s NYTime’s OP-ED page that purported to look at the impact of steroids on the performance of Baseball players, based on the Mitchell Report. They asked the question: “In a complex team sport like baseball, do the drugs make a difference sufficient to be detected in the players’ performance records?”

Their conclusion? The authors of More Juice, Less Punch found that Steroids, Human Growth Hormone and the like do not have a net benefit to major league players. Based on their review of pre- and post- steroidal usage, the overall impact on players stats was de minimus. (sic)

I remain unconvinced.

Ever since Freakonomics became a runaway economics best seller, there seems to be increasing attempts by “rogue economists” and others to discover the hidden, counter-intuitive side of everything.

Remember that by far the main reason Freakonomics was cited in the media was the “strong causality” Levitt inferred between Romanian abortion and crime rates. I’m sorry, but anybody who thinks they can infer any hidden causality between two society-wide effects 15-20 years apart is just being an idiot.

I am getting so sick of “startling” academic studies. Seriously, these people believe that steroids offer “no net benefit” to the baseball players. Intelligent, vaguely streetwise academics need to start tearing this garbage apart instead of letting some publicity hounds tarnish the profession.

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