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.