Is China Working At All?

Let's Talk China For A (Minsky) Moment

For over a decade now, there's been this talk about China being too indebted, and how its economy was built around real estate speculation, and how the property bubble was going to burst, and once that happened the entire Chinese economy was going to come down like a house of cards. For over ten years, I've been writing about how the wealth disparity, the education disparity, the income disparity, opaque and misleading government datas on its economy, and so on would eventually bring about a crisis. If the solution was evermore debt, there had to be a moment when China, with all its misapplied industrial might and ghost cities and multi-generational mortgages for unbuilt housing, and all the excess of their developers, would have to have its Minsky moment. 

I blogged about it a lot. And then some. In 2016 the share market bubble in China burst. Somehow the CCP government managed to stave off the inevitable once again and quarantined the fallout from bursting the property bubble. Nobody talks about it, but that's what they did. Otherwise world markets would have felt it. It worked so well and smoothly it made us all look like idiots for calling the China Bubble as having burst. And for over ten years, that Minsky moment that collapses debt-fuelled bubbles never seemed to arrive. Until earlier this year when over 300 regional banks faced bank runs. 

Now that it has, we've all got to be wondering the same thing: will Xi Jinping reverse course and let the free money flow? Because that's what they had done for most of the last decade; and after all, that's what they always do. It is possible they won't do so, and they let the whole shebang go? But then the social turmoil that would follow would become revolutionary. So if they want to stave off a revolution, they need to going back to delivering economic growth for everybody. 

Will they or won't they? Does anybody care? The weird thing is they look to be in policy paralysis when it comes to the economy. 

Not Your Daddy's China Now

The world needs a massive readjustment to China. Some parts of the world are re-orienting their stance faster than others. Certainly any time that Paul Keating pops his head up to tell us Asia is our future and China is our friend, he looks well and truly out of date. He was right between 1978 and 2012. Even with the Tiananmen Massacre of 1989, we all collectively held our noses at the the Chinese Communist Party's predilection for violent control and did business with the Chinese because it was so clearly the greater good (if by 'greater good' you mean globalised greater profits). Somehow China went from a nation where everybody was wearing heir strange national uniforms to a country where designer goods and luxury items are consumed by a fully modernised populace. We languidly thought if everybody in China became consumers, democracy would follow. I don't know why we chose to tell ourselves that, but that's exactly what we did and we couldn't have been more wrong. 

All the same, China could be counted on to be a good participant in the global trade stakes, and it behaved like an economy-first developing nation. You could charge China as having been an economic animal under  Jiang Zemin and Hu Jintao, forever seeking export markets and flooding the world with cheap goods. Across that time they exported so much deflation, it allowed Central Banks around the world to run low interest rate regimes. China plugged itself into global markets for the first time in history - I don't say this lightly - and reaped the tremendous benefits of globalisation like no other nation. 

And having succeeded in doing so, Xi's China has decided it wants to be a political animal instead. In the last decade under Xi Jinping, Chinese labour has gone up. It has started to prosecute territorial claims aggressively. It has devised a strange policy of 'wolf warrior diplomacy" where their diplomats say undiplomatic things. It has left a lot of people wondering if they are even friendly. The most you could say about Xi's China is perhaps John Lennon's refrain about revolutions, "but when you go carrying pictures of Chairman Mao, you ain't gonna make it with anyone anyhow". Xi Jinping's China is a very different animal to the China that existed before his leadership. 

Back To The Future?

The world is taking stock right now in the wake of Xi Jinping being made the lifetime dictator of China. Arguably, this was not supposed to happen. The rising living standards of China were supposed to bring about a gradual change where China would transition from a military Junta of communists towards a democracy. Of course this kind of transition happened in Taiwan, but Taiwan is not shackled with the curse of considering itself a great power. Just as Russia failed in its transition from the Politburo to democracy and ended up with Vladimir Putin, China too has utterly failed to make a transition out of its Politburo system. Laughably the CCP even argued the Politburo was democratic and therefor China had its own version of democracy - which just goes to show how little they understand of democracy. 

The strangeness of our times is such that we now have a leader of Russia with a view to turn back borders to 1955, paired with a Chinese leader who wants to go back to the leadership style of 1955. With both countries using their resources as bargaining chips, it's strange to watch these leaders try to bargain their way back to an imaginary glory in the past. The uneasy alliance between Russia and China certainly looks like a re-run of the uneasy alliance between Stalin and Mao. I imagine there are a lot of people waking up to a world with a cold war and belligerent Maoists, and feeling a bit of deja vu.  

The future of China led by Xi is distinctly unappealing. You wouldn't want to invest more capital there, and you wouldn't want to hire the labour there with its rapidly rising cost. The sovereign risk is no joke. The demographics are aligned in the direction of an ageing population with shrinking economy so it's not like there's much scope for the domestic demand to take over. The country is sliding towards an awkward 20th Century style of nationalism that may well get them into armed conflict with its neighbours and it's still a country with over a billion people with 37% food security. Now is not the time to ignore economics for their leadership, but here we are witnessing how they ditch economics in favour of nationalist ideology. 

It does make you wonder.

View From The Couch - 27/Jul/2022

EVs With Lithium Batteries For Everybody?

What's been on my mind a lot in recent weeks is this notion that our automotive transportation is going to change over to a fleet of EVs with Lithium batteries. Electric vehicles to begin with are commodity-metals-intensive. They use a lot more copper cable than an ICE vehicle would, and they use things like raw earth magnets for the motors. A quick back-of-the-envelope calculation tells you that if you wanted to replace very gasoline/petrol ICE vehicle with Lithium battery EVs, there wouldn't be enough of a Lithium supply to fill the need. 

I hold shares in some Lithium mines in Australia so I'm biased - I think if the world decides EVs with Lithium batteries, I'll stand to make some money in the mid to long term. Yet the little environmentalist in me is a little uncomfortable with the prospect of crappy manufacturers filling the world with crappy lithium batteries in their crappy electric vehicles. It's the stuff of nightmares just as bad as global warming. Maybe the whole world should have a deep think about whether this is indeed the way we want to go in terms of vehicles. There's no point replacing one catastrophic global problem with another one. 

Toyota is apparently the world leader in patents for batteries. So you would think Toyota would be leading the way with EVs but they are not. If you listen to the corporate communications coming out of Toyota, they seem to think hydrogen fuel cells are a better option than Lithium batteries. Indeed, they're pretty big on hydrogen in general. It stands to reason that if we could connect up the hydrogen economy to renewables, and ran vehicles with hydrogen fuel cells, we would be lessening the overall impact of lithium mining on the world. 

Of course, Elon Musk thinks Hydrogen fuel cell vehicles are a mind-bogglingly stupid idea. He's very deeply invested in Lithium batteries. All I'm saying is, there are real arguments for not going entirely with Lithium battery EVs. 

End of Globalism

There's a bit of talk lately about the end of globalisation. The salient argument being, America has been withdrawing from the world, and as it withdraws, it is leaving power vacuums on the world's high seas. The eventual picture maybe that there will be a free trade blocs built around NAFTA, EU, and CPTPP. Only liberal democracies need apply - because those blocs can and would trade with one another, but it deliberately leaves out China, Russia, Pakistan, Myanmar, the Middle East, and Eurasia, as well as Africa. 

Of course, the Middle East will likely hang on as long as oil is needed, but if the world moves on to running vehicles and planes without fossil fuels, the Middle East will likely lose its purchase on the economic relations involving these blocs. It's remarkable really - especially for us Gen-Xers because our generation was the one that felt globalisation was this inexorably, irresistible economic force that would wash away tariffs and protections and lower our standard of living (instead it imported deflation from China and we ended up with ore stuff than we need for dirt cheap, but that's another story). Naomi Klein was all over this space with her books and the big protests in Seattle in the late 90s was in opposition to globalism. Now we find less than a generation later that globalism is surrendering to history, and that our world is going to move back to trading blocs of the sort that existed pre-World War II. 

It's a bit sad that America's withdrawal from Afghanistan has been interpreted as America's weakness rather than loss of interest in global affairs. The invasion of Ukraine and the sabre rattling by China in the South China Seas is all a little disconcerting misreads. It's not the America is weak now; it's more that it doesn't care what the rest of the world does to beat itself up. It's still invested in the status quo, and more importantly, it will look after its allies. That said, it feels a little weird that we have to start building institutions like the Quad and AUKUS to fill in the power vacuum. 

In an ideal world, Russia and China come in from the cold instead of trying to impose their will on their surrounding countries. Nobody really shares in the grand vision of a Great Russia or a Great China if it means their sovereignty gets compromised. There is some level where the onus is on Russia and China to play nice instead of play these dominance games. The long term prognosis for both those countries is not good thanks to their ageing demographics. They are going to need more friends in the future, not less. Making the whole world your enemy is not proving to be a good move by Russia. You kind hope China gets the message but alas it's run by another dictator. 

If globalisation really is in retreat, you would think it would stop these countries dead in their tracks and make the reconsider their place in the world. The history where Russia had few friends or China had few friends were not good for either country. 

View From The Couch - 11/May/2022

The End of Globalism

Not so long ago - well it doesn't feel that long ago - Globalism seemed set as the way of the future. There would be more coming and going of goods and trade and ideas and education. Like it or lump it, we were all set to compete on a global stage and there was no escaping its tendrils as goods and services put together with global supply chains and global transportation made its way around the world. Globalisation looked like the kind of end point of history that say Francis Fukuyama might approve of; even allowing for these pockets of global players who didn't quite fit into the club of liberal democracies. You could argue Russia was coming along ever slowly towards seeing things the way the west sees them, and even China under the CCP seemed to prioritise making money over ideological purity thanks to Deng Xiao-Ping-ism.

Now in the wake of the Covid-19 pandemic, the bellicosity of Xi Jinping's China, and the Russian invasion of Ukraine, some things have come into very sharp focus. The first thing on the list is that China under Xi - so China since about 2012 - has been a really crappy participant in the global order. The second is that Russia has also been a crappy participant in the global order. And between the two of them, their contributions have lessened to the point of making the first world wonder whether there is any merit in extending the welcome mat to these countries. 

To be sure, China is a big market that seemingly promises future growth except for the gigantic property bubble that has just popped. Russia, for its part is  tremendous exporter of oil, gas, wheat and fertilisers - so much so that the sanctions to remove Russia from the global markets is in a sense flirting with mass starvation scenarios. 

It's kind of amazing things have come to this, but the last decade has been to put it mildly a shit show for globalism. It is no wonder it is in retreat. For a while there, globalism looked so locked in, the people protesting against it in the late 1990s looked like ideological crazies. Now, globalisation is forced to being rolled back by the simple reality that you can't do business with countries with dictators like China and Russia. It may profit you in the short to mid term but in the long run, they're sure to screw you over. In that sense, there's not much daylight between Saddam Hussein and Vladimir Putin or Xi Jinping. 

The End of Deflationary Pressures

For some time we've been in this weird loop since the end of the Global Financial Crisis around March 2009. Governments have spent lots of stimulus money in the hopes of stoking inflation but all these quantitative easing and printing money did not lead to the kind of inflation they taught in schools. Part of the reason is that as the world went global, so did the money, so all the money printed by the US Fed or the RBA seemed to just flow out into the wider world and did not come back as inflation.

It's a complicated area but the bottom line is that even faster than the US was printing money, China had been exporting deflation to the world through its cheap labor. I think I've covered this phenomenon somewhere in the past so I'll skip going into it here. Suffice to say China's labor costs have been going up over the last decade, and so there probably has been less deflationary pressures that China was exporting, leading up to the Covid-19 pandemic. If the last 30 years of gentle economic growth for the first world was founded on Chinese manufacturing being so cheap and easy, that context is coming to a rapid end. 

Worse still China is the most indebted nation in history both in absolute terms as well as per capita, and for political reasons of the CCP needing to stay in power - or perhaps it's just Xi who needs to stay in power - they have blown up their property bubble. We have no idea how this is going to play out in global markets. Judging from the ructions of April and May, global markets do not like what is going down in China. Markets might approve and accept the US Federal Reserve raising interest rates, but it does not like the figures coming out of China. The supply chain issue that we have come to understand isn't just about the fact that China is in lockdown across its most productive cities. It's the fact that China itself has become this gigantic counter-party risk in the last few months. 

Some of the manufacturing the Chinese had been handed by foreign corporations is now being on-shored back to those very foreign shores. The reason we're seeing such stubborn inflation in the first world is simply because the deflationary pressure China brought to the world economy has been cut out of the loop. This means we can expect inflation to keep rising, and for interest rates to keep rising until those inflationary pressures are tamed. In turn this means we will be having that recession we had to have back in 2008-2009 that we didn't quite get because China took on the greatest debt in history to keep the punch bowl swirling. All of that, on top is about to get unwound out of China. 

Brace yourselves. This ride is going to be a bit rough.

Can Global Capitalism Even Be Fixed?

I'm sure people will make every effort to revive it, but right now, the forces are arrayed against it. 

  

Raven Runs

Ever-Grander Fears

Buy now you've heard about this Evergrande situation where this Chinese real estate developer owes USD 305 billion as it starts to default on some of its bonds.Beijing insists that even if it should default, it won't become a contain to affect global markets. A proper cynic would say, "of course they would say that."

There are two things that really worry me in this situation. One is that Evergrande is not going to be bailed out in anyway by the government because the CCP government intends to make an example out of it. It might be unwise to ignore the significance of letting Evergrande fail or implode. We only have to think back to the Bear Stearns moment during the GFC. That led to a bunch of other moments of sheer financial anguish and terror right up to and beyond the Lehman Shock. The point is, Bear Stearns didn't fail alone. When the tide went out, a lot of firms were exposed without their metaphorical pants on. The noises coming out of Beijing seem to indicate they're not thinking about this as a market problem, they're thinking about this as political problem because to the CCP all problems are political problems. 

So that leads me to think Evergrande and its pile of debt isn't out there on its own. There is a whole flotilla of these kinds of companies, each owing way too much money. The total size of this debt in the real estate  sector in China is pegged to be between USD 50-60 Trillion. The China's GDP is USD 16.6 Trillion

In other words, this thing is huge enough to swallow up China's economy. The calming words of China's central bank is no panacea to the pile of risk. With all due respect, it's a big pile. Evergrande might end up being the only company that goes under in this bubble-bursting moment. Something tells me that would be way too optimistic. Chances are better than even the whole sector in China will be on the receiving end of the stick. If there's no contagion to the globe, that's one thing - but there's no assurance there won't be a contagion of sell orders in China. This could become a massive market crash "with Chinese characteristics".  

The second thing that really has me worried is that the Renminbi is pegged to the USD. This is good for China because it will probably stop a currency crisis from blowing up during the debt crisis for which they have lit their fuse to blow up. It's certainly wonderful for them that their astronomical debt is denominated in USD and so, while it is pegged, cannot blow out against the USD. But it also means it commits the test of the world to be dragged in by the unfolding debt crisis. Instead of China's Renminbi collapsing in value, it will stay pegged to the USD - and through the pressure it puts on the USD, we will feel it everywhere on the globe. This isn't Greece with its GDP of USD 200 billion which cause so much heartburn during the last decade. This is China doing the dragging. It's going to weight everybody down. 

Happy days, no? Some think this won't be the Minsky Moment for the globe. Sure, easy to say. Yet here's another thing on top of all the above. The US markets are ready for another 'Taper Tantrum'. The FRB is trying to taper back the stimulus and rate cuts it brought in to bolster the markets during the pandemic. Just as it happened in the wake of the GFC, the markets have sent signals to the effect it does not like the taper. Combine it with the fact that we're in October, the month of crashes - c.f. 1929, 1987, 1989, 2007, and with the last week of October looming (when these crashes tend to happen), you're made to ponder if you're staring at the crest of the giant wave that's about to break. Is this the moment the global property bubble comes unstuck? And what is that going to do to the economy?

The deferred Evergrande coupon payment date from 25 September comes up Monday next week. The tea leaves say they'll probably default. The FRB will meet on 2nd November. In between those 2 dates, there's a solid week for things to go pear-shaped. Hold on to your hats. 

Come Join The Fun!

Where Things Turned South For Hong Kong

How Hong Kong Protesters Screwed The Pooch 

The following is a comment from R.S. who wanted to tell me a few things about the subsequent developments since the handover. I will put it here without editorialising it. It's well worth the read because it comes from the heartland of HK politics, if HK could said to have a heartland in its polity.  

There are links at the bottom which are well worth a check.

---->

Gday mate. I tried to post a comment in your blog but it only allows me 4000 characters! Where to start?

Interesting post but like all things in life, things are usually a bit more complicated than what you normally see and there are many shades of grey in between.

I guess since the ‘97 Handover, Hong Kongers, particularly its youth, have had a hard time accepting that they were in fact now under the guise of the Chinese motherland. It’s still pretty weird to me now, more than 20 years later, that they play the Chinese national anthem every night after the News on TV and on the radio. I cannot imagine what it is like for a child born after 1997 to hear this Communist patriotic anthem and try and relate this to life in HK. In the last few years at sporting events in HK, where the HK national team were competing against another team, they would play the Chinese national anthem and spectators would stand up and turn their backs to the sporting arena and hold up their middle finger! What patriots! Go team! 

What really pushed HK to where we are now, were the “pro-Democracy” demonstrations of 2019 where the city descended into sheer utter madness for months on end as hordes of black clad boys and girls in hard hats, goggles and umbrellas, would wander particular areas of HK and cause unbelievable chaos under the banner of “democracy”. This was totally different to the Occupy Central Student protests in 2014 which was mainly non-violent and had a totally different vibe. The 2019 protests had no “leaders” and caused utter destruction to public property, trash businesses that they “believed” were pro-government, mainland banking offices and any business that had the slightest leaning towards being Pro-Government. They would stop traffic and blockade public roads. Anyone that dared to confront them were quickly backed up by other angry hordes of protesters. When the police finally arrived after 30mins, they’d all disappear within minutes. And since they were all wearing black, you weren’t able to tell who were the troublemakers and who were there just standing by.

There were 3 things that really pissed off a lot of people that were initially sympathetic to the Democratic cause.

1. The storming and defacing of the Hong Kong Legislative building - This would be the equivalent to storming of Parliament House in Canberra or the Capitol Building in Washington. The HK Riot police eventually gave up trying to defend the building from the inside as it was inevitable from the number of protesters outside that they would eventually break through. The police eventually fully retreated, hoping that the angry mob would just leave after they broke in. It eventually turnout out to be a PR disaster for the pro democracy movement as nothing was achieved except for the filming and documentation of those that did the violent storming (who were later arrested or who were afraid of being arrested, eventually fled HK). Government offices and equipment were mindlessly trashed and the legislative chamber was occupied and defaced and graffitied. Even that didn’t happen in The Capitol Building! Millions of taxpayers dollars were spent afterwards on the damaged property. The Proud Boys would have been….well “Proud”.  

2. The shutdown of the Hong Kong International Airport for 2days by anti-government protesters - This was sad sad day for the symbol of the free wheeling economy of HK. Named the busiest Airport in the world since 1996, it handled around 70million passengers in 2019. For it to be completely shut down for two days in the name of “democracy” was just outrageous. Protesters blocked departing non HK passengers that were leaving to go home or to other destinations and argued that it was to draw attention to their cause. ie cause as much chaos to Hong Kong and to the image of Hong Kong so that the government will back down and accede to their demands. Yeah right. What they did do was cause economic pain and inconvenience to everyone including international travellers. You could tell in the days before the standoff that things were going to descend into something ugly, when they occupied the Arrivals Hall for several days and handed out fliers and took to beating up anyone (mainly mainlanders coming back to HK) that disagreed with their demands to the Government.

3. The siege and standoff of PolyTechnic University  - This is the equivalent to UTS in Sydney, where students and high schoolers literally took to the grounds surrounding the university campus and occupied it for a week while battling riot police. Not only did they trash the University completely, but they trashed the surrounding areas to the university by digging up bricks and laying them around the outside so that the Riot police would not be able to approach them in armoured vehicles. They lobbed Molotov cocktails off the roof of the campus and used giant catapaults to attack the police on the ground. Sporting equipment from the university were used as weapons and real bow and arrows were fired into the the police. It was completely insane and scenes were like something out of Beirut. The police eventually starved the students out as they had no food or water, as one by one they walked out of the only entrance that was not blocked. Some protesters tried to escape by going into the underground sewerage system. (Not a good idea in HK!) When the police eventually moved in, they found thousands of unused Molotov cocktails that were piled up in the student courtyard and the Chemistry Department has been completely raided of its most toxic chemicals. After the siege, the university was boarded up and sealed off for 6months as they cleaned up the defaced halls and damaged rooms. Again all paid for by the taxpayer. 

So after much social upheaval and constant rioting that became increasing violent (on both sides), the CCP introduced the National Security Law to quell and prevent crimes of secession, subversion, sedition and collusion with foreign forces, carrying a maximum sentence of life imprisonment. After this law was passed, all political demonstrations and any rioting immediately stopped. It was like switching on a light.

So yeah, here we are now. Yes they are putting people in jail now using the National Security Law and yes you can’t say shit about the Government now. But at least its back to business (or work from home) and there are no nightly reports of Molotov cocktails being tossed into the MTR stations and MTR station entrances being lit on fire. No mass acts of violence or major disruptions. Trying to impose a democratic system on HK now is further away than ever. Those students really did stuff things up for themselves. And hence that’s why most of them will leave eventually.

Some clips from those times:

https://youtu.be/QtsR5JpF5aU

https://youtu.be/m_0-x_2l3XE

https://youtu.be/YHCArqqE9rE

Cheers mate. Keep up with the posts!

HK '96

The People You Meet On The Road

All the political stuff going on in Hong Kong to do with democracy and human rights was foreseeable. I was there in 1996, about 18 months prior to the handover. The Communist take over was slowly underway and they sent in their uniformed state police who stood on street corners demanding IDs from people. I spent a bit of my free time talking to locals about it all and told them that they won't be able to keep all of their lifestyle once the Communists took charge. 

Just about everybody I met insisted that it was going to be business as usual. As long as people were making money, there would be no reason to change things. They resented the mere suggestion that Hong Kong might be about anything but money. Money, yo, money talks and bullshit walks! If the mainlanders could just get first hand experience of capitalism, then they would not want to go all authoritarian on them. I tried to explain to them that's not how authoritarians and totalitarians think. They first thing to be kicked aside would be democratic freedoms and rights, and when those are gone, it would be a lot less pleasant for everybody concerned. They then told me I was paranoid and nuts. The thing is, it's not that paranoid to think an authoritarian organ like the Communist Party of China hates your freedoms. 

Still, given the prosperity gap and the lifestyle gap between Hong Kong and the mainland at the time, it may have been inconceivable that the mainlanders would come to call the shots in such a way as to curtail Hong Kong's very sense of itself. Hong Kong after all was like a wild flower of modern capitalism that blossomed off the coast of the mainland, while the mainland seemed to have more in common with the medieval world than modernity.  

Somehow during that time in Hong Kong, I met an American woman who explained to me the frightening things she had witnessed and told me she was bugging out to Singapore before the takeover. She could see the writing writ very large and in Hi-Viz colours on that metaphorical wall. She even had stats at the ready as to how the mainland would inevitably grow and how when time came, it would would seek to undermine the independent-thinking of Hong Kong. All, that in spite of their promise of one state, two systems. I remember walking around Lan Kwai Fong talking about all this with her. She loved Hong Kong, but she couldn't see how it could stay the same after the Handover. It might look the same but at some point it would breakdown. The pretence would get old and erode away. 

It made a lot more sense than anything else I was hearing on the ground. Years later, here we are. The communists have taken away freedom of speech and have dismantled the institutions of democracy. Democracy as it turned out, was a lot more fragile in Hong Kong, just like she had predicted. 

Come Join the Fun!

View From The Couch - 31/Dec/2016

Just Guessing But...

I've been pondering this problem of global warming. First of all, we've run past 400ppm of CO2 in the atmosphere. We're not even counting the CH4 Methane, and Methane is of course 4 times worse than CO2 when it comes to trapping heat in the atmosphere.

Our democratic processes in the first world are simply not getting anywhere near the results we need to curb the runaway emissions growth. If you look just at Australia for instance, the mining interests for fossil fuels have spent so much money to cripple the proper discussion of this threat that it has become nigh impossible to make any sensible progress on the issue. While nations around the world are moving over to renewables in a hurry, it appears that the USA and Australia are going to be the stupid holdouts sticking to fossil fuels.

The thing is, the massive problem of emissions isn't just a problem isolated to the climate, but something that will have a chain reaction in food production. Agriculture is going to take hit as a result of the effects of climate change, and the most vulnerable nations are places with big populations with very little food security - like China and India. If it ever gets to the point where not enough food can be produced to supply these countries, they are going to have riots on their streets, and in the case of China, the suppression of those riots will probably lead to a revolution - exactly the kind of outcome the current regime will want to avoid.

So if you work backwards from the pointy end of the problem, it's far more likely that an authoritarian regime will try and invest in technologies that will actively suck out carbon from the atmosphere in order to bring the problem back under control. I imagine that the Chinese government will spend whatever is necessary to create massive renewable power plants with the specific purpose of converting atmospheric carbon into liquid or solids.

Here are some examples of technologies out there already:

• Synthetic Photosynthesis.
• Nano Spike Catalyst lowers energy threshold to reverse combustion and harvest ethanol.
• Large scale carbon capture projects
• Capturing carbon and turning them into building materials

The thing is, Green groups would have you believe that this is futile and what needs to happen is zero economic growth or some such nonsense. Geo-engineering is a dirty word in the Green paradigm, but when you look at just how much runaway emissions are going on, and how capping emissions is still going to get us into a world where the sea level rises by meters and the weather patterns are going to be shot, then it's easily arguable that what needs to be done is to shove the carbon genie back into the bottle.

If you're running China - an authoritarian state that's not scared to crack a few eggs - one of the advantages is that you can send a directive out and it gets done on a massive scale. It is the most likely candidate to simply order massive solar and wind generators to power these projects en masse with the specific purpose of capturing as much carbon s possible, and lowering the parts-per-million figure back below 400ppm. And they may well do this while we in the first world are still stupid enough to be arguing whether Global warming is actually happening and whether we should do something a bit more serious than Direct Action in Australia as we keep digging up fossil fuels.

Worse still, the countries that don't move out of fossil fuel will end up paying for the fact that they keep emitting because China will send them a bill for all the carbon it is capturing, through an international emissions trading scheme.

Of course, China might not do any of this, in which case we're really going to be stuffed. But if you go through the ay in which the cards are stacked, you can see China would see the advantage in going hard in this direction. And if they do, the countries most committed to fossil fuels are going to end up paying up big time.

RIP Debbie Reynolds (1932-2016)

Away after Carrie Fisher passed away, her mother also passed away.

Starring in the legendary musical Singin' In The Rain and singing the hit song Tammy. Shining on Broadway and being nominated for an Oscar for The Unsinkable Molly Brown. Her own TV comedy show and an Emmy-nominated role in the sitcom Will & Grace. 

Debbie Reynolds' showbiz career exemplified an old-style versatility – singin', dancin' and actin' – that continued well into her veteran years. 

Her death at 84 a day after daughter Carrie Fisher added sadness to sadness. Son Todd's comments that "she's with Carrie" and that the stress of his sister's death was "too much" for his mother showed the paralysing impact of grief. 

Reynolds, who had a suspected stroke, will be best remembered as a luminous talent on stage, film and television - Hollywood royalty. Wholesome and charming in her early roles, she was later known as a brassy personality who was portrayed as an overbearing showbiz mother in Fisher's semi-autobiographical novel Postcards From The Edge.

It's just been a terrible year for celebrity deaths.

RIP Alphonse Mouzon (1948-2016)

This happened in the jam session of duelling deaths.

Alphonse Mouzon, a powerful jazz drummer who made his greatest contributions with a funk backbeat, forging a standard for 1970s fusion, died on Sunday at his home in the Granada Hills neighborhood of Los Angeles. He was 68. 

The cause was cardiac arrest, his son Jean-Pierre Mouzon said. Alphonse Mouzon learned this fall that he had neuroendocrine cancer and used a crowdfunding platform to help pay for treatment. 

Few other drummers were as integral to the development of fusion as Mr. Mouzon, who combined volcanic intensity with a brisk attunement to dynamic flow. He played in the first edition of Weather Report, and was a charter member of another defining jazz-rock band, the Eleventh House, led by the guitarist Larry Coryell. 

Mr. Mouzon had a productive association with the pianist McCoy Tyner, playing in a volatile acoustic setting on albums like “Sahara” (1972) and “Song for My Lady” (1973). He also served as the propulsive engine on notable fusion albums by the keyboardist Herbie Hancock, the flutist Bobbi Humphrey and the guitarist Al Di Meola, among others. 

Outside of jazz, Mr. Mouzon worked with major touring acts including Carlos Santana, Eric Clapton and Stevie Wonder. The drummer John Bonham of Led Zeppelin acknowledged him as an influence.

I want to write more about Alphonse Mouzon, but I'm really bummed about all of these deaths.

RIP George Michael

As everybody with a heartbeat knows, this also happened on Christmas Day.

I kind of refrained from writing about George Michael because his cause wasn't exactly mine and his music never really did much for me. But seeing that all these other people are dropping like flies, I figured I may as well acknowledge it here.

Ugh, what a year

China Versus Crown Resorts

The Business End Of The Stick Meets The Sticky End Of The Business

I've been wondering for sometime just what on earth is going with Crown Resorts. First of all, they don't perform well for shareholders. Generally speaking, in a two horse race kind of way, had you held shares in Echo Entertainment/Star City over the last few years, you would've made more money than with Crown. The other thing that makes you wonder is that James Packer's gone and put all of Crown's eggs in to a basket that targets Chinese high-rollers. Which, of course when you think about it can only lead you to the conclusion that Crown intends to be the money launderer of choice for corrupt Chinese officials on the mainland. Which is pretty extraordinary. Imagine another business model based on targeting criminals and helping them launder money somehow and see if you think that is sustainable. Unless you're big corporations doing the elaborate international tax dodging, it's pretty hard to spot the opportunities, let alone the sustainability of such a venture.

It's a bit like parking a cruise ship casino off the shores of say, Columbia, in the hopes that the big drug lords come and gamble away millions in your casino using it as money laundering service. There's something fundamentally crooked and wrong about the arrangement. Yet, there was Mr. Packer the Junior, right at the door step of mainland China with his casino on Macau, and a sales team targeting 'whales'. How long could that have lasted? It assumes the Chinese authorities don't care when they say they do care. I presumes that corruption and its ill-gotten gains are monies that can be taken away and out of China, and really, how can that be a sustainable business model?

Turns out the communist Chinese weren't going to sit around and play patty cake when they could reach for the bat and play hardball.

Crown Resorts employees including three top Australian executives have been held incommunicado since Chinese police executed a series of late-night raids at their homes across several mainland cities on Thursday. 

The company, consular officials and distraught families have been unable to establish contact with the group.

Shanghai-based Crown employee Jiang Ling answered her door at midnight on Thursday to find five plain-clothed police officers outside her apartment. 

"I kept saying ... 'Why are you here?'. They kept repeating 'Oh, your wife knows' and she didn't obviously… they finally said 'gambling'," Ms Jiang's husband, American expatriate Jeff Sikkema told Fairfax Media. 

"The main thing that I understood ... they wanted to know was who her boss was and some of her other colleagues, just looking for names."

That sounds like they mean business, doesn't it? It impacted share prices on casino operators.

The Chinese foreign ministry confirmed over the weekend the Australians detained on suspicion of committing "gambling crimes", without specifying how many. It said the case remained under investigation. 

Shares in other casino operators in the region fell in response to the arrests
Crown's largest Australian competitor, The Star, did not escape the fallout - its share price fell more than 5 per cent but closed down 3.66 per cent. 

Hong Kong-listed Sands China fell as much as 5.4 per cent, while Galaxy Entertainment Group Ltd. lost as much as 4.7 per cent on Monday. 

South Korea's largest operator of casinos for foreigners Paradise fell as much as 0.7 per cent in Seoul trading, while fellow Korean casino operator Grand Korea Leisure Co. declined as much as 0.9 percent. Melco Crown Philippines Resorts
Corp lost as much as 1.6 percent in Manila. 

"This is a clearer signal to all casino operators and junkets in the region, that the Chinese government doesn't like gambling and will continue the crackdown on the industry and capital outflow," said Tony Tong, founder of Hong Kong-based risk management consulting firm Pacific Financial Services Ltd.

Ouch. Crown itself lost 13.9%, down to $11.15 per share. Apparently that is half a billion dollars of Mr Packer the Minor's worth down the gurgler; that'd suck quite a bit. 

It's arguable whether it is the gambling the communist Chinese brass dislike so much, or the very real  ease with which money floods out of China through the casinos. As I said above, if you're on their doorstep and your business plan is to hoover up the escaping money from the mainland, it's no surprise the Chinese government is going to pick a fight with you. 

I understood the reasoning when Mr. Packer the Junior, sold out of Channel Nine and the TV business in order to get into the gambling business, but even allowing for the decline in the free-to-air TV business, it seemed a little drastic to want to go all in on Casinos, and ones with Chinese VIPs as the main targets at that. He's ignored all the noises from China that they're trying to stem the flow of money outwards since the GFC. It's not like this is a surprising development. I won't slam Packer on the morality stakes of wanting to be in the gambling business, but it does seem incredibly blinkered to not have seen this sort of development coming. 

The things is, if there's one thing it brings to mind, it is the One.Tel debacle over which Mr. Packer the Diminutive and his pal Wee Lockie Murdoch presided. In that instance they were proceeding with a business model that was hardly sustainable (nor made any sense) in a bid for more customers, only to find the gravity of their situation was enough to suck the entire venture down. As with that instance, Mr. Packer the Lesser, has found an unsustainable business model and stuck with it in the face of reality. He may have inherited a fortune but it seems abundantly clear that he doesn't know what he's doing with it. He is beginning to look like that joke where a man puts out a book "How I Came to be Worth $1million" You open the book and it tells you how the man inherited $1billion and squandered most of it. 

Politcal Donations Are The New Inefficiency

The Best Democracy Money Can Buy

It's kind of laughable that the first casualty of this Parliament is an ALP Senator, but that's what we've got with Sam Dastyari stepping down as manager Opposition business in the Senate and shadow spokesperson for consumer affairs - and, really, rightfully so.

"In the past week, it's clear that the ongoing examination of my behaviour is taking attention away from bigger issues facing Australia and Australians. Yesterday, I called a press conference and answered questions. Today, I have reflected on that and decided that wasn't enough. It's clear to me now that this has become a distraction. 

"I made a mistake and I'm paying the price. For that mistake...I will continue to serve with pride as a senator for New South Wales and I look forward to serving a Labor Party government in the near future in whatever capacity I can."

...and so that went. To be frank about it, I'd say Senator Dastyari fucked it up well and good, and looked terrible when he went and defended the Chinese position in the South China Sea even before it was evident that he was on the take from the Chinese. The moment you end up mouthing propaganda for another sovereign government, you disqualify yourself from your own. The bit where you took money for it only lessens your character. The propagandising for others is a form of treason.

Political donations will continue to be a topic that never gets fixed; a little like Negative Gearing and Asylum Seekers stuck in off shore detention centres. It's an issue but our government has no spine to fix it. Really, Sam Dastyari's case is being looked at in the wrong way. It's not just that he peddled influence for another government for a measly sum of $1600-odd. It's that other entities can buy influence of MPs for the same measly amount of money and it passes their own scrutiny. That is to say, it's okay for Barnaby Joyce to court the donations from Gina Rinehart, because she's an Australian citizen and hat she wants is conservative policy - according to Barnaby. Make no mistake, our politicians are for sale.

The truth is, there's a whole, bunch of people with way too much lobbying power through the weight of money, and so if it's not straight out corruption of access through money or policy formation through lobbying with money, it's going to be junkets an trinkets and wining and dining to put a point across forcefully. Otherwise, how does one explain the extraordinary influence of the mining lobby in Canberra? The Coalition obsess over the relationship between the unions and the ALP, but equally suspect is the relationship between the business lobby and the Liberal Party. That being the case, it's no surprise John Howard doesn't want the donations rules to be changed.

It's a bit of a joke because Mr. Huang who has donated over a million for both sides of politics thinks the Chinese get a bum deal because for all the money they've donated, the politicians of this country simply don't do as Mr. Huang says. If that bit of mumbling doesn't tell you what the expectation is for those who donate money, you'd be sticking your head in the sand, ostrich-wise. I guess the good news is that the needs of Australia still outweigh the needs of China in the eyes of our politicians, but even so the Sam Dastrayi thing together with Barnaby Joyce' contention reveals just how blasé these politicians have become about these donations. It certainly explains NSW politics, it would be a fool to think it's not affecting national politics.

I've mentioned before how vested interests ate out the prosperity of Japan. The same thing is happening here, but nobody is doing anything about it.

Quick Shots - 26/Apr/2016

Endless Summer To Go Into May

This is worrying.

Sydney's abnormally warm autumn will extend well into May, with unusually dry conditions inland creating late-season heat records across large parts of Australia in play. 

The city has had just two days this months with maximums below the long-term average of 22.4 degrees, and most days in the coming week will be several degrees warmer than that. 

With a warm start to May, temperatures will creep up to the mid-20s early next week – 30 degrees is possible in western suburbs. 

"We're still missing the significant cold fronts that are normally due this time of the year," said Brett Dutschke, senior meteorologist with Weatherzone.

There's already a big pile of worrisome things to do with Global Warming so adding this on to the list of evidence is no big addition, but that in of itself is a worry because it means we've become inured to the ever growing pile of evidence indicating anthropogenic climate change is happening.

Overpopulation And Depopulation

Here's something interesting from Zero Hedge. It's a rare article that isn't screaming imminent doom. No, the doom is a bit further off in this article:

Strangely, the world is suffering from two seemingly opposite trends...overpopulation and depopulation in concert. The overpopulation is due to the increased longevity of elderly lifespans vs. depopulation of young populations due to collapsing birthrates. The depopulation is among most under 25yr old populations (except Africa) and among many under 45yr old populations. 

So, the old are living decades longer than a generation ago but their adult children are having far fewer children. The economics of this is a complete game changer and is unlike any time previously in the history of mankind. None of the models ever accounted for a shrinking young population absent income, savings, or job opportunity vs. massive growth in the old with a vast majority reliant on government programs in their generally underfunded retirements (apart from a minority of retirees who are wildly "overfunded"). There are literally hundreds of reasons for the longer lifespans and lower birthrates...but that's for another day. This is simply a look at what is and what is likely to be absent a goal-seeked happy ending. 

In a short yet economically valid manner, every person is a unit of consumption. The greater the number of people and the greater the purchasing power, the greater the growth in consumption. So, if one wanted to gauge economic growth, (growth in consumption driving economic growth), multiply the annual change in population by purchasing power (wages, savings) per capita. Regarding wage growth, I hold wages flat as from a consumption standpoint, wage growth is basically offset by inflation. Of course, there is another lever beyond this which central banks are feverishly torqueing; substituting the lower interest rates of ZIRP and NIRP to boost consumption from a flagging base of population growth. (There is one more boost to consumption, huge increases in social transfer payments primarily among the advanced economies...but while noted, these are a story for another day.)

Anyway, it has interesting graphs and the details make for interesting reading. 

We're Getting French Submarines! 

In a turn for the more interesting, the Coalition Government decided to go with the French submarine tender. 

The commitment to a local build shores up the government's political prospects in South Australia, which were looking shaky amid concerns work could be sent offshore. MPs including senior frontbencher Christopher Pyne faced losing their seats if the Coalition broke a pre-election pledge to build all 12 boats in Adelaide.

But the choice of France is causing ripples with rival bidder Japan, which branded the decision "deeply regrettable" and issued a please explain.

I don't know what to make of all this. 

From an Australian point of view, the government got what it wanted - 12 subs, built in Adelaide, with somebody else's tech. As an essential part of the decision, by picking the French, it stays out of China's bad books - which is spineless whichever way you look at it. 

From the Japanese point of view, it looks weird because Tony Abbott came bounding in wanting to buy the subs, only to be replaced by Malcolm who put it out to competitive tender instead and chose somebody else. It's a bit more mixed because there are voices in Tokyo that didn't want to sell the tech at all, and they'll now look like the more responsible voices. After all, with allies like these, how needs enemies, they'll argue. 

In a weird way, it's good that Australia picked the French because it really means we don't want to fight China, and it's good for Japan to know that Australia can't be relied on for much if it came to a shooting war with China. That being said the Americans will provide the weapons systems for interoperability. They've indicated the French subs are not as good as the Japanese 'Soryu' class subs so they'll be a bit unhappy that Australia deliberately opted to go with the French. 

China is celebrating the French choice as a victory for its diplomats. 

I guess the downside of this 'process' is that Australia was going to piss off two countries either way, but three countries if it picked Japan's tender. Based on this decision it seems Canberra and Tokyo are never really going to see eye to eye about mutual security, and that's bad (as in, I'm not going to write it's "not good" because it's worse than that, it's bad). Malcolm Turnbull was making noises about Japan still being a strategic partner but it's hard to see how he's going to make that statement stick right after he showed that the partnership didn't mean all that much to his government. 

You'd sure hate to be the Australian Ambassador to Japan tonight, trying to explain how the hell a surefire sale turned into a tender and a swing-and-a-miss. There's no spinning "fuck you." 

News That's Fit To Punt - 16/Apr/2016

When Governments Suck This Hard

Several people sent me this link yesterday. It obviously hit its mark because lots more were posting it upon Facebook. It's a veritable talking point sort of article, obviously because it sums up what most people have thought and continue to think of this sorry government.

How to explain the trainwreck that is the last three years of the federal government? The debacle poses a challenge that will dog journalists, policy wonks and historians for decades to come. The explanations for its dysfunction and sustained under-achievement are complex, but there are at least two distinct theories worth considering.

In Malcolm Turnbull’s second ministerial reshuffle in February, Alex Hawke was promoted to the office of assistant minister to the treasurer. In 2005, the then young Liberal office holder prophesied that conservative politics in Australia would move increasingly towards an American model. Hawke explained that: “The two greatest forces for good in human history are capitalism and Christianity, and when they’re blended it’s a very powerful duo.” 

Can the relentless incoherence and incompetence of the current government be attributed to a particular blend of capitalism and religion that has found favour in the US? Perhaps. British author Will Hutton argues that a malaise has swept the political right throughout the west and that it has given up on the Enlightenment and in doing so has rejected “tolerance, reason, democratic argument, progress and the drive for social betterment as cornerstones of society.”

If there is a serious contest about capitalism being waged in Australian politics, it is invisible to most of us. To the extent that there is a debate, it focuses on neoliberal capitalism. Perhaps Hawke’s invocation of capitalism is another way of expressing an opposition deep within the modern Australian conservative; an opposition to taxes and to government itself. Despite the rhetoric, the recent experience of conservative governments including the current government is that they levy more tax than their Labor counterparts.

And so on it follows. Anybody with a modicum of education and a sense of fairness would find this unsurprising. Yes our government is unrelentingly crass and incoherent, and it's totally impossible to work out what exactly they came to power to do given their contradictory (mostly self-contradictory) positions on things.

China Boom Is Over,  She Says (She's Probably Right)

Here's even more confirmation Australia is headed for economic turbulence. 

The slowdown in China's rapid economic expansion and "rebalancing" away from resource-intensive construction activity towards domestic consumption has dramatic ramifications for Australia's quarter century of uninterrupted economic growth.
In the official lingo, Australia is being forced to "transition" away from the mining boom. But to what? 

Julia Gillard began grappling with the "challenges and opportunities" presented by China's maturing economic development in 2012 when she released Treasury's 'Australia in the Asian Century' white paper. 

It too extolled the opportunities that would flow for Australia to replace record iron ore exports with shipments of health and financial services, meat, wine and dairy.
Add to this list cherries from Tasmania and crayfish from Geraldton, Mr Turnbull this week told a "gala lunch", while extolling the virtues of the recently signed China Australia free trade agreement. "The early export gains have been extraordinary," he claimed. 

Of course Ms. Irvine goes on to argue that services exports from Australia are nowhere near lucrative or competitive as to what our mining exports were able to do during the Mining Boom.

It's a special kind of mess when a Liberal Government can't point at its own record to make the point that the people are better under their economic care. It's also sad that short of thinning exports, was we have to offer Chinaware primary produce - things that are well and truly the part of the commodity trade and where prices are always in deflation.

This probably doesn't need a refresher but the problem with the Gillard Government was that without a solution it opted to double down on the Property Bubble; which, if you think about is no solution at all because it pays no attention to the economy on the other side when ultimately property prices recede back to historic norms, and there's still no industry to replace the mining boom.

The clear and obvious idea lay in the value-add that Australia could provide, so science and technology would be your front line areas to secure an industrial future for Australia beyond the Mining Boom. But of course there aren't any typical union jobs in the ranks of science and technology so the ALP in its worst moments of self-interest would not pursue such a path (And frankly I can't think of any other motive).

The subsequent Coalition Government has been worse in that it helped shut down car manufacturing Australia (because those jobs are unionised) and managed to gut a good portion of the secondary industry while wielding a budgetary axe to science and technology as well as compromising the NBN. So just in case you're wondering, Malcolm Turnbull hasn't been a panacea for the extreme Stupid which befell the Coalition Government under Tony Abbott, any more than an ALP victory might be of any help if they should squeeze past this terrible government at the next election.

Why Pay Tax When You Can Do This?

Glory be. How in God's Green Earth do these big companies get away with not paying tax?
In case you've wondered ho, here is the explanation:

Once upon a time, multinationals had proper 'bodies corporate'. Typically, they had six or eight directors who made decisions in the interest of their Australian entities, a director's duty. 

Shell Australia for instance used to be called Shell Australia. It had a full board, board meetings were generally attended. After every year end, the company would produce a glossy annual report, its financials there for all to see. A press conference, though meagrely attended, would be held. 

Now the Anglo-Dutch giant refers to itself as "Shell in Australia". Its statutory financial statements are nowhere to be seen. If you fork out $38 a pop to the Australian Securities & Investments Commission (ASIC) you can find them. Net, they have paid no corporate income tax on $60 billion in revenue in three years. 

Shell is a big one but the pattern is clear. Thanks to tricky financial structuring, multinationals regard paying income tax as optional. "Leakage" they call it in the land of tax lawyers. 

ASX companies, such as Woodside, Shell's peer on the North West Shelf, are bound to file their accounts publicly, and free of charge. They are visible, and they are filed – unlike Clive Palmer's accounts of yore – on time each year. 

Compliance, generally, has been in freefall over the past decade. Even the Business Council of Australia, which pontificates to government on good business practise, has only managed to get its accounts in on time in eight of the past 16 years. 

The question needs to be asked of multinationals: what is the economic reality?
Is Shell a little piece of London, and Chevron a little piece of America, which has been given carte blanche to plunder Australia's resources, pay little (in royalties in the case of Chevron) for them and bank all the proceeds of their sale in foreign head office bank accounts? 

Once Chevron has paid the money it pays to real Australians (during construction Gorgon & Wheatstone), there is not much in the way of ongoing economic benefits for Australians. 

Are these really Australian exporters? Multinationals used to run subsidiary companies and the money earned by those companies was banked in Australia and circulated in the Australian economy while the parent waited patiently for a dividend.

What a joke. The kind of money being discussed seems to be the kind of money needed to properly fund the NDIS and the Gonski Reforms and a whole lot more. It's not that these things are unaffordable, it's that our government both ALP and LNP has let their corporate donors run roughshod over the tax office. What we want is for the ATO to start going after these multinationals. That should be the platform parties run on if they want us to take them seriously about things like the budget deficit. 

Quick Shots - 09/Feb/2016

Hard Landing In China - "We Crash, You Die!"

Pleiades sent me an article in the AFR today outlining the retreat of bank shares this year. it's not exactly joyous reading. Pleiades thinks this is the shit hitting the fan. He is probably right.

So far this year, European bank stocks have dropped more than 20 per cent, and this pattern continued overnight, with both Deutsche Bank and Commerzbank shedding more than 7.4 per cent. The shares in three big Greek banks all slumped more than 27 per cent on Monday night. 

At the same time, worries about tighter financial conditions weighed on US bank stocks, with Morgan Stanley dropping 6.4 per cent, while Goldman Sachs falling 4.8 per cent.
At the weekend, China said its foreign exchange reserves dropped nearly $US$100 billion ($141 billion) last month to the lowest level in more than three years as Beijing further sells dollars to prop up the yuan. 

China's foreign exchange reserves now stand at $US3.23 trillion, about 20 per cent below the peak of nearly $US4 trillion reached in mid-2014.

Capital flight out of China is accelerating not slowing down.  There's really no sugarcoating the fact that China is slowing down towards a hard landing. Nobody really manages 'soft landings' but on the scale of measuring just how hard a landing this is going to be, it looks like it's gong to be solidly hard.

Abenomics Is Reaching The End in Japan

The latest news out of Japan with its NIRP (yes, negative interest rates policy) is that Abenomimcs has failed. Stocks, USD/JPY trade and Bond yields have collapsed. Naturally, banks are taking a hammering over in Japan as well. The markets are indicating Abenomics simply is not working.

The market's reaction is getting duller day by day. The negative interest rates boosted the market only for two days," said Norihiro Fujito, senior investment analyst at Mitsubishi UFJ Morgan Stanley Securities, and trading data shows even that was down to short-term "gamblers", he added. 

A week later, even those gains are gone, as foreign investors withdrew a net 207 billion yen from the market, taking their total for 2016 to more than 1 trillion yen. U.S.-based Japanese stock funds also saw an outflow in the week ended Feb 3.

Curiously, the Yen rose against the US dollar, even as foreign investors pulled out of Japanese markets.

So, even if the US is doing much better now, with interest rates going up, two out of three of Australia's trading partners are going through what can only really be described as bad times.

Deutsche Bank is now issuing statements defending its liquidity, which is like a throwback right to the GFC. At this point the scuttlebutt is that DB might be the new Lehmann. This is not surprising because Deutsche Bank is neck deep in derivatives that have gone sour, and for a long time it was speculated that any movement of US interest rates would blow up positions taken by those derivatives and adversely affect Deutsche Bank.

Judging from the headlines, it's clear we've entered a new phase in the repercussions from the GFC. It may just be the point at which all the Quantitative Easing and money printing is now coming back with consequences to roost. The Central Banks can't very well spend even more in an attempt to spend their way out of the woods.

News That's Fit To Punt - 28/Jan/2016

The Republic Debate Again

Back in the 90's I was a Republican. Not the American kind but the Australian kind that wanted a head of state who was Australian. I have to admit that the choice was based on a few factors. One, was the 1975 Dismissal, which left a very bitter legacy in our polity. Another, was the fact that the Queen - with all her trappings and achievements - seemed not just an anachronism but an out-and-out irrelevance. This led me to think the Republican cause in Australia was progressive. The last factor was how Paul Keating as Prime Minister argued the case for a Republic, which was very persuasive.

Of course we know how that ended. At the time, the debates came down to Tony Abbott on the side the monarchists, and Malcolm Turnbull on the side of the Republicans. It didn't matter that Tony Abbott was largely incoherent in his logic, and that Malcolm Turnbull was persuasive; John Howard had managed to split the Republican vote between those who wanted a direct election of a President and those who wanted minimal change in the structure of the government.

More importantly, we find that Turnbull is not so bullish on the moment today. That stands in stark contrast to the new Australian of the Year who wants to push the issue.

I think about that today and a number of striking things pop out. First, there is the obvious strangeness of seeing Tony Abbott and Malcolm Turnbull continue to tussle in the public eye; this, despite being on the same party. Tony Abbott went on to do in Malcolm Turnbull as Opposition Leader back in 2010, and it took until late last year for Malcolm Turnbull to wrest back the leadership role with the Liberals. The rancour remains; Abbott will contest the seat of Warringah and will remain the thorn in Turnbull's side. Another words, the tussle between these two men is likely to continue a little bit longer.

The second, is the persistence of the idea that Australia should become a Republic, and that this symbolic change is somehow vital to our national identity. Thus, notwithstanding the loss, the Republicans aren't going to let it go. Naturally, the Monarchists won't either. But on a long enough time line, the Republicans may well get their way; and once they do, it's hard to conceive of a way back to a constitutional monarchy.

In the mean time, there's research to show that the younger generation are eminently okay with the Monarchy. Those who did not witness the Dismissal simply don't care. The people most wedded to the idea of the Republic are the people who came of age in the Whitlam era. That tells you something about the years since, and how they have slowly obscured the anger, obfuscated the problematic, and hung a veil over the ugliness that was palpable to those present in 1975. Maybe the Republic is not as inevitable as it seems.

Is The Property Bubble Finally Popping?

This is the question.
First off, Sydney house prices dropped 3.1% in the last quarter.

Rising mortgage rates, restrictions placed on investor lending, a surge of new apartments and a slowdown of Chinese buyers in the Sydney market were all behind the sluggish result, AMP Capital chief economist Shane Oliver said. 

“The December quarter was a bit unusual in that a lot of negative things came together in a perfect storm,” Dr Oliver said. 

But this fall “exaggerates the weakness in the market” as it has to be viewed in the context of the huge growth Sydney already experienced, he said. 

Over the past three years, Sydney house prices are up 52.6 per cent or $349,183, Domain data shows, with house prices up 14.8 per cent over 2015.

So there's that account. Of the factors cited, the most ominous might be the retreat of Chinese investors, as it signals some kind of link to the collapse in Chinese economic sentiment. Of course, the Chinese share market is known not to be connected to much, but all the same, nobody believes the official account that the Chinese economy is growing at a 7% clip.

Apart from which, the Chinese markets themselves have popped. Who is doing the lending now to enable Chinese investment in to Australian real estate? That being the case, you have to wonder if the drop in Chinese buyers was a little hesitant drop or a tap turning off.

The Pot Calls

Rupert Murdoch is a funny tweeter. Rupert seems to think Google needs to pay more tax. The problem with Rupert taking such a position is, that his own companies also need to pay more tax.

Rupert Murdoch, whose News Corp paid no UK net tax at all between 1987 and 1999, attacked Google parent's tax deal with the UK. 

"Google et al broke no tax laws,'' Murdoch wrote on Twitter. "Now paying token amounts for p r purposes. Won't work. Need strong new laws to pay like the rest of us.''
He was referring to Alphabet's agreement to pay £130 million pounds in taxes dating back to 2005.

Murdoch's attitude to low tax rates in 2016 put contrasts with data on his company's behavior in the past.
A 1999 report by The Economist showed Murdoch's own company, News Corp, had paid a tax rate of 6 percent over the previous four years.

In the UK, it had paid no net tax at all on £1.4 billion of profits made since 1987.
Fairfax Media reported earlier this month that eight of the 10 media companies that paid no income tax in Australia are linked to the Murdoch family.

What can you say to that kind of brazen hypocrisy? It's sort of funny he thinks there's a tax paying "us" that brackets him with the run of the mill taxpayer who can only dream of a holiday in the Barbados, let alone 23 subsidiaries in tax havens.

Well, here's to you Rupert.

Quick Shots - 20/Jan/2016

The Mining Boom's Well Over...

I've been a bit out of things this week so I haven't exactly followed the news or markets. I do want to point out that it's been 11 losing days out of 12 trading days this year so far, so everybody is getting their arses handed to them as Brent Crude hits US$28. Really, unthinkable sort of pricing.

Nobody with any familiarity with China believes in the GDP growth figures that come out of Beijing. There's going to be a big problem if we're counting on 7% or so GDP growth when in fact the likely number is mines 1%.

Pleiades sent in a Crikey article which is behind a paywall, but the gist of it is that our political class and bureaucrats missed the cue, and completely bungled the landing from the mining investment boom that overtook the entire Australian economy for a decade and a bit there. Among the things they failed to anticipate was how hard other nations would head towards renewable energy, even if our government under the Coalition sat in denial about climate change and resisted doing anything for as long as it could. Right now, the share markets are showing how and why we're going over the cliff.

Our Honey Is Poisonous

This is depressing.

Australian honeys are the most contaminated in the world with natural poisons linked to chronic disease including cancer, according to international researchers. 

Pregnant and breastfeeding women in particular should be wary, experts say, with unborn and breastfed infants at higher risk of organ damage from such toxins. 

The news affects varieties of honey sold by many leading brands and widely available on supermarket shelves. While the products do meet more relaxed Australian food safety standards, all but five Australian honeys tested had more contaminants than the European Food Safety Authority would consider safe or tolerable, the research published in the Food Additives and Contaminantsscientific journal shows. 

The Australian Food Code bans the use of poisonous weeds such as Paterson's curse (also known as Salvation Jane) and Fireweed in human food. Their flowers are laced with chemicals called pyrrolizidine alkaloids that are considered the most common cause of poisoning in humans and livestock worldwide. 

But Food Standards Australia and New Zealand (FSANZ) permits honey to be sourced from restricted plants, as long as it is blended with other honey to dilute it.

That's a worry. Of course, the article finishes with a line from the honey industry body about Australian consumers having nothing to fear. It's strangely reminiscent of what tobacco growers used to say about cigarettes. It's a bit of a giveaway that we ought to get very paranoid in a hurry.  

The Impossibility Of Sensible Conversation

It's always surprising just how lunar-crazy the right are in this country. I guess the lunar left are also crazy but they've not been anywhere near the controls, or making policies for this country in a long time. The infighting breaking out in the Liberal ranks about the next Federal election.

Just look at the craziness here:

"Our sovereignty has been signed away at the United Nations by Malcolm Turnbull, [Foreign Affairs Minister] Julie Bishop and [Defence Minister] Senator Marise Payne," he writes. 

"Now UN laws override Australian laws thus dictating what countries our refugee and immigration intake come from." 

"Former prime minister Tony Abbott agreed to take in 12,000 persecuted minority refugees, mostly being Christian. Malcolm Turnbull has already changed that to being 12,000 mostly Muslims, who clearly do not assimilate to the Australian way of life and our laws," he says.

(Mr Abbott denied Christians would be given preferential treatment, saying: "It's those who can never go back that we're focused on.") 

Cr Cornish goes on to "strongly question the Liberal Party's direction in regard to conservative values". 

"It currently shows little difference with the aims and objectives of the Labor Party, that being the removal of religion and replacing it with government founded [sic] tolerance of everything, climate control, over control of our everyday life and the erasing of our heritage and way of life through wanting to change our flag and changing our head of state to a corruptible president," he says. 

Cr Cornish also attacks Lindsay MP Fiona Scott over last year's leadership change that saw Mr Turnbull become Prime Minister. 

"Fiona Scott was only elected due to the hard work and support of Tony Abbott," he writes. 

"His many campaign visits to Lindsay along with his 'sex appeal comment' got Fiona just over the line, only to have her stab him in the back for his hard work and party loyalty."

So one part of the Liberal Party strongly believes in this kind of divisive politics. They pine for the days of Tony Abbott as PM (even though it was clear Tony Abbott had been an utter failure), and they play this line of absolute fear for international commitments that this country has made.  It's the same bunch of people who think nothing of locking up kids in detention centres or ignoring climate science, or complaining about political correctness. Basically, Malcolm Turnbull's job is to corral these crazies under the same party and somehow get to the election and win it. Even if he wins it, he's going to have to cajole these crazies to do what is required because these crazies are ideologically against it, and think there's some kind of principle at stake in their wrongness. 

Whatever it is disaffected ALP voters thought Malcolm Turnbull might do that was so much better than Tony Abbott, you have to say the the likelihood of that happening is quite minimal.

Hold On To Your (Made-In-China) Hats

The Bubble Has Burst

The Bubble in China has burst. We just haven't felt the ramifications of it yet because the process has only really begun this June when the equities market in China blew a gasket and went down from its bubbly heights. Make no mistake, that collapse in the equities market we witnessed in June was the point at which the Chinese economy hit its Minsky Moment. Yesterday's falls are merely the logical continuation of the spiral down. In September during the G-20, the head of POBC made comments to the effect that the market moved as if a bubble popped. Thus, we have to acknowledge the moment that we feared has in fact arrived.

The news in December was how China opened up a bond market for international investors, but somehow managed not to drum up good business. The tricky thing here is that like Japan, China's government debt is mostly held within China. There's very little debt owed to international markets. The complicating factor is how the Yuan/Renminbi is still tied to the US dollar in some way through a red - but if December was anything to go by, China has been devaluing the Yuan as quickly as it can. The long and short of it is that there won't be new money going into China from international markets. And if debt has reached saturation then, there's no inflating the sagging asset prices any more.

While China is too big to fail as an economy, it still has to navigate some kind of landing as it moves into a developed world, low-growth sort of economy. The long wished-for soft landing is looking less likely by the day, and instead it is looking more and more likely that China is headed for a solidly hard landing. A lot of this has to do with the inherent contradictions of containing an (ostensibly) market economy inside a pretty rigidly controlled economy. So on the one hand there is market competition, with say, many firms in any one area. But the prices of their output are still rigidly controlled, and so are wages. This leads to a situation where the central government demands 15% wage increases while not allowing for prices to go up because they're trying to control inflation.  The apparent growth that they report, is conjured from stealing from the margins of companies.

Under this arrangement, wages have exploded roughly 500% in the last decade, all of which was absorbed by the companies operating in China. Indications are now coming out of China that many foreign firms are retreating out of manufacturing in China, moving factories to Vietnam, Cambodia and even on to Myanmar and Ethiopia. Because the Yuan is pegged to the US Dollar, it also creates inflexibilities that result in phenomena where goods and services work out to be cheaper in Tokyo than Shanghai.

And that's just the framework showing signs of heavy contradictions between a market economy and a controlled economy.

Where Did Their Bubble Come From?

As it turns out, the single area where the government did not exert the usual controls turns out to be real estate. Technically, all of China's property belongs to the state, and farmers are leasing their land from the state. This has made it very easy to take the land from farmers in rural communities. Local municipal governments have paid a laughably small amount of money to remove the farming communities off the land, hand it to developers, and by the time they lease it out as commercial property, they are able to put a price tag on the same land that is 50 to a 100 times what they paid.

This magically large margin has gone into local municipalities as income; so much so that there are many municipalities that have anywhere between a third and a half of their revenue based on this mechanism. It means the municipalities don't have to raise taxes to find money to invest in infrastructure projects. The developers profit, the politicians profit, the bureaucrats arranging these deals profit form kickbacks, everybody involved gets a piece of the action.

Which illustrates why the Chinese government essentially let the property prices skyrocket. Of course, it is easy for the wants of the many to outweigh the needs of the few, but at a certain point the real estate prices became so unrealistic the whole market came off the boil. This led to sagging prices as well as people carrying enormous debt, sliding backwards and out of the market, putting even more pressure on property prices. In response the Chinese government stopped lending money for property and instead encouraged people to take out loans and buy financial products. In 24months, the Chinese equities market went up 250% and then this June, tumbled down 30% from its peak.

The thing to keep an eye on is the surge of money that flooded out of China, that financed other property bubbles around the globe. At the heart of it is the flipping of farm land into commercial land with no consideration for demand. If you were in a part of the chain that profited from this activity, you would have looked upon all this a once in a lifetime opportunity and really, there is nothing to do but take your money and run.

But consider this for a moment. The building of the massive ghost towns in China comes from this process of price controls and pegs on the one hand and abject profiteering off the land irrespective of demand on the other. Nobody wants to move to the ghost towns, certainly not at the prices being asked for, which means all of those developments are forces in asset price deflation waiting to be unleashed but for the moment are included in property prices in China. To some extent, there needs to be price discovery, but there are so many mitigating factors stopping that from happening, most of which are the state controls.

If China commits to moving to a market economy, then it effectively lets go of the controls it has been exercising for a long time. It's hard to imagine they'll do so. Instead, they are likely to keep applying controls in a bid to sustain the asset prices. You wonder how that scenario is going to play out. It can't be good - but the bubble has collapsed. Whatever kind of landing they can engineer, the landing gears are about to hit the tarmac.

How Much Of Our Bubble Is Their Bubble?

It's hard to say just how much of Australia's property bubble is directly because of China's bubble getting exported. It's not all of it, because Australian households themselves are carrying all-time debt. The private sector debt has been record high since well before the GFC. This suggests strongly that our bubble is not their bubble. That being said a few things come to mind. The recent growth in house prices coincided with the rise in revenue from high commodity prices. Those factors have all but disappeared with commodity prices hitting unthinkable lows and revenue dropping substantially. China's simply not going to buy iron ore and coking coal at the volumes and prices it did a few years ago. China's bubble bursting will hit our revenue even harder.

The other thing we learned this year was that even though Australia's economy is greatly dependent on growth in China, our economy is relatively unaffected by the daily gyrations of the Chinese Market. This is because not only is the Chinese market not really connected to the global financial markets, it doesn't seem to be connected to its own domestic economy. There are simply too many state run businesses lined up in the Chinese bourse, and everybody knows they are of some kind value, but they can't be understood from reading the balance sheets because nobody seems to be in the transparency business when it comes to business in China. And this means things take a long time to work their way out of the Chinese financial markets and affect the global financial markets. Add in the fact that most of Chinese government debt is held domestically by these state owned businesses, it gets very opaque as to how things might play out and at what rate.

We do, however know a few things. The real estate market in China had its Minsky moment in 2014. The state intervened to coerce investments into the equities market and this led to even more loans being made out to buy these assets to inflate. The bubble came undone in June this year. Commodity prices for things Australia has been selling China, have collapsed. There are serious signs the crunch is now on, but no indication for how this will spill out of China. But you have to say, when (not if) it happens there'll have to be a great readjustment of Australian asset prices, up to and including real estate.

Where To Now?

The new movement out of China is this Asia Infrastructure Investment Bank. All these nations signed up to go with an institution that is designed to be a vehicle for Chinese construction firms to go around the place and build stuff. The AIIB is meant to be China's response to the US influence over the IMF, but closer examination reveals it is some kind of investment vehicle designed to carry out a kind of economic colonialism on unsuspecting Asian countries. This isn't small potatoes because there are something like 100 steel manufacturers alone that have basically hit the limit and are desperately undercutting one another. All this Chinese capacity for processing raw materials and constructing infrastructure is looking for somewhere to go and keep doing its thing. You can bet your bottom dollar we are going to see some extraordinary things as a result of this movement.

Thus, if the AIIB ploy of building a modern day Silk Road transpires and all those companies somehow manage not to go broke when China has its hard landing, then a commodity-driven country like Australia might be able to keep supplying that process. If the AIIB fails to deliver, then we're going to see big wobbles up ahead. China is not only too big to fail, it's too dangerous to fail.

A Bank of America analyst thinks the possibility of a Chinese financial crisis is 100%. On the other hand, a Citigroup/Citibank analyst says it's too early to worry. The indication therefore is, soon, if not imminent.