There appears to be a typographical error in the title of this post but the error, alas, is fully intentional. We are, once again, playing macabre roulette with the global economy and China's National Development and Reform Commission (NDRC) ended the week with a domestic economic stimulus announcement that rang the Pavlovian bells for a pack of hungry dogs who bet up equities when that bet is empty. By announcing nearly 1 trillion yuan ($157 billion) in approximately 60 large scale infrastructure projects, President Hu Jintao and NDRC Chairman Zhang Ping's announcement was not merely a shot of adrenaline for the sagging GDP statistics (still multiples greater than the
On June 15, 2012, the World Trade Organization determined that Chinese import duties on
specialty steel were "inconsistent" with global trade
guidelines. These tariffs were China's response to what it saw as
anti-competitive "buy American" subsidies which were a cornerstone of
foundering economic stimulus package. And
to be clear, high-tech steel has not been the only wishbone of contention
between the two trading partners. China prevailed in its complaints against the U.S. on tires, steel, and other U.S. tariff and
trade restraint issues recently and is currently in a heated dispute over its
solar panel exports. A year ago, U.S.
chicken producers cried fowl (another intentional typo that's just too irresistible)
on Chinese tariffs on U.S. chickens - a tariff China levied under the premise
that U.S. chickens were fattened on subsidized corn feed - an allegation that
doesn't take any conspiratorial insight to readily confirm.
So this week's infrastructure announcement (which, just to keep our heads straight represents about the same investment as
official Hollywood-esque "culture budget") was supposed to be a
windfall for the global economy and pull us back from the edge of the precipice
of fiscal despair. This "news"
came on the heels of European Central Bank President Mario Draghi's "new
plan" (which seems to be terribly reminiscent of all his "older"
plans) to lower interest rates for euro zone economies and provide short term
(1 to 3 year) "sterilized" debt. While most of you have no idea what sterilization
of debt is (and, lest you think that it means that it cannot procreate and make
other bad baby debts, would we be so lucky!!), what you need to know is that
the last time the eurozone tried to deploy this strategy, it came up about 9
billion euros short on the heels of a 23 billion shortfall the time before. In other words - it didn't work! And, the U.S. Department of Labor released
crappy jobs data that included downward revisions on previously less crappy
data estimates from earlier in the year. By the way, for those who have a mathematics
proclivity, the following represents the economics equation of the week:
China Roads and Sewers + EU Money laundering - 365,000 U.S. Workers out of the Workforce = Stock Market Euphoria
Δ¥1tC + €i2 = -1 - 44% U.S. Labor = Irrational Exuberance∞
And all of this craziness is because "the market" is pretty sure that the events of the past few days will force U.S. Federal Reserve Chairman Ben Bernanke to lower interest rates making money cheaper still. When one has compressed yields to zero, the utility of this anticipated Fed intervention is fascinating as the next step will be having investors actually pay for the privilege of owning dollars (and you thought servicing fees on your checking account was bad).
So back to our steely rubber chicken where we embarked on this journey a few paragraphs ago. The much ballyhooed stimuli aren't. And worse than that, the masters of propaganda alleging that these are positive steps are overlooking several vital long term threats which cannot be avoided and whose pain will be felt quite broadly.
First, the winners on the
China announcement will be those
countries who play ball with construction commodities - steel, concrete and the
like. And, to be clear, while a few
mining and refining technology suppliers in the U.S. may pick up a few extra
orders, it's far more likely that we'll see the October surprise coming out of
the Communist Party's government transition which will award business to those
countries who have been most accommodating to the Chinese. For those of you who weren't watching, the U.S. is not on
the top of that list and Secretary of State Hillary Clinton's recent visit set
us back further down the most-favored-nations hierarchy.
Second, by pricing our debt at excruciatingly low levels, we're relegating our debt purchasers to fiduciaries alone - in other words, the only buyers are those who are compelled to do so by statute or mandate. However, these buyers of debt use debt as a means to fulfill long-term obligations (like insurance, retirement accounts, pension benefits, etc.). By 'solving' the short term stimulus rancorous challenges, we're undermining the future earnings of these institutions and that means that we'll all pay in multiples later. And with Social Security holding the vast majority of our national debt, we'll 'reform' Social Security regardless of what happens in November as the 'promise' of a retirement benefit is both unfunded and now insufficiently yield-generating. No matter how you vote in November, the end of FDR's New Deal is all but certain.
Third, while many U.S. companies are waiting to get their fingers on China's infrastructure spend, this announced domestic expenditure may very well be the tipping point where China's mandatory technology transfer strategy of the past two 5 Year Plans (executed by the NDRC) rears its ugly head. Few corporations in the
U.S. or Europe
have wanted to talk about this phenomenon. For the uninitiated, China has, for
a decade, demanded that when it buys technology from international
corporations, those corporations must frequently transfer technology, patents
and know-how along with the purchase. What
this means is that large companies like GE, Siemens, and others have assigned to
or developed co-owned rights to their intellectual property with the Chinese government. Now, rather than dictating the price for goods
and services, these same companies will be invited to grovel for whatever
crumbs their customer is willing to share.
We've got about 6 weeks before a new
emerges. The ascension of the
"Fifth Generation" leadership will take place in October and the
rising leaders of China
will, for the first time, be represented by a number of senior officials who were
trained in the U.S. and Europe. Many of
the rising stars have real executive experience in companies like SINOPEC,
China Telecom, several of the banks and industrial behemoths. With their business training and corporate acumen,
that is rising is one that is more likely to be far more savvy than their
predecessors. With an eye towards
economic conquest for domestic "harmony" and pacification, the
will be far less collaborative with those who seek to rely on historical
What this means to the rest of the world is that the markets at week's end bet wrong. Sure, there's the irrational exuberance that is merely our modern incarnation of the Dutch Tulip craze or John Law's giant swindle in the Mississippi Company. Astute investors should know that the Chinese infrastructure spend is a jobs and commodities play. Astute investors should know that the ECB concessions are neither new nor announcements - they're a cheap magic act that accomplishes no structural benefit. And We the People should see through the pressure on the Fed to realize that greater intervention today will merely accelerate the harm to our social fabric tomorrow. Social Security's creator famously said that, "In politics, nothing happens by accident. If it happens, you can bet that it was planned that way." Little did he know that his "sacred obligation" would fall prey to the hyenas who seek to pick the last sinews off the bones of system upon which they've fattened. Get used to rubber chickens because that's what comes next!