Skip to comments.Two Of The Biggest Problems In The Financial System Will Hit In 2013
Posted on 01/14/2013 10:55:48 AM PST by blam
Two Of The Biggest Problems In The Financial System Will Hit In 2013
Stock-Markets / Financial Markets 2013
Jan 14, 2013 - 03:11 AM
By: Graham Summers
This week is options expiration week: the week in which various call and put positions will expire. Wall Street is notorious for using these weeks to gun the markets this way and that in order to insure that the greatest number of puts and calls expire worthless. So expect the market to be even more volatile than usual this week.
Outside of this, the investment world is slowly emerging from its Central Bank policy induced stupor to realize two of our long-standing themes:
1) That European markets are highly overvalued based on their underlying fundamentals.
2) China has an inflation problem and cannot print money non-stop to keep its economy on track.
Regarding #1, Bloomberg ran an article over the weekend expressing concerns that the European markets are overvalued. The truth of the matter is that the entire European banking system is insolvent. There is simply no other way to describe a banking system that is leveraged at 26 to 1 with net assets at nearly 300% of GDP (Europes GDP is $16 trillion and its banking system is $46 trillion).
However, the mainstream media can never tell the ugly truth here (doing so would trigger a panic). So instead were going to see concerns voiced that Europe is overvalued and that European economies need to pick up because the ECB is essentially tapped out.
This is about as close as well get to the media admitting Europe is bust and out of solutions. The fact that this story is already showing up in the media should be a warning that the next round of the EU Crisis is likely around the corner. Both Spain and Greece have recently admitted their banks are at negative value. Expect the news to worsen out of Europe in the coming weeks. What happens if the markets call Mario Draghis bluff? Well find out this year.
Regarding #2, roughly 30% of Chinas population lives off of $2 per year. Food inflation hits this country very hard. And the Government is now stuck between a rock (a slowdown in its economy) and a hard place (higher inflation that results in mass civil unrest).
As a result of this, the Government has to focus on managing expectations both inside and outside of the country. Inside of China this means making public displays of cracking down on corruption to keep the population calm (many Chinese area beginning to ask themselves, why should I go along with a system in which Im not getting wealthy but corrupt officials are? The Government is also taking measures to control prices (see the ongoing rise in Chinese imports despite the economic slowdown) in an attempt to keep inflation at bay.
Outside of China, the Government needs to send signals to the rest of the world that it will not be engaging in massive stimulus without triggering a capital run. Notice that the language coming out of the new leadership is carefully crafted: new party leader Xi Jinping has openly stated that China will not be pursuing high growth rates through stimulus going forward.
The message here is that well engage in stimulus, but we wont be pumping anywhere near the amount needed to hit double digit growth. The investment world is totally convinced China is going to pump $1 trillion or more into its economy. Chinese officials are denying this. Take note
typically when the investment world finds out its wrong there are serious fireworks.
roughly 30% of Chinas population lives off of $2 per year.
Sheesh and I just spent 11 bucks at the Naval Academy Club for lunch.....I just sent over 5 years worth of their income...that is astonding.
I was going to comment on that one too... I know stuff is cheaper in other Countries -- but no way. That is less than a penny a day. They must've dropped at least two decimal places...
I’m tired of waiting for this to happen. The elites are really good at defying the laws of physics and prolonging the inevitable at the expense of everyone else’s savings.
After all, Japan is still in the doldrums and Obama got re-elected despite the most irresponsible economic policy in this nation’s history.
Feudal lords taxed people (mostly materials, not cash). In addition, peasants worked for the local lord and built castles, roads, cathedrals, etc. No money changed hands, but you could be fed for doing the work. That was a form of wealth redistribition -- the government taxes everyone, and then has people perform work, and gives them the taxes (food) that was collected.
If you look hard, you can see that America still follows an economic system that has some of these features. In other countries, it is even more obvious. People in China make $2 a year? Sure. They work, and the government keeps them from starving. Cash is really not required.
In the cities, things can be different. As the old Medieval saying went: "City air makes you free." The city burghers created the bourgeoisie -- the Middle Class that actually used money for daily living. Commerce and craftsmanship created real opportunity.
Note that in the Chinese countryside, the people are not free, but must worry about survival. Note also that we in the West have turned this around -- most of the people in our cities are not "free" but are wholly dependent on government handouts.
We are all so much closer to serfdom than we like to think.
Oh yeah. I agree 100 percent with you...definitely missing decimal places.
Most people like the idea of serfdom, so long as it doesn’t offend their precious post-modern sensibilities.
Real freedom requires virtue, hard work, and the ability to accept failure.
Serfs don’t have to do any of that, their lives are structured for them and they don’t have to think or do anything other than what they’re told.
When I was in college several years ago, the first global online game took off. I remember chatting with some players in China that were paid $1 a day to play the game for 12 hours. They would farm game gold to sell to American kids on Ebay. There were four Chinese men living in a small room with a bunk-bed. They would hot bunk. Two guys would sleep while 2 guys would farm gold and the bed was never empty.
All the pretend game gold was transferred to a "boss" who would do the Ebay listings and pay the workers. I don't know how many farmers they had total but it was lots. They were jerks in the game but to them this was a high stakes job with a real paycheck on the line. Talk about sad! Still that would be a couple hundred dollars a year, not just 2!
It’s good to get more accurate information, of course. But if 30% of the people in China are living off $700 a year, it still tells the same story. I’m sure it is a more comfortable existence than a mere $2 a year, but even $700 a year won’t pay for many luxuries.
If 30% of the people in China make very little (whether $2/yr or $700/yr) it means that they won't be buying the stuff we produce, but that we will be buying the stuff that they produce.
America will have jobs at home when we open up new markets for what we produce. At only $700/yr, China is not a fully exploitable market for us. That's bad for them, and bad for us.
A real wake-up for me was reading about the East Germans' disappointment at finally having freedom. Once the initial euphoria had passed, many actually missed the good ol' Communist days when everyone was given a job and a place to live.
We're halfway there. You can get a free place to live here now; we just don't bother with the job part. No worries -- here's your debit card. No shame, dude!