Central Perk: 16 aug. 2013

vineri, 16 august 2013

Mish's Global Economic Trend Analysis

China Releases "Willfully Fraudulent" Inflation and GDP Data
Minimizing ObamaPain: Economic Distortions at the 50-Employee Margin
Losing Faith in Gold at the Wrong Time; Did Paulson's Sale Mark the Bottom? Who's Left to Sell?

China Releases "Willfully Fraudulent" Inflation and GDP Data

Posted: 16 Aug 2013 06:45 PM PDT

It's easy to make a case that GDP data everywhere is fraudulent because of the definition which includes government deficit spending, regardless of how ridiculous or useless the spending is. However, China takes the distortions to a level well beyond other countries.

Please consider Dodgy data may add $1 trillion to Chinese economy.

China may be exaggerating the size of its economy to the tune of $1 trillion by releasing "willfully fraudulent" inflation and GDP [gross domestic product] data, according to a study out this week.

Numbers from the world's second largest economy are treated with skepticism by some economists, but this latest report has attempted to quantify the scale of discrepancy.

"There is strong evidence indicating that the rate of real Chinese GDP growth, and ultimately total real GDP, may be significantly over stated," said Christopher Balding, associate professor at Peking University's HSBC Business School, and the report's author.

Through "significant and systematic irregularities", official estimates overstate China's true GDP by 8 to 12 percent, or $1 trillion, according to Balding.

In particular, the report focused on housing inflation data, which is one of the biggest items in the Consumer Price Index (CPI). China's booming economy has caused people to migrate from rural areas to the expanding cities, causing house prices to rocket in industrialised areas. Yet official statistics showed rural house prices increasing more than those in urban areas, said Balding.

According to the National Bureau of Statistics China, the price of private housing in rural areas grew at 1.67 percent per year on average, more than three times faster than prices in urban areas, which averaged 0.53 percent.

In addition, official statistics suggest the price of private housing in China rose by a very modest 8.14% over the 11-year period, despite a housing market boom and a quintupling in nominal GDP.

"The claim that the housing component of CPI grew by less than 10 percent between 2000 and 2011 is nothing less than comical," Professor Balding wrote.

Housing and the CPI

On many occasions I have commented on the distortions of housing and the CPI. The same holds true in the US. For example, please consider ...

As in the US, China does not directly include housing prices in the CPI. I believe housing prices should be in the CPI.

Ignoring asset bubbles is ridiculous, just as the US proved.

Regardless, it is preposterous to presume "the price of private housing in rural areas grew at 1.67 percent per year on average, more than three times faster than prices in urban areas, which averaged 0.53 percent."

Moreover, and unlike other countries, China includes money that is allocated an not even spent. Chinese electricity usage reports are questionable to say the least.

Is Chinese GDP distorted? Of course. GDP everywhere is so distorted as to be useless, but China is at the head of the list.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Minimizing ObamaPain: Economic Distortions at the 50-Employee Margin

Posted: 16 Aug 2013 10:54 AM PDT

In response to Is Obamacare Really Responsible for Rise in Part-Time Employment? If So, Why Doesn't Average Weekly Hours Show Just That? I received an interesting email from a reader "Robert" who owned a family business with close to 50 employees.

Hello Mish

Having been in a family steel fabricating business for eight years, I can tell you that rather than take on new employees, we always added hours rather than employees when things were active. We ran for years with 42 employees through good times and bad. Even though we sold the business about 6 years ago, I can tell you that if I were still running things today, rather than go over 50 employees, my decision would have been to add overtime hours to meet higher demand. This increase in hours would have tended to offset the trend in some other industries to cut hours to less than 30 hrs/week leading to the observed flat trend of Average Weekly Hours in data provided by the BLS.

Minimizing ObamaPain

And so it goes. Some industries hire temps, some increase hours (especially companies near 50 workers), and some reduce hours and hire more workers.

The net effect has been a huge shift towards hiring more part-time workers, but the distortions are not uniform.

Everyone does what they can to minimize ObamaPain

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Losing Faith in Gold at the Wrong Time; Did Paulson's Sale Mark the Bottom? Who's Left to Sell?

Posted: 16 Aug 2013 09:08 AM PDT

Bloomberg, frequently a fount of anti-gold propaganda came out with a pair of articles on Wednesday, worth a read primarily from a contrarian point of view.

Gold Bull Paulson Cuts SPDR Stake by Half in Bear Market

Bloomberg reports Gold Bull Paulson Cuts SPDR Stake by Half in Bear Market

Billionaire hedge fund manager John Paulson, who told investors as recently as last month that they should own gold, cut his holdings in the metal by more than half as prices plunged into a bear market.

Paulson & Co., the largest investor in the SPDR Gold Trust, the biggest exchange-traded product for the metal, pared its stake to 10.2 million shares in the three months ended June 30 from 21.8 million at the end of the first quarter, according to a government filing yesterday. The New York-based firm, which manages $18 billion, cut its ownership for the first time since 2011 "due to a reduced need for hedging," according to an e-mailed response to questions.

Billionaires George Soros and Daniel Loeb sold their entire SPDR stakes in the past quarter, U.S. Securities and Exchange Commission filings showed.

At an investor conference on July 17, Paulson affirmed a commitment to investing in the metal and stocks of producers to hedge against currency debasement as central banks pump money into economies. The firm didn't provide additional comment yesterday on its SPDR stake. The hedge fund made $15 billion for investors in 2007 by betting against subprime mortgages before the housing
collapse.

Money managers cut their bullish gold bets by 27 percent to 48,103 futures and options in the week ended Aug. 6, U.S. Commodity Futures Trading Commission data show on Aug. 9. The net-long positions dropped 76 percent since early October.

David Einhorn's Greenlight Capital Inc. sold its entire stake of 1.97 million shares in Barrick, the largest producer of the metal, in the second quarter, a government filing showed yesterday. Jonathan Gasthalter, a spokesman, declined to comment.

"Confidence in gold is rattled over the short term, and we saw rotation of funds out of gold into equities that continue to march higher," Scott Gardner, who helps manage $400 million at Verdmont Capital SA in Panama City, said in a telephone interview.

Who's Left to Sell?

With all that selling, some might wonder "Who's Left to Sell?" The answer might not be what you think at first glance.

Since someone has to own the assets at any point in time, there is still someone left to sell. There always is. However, from a sentiment standpoint, high profile gold supporters dumping their stash en masse is what it takes to make a bottom.

Losing Faith in Gold at the Wrong Time

Bloomberg poured it on with a sappy report Losing Faith in Gold From Ghana to Vancouver Proves Rout.

The article starts off with a video "Crime Hits Ghana Mining Town Amid Gold Decline". In a second video, Bloomberg's Niki O'Callaghan reports on gold's decline from its 2011 peak, which has ravaged markets and livelihoods around the world.

Here are a few clips from the article.

Gold's swift fall, including two days in April when it plunged the most since 1980, has ravaged hopes and livelihoods around the world -- from the 1 million miners in Ghana who scour in the dirt, to thousands of executives and geologists at mining exploration firms that are running out of cash in Vancouver. Gone too are jobs for auditors, bankers and analysts in the finance capitals of Toronto and London. Investors who bet big and lost are shifting assets elsewhere and scaling back retirement plans.

"The foundation for gold has eroded," said Edward Lashinski, the Chicago-based director of global strategy for futures trading at RBC Capital Markets LLC. "Capital can be deployed much more effectively in other enterprises that actually see a return."

The drop frustrates ordinary and sophisticated investors alike. John Paulson, the New York hedge fund manager noted for making $15 billion with a bet against the U.S. housing market in 2007, told investors in February 2012 that gold would be his next triumph. His gold fund lost 59 percent through July this year, according to a person familiar with the results. The University of Texas Investment Management Co. -- whose advisers include Dallas hedge fund manager Kyle Bass, also known for a winning housing gamble -- has seen a gold hoard once valued at $1.5 billion decline by more than $400 million.

'Trash Bags'

"We're holding trash bags," said Philip Mann, 53, who with his wife put about $160,000, half their retirement savings, into gold and silver coins starting in 2009. They're now worth at least 40 percent less, including sales mark-ups, he said. The drop forced him to cash out a 401(k) retirement plan, losing money to penalties. It also drained resources for two sons' college bills and the planned purchase of a new home, said Mann, a retail supply-chain manager in Portland, Tennessee.

"Gold is still a bubble," said Ronald Wildmann, managing director of Basinvest AG in Zurich, which manages 100 million Swiss francs ($107 million).

Sappy Bloomberg Reporting

Pray tell how can a decline in gold force anyone to cash out their 401K, losing additional money to penalties? The answer is "It can't".

The real story is Mann put money he needed for other purposes into a speculative bet at the wrong time. That byline is not remotely newsworthy.

The same thing happened with housing in 2005 and with equities in 2007. And with all the equity bulls and their absurd faith in the Fed, it is going to happen again with equities.

More Bloomberg Propaganda

Want some additional anti-gold propaganda courtesy of Bloomberg? If so, please consider a 13-segment slideshow on "The Real Cost of Owning Gold"

Did Paulson's Sale Mark the Bottom?

I think so, and so does Pater Tenebrarum at the Acting Man blog in his article Gold and Gold Stocks Update – John Paulson Sells GLD

Paulson & Co. – a Victim of Redemptions?

Today news hit that John Paulson has finally sold a big chunk of his position in GLD. It is not terribly surprising that this happened in the quarter when gold made its low. After Paulson sold his holdings in bank stocks, the group soared, with many of the stocks he had sold at the lows rising by 200% and more thereafter. However, this time it has probably less to do with his bad timing, but very likely more with the bad timing of investors in his funds.

As the Bloomberg article mentions: "Paulson & Co., the largest investor in the SPDR Gold Trust, the biggest exchange-traded product for the metal, pared its stake to 10.2 million shares in the three months ended June 30 from 21.8 million at the end of the first quarter, according to a government filing yesterday. The New York-based firm, which manages $18 billion, cut its ownership for the first time since 2011 due to a reduced need for hedging, according to an e-mailed response to questions."

A friend reminded us that Paulson & Co. runs many funds that are denominated in gold. Any redemptions from these funds would therefore reduce the need for hedging. So it seems that Paulson's investors have cut their exposure to the gold denominated versions of his funds at exactly the wrong moment. This is actually something that always tends to happen near market lows.

Apparently a number of other prominent hedge funds, including the Soros fund, also cut their exposure in the second quarter. So far they have all been wrong twice: first by holding on until the lows were made, and then by selling just as the market reversed and a rally started.

As a matter of fact, we think it is a good thing these investors are gone. They were all late-comers to the gold bull market and their involvement has essentially proved to be a curse rather than a blessing. In fact, one should probably begin to get careful once they decide to get involved again, which is bound to happen at some point. In the meantime, these latest news may well contribute to a developing 'wall of worry' backdrop.

Bloomberg Slant

Via email, Tenebrarum had this comment regarding Soros selling his gold: "Bloomberg is not telling you everything. When Soros sold the positions they are talking about (which by the way is old news regurgitated), he concurrently bought a huge position in call options on GDXJ - an investment that was far greater than what he sold."

Comment on Paulson's Sale

The one thing upsetting about Paulson's gold sale is the fact that he dumped his gold even though "he told investors as recently as last month that they should own gold".

If this was purposeful, I consider it unethical. The other possibility is redemptions forced the sale. Of course both could be true.

The Bottom?

Only in hindsight will we know if Paulson selling marks the bottom, but I sure like my chances here with all the bears coming out of the woodwork in praise of equities and trashing gold.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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