Juggling Dynamite

Each time I hear financial pundits declaring China's domestic demand as the new engine of the global economy today, I figure they must be smoking dope or desperately reaching for an investment thesis to sell. Contrary to popular hope, China today needs US consumption if they want to keep their over-grown economy afloat. Yes there are over a billion people in China. But with a median household income (in US purchasing power parity terms) of $5,380 a year, China needs western buyers to sell to. The only way to fix this imbalance would be for Chinese workers to get a huge pay raise and start spending a lot more (they currently save some 40% of their income). It seems that their communist government is unlikely to support huge pay increases; and they certainly seem opposed to an increase in purchasing power through a much stronger Yuan.
As discussed in this clip, with $847 billion in Treasury securities, China is the largest foreign holder of U.S. debt. China’s export industry would virtually collapse without the U.S. market. “China this year has run up a $145 billion trade surplus with the U.S., more than the U.S. deficit with the next seven- largest trading partners combined,” according to Bloomberg.

US States poised to be the next credit crisis:

“The similarities between the states and the banks are extreme to the extent that states have been spending dramatically and are leveraged dramatically,” she said. “Municipal debt has doubled since 2000, spending has grown way faster than revenues.”
Whitney also offered another warning about banks, saying a sharp dropoff in trading revenue and a double-dip in housing would hammer at fourth-quarter earnings… Whitney reiterated her call that some 80,000 financial services jobs will be lost this year, based on an expected 25 percent sequential decline in equity trading and “low single-digit” returns on equity.
On top of that, she said housing numbers will begin to worsen. The monthly Standard & Poor's/Case-Shiller housing report earlier in the day signaled that home prices were flattening but stabilizing; Whitney said that reading is going to get progressively worse.
“This quarter is going to be unique for the banks because this will be the last quarter when they can dodge the credit bullet,” she said. “We think October, after the banks report, you'll see a really ugly Case-Shiller number, which means the fourth quarter is going to be very tough for banks.”

We caught the new Oliver Stone picture: Wall Street 2 this weekend. I thought it was reasonably well made, entertaining. Does a good job of explaining moral hazard and why rescuing people from their financial mistakes is typically a recipe for repeated disaster.

It also does a good job of reminding viewers of the 'feeling' of the 2008 financial meltdown. (Well actually every financial meltdown; they all have a similar feel about them it seems) For those that have grown complacent again with market risk in the world today, the movie offers another chance to recall what that risk really looks like and to remember why those with something to lose, don't want to be left swinging in the wind of the next market storm. I have found that the more one understands about how markets truly work, the less one ever feels complacent to be in them.
For me there was nothing surprising in this film. The only bad part was the reminder that nothing about our system has so far been “fixed” today. In many ways human nature around money and markets is innate, not fixable. That is why we need well defined rules, enforcement, prosecution. At least after the first movie in 1987, the bad guy was caught: Gekko was headed off to jail.
This time, two years after the storm we have most of the major culprits not in jail, in many cases not even in shame. Most are still in positions of power or packaging out to the lap of luxury.