President’s Weekend and I should be skiing… but I’m not… don’t ask why (sore subject)…
The “American System”: Chinese economic growth plan & its many predecessors | Michael Pettis (MacroBusiness)
Having reached a critical juncture for future success/failure, China’s growth model follows all the “investment led” developing markets before it: USA (starting in 1820s), Germany (1930s), USSR (1950s), Korea (1960s), Brazil (1970s), & Japan (1980s).
Based on Alexander Hamilton’s works, this “American System” has 3 main tenants:
1. Infant industry tariffs- erect barriers against more productive/cheaper foreigners, steal their intellectual property & encourage innovation via domestic competition (China has erred recently by choosing large national champions over small businesses)
2. Internal improvements- government must spend on infrastructure, until its tax revenue growth rate faces diminishing returns (China has overinvested in infrastructure & should reallocate to its legal system)
3. National financial system- banks must take risks on new ventures & write down bad loans to purge the system of zombies (China has backstopped its SOEs to prevent bankruptcies)
Rail traffic weekly: More improvement, big bounce from oil & gas | Association of American Railroads (AAR)
Carloads -5.7% and Intermodal +5.7 (cumulative ytd volume y/y); -2.3% and +7.7 respectively (vs. this week last year).
6 of 10 carload groups posted gains: Petroleum products +65% & minerals +14; grain -17.3 & ores/metals -13.5.
[Another w/w improvement, as weak ytd start is reversing; very strong bounce in petroleum volumes.]
Analyst research: 3D Systems (DDD) is a “bubble stock” | Citron Research
Short seller’s research report compares hype around 3D printing to Dot.com, real estate & alternative energy bubbles. Cites low R&D spending, aggressive M&A strategy & misleading/promotional rhetoric from management teams.
$DDD $SSYS $XONE
United States & European Union discussing free trade pact | Business Insider
Part of President Obama’s State of the Union address, US/EU free trade pact talks will resume, as confirmed by European Commission today. Estimated to add 1% to each region’s GDP.
The coming US Dollar bull: Consequences of a strong USD | The Big Picture
Because of USD reserve status, loose monetary policy doesn’t trigger capital flight as in other countries, hence the Fed is more tolerant of inflation than any other central bank. Since Bretton Woods system ended in 1971, USD has been in bear market 70% of time (only 2 bull markets).
1. EUR will weaken- since the EU’s done nothing to close competitiveness gap between north & south, the core is importing inflation
2. JPY bear market- reversing 4 decades of strength (+400% gains against USD) to end deflation, end fiscal stimulus (accumulation of national debt) & reverse surpluses (due to age demographics)
3. Emerging Market crisis- USD bulls both triggered EM debt crises (1980s Latin American & 1990s Southeast Asian); BRICs in trouble today over next 24 months
This is not a fluke: Deflation is returning & the Fed will need more QE | Bank of America Merrill Lynch (BoA)
Five forces causing deflation:
1. Excess capacity- output gap between 3.6-5.6% (widest since 1982 recession)
2. Labor costs- 7.9% unemployment putting downward pressure on wages & salaries
3. Imported deflation- Commodity prices trending down & now food/energy components won’t contribute to gain as in 2011
4. Inflation expectations- 5y5y breakeven has crashed back down to its 10y average
5. Monetary transmission mechanism broken- banks aren’t lending growing excess reserves
Rising rents due to low vacancy may counteract all this.
The oracle of Boston: Seth Klarman (Baupost) | The Economist
Profiles the quiet hedge fund manager, who seeks ‘value investments with a margin of safety.’
“[He’s] patient and confident enough to do nothing. He currently has 30%–and has been known to have as much as 50%–of his portfolio in cash” and has even bought distressed assets from distressed sellers (e.g. Lehman debt & European bank loans).
Bankers turn sunshine into bonds | Financial Times (FT)
Bankers are close to securitizing business & household solar panel leases, packaging them into bonds backed by cash flows.
#CLO #ABS $TAN
The Federal Reserve’s POMO portfolio & their exit strategy (or lack thereof) | Peter Tchir (TF Market Advisors)
Full analysis of POMO portfolio by maturity and ownership (share as percent of outstanding):
While the Fed only owns 16% of all T-bills & bonds, it controls almost 30% of all interest paid (due to Operation Twist’s skew toward long end of curve), including 70% of 8% coupon CUSIPs, which leaves all the 1-2% cpns in the marketplace. That way, the Treasury effectively pays its biggest interest expenses to itself.
The Fed can’t & won’t unwind the 10y+ CUSIPs, which removes a $2T seller from the market and keeps rate low for a long time.
The Fed’s bailout of Europe continues in January | Zero Hedge
$237B has been injected into foreign banks ytd, per the growth of foreign banks’ excess reserves with the Fed. Since domestic banks’ reserves have declined, QE4 seems to be subsidizing European banks & EURUSD.