Consider the Chinese economy as a winery operation. The foot-stomped sludge of crush grapes represents investment, some combination of public, private and foreign capital. The tap that will eventually be shoved into the cask is the means of extracting the finished product, which for our purposes is analogous to sustainable economic growth. Like all metaphors, this is an over-simplification, but it does embody the time lag between investment and output as the fermenting period. (The biggest flaw clearly is the considerable output generated immediately by the investment – construction revenues and the spent wages of construction workers, etc, but stay with me for a second.)
No national economy operates frictionlessly at 100% efficiency. Any misallocation of capital, whether bad tax policy, inefficient social safety net spending, whatever, implies that some investment is wasted. There are, in other words, leaks in the wine barrel.
The issue for the China and industrial metal bulls at present is the state of integrity of the wine barrel. The bullish scenario for China is dependent on a resurgence of investment after a period of credit control designed to slow inflation. This period, however, also corresponds with further revelations regarding capital misallocation in the economy, most recently Shedlock’s piece today (“China’s Deserted Fake Disneyland”) outlining the severe declines in Chinese real estate prices. The world’s best blog, Financial Times Alphaville, has previously outlined the dependence of regional government finances on revenue from leasing land and while government finances remain extremely opaque, the large scale use of Special Purpose Vehicles to finance real estate transactions has been documented. Falling land prices are a major threat to the viability of these structures.
The Chinese government will undoubtedly end credit restrictions if growth falters and indeed, they are already doing so. The wisdom of investment in the China Story will depend on whether a renewed surge in credit, our crushed grapes flow, will merely leak out of the cask before it can be tapped.
Europe: The inner workings of the Eurocracy have been maddeningly unintelligible of late, most notably with its seeming ignorance of the market’s avowed belief that the ECB must provide massive liquidity before the crisis is over. The Washington Post’s Ezra Klein has, at least in my opinion, found the most believable framework for understanding political motivations. In Germany’s High Stakes Bet, Klein concludes that Germany is playing chicken with the EMU, using the crisis to bludgeon Southern Europe into conformance with the German model of fiscal prudence. When the Germans are satisfied, they will pave the way for “QE Europe” to repair government fiscal health and recapitalize the banks. No other theory makes as much sense.
Clarification for “OWS and Why Anybody Not at Their desks at 7:30 is a Nobody”: I knew, writing that post, that it would generate some annoyance and was sorely tempted during the process to soften it up. But I didn’t and spent a good part of the day reading emails through my fingers in the same way I’d watch “Saw II”. I am not one of those people who enjoys pissing people off or is likely to annoy readers for the sake of page hits.
In order to feel like there’s any point in blogging at all, it is important to choose topics that do not seem to be discussed elsewhere. Yesterday, unfortunately, this led me to a depiction of the worst kind of bigoted chest thumping behavior apparent in finance. But, given that I stand by the accuracy of the description, editorially I felt it was better and more interesting to tell the ugly truth than water things down into acceptable, less accurate platitudes to avoid offense.
This is not to say that if I re-wrote the piece I wouldn’t change anything. The title was a bit, umm, blunt, but most of them are – it’s a big Internet and marketing is an ugly business. I certainly would have been clearer as to the targets of derision, because I have never heard it focused on professionals in most other fields. I should have specified that the feelings of superiority I described where more reserved for the professionally disaffected, the protestors who rotate from G20 meetings to any rally likely to be featured in the NY Times the next day. I would also have mentioned the interesting fascination among financial professionals with people who “work with their hands”, a feeling consistently strong enough that it would surprise most outsiders. I attribute this to the lack of “tangibility” in finance that makes the thought of being a bricklayer, and building something visible and lasting, very attractive. People who build their own businesses, regardless of scale, are also targets of admiration.
In the end however, the self-congratulatory arrogance of higher-end financial professionals is, in my experience, a general fact. It is also a fact that when the alarm goes off at 5:00am, motivating yourself to get up often involves in internal monologue featuring a myriad of half-truths about how important you are in the grand scheme of things, even if you know most of them are indefensible. A lot of the locker room-style humor on trading floors, really the primary source for the material from yesterday’s post, follows a similar pattern and it is not always clear the extent to which people actually believe it, or are just venting or trying to make someone else laugh. It is nonetheless there and at least you now know about it.