The Optimistic Thought Experiment - Thiel

However that may be, there is no good scenario for the world in which China fails. The short-term consequences of such a failure would include a lack of cheap capital from a Chinese savings glut; fewer cheap goods from China; massive political unrest within China; and deep recessions throughout East Asia and most emerging markets, whose derivative growth is the caboose to China ’s locomotive. And so we are led to ask: To the extent that China involves a leveraged play on globalization, should one therefore simply invest in the Chinese stock market? In our optimistic thought experiment, one might expect China to outperform the rest of the world in every good scenario.

If there is a catastrophic approximation embedded in this analysis, then it consists of the conflation between China as a real economy and “China” as a financial instrument. To say the least, there are many eerie parallels between the Chinese stock market of early 2007 and the Nasdaq of early 2000: an abstract story of long-term, exponential growth; rampant speculation; and unprofitable or overvalued companies.

One intermediate possibility is that the China of 2014 will be like the internet of 2007 — much larger, but with winners very different from the ones that investors today expect. The largest New Economy business is Google, a company that scarcely registered in early 2000. Might it also turn out that the greatest Chinese companies of 2014 will be concerns that are private and tightly controlled businesses today, rather than the high-profile and money-losing companies that have been floated by the Chinese state?

At the very least, outsiders need to understand that China is controlled for the benefit of insiders. The insiders know when to sell, and so one would expect the businesses that have been made available to the outside world systematically to underperform those ventures still controlled by card-carrying members of the Chinese Communist Party. “China” will underperform China, and a “China” bubble exists to the extent that investors underestimate the degree of this underperformance.²⁸

This limitation also may be framed in terms of globalization. In important respects, “China” as a financial economy is sustained by the absence of globalization — in particular, by the enormous amounts of capital trapped within China’s borders that must either suffer slow death from inflation (now running higher than Chinese bank deposit rates) or brave the acute sense of vertigo of the elevated stock market. Because the free convertibility of the renminbi would dampen equity speculation, a long “China” position is not a forecast that financial globalization will succeed, but rather a bet that its internal contradictions will persist.

Study other depresssions

"Over the past 35 years it has seemed as if everyone in finance has wanted to be someone else. Hedge funds and private equity wanted to be as cool as a dotcom. Goldman Sachs wanted to be as smart as a hedge fund. The other investment banks wanted to be as profitable as Goldman Sachs. America's retail banks wanted to be as cutting-edge as investment banks. And European banks wanted to be as aggressive as American banks. They all ended up wishing they could be back precisely where they started." (The Economist, "A special report on the future of finance," January 24, 2009, p. 17.)

Gartman: Grains vs Gold

Grains are trading at historically low levels compared to Gold, as it Oil, probably anyway.

Gartman stock picks

Arch Coal at $12.50, FCX at $34 - down from $120, US Steel at $18, - down from $180! Imperial Sugar at $5.50, down from $35 two years ago. Others SU, CHK, BG, AA, DOW, SFD, DRYS, NSC, ACI, ANDE, GE?

Another Gartman play is Aussie and Canadian currencies against the dollar - the bet being that these natural resource rich countries will get bid hard buy China when it gets back going again.

Hedge fund investors turn to gold in bet against central banks

"The size of the Fed's balance sheet is exploding and the currency is being debased. Our guess is that if the chairman of the Fed is determined to debase the currency, he will succeed," Mr Einhorn wrote to investors.

"Our instinct is that gold will do well either way: deflation will lead to further steps to debase the currency, while inflation speaks for itself."

Expansion of LNG threatens gas glut

By Ed Crooks

Published: March 8 2009 18:44 | Last updated: March 8 2009 18:44

A huge expansion of global capacity for producing liquefied natural gas is set to bring additional volumes on to an already depressed global market.

Plants scheduled to come on stream over the next year will increase global LNG production capacity by 30 per cent, putting downward pressure on natural gas prices worldwide, particularly in the US and Britain.

LNG – gas super-cooled to -160°C so that it can be transported by tanker – has been the fastest-growing fossil fuel of the past decade. It provides only about 7 per cent of global gas supply but plays an increasingly important role in meeting marginal demand.

A wave of LNG projects approved in the middle of the decade – in particular the vast facilities in gas-rich Qatar – is due to come on stream this year and next.

Some of their production has already been sold on long-term contracts but much of it will go into spot markets, where prices have fallen steeply over the past year.

Professor Jonathan Stern of the Oxford Institute for Energy Studies said that gas demand had “gone off a cliff” worldwide, with electricity generators and industrial users such as car manufacturers cutting their use sharply.

Prof Stern estimated that Asian and European markets could shrink by 10 per cent this year.

Asian buyers are using flexibility in their contracts to take less gas, leaving sellers to look for markets in the US and Europe.

Several new terminals for receiving LNG are also coming into operation in the first half of this year, including Sabine Pass in Louisiana, South Hook in Wales and Rovigo in north-east Italy.

Much of the surplus gas is likely to head for the US. LNG from Qatar costs about $2.50 per million British thermal units to deliver to America, according to Frank Harris of Wood Mackenzie, a consultancy.

That makes it competitive in the US market, where the Henry Hub benchmark price was at a 29-month low of $3.93 per million BTU on Friday.

Mr Harris said that companies with LNG projects due to come on stream this year “would not be rushing hell for leather to get production at full tilt”, and the additional volumes coming on to the market were likely to be well below the planned increase in capacity.

However, projects under construction cannot be deferred indefinitely. So if the new plants do not reach full production this year, they are likely to do so next year. “2010 may be the really horrendous year,” Mr Harris said.

Nouriel Roubini with John Mauldin

Some of these countries are going to enacting structural reforms – China, India, Vietnam, even some of the emerging European ones; and therefore, once they get out of this mess, there is going to be high growth, highopportunities and the asset classes that have been beaten up even more than US equities are going to have a rally. But in my view that might be more like a 2010 story, or even later. This year I just see significant downside risk across the world. People ask where they might invest outside the US. Unfortunately, this is a synchronized global recession. Therefore, I don’t see many places to hide.

Eastern European economies borrowed big in Swiss Franc and Euro from European banks, and the East European currencies have plummeted skyrocketing the debt owed. Thus the East European countries are sunk as are the EU based banks that lent to them. This is a HUGE story that is just beginning to play out.

"Over the past 35 years it has seemed as if everyone in finance has wanted to be someone else. Hedge funds and private equity wanted to be as cool as a dotcom. Goldman Sachs wanted to be as smart as a hedge fund. The other investment banks wanted to be as profitable as Goldman Sachs. America's retail banks wanted to be as cutting-edge as investment banks. And European banks wanted to be as aggressive as American banks. They all ended up wishing they could be back precisely where they started." (The Economist, "A special report on the future of finance," January 24, 2009, p. 17.)

Stephen Roach - Grow now, ask questions later formula will end in tears. He points out that the 1997 Asian Contagion was in large part alleviated by policies that got us in to the current mess. Massive trade in balances, where the U.S. sucked up all Asian exports. Jump-starting U.S. consumer consumption will not re-set these imbalances. Asian governments want the same thing - to get the US consumer buying again - because that is what their economy is geared for.

This will not be a recipe for future happiness.

The Daily Reckoning - Grain Prices to Rise

The net effect of the failures in banking is that a lot of people have less money than they expected they would have a year ago. This is bad enough, given our habits and practices of modern life. But what happens when farming collapses? The prospect for that is closer than most of us might realize. The way we produce our food has been organized at a scale that has ruinous consequences, not least its addiction to capital. Now that banking is in collapse, capital will be extremely scarce. Nobody in the cities reads farm news, or listens to farm reports on the radio. Guess what, though: we are entering the planting season. It will be interesting to learn how many farmers "out there" in the Cheeze Doodle belt are not able to secure loans for this year's crop.

My guess is that the disorder in agriculture will be pretty severe this year, especially since some of the world's most productive places - California, northern China, Argentina, the Australian grain belt - are caught in extremes of drought on top of capital shortages. If the U.S. government is going to try to make remedial policy for anything, it better start with agriculture, to promote local, smaller-scaled farming using methods that are much less dependent on oil byproducts and capital injections.

This will, of course, require a re-allocation of lands suitable for growing food. Our real estate market mechanisms could conceivably enable this to happen, but not without a coherent consensus that it is imperative to do so. If agribusiness as currently practiced doesn't founder on capital shortages, it will surely collapse on disruptions in the oil markets. President Obama at least made a start in the right direction by proposing to eliminate further subsidies to farmers above the $250,000 level. But the situation is really more acute. Surely the US Department of Agriculture already knows about it, but the public may not be interested until the shelves in the Piggly-Wiggly are bare - and then, of course, they'll go crazy.

Gartman Stocks

Prosaic Old Guard Stocks:
GE, DOW, X, AAS, IPSU, SFD, CHK, SU, AND, FCX. Stocks that may presently have sharply reduced their yield, but which will likely bring it bac.

Either America will fall into chaos, or these companies will thrive once again.

Grains: Currently grains are trading at historically VERY undervalued levels vs. gold.

What is the best grain/agriculture ETF?

Gartman

The shipping industry is extremely prone to large bullish/bearish swings. They are currently very bearish - thus this is bullish for the purchase of shipping stocks.

Remember, "When they are yelling, you should be selling. When they are crying, you should be buying."

They are crying now. The time for being bullish of shipping is just ahead.

http://seekingalpha.com/article/120427-why-the-u-s-needs-a-cultural-reset

"The US is the only significant nation that deliberately chooses to be a very large net energy importer when there is no resource, technological, engineering, human and financial capital constraint to being, at least, net neutral and even a major net exporter.

The majority culture chooses to outsource energy supply and pay hundreds of billions of dollars a year for the consequences because it believes, rather strangely, that using large amounts of energy is fine but producing it is not.

The Federal Government need not overtly repudiate when it can conveniently and - not just with the tacit acceptance, but open acclaim of much of the majority culture - do it covertly and efficiently. The government will engineer high inflation so it can service and refinance its debt with debased dollars, which means that holders of government debt will have an appreciable portion of their capital simply purloined by inflation. Partial and systemic repudiation of US Government debt is too tempting and easy to be ignored. Of course, with high inflation will persist high unemployment, a devalued dollar and high interest rates.

The bottom 50% of the population will thus be ruthlessly taxed via a steady and cruel degradation of their quality of life and, worse, of their ability to attain the skills and opportunities to better their lot. The top 10% will cope quite handily and, as a whole, may even prosper because of their asset mix, ( real property, hard assets, inflation indexed financial instruments) their financial management capabilities and their personal pricing power. Many small businesses will also be hurt, but many large businesses will find inflation a welcome friend as long as labor, energy, material and legacy costs rise less than prices for their goods and services."

General Trading Ideas

These are not necessarily trading ideas, but rather ideas collected from reading, that can be used to develop/underlie/support/back/JUSTIFY a particular trade.

Vinod Dar wrote: China's future choices are to:

• continue on it's current path - buy U.S. debt to support the U.S. consumer, thus continue to promote Chinese exporters.
• Concentrate on Chinese infrastructure, developing domestic consumption, military - naval build up.
• Develop long term natural resource/energy projects internationally.

Dar sees the 2nd two bullets as the most likely.
Trade: Short U.S. bonds, long Chinese infrastructure stocks, long natural resources needed by China.