CHINA and everyone

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Yes, I did. Thanks. It also made me realize, Abe Lincoln invented the QEs. His 450 million of printed "green backs" and as is often the case when first issued, they stimulated growth. IE make for more purchasing power, spending, etc. and in Abe's case paid the soldiers fighting on the North's side in the civil war (or "war between the states" if you are southern born). QE 3 did little if any good for the economy, and QE 4, if it comes will just increase the per capita debt. The fed's tool box, is now empty as interest rates can't go below zero.

Like then, "We live in interesting times." Some times preceded by: "May you ..." to make it into a Chinese curse.

Something very strange is happening in the gold futures market - and scary. IE. It is entering into "backwardation."
That is when people pay more for immediate delivery than put a small "earnest money" deposit down (< 10%) to own a future delivery contract, say just to be specific, for delivery in six months. They should and almost always are willing to a higher price per ounce six months from now than the current "spot" price. In part because they are paying zero to store the gold for the six months before they take delivery - the seller of it to them is paying that or taking the risk that the price may go up before he "covers" his contractual obligation. He could be hoping the PoG will fall but given the current upward surge (more than 1% per day for last week), that is a very risky bet.

The other main part of why one normally is willing to pay higher future delivery price is that with <10% down, you have >90% of the money under your control for the six months - can invest it and your investment, on average will cover the higher future price.

Gold is now entering "backwardation."

I think it is mainly (1) that explains why backwardation in gold is starting. IE there is a growing concern that COMEX will default on future delivery contracts as their stock of registered gold is very low compared to normal:

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It is only Registered class gold at COMEX that is available for meeting the delivery contract obligations. There is about 8 million ounces of Eligible class gold at COMEX now, but every ounce of it has a specific owner. COMEX is just holding it in their vaults for the owner.

It is called "eligible" as it is physically identical (bar shape, size, and purity) to the deliverable gold of contracts. So if the owner is willing, he can release his ownership claim, and let his gold transfer to the registered or deliverable class vault(s). He might be quite willing, even anxious, to do this, if the PoG were falling, but it certainly is not now. If he accepts a small premium over the current spot price, he gives up any further appreciation gains.

Because there are now many dozens of open delivery contract for each bar of deliverable gold at COMEX, an increasing fraction (still small) of holders of delivery contracts are asking for their gold instead of accepting a cash settlement for it value. IE many are beginning to think:
"I had better take my promised gold while there is still some in the delivery vault - before one of the many others with the same claim on it takes "my gold" -Damn if I want to take COMEX to court for defaulting on me."

There is so much gold, with no real industrial need for it (tonnes for every gram of industrial demand) that reason (2) : "I got to have more gold now," is not a big factor causing the "backwardation." Gold is not like wheat. The baker needs wheat NOW, not in months, so will pay higher spot price than the future delivery price. IE wheat or coffee, etc. can easily fall into a backwardation condition, but gold never should. However, the outflow from gold ETFs like GLD has reversed! Is no longer a source of physical gold to supply the physical demand, but is ADDING to the physical demand, so some who promised physical delivery may be hard pressed to deliver. The inflow into all ETFs last week has been estimated at 1,500 tones! GLD alone got a single deposit of 300 million dollars, which they need to buy gold to cover.

When, as now, gold goes into backwardation, that is a strong indication to expect serious trouble soon.
Yes we now do live in "interesting times" !

 

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I liked that one too as it shot holes in the silly but common theory that China's 2% devaluation of the yuan is the cause of current stock market etc. troubles with:

For some years now, I have noted that the "PetroDollar" was created when the US was the main buyer of Saudi oil and the main supplier of weapons (with even US planes based in Saudi Arabia). None of that is true now*, but China is the main buyer of their oil and their main weapons supplier now. Also within the last year meetings at the highest level have occurred in both Riyadh and Beijing with their oil minsters active participants. You don't need to be a "rocket scientist" to know that creation of a "PertoYuan" was at least discussed, and for the same reasons that once created the "petrodollar." (Main buyer of the Saudi oil and main weapons supplier.)

BTW, the current king of Saudi Arabia, then just an important "crown prince," was the Saudi leader of the Saudi side of the first discussions!

* In fact many believe, Saudis are the main funders of ISIS and helping them market the oil they produce. Saudis are Sunni, as is ISIS with a common enemy in Shiites. China is neutral in this more than 1000 year conflict - They just want the oil and more market for their weapons. (Will sell to both sides.)

 

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It ain't just selling arms
it's also protection............"boots on the ground"

Is China ready to send in the troops to protect opec oil fields?

 

The bigger question is would Arab oil producers trust them or want them? And I think that answer is a very clear and unambiguous NO.

I'm sure China would love to send troops, but it doesn't have the ability to project that kind of military power. It isn't a super power. In order to protect Arab oil producers it needs a Navy it has yet to build.

 

Except it wasn't a 2% devaluation, it was a 4% devaluation in two days. And it wasn't China's first attempt to rescue its failing economy. China fought long and hard to avoid devaluing its currency. It froze its stock markets, it prohibited short selling, it enacted a number of controls to prop up its economy. Further, its economic growth numbers are just not consistent with the data. People don't believe China is being honest with its economic disclosures. So you are not being honest. We just had a discussion about the 4% devaluation in two days.

And you have no evidence to back up your "petroyuan" assertions and oil machinations. I see absolutely no evidence Arab oil producers want to chummy up with China. Oh, they are perfectly willing to sell them their oil, but is quite another to invite them into their bedroom. China probably raised the issue, but the Saudis are other Arab oil producers are not stupid.

Just because the Saudis don't like Shiites, it doesn't make them bosom buddies with ISIS.

 

Well, it's very apparent you are confusing monetary and fiscal policies yet again. Where is your evidence QE 3 did little if any good for the economy? Inflation remains low, unemployment is falling, and the economy is growing nicely. And the Fed's toolbox is far from empty. As you have been told over the years the Fed has many tools in its toolbox. Interest rates is just one of them, and you can have negative real interest rates. We have had them.

The Feds purchase of debt (i.e. QE 1, 2 &3) have absolutely nothing to do with increasing debt - PERIOD. And you have been told this over and over and over again over the years. The Fed has no authority to issue debt. It can only buy existing debt or sell existing debt. So there is no way in HELL or anywhere else for that matter that the Fed could increase per capita debt as you have asserted...that is another oops.

Yes we do live in interesting times. All that means is people are speculating on gold for the reasons I previously gave. If the Fed increases interest rates as has been expected, this trade will (ceteris paribus) unwrap very quickly.

 

That would depend upon who was trying to take, without adequate compensation the oil. If that is the US, then no China would not fight the US. They are winning WWIII, which is economic as all wars between nuclear powers, with many nuclear, mirved, missiles launched from submerged submarines, like China has, must be. See photo of China's Jin -94 class subs below.

Currently there is little need for China to use force to get oil shipments from the Mid East. The just buy it. Very little, if any of the oil from the most developed Iraq oil fields - those in the South that the Iraq/ Iran war was mainly about goes to the "western powers" - China gets most of it. Oil from the Northern part of Iraq is under Kurdish control and flows out by pipe line thru Turkey, mainly, although some goes "God knows where" by tank trucks. For more than a year, the oil from the big field near Mosul has been doing the same - leaving by tank trucks. I don't know, but would not be surprised if part of it ends up in Baghdad, with payment to ISIS. (Why not? Baghdad delivers modern weapons to the battle lines with ISIS and drops them their - keeping ISIS well supplied with US made equipment.)

Jin-94 sub marines with 12 launch tubes for the new mirved SBM ICBM which has a range of 8,700 miles - I.e. only one (of the 5 or 6 China now has) surviving a US first strike can hit NYC and 119 other US cities from more than half of the Pacific Ocean and all of the Artic Ocean. (And each of those 120 independently targetable nuclear bombs is 2.5 times more powerful than the one used on Hiroshima!)

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Jin 94 sub

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BTW, continuing post 3 comment that PertoYuan may soon (couple of years) replace the petro dollar - why the "petroyuan" is coming:
Exactly the same conditions when Nixon & Kissenger got Saudi Arabia to set up and enforce the petrodollar system no longer exist between US and Saudi Arabia; But do exist between Saudi Arabia and China now. I.e. Now China is the main supplier of weapons to Saudi Arabia and main buyer of oil from Saudi Arabia. US buys less every year now with "fracking" and lower demand.

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Chinese made DF-21 , mobile, missile first sold to Saudi in 2007, can strike all of Israel from North Saudi land. US would not sell weapons Saudis wanted as some could be used against Israel. (Covers all of Iran - the main Saudis need.) It also can hid in a garage, come out and launch in a few minutes. The Israeli IDF can not take them out before the missile is half way to Tel Aviv.

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Chinese Premier Li Keqiang, right, shakes hands with Saudi Crown Prince Salman Bin Abdulaziz at Ziguangge Pavilion in the Zhongnanhai leaders’ compound in Beijing on March14,2014, but now Salman is the KING of Saudi Arabia!

 

That is correct. I never said the Fed issues debt. The Treasury does that, but there MUST be a buyer of new Treasury issue. Recently that is mainly the Fed - several trillion dollars of it (about 80%) I think of all new issue. The Fed "facilitates" the US going deeper per capita in debt. If Treasury had to sell new debt only in the open bond market, many banks would see their balance sheets, rich with Treasury bonds now, tank.

Until a couple of years ago, China was the second main facilitator, but they no long want to hold US treasury paper. Trying (and some what succeeding) to reduce the dollar fraction in their reserves, but it is hard task, as US runs a chronic large trade deficit with China and they need to "park" their dollar surplus some where. It takes time to buy up companies, oil fields, etc.

 

The TPP had a "still birth." Is DOA. IE not even the two main partners (Japan & US) could agree on its terms.
The US economic influences is at an all time low.
Uncle SAM could not even stop "best ally" England, from leading the parade to join China's AIIB.

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Note in cartoon below, the British Flag man is leading the exit.

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China's economic power is rapidly growing. Now that the IMF's decision on making the RMB part of the SDRs has been delayed a year, it is essentially certain that will happen. (In late September 2016, as I recall.) Just before the presidential election. - What do you think? - Did Trump give the IMF a billion or so to get that shock delivered when it would help his chances, the most (If he is either the Republican or third party candidate.)?

 

Except that just isn't true. China's economy is in decline. Have you not been paying attention to recent news or are your biases preventing your from recognizing reality? As previously pointed out to you China's recent dramatic and extraordinary moves to rescue its economy were the nail in China's currency aspirations. Contrary to your assertion, Chinas dramatic devaluations were not a move to make its currency market driven. It was a desperate move to rescue its economy...kind of like a drowning man desperately grasping for anything to keep him afloat. Contrary to you assertion, devaluing the yuan did nothing to make it a more freely traded currency.

What the IMF did was to make no changes to the SDR (Special Drawing Rights) currencies for AT LEAST a year. It didn't forestall a decision. It made a decision. It's just not the decision you and China wanted. As pointed out to you, the IMF issued a white paper which concluded it wasn't appropriate to include the China's yuan as a SDR currency. Also as previously pointed out to you, the US economy accounted for more than half of the world's total economy after WWII, because the US was the only major industrial power to survive WWII in tact. Now over time, as previously devastated regions have recovered, the US accounts for less of the global economic pie. That is to be expected, that is a good thing. The US have gone from more than half of world GDP to about 25% of world GDP today. But that doesn't mean the US is in decline. It isn't. The rest of the world is just doing better. Economic growth isn't a zero growth scenario as you and those like you seem to think it is.

As I have told you before, China is a long way away from SDR status. China needs to be more transparent and it needs to be more market oriented if it wants to be recognized as a big boy. If China wants to be recognized as a big boy, it needs to play by big boy rules. And thus far, China has been unwilling to play by big boy rules and I don't see that changing anytime soon.

 

LOL, and you know this how?

Another uninformed conspiracy nut....the world does face significant social issues going forward. But that doesn't mean the end is nigh. Much of what you listed, have been ongoing issues for some time and are not limited to the US but are issues faced by all nations and some are just not at all true (e.g. Social Security going bankrupt next year) and some are just not relevant (e.g. bond rating agencies being sued). Bond rating agencies have been sued. People are sued every day. So what? It really isn't relevant.

And I cannot help but notice you have left off the most significant challenges like the role of automation in our lives. Soon technology will displace drivers with self driving cars and delivery drones. Drivers account for a huge number of middle class jobs. We will transition from a labor driven economy to a ownership driven economy. What will that world look like? That is probably the most significant challenge we face in the coming decades. What are the social and economic ramifications? It's huge, it's just around the corner, and you haven't even mentioned it.

Corruption in government an the influence of special interest money on our government, that is a big issue you left out. Election and ethics reforms are probably the most significant and urgent reforms needed and are the most challenging. Because election reform affects how decisions are made in Washington.

And then there is geopolitical instability created by dictator states like China and Russia. Now that is another serious crisis and one that worries me. Putin's aggression and China's aggression could very easily escalate into a WWIII. A few decades ago, we celebrated the fall of the Soviet Union and with it the threat of WWIII. Now all that is back on the table again.

Then there is global warming, we have always had the run of the mill challenges you listed. When I went to college many decades ago, college tuition was an issue then. I put myself through college totally without family help or support. My son is doing it today. But global warming is something very different, very new and very critical.

PS
Social Security isn't going bankrupt in 2016. Social Security if fully funded through 2034 according the latest trustee report, a year later than previously forecast. The disability fund will run out of funds in 2016 if congress doesn't appropriate more money. So maybe you are being disingenuous rather than just being uninformed. In the US pensions have mostly vanished in the public sector. The only people with pensions in the US these days are government workers, grandfathered pensions, and unionized workers. In private industry pensions have gone the way of the Dodo bird and been replaced with self directed pension savings like 401Ks and IRAs. The problems with 401ks and IRAs is that most individuals are not suited by temperament or education to invest their retirement savings and many employers offer very limited investment options. Employers have shifted the risk of funding and investing for retirement onto the employees. That is what has happened. And the fact is most employers are better able to invest retirement savings than their employees.

 

Your opinions /predictions are not realized facts (nor are mine) but they differ greatly. Mine are more in accord with the head of the IMF:

Note that was her POV on 16April2015. The decision has now been delayed until 1st of October 2016. Very probably to give China more time to take more steps like the recent one of allowing the market place to have greater control of the RMB / dollar exchange rate, and to let China widen more - to + or - 4% (instead of 2%) the band within which the yuan trade freely.

I am now very confident that the RMB will be part of the SDR by end of 2016. Are you brave enough to state it will not be?

 

kmguru said in post 12: " Dear Billy T:
I need some serious thoughts here since you are the best in Economics here. ..."

Possibly because I document my facts with links, photos (3 important ones in post 9 alone), and published cartoons, instead of just assert my opinion and make personal attacks trying to undermine any views that differ from my opinions. Most readers can recognize the difference being "hot air" and facts. Also to my credit, I don't stuff words into others mouth they never said and then demand they support a view they don't hold.

 

That's more than a little disingenuous BillyT, your citation occurred in April of this year before the curtain on China's economic woes was opened. You have always been confident. You were confident the US Dollar would crash with people running to dump dollars on October 31, 2014. Your confidence didn't help you, because that didn't happen. Now you have made the same prediction for this year.

 

LOL, yeah, you document with specious and fallacious "facts" and advertisements from purveyors of gold and silver.

 

Yes there are many problems, in most countries. I can't comment on all you list, so will just say a few words about China's

They are making real dents in their corruption problems - Sales of many luxury goods that were mainly used as bribes are way down.

China has avoided many development costs, both by stealing technical information and more important by clever use of its natural resources and huge market place as salaries have been growing IN REAL PURCHASING POWER, by double digits annually for several years. IE if you want to sell in China you need a local Chinese partner, who can learn what could be called "trade secretes."

Sometimes it is more raw materials than market that makes foreign firms partner up with local firms. World's largest and best maker of strong magnets, for many things from electric cars to wind turbins, a Japanese firm (name I forget just now) did that to get assured access to critical rare-earth elements the magnnets (and several other products) require.

China, believes in the "invisible hand" to guide the commercial market place, much more than the US does. Very light regulation, if any. If you think their is profit to be made by producing and selling X, you open that business and see if you were right - very little "red tape" and recently few officials even dare to ask for bribes.

Long term, high cost projects are centrally planned. Things like world most extensive high speed rail system, largest ports, greatest in human history urbanization of a rural population, Most efficient and modern airport, beautiful and built in less time than London spent discussing an expansion of Heathrow. (see photo of it near end of this post). But what really impresses me, is their ability to recognize and implement solutions that take many decades to complete. Beijing, critically dry with much less rain than California has, is just now getting water from more than 1000 miles away (the south of China, where there is ample supply. The design studies started in mid 1950, for that project, which I call the "Half Nile" as it moves slightly more H2O than half the Nile's total annual flow! (and delivers it 45 meters higher than the source.) Not possible for US to undertake expensive project, whose first benefits would be delivered decades after most Congressmen voting for them would be dead, or at least long retired from political life.
How they moves half the Nile's flow 7,2 km beneath the wide Yellow river on its way to NE China:

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A mile long with internal trains to move pasengers to/ from the oval parking and bus area in foreground to their gates.

BTW, China has bad pollution problems as most of its energy still comes from coal but they lead the world in producing and installing environmentally friendly systems. For example four times more photo cells each year than US does.

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