Juggling Dynamite

What I find surprising about the big shift in market sentiment the past few months is not that some players have resumed their Reckless Myopia— humans always come back to speculative madness eventually. But the surprising part this time is that it has resumed so quickly. Usually it takes at least a few years for market mania to resume; this time crazy has gone from zero to 60 in a few short months.
Another thing I have always found fascinating about market history is how universal human behaviour is through distant cycles and distant lands.
This next series of interviews with independent Chinese Economist Andy Xie draws these remarkable parallels between China and America and our present credit bust cycle and the Asian credit bust of 1998 as well as the Japanese banking crisis of the 90's and thereafter.
What I really like about Andy Xie is that he is a pragmatist. He has lived in America and is on the ground in China. He knows both countries and cultures well. He makes the real life, big picture points to help us understand the incredible economic links between China, America, our consumption habits and reckless behaviours.



Xie also makes some goods points about what the Obama administration has done wrong to date in handling the American credit crisis.
I keep hoping that Obama will snap out of his daze on these issues and see the need to fire his present financial advisors including Bernanke. (Maybe this is my bout of hopeless optimism.)
Maybe after he announces his Afghanistan plan tonight he can revisit a strategy for the financial stewardship war being lost right now at home.
Watch this clip from Dylan Ratigan on point:

Further to my recent comments about the weak US dollar being the funding currency for risk-taking around the globe the past 8 months, today we see the flip-side of this trade as risk aversion roars back amid reports that Dubai World may be defaulting on its debt. The natural product of risk aversion today is U$ dollar up, risk assets down:

Dubai Sends Risk Aversion Soaring
Meanwhile chronic over-production continues to be a huge problem for China and the rest of the world. The massive government stimulus this year has only exacerbated the problem by insisting on greater and greater production and investment, despite much diminished demand. It will take a long time for stock-piles to work down both of raw goods and finished products. These issues were re-emphasized today in a study released by the European Union Chamber of Commerce in China:
“The crisis has throttled demand for exports from China at a time when even more investment, in the form of the Chinese government's massive stimulus package, is being pumped into building new plants and adding unnecessary capacity.
“As a result, the problem is actually getting worse in many industries,” the report said.
The State Council acknowledged in August that overcapacity was blighting many industries and that local governments were expanding capacity “blindly”.
The cabinet subsequently singled out iron and steel, cement, electrolytic aluminum, glass, coal chemical, polysilicon and wind power equipment as the worst offenders and announced steps to rein in their expansion.”
See Chinese Overcapacity is Worsening, EU Chamber Warns

The Baltic Dry Index (BDI) collapsed in 2008 and into the summer of 2009, then rallied sharply the past 2 months. This has encouraged some to conclude that global shipping is now in recovery. The problem is that as a leading indicator the BDI has become distorted recently to more of China stimulus indicator than a global trade indicator. Less than 10% of bulk imports have been coming to America, with about 50% going to China for stimulus driven stock-piling and re-stocking. In addition an unusually large surge in new ships coming on stream this year and next is likely to drive shipping prices down again over the coming months as many vessels bid to carry below-trend global trade volumes.