Juggling Dynamite

In the midst of the 2007-2009 bear market there was a naive phase where bulls were optimistically chattering about Chinese Wealth Funds riding to the rescue to scoop up over-valued assets and prevent prices from declining further. We know how that panned out. Lately we have heard many of the same misguided comments about how China will backstop the Euro zone and stop the forces of gravity from knocking bubbly prices back down to earth. As I have said throughout, there is not enough money on planet earth to stop the natural correcting forces of a recession and cyclical bear market once it gets underway.

Jim Chanos, founder of Kynikos Associates Ltd. hedge fund, at the Clinton Global Initiative in New York yesterday, debunks many of the China miracle myths, discussing China’s economy, debt and real estate market, “their property market is hitting the wall now.”

“If we assume that China will grow total credit this year between 30% to 40% of GDP, and half of that debt will go bad, that is 15% to 20%. Say the recoveries on that are 50%. That means that China, on an after write off basis, may not be growing at all. It may be having to simply write off some of this stuff in the future so its 9% growth may be zero.”

All important food for thought for stock and commodity bulls today. He also makes some important points on the belief in further bailout hopes for Europe.

Watch his video interview here.

Surprise find. Today I was looking for an old article on my hard drive and found a long-lost copy of the second segment of a two-part interview I did with Jon Chevreau of the Post on February 6, 2008. The first segment was uploaded to YouTube long ago and many viewers have asked me since for the second part. At that time, we were not able to upload segment 2 to YouTube as it was over 10 minutes in length and the Post somehow lost part 2 of the video from their website.

I did not think we had retained a copy until I found it in an unlikely file today. In any event, here it is at long last.

As I watch today, I am struck by a few things. At that time I was being labelled a bear and a pessimist because I was warning that asset prices were over-valued and at risk of the next big cyclical decline in the secular bear that began in 2000 and that in that environment, stock prices had the potential to retest the 2002 cycle lows. Most financial folks scoffed that this was ridiculous. We are no clairvoyants. But because we are humble market historians and disciplined risk-measurement takers at our firm, we were able to get a top down view of probable outcomes. In doing so one can take proactive steps to protect capital before the carnage.

When Jon says that the decline of then 20% on the S&P was already big and surely P/E’s of “14” were attractive and a buying opportunity, I said that the problem with that argument was that the “E” or expected earnings of the “P/E” quoted were overly optimistic and likely to decline further which would expose stock prices as still being too rich. This is precisely my concern again today.

Mostly I am struck today by how my comments in February 2008 (the S&P went on to lose another 30% and the TSX another 35% before they bottomed 13 months later) are very applicable to our concerns about the downside risks from where we are today in September 2011. Time will tell…

Bill Clinton speaks to the Daily Ticker’s Aaron Task at the Clinton Global Initiative’s annual meeting in New York. Clinton has some good ideas on how America can now retool itself for greater energy efficiency, rebuilding infrastructure and self-sustaining farming and how all of this will help create the desperately needed intelligent ‘made in America” jobs for the 21st century.

“While the development of a global economy and the information technology revolution caused upheaval for many workers, Mister Clinton says these trends were accelerated by “the adoption of two bad ideas”:

Turning Stakeholders into Shareholders: About 35 years ago, the notion of what a corporation is changed, Clinton notes. Previously, corporations were “more or less” equally responsible to shareholders, employees, customers and the communities where they operated. “Now, shareholders are up here and everybody else is way down there.”

Government as the Enemy: Clinton cites a “30-year anti-government rant,” which is a uniquely American phenomenon, as another root cause of joblessness. “Instead of figuring out how the government and the private sector can work together, saying that ‘government is the source of all problems and if we just choked it off, never another regulation, never another tax, never had another program all will be well.’ There is not a single, solitary example on the planet where that’s worked, including in America.”