The Phony Chinese “Miracle”

Posted On Mar 7, 2016 By Dave Gonigam

  • Japan’s 25-year economic quagmire…
  • … about to be rerun on a bigger and more catastrophic scale in China
  • How massive credit growth became massive concrete pours… and it won’t end well
  • The return of “Zero Hour”: 500 people lay claim to the same ounce of gold
  • Rickards, Trump and Robespierre… Uber and productivity… a three-year-old video suddenly viral… and more!

Remember when Japan seemed unstoppable? Good ol’ “Japan Inc.”? When Sony bought Columbia Pictures and Mitsubishi bought Rockefeller Center? When the storyline in Back to the Future Part II included Japanese economic domination? When American executives were falling all over themselves to study “hourensou” and other Japanese management techniques?

You know the rest of the story, too. Japan’s been in an economic funk since 1990. The Nikkei stock index is no higher now than it was in the spring of 1992.

Six weeks ago, in hopes of shocking the system back to life, the Bank of Japan took a fateful step into the realm of negative interest rates. Like all the other Band-Aid solutions of the last quarter-century, that won’t work, either — not if ordinary Japanese are raiding hardware stores to buy safes in which to store their cash.

China’s going down the same road, according to David Stockman. An economic miracle? He has another name for it — the Red Ponzi. And its demise will make a bigger mess.

“The Red Ponzi,” he says, “is just another version of Japan Inc. — a state-built house of debt, export mercantilism and fabulous overinvestment that eventually came to a dead stop 20 years ago. And Japan at least had some rudiments of true capitalism such as law, contracts and some vestiges of market discipline.

“With respect to China’s red capitalism, however, there is no place in the history books where you can find a booming economy that is so artificial, fragile and prone to cataclysmic accident. It has not grown organically from the grass roots owing to capitalist enterprise. Not in the slightest.

“Instead, it has been concocted from the center by Communist Party bureaucrats who discovered the miracle of an unhinged printing press. They’ve adopted the economic arithmetic of Keynesian GDP accounting under the slogan ‘If you build it, we will count it’ and created a vast state-controlled, pyramidal apparatus of credit distribution down a cascade of corruption that is pleased to call itself a banking system.

“It’s now swamped in mindless, debt-fueled speculation and building without any semblance of economic discipline, efficiency or rationality.”

And the cracks in the foundation are starting to show.

Over the weekend at the annual meeting of the National People’s Congress, Chinese leaders gave themselves some leeway when setting a GDP growth target for the year. Rather than a hard-and-fast number, they settled on a range of 6.5–7.0%.

Chief economic planner Xu Shaoshi said the Chinese economy will “absolutely not experience a hard landing” — the sort of remark that has a methinks-he-doth-protest-too-much quality to it.

Yesterday, the Chinese government issued its monthly disclosure of its foreign exchange reserves. The rapid depletion from a peak of nearly $4 trillion in late 2013 appears to have leveled off in January.

Here too the leaders feel compelled to offer reassurances. From the Financial Times: “China’s official foreign exchange reserves only include highly liquid assets, a top central banker said on Sunday, seeking to reassure investors that authorities have enough ammunition to prevent a sharp fall in the renminbi.” Skeptics wonder if some of those “reserves” include foreign real estate and other investments that can’t be unloaded quickly.

Whatever “miracle” Chinese leaders have achieved was made possible by 60-fold increase in credit over the last two decades.

Total credit outstanding grew from half a trillion dollars in the mid-’90s to $30 trillion today. Mr. Stockman says that goes a long way toward explaining how the Chinese produced more cement from 2011–13 than Americans did during the entire 20th century.

“Likewise,” says David, “it’s how the Red Suzerains in Beijing built themselves 1.2 billion tons of steel capacity — more than the rest of the world combined — when there is sustainable demand for less than 500 million tons in China’s domestic economy.

“This same credit binge caused China to accumulate upward of 65 million empty apartments. Yet it is still building new ones at a four times faster rate each year than its annual sales.”

Yet hope springs eternal: Iron ore prices leaped a staggering 19% today as Chinese steel mills got busy restocking for peak demand ahead of summer construction season.

But is that demand for real?

Even Goldman Sachs — the firm that’s already abandoned five of its top six trades for 2016 — has this one figured out. “We are yet to find evidence of higher-than-expected steel demand — whether in the order books of individual steel producers or in the official data for new orders.

“China is a monstrous house of economic cards,” David concludes, “and an inherently unstable polity that will blow sky high in a matter of time — and probably not that much more time.

“China’s rulers have no clue about how to contain the incendiary pressures which are now building to the ignition point. There are no possible economic mechanisms or even viable half-assed statist schemes to stabilize the $30 trillion mountain of debt that sits precariously on its fracturing hothouse economy, or to relieve it of its fatal debt addiction. So Beijing will soon have no alternative but to rule by the brute force of paddy wagons, and even firing squads.”

But that’s further down the road. In the meantime, they have to stop the bleeding of their forex reserves — especially if the numbers are cooked and many of those “reserves” are illiquid.

Markets went into a tailspin last August when China devalued the yuan by roughly 2%. Jim Rickards went on record here last month suggesting Chinese leaders might resort to a 20% devaluation… in a single day.

[Ed. note: And that’s not even the biggest currency shock in store this year. No, Jim believes an even bigger shock will come from a supposed American “ally.” We’ve described the story regularly during 2016, but Jim issued a time-sensitive update over the weekend. We urge you to check it out right away at this link.]

Major U.S. stock indexes are going nowhere fast as a new week begins. As we write, the S&P 500 has shed all of three points, at 1,997.

Crude’s climb last week has extended into today; a barrel of West Texas Intermediate has crested the $37 level for the first time in two months.

Gold sold off after we went to virtual press on Friday… but it’s recovered some of those losses. At last check, the bid was $1,266.

“There’s so much interest in ‘paper’ gold that physical supply has utterly broken down,” says Byron King.

“Here’s a chart comparing the amount of physical gold in storage in Comex versus the number of registered ‘owners’ against each ounce.

Somthing's Gotta Give.png

“From the early 2000s to not long ago,” Byron explains, “the number of ‘owners’ per ounce — people who bought a ‘paper’ gold contract, supposedly backed by real metal at Comex — was basically flat, just a handful of claimants for each ounce. Plus, there were literally millions of ounces of gold on deposit in Comex. There was gold in the vault, in other words. If you showed up with a contract, you could walk away with gold. That’s how markets ought to work.”

All that started changing within the last two years. “Note,” says Byron, “this was also a period when Comex sold down significant amounts of physical inventory, from several million ounces in vaults to well under 1 million ounces. Most of this gold moved out of the West (London, Zurich, New York) to the East (China, Russia, India, Middle East). It’s gone forever… certainly from the West.”

And look at the level now. “Thus if even one claimant shows up for an ounce of yellow metal, the cupboard will be bare — and there are 499 other claimants as well.”

Longtime readers will recognize this as the setup for the “Zero Hour” scenario our fearless leader Addison Wiggin was describing here three years ago — when the price of real metal from a coin shop will leap far higher than the quoted price on CNBC’s ticker.

“Risk is exploding for paper gold traders,” says Byron. “A collapse may not happen literally overnight… but we’re looking at a very dangerous situation.”

Got physical metal? “If you don’t have some, get some,” Byron urges. “Go for basic bullion coins. Don’t worry about numismatic coins. Don’t pay big premiums. Just get U.S. Gold Eagles, Canadian Maple Leafs, South African Krugerrands, etc. Build your stash while you can, because some day, you won’t be able to get gold, period.”

“A few days ago,” writes one of our regulars, “you quoted Jim Rickards as saying that the elites are not engaging in conspiracy, that they are just out of touch with reality.

“How could that possibly be? Perhaps Louis Seizième and his beautiful wife, Marie Antoinette, could give us a heady exposition on the topic. Might we hope to refer to Mr. Trump as Monsieur Robespierre?

“Certainly, Robespierre is as pertinent today as ever before — ‘The secret of freedom lies in educating people, whereas the secret of tyranny is in keeping them ignorant.’ However, Mr. Trump, emulating Monsieur Robespierre, is not without its own ‘less than interesting’ possibilities.

“Given the state of education in the U.S., it is likely that many of even The 5’s readers will have no idea to what I am referring. As Robespierre pointed out, that is the problem, isn’t it?”

The 5: Yeah, that’s what makes us worry whenever someone calls for a Second American Revolution, no matter how heartfelt or sincere. It could easily turn out like the one in France a few years later…

“All of us have biases under even the best of circumstances,” writes a reader whose letter we’ve had to severely truncate to fit within our 5 Mins. We hope we’ve still done him justice.

He took note of Charles Hugh Smith’s remarks here on Friday about Airbnb, Uber and other fast-growing tech startups: “All these ideas,” wrote Mr. Smith, “are consumer-based rather than production-based.” He contrasted them with “digital technologies that enable higher crop yields, lower failure rates in manufacturing, etc., [that] have quantifiable value because they either lower the costs of production or increase productivity.”

“While I agree with the basics of that premise,” says our reader, “an argument can also be made that these outfits have quantifiable value because they lower costs and increase productivity. They take nonproductive assets and turn them into productive ones. They lower costs for consumers, in turn making their dollars more productive.

“I get it that one widely held perspective is that if money spent does not produce, increase or improve a concrete product, then assets are not increased and the economy does not truly ‘grow’ or increase. However, if I set aside my bias in that regard, I find myself thinking from a slightly different perspective and understanding that things like Airbnb do grow the economy by freeing up capital for other uses.”

The 5: Well, that’s a valid point.

Look, there’s no question that if I spend $10 for an Uber ride this afternoon that would have cost me $25 in a taxi, then I’ve got $15 more to spend for dinner out tonight. That’s good for everyone involved in bringing the food to my table. And it’s good for “the economy,” however you wish to define it. And my standard of living has improved accordingly.

Without putting words in Mr. Smith’s mouth, we believe he was merely pointing out that there’s only so much valuation to be wrung out of such efficiencies, and the next breakthrough will have to come in something that creates new wealth in the sense of growing it, mining it or manufacturing it. Those breakthroughs might not be forthcoming, especially if the world is as awash in “stuff” as it is.

“Check it out!” a reader says of a YouTube video featuring Godfrey Bloom, a member of the European Parliament, titled “Why the whole banking system is a scam.”

“A little over two minutes,” the reader says. “Check it out! I think Jim as well as all would enjoy this immensely! Now when folks ask me a question, they can have the short answer at the above caption on YouTube! And they are loving it!

“Love The 5… best part of my day!”

The 5: This is the second time in a week a reader has brought the video to our attention. It’s good stuff…

Bank System Scam

Odd, since it’s from 2013. For the life of us, we can’t figure out what made it take off now.

Oh… we’ll never turn down a compliment, but if The 5 is the best part of your day, we really urge you to get out more!

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. It’s the biggest White House scandal of your lifetime — no matter how old you are.

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