The Coming Collapse of China — Not!

English: Morgan Stanley's office on Times Square

Morgan Stanley: Its advice on one of China’s most blatant securities frauds left many U.S. investors feeling blue.  (Photo credit: Wikipedia)

I participated yesterday in a discussion of the recently fashionable view that China is on the brink of economic collapse. This theory has already done much to assuage Americans’ concerns about their nation’s faltering economic prowess — but it will take more than talk to wish away the China challenge.

As I pointed out in yesterday’s session,  which was broadcast by Huff Post Live,  discussions of collapse in China conflate  two quite different issues: one is the fate of Chinese asset values and the other  that of China’s real economy. I am an agnostic on Chinese asset values but my view on the real economy is the same one I have espoused for two decades: China’s GDP growth should remain super-fast well into the 2020s. To be sure  the immediate outcome is clouded by continuing weak demand in China’s main export markets in Europe and the United States but these problems hardly speak to  Chinese failings. The fundamental driver of Chinese GDP growth remains in place: catch-up. China can readily continue to boost its output at remarkable rates simply by copying tried-and-tested production techniques and organizational methods learned from the United States, Japan, and Europe. Thanks to a super-high national savings rate, Chinese manufacturers can keep jumping to ever more productive machinery every couple of years. The net effect  is that though per-capita output in China is still little more than one-sixth of First World levels,  there is plenty of room for further improvement. It doesn’t hurt that hundreds of foreign corporations, lured by visions of a slice of the Chinese market, are falling over themselves to bring their most productive manufacturing technologies to the Middle Kingdom.

What of Chinese asset values? They  certainly seem rich. But that observation could have been made a decade ago and indeed two decades ago. At some point there will be a truly painful correction but anyone who shorts Chinese stocks may have a long wait.

This is hardly an argument to buy Chinese stocks, however. Quite simply the problem is Chinese accounting. Although many — perhaps most — Chinese corporations will probably deliver on the stock market’s high expectations, there have been far too many accounting miscues in recent years. It does not help that some of these seem to have been deliberately  intended to rip off unwary American investors. Even some of  America’s erstwhile “most respected” securities houses have been taken for a ride. It is worth remembering Hong Kong-based Longtop Financial Technologies, for instance. Its 2007 IPO was underwritten by Goldman Sachs and Deutsche Bank.  Even after the auditors reported evidence of massive fraud, Morgan Stanley discounted the suggestions and recommended using  the stock’s subsequent swoon as a buying opportunity. Similarly American investors have been left holding the bag after revelations of accounting mishaps at such Chinese companies as CleanTech (CLNT), SunTech (STP), and China MediaExpress (CCME).

The conclusion is that though China will continue to thrive, it affords few opportunities for  prudent investors.

 

 


Friday Charts: Don’t Fear Another Financial Collapse Until This Indicator Soars


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If you weren’t with us last week, you need to know that on Fridays I embrace the adage that “a picture is worth a thousand words.”

I select a handful of graphics to put important economic and investing news into perspective for you.

This week, I’m dishing on digital and print media, protesters and unfounded fears over a financial collapse.

So say “goodbye” to long-winded commentary. And “say hello” to easy-to-understand pictures with some quick-hit observations.

Print Media: Dead or Dying? Who Cares!

The last time I suggested print media is dead, some old-school readers rioted (via nasty emails, of course). Remember, we’re in the Digital Age. Old-school protests don’t work (more on that in a bit).

Anyway, apparently some of you still get The Grey Lady on Sundays and love thumbing through her dew-moistened pages. So, yes, technically, print media isn’t dead. But it’s only a matter of time.

Here’s more proof, courtesy of thinker and blogger extraordinaire, Mark Perry.

Over the last 60 years, newspaper advertising’s fallen off a cliff.

Fun fact: The year advertising revenue peaked is the same year blogging software first appeared, according to NYU journalism professor, Jay Rosen. Coincidence? Not so much.

It’s hard to stay in business when your primary source of revenue is on a crash course with zero. Unless you’re the U.S. Postal Service, that is.

Whether you call print media “dead” or “dying,” it doesn’t matter. The investment implications remain the same. Avoid traditional print publishers like the plague. Even if they pay dividends like Gannett Co. (NYSE: GCI).

Foiled Again, Batman

Now let’s move on to people that are actually protesting physically, not digitally: the Occupy Wall Street folks.

Their mission? To fight against “the greed and corruption of the 1%.” In the spirit of Dr. Phil, “How’s that working out for them?”

Not so good.

Since the self-professed “leaderless resistance movement” began a year ago, the SP 500 Index is up 20%.

Let’s give the protesters the benefit of the doubt for a second. They really just want the big, bad financial sector to implode on itself, right? And that must have happened by now, right?

Foiled again, Batman.

The SP 500 financial sector is up even more since the protests began.

Maybe the financial collapse is right around the corner then? Or not.

While chatter about it certainly keeps increasing, the most reliable indicator of impending financial doom isn’t signaling any trouble ahead.

Turns out, Credit Default Swaps (CDS) – which represent the cost of insurance against a default – are falling precipitously in the financial sector.

You’ll recall, spiking CDS prices preceded the Great Recession and all the European bailouts. So the next time someone tries to scare you stockless about a financial collapse, check out CDS prices before you even think about believing it.

That’s it for today. Before you sign off, though, do us a favor. Let us know what you think about our pretty pictures today – or any of our recent work at Wall Street Daily – by sending an email to feedback@wallstreetdaily.com, leaving a comment on our website, or catching us on Facebook or Google+.

Thanks and enjoy the weekend!

Ahead of the tape,

Louis Basenese


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Rep. Marcy Kaptur: Reinstate the Glass-Steagall Act

Rep. Marcy Kaptur is a Democrat from Ohio.

After Wall Street’s 2008 economic collapse led to the Great Recession, it has become evident that to move forward, we must return to the past to ensure a safe, viable financial system for a 21st-century American economy. We must reinstate the Glass-Steagall Act of 1933. Glass-Steagall is not a one-size-fits-all cure for the ills of the financial sector, but it is exactly the type of reform that Congress must implement against the pleas of Wall Street executives. This is why I have introduced H.R. 1489, the Return to Prudent Banking Act of 2011, which would reinstate Glass-Steagall’s separation between commercial banking and the securities business.

[Steve Bartlett: Diversified Banks Are More Stable]

From 1933 until 1999, American financial institutions were barred from acting as any combination of a commercial bank, investment bank, or insurance company. The American financial system was built on confidence and fairness, and it allowed for access to capital, protected consumer accounts, and paid depositors and investors a decent return. From 1933 until 1999, Gross Domestic Product grew from $56.4 billion (in current dollars, according to the U.S. Bureau of Economic Analysis) to $9.3 trillion in 1999. However, as Wall Street gained political and economic influence, Congress passed the Gramm-Leach-Bliley Act, which effectively removed the banking barriers and safeguards that had been in place for more than six decades. We were told by Wall Street and its supporters that banks were “hamstrung by outdated restrictions of the 1930s.” I was one of 57 members of the U.S. House of Representatives who would vote against Gramm-Leach-Bliley. As the anti-regulation movement won the day, this legislation was a clear signal that Wall Street was in charge. Banks grew larger and riskier, and American taxpayers were given the bill when the deregulated financial sector fell apart.

In order to move forward, we must not build our financial system around the failed concepts of speculation and manipulation, but around the cornerstones that made it strong: confidence and fairness. Earlier this year, expert witnesses testifying before the House Financial Services Committee correctly stated that, “investor confidence in U.S. equity market structure is perhaps at its lowest point since the Great Depression,” and the public believes “that the stock market was ‘not generally fair’ to small investors.” It should be no surprise that consumer confidence is low. The economy may be complex, but Americans understand that the Wall Street banks control an outsized portion of the economy, and that they have an outsized interest in their own profits.

[Read the U.S. News Debate: Does the J.P. Morgan Loss Prove the Need for Tougher Bank Regulations?]

People who share my views are rapidly growing in number. On July 25, 2012, Sandy Weill, the former chairman and CEO of Citigroup, in a major reversal, stated on CNBC: “What we should probably do is go and split up the investment banking from banking, have banks be deposit takers…have banks do something that’s not going to risk taxpayer dollars.” While these statements came from the former CEO of a firm that was given $45 billion by taxpayers, his words should not be taken without due consideration, irony, and regret. The growing ranks of supporters wanting a return to a better-regulated Wall Street include 78 cosponsors of H.R. 1489. The time is now to implement smart reforms to protect the American economy as well as the American consumer. Congress must act and reinstate Glass-Steagall so the public can be assured that the economy is working for them, not just for Wall Street’s CEOs.


Clinton: ‘Obama didn’t cause’ the financial collapse

ORLANDO—Former President Bill Clinton, still widely popular for presiding over a sustained economic boom, seemed to suggest at a campaign stop today that he might share blame for the 2008 financial collapse.

The comment came as he forcefully argued that whoever is to blame for causing the crisis, it did not begin on President Obama’s watch and the nation should reelection Obama because he’s been moving the country in the right direction.

“I honestly believe, it doesn’t matter who caused it or whether the contributing factors all happened under President Bush or something I did or something Ronald Reagan did 30 years ago,” he told an enthusiastic crowd of around 2,000 in a ballroom of the Rosen Plaza Hotel. “Regardless, President Obama didn’t cause it.”

“But if he just kept telling us that and not doing anything to fix things, we’d have to replace him. Because we hired him to take a job, and you don’t get to take only the good and not the bad. And so, he took it on,” he continued.

Clinton told the Washington Post Tuesday night that he believes the election will turn on the central question of whether Americans can be persuaded that the economy was hurt so badly by the collapse that no president could have turned it around in just one term.

It was a point he made in Charlotte and again in front of a Miami crowd on Tuesday. He pressed the message in Orlando Wednesday, part of a series of campaign stops Clinton is doing on Obama’s behalf in the wake of his highly received speech at the Democratic National Convention in Charlotte last week.

“What I want to say again and again and again is it is my opinion—as someone who beginning when I was a governor in 1979 has spent a lifetime trying to create jobs… It is my opinion that no president—not Barack Obama, not Bill Clinton, not anybody who served before us, nobody who ever had this job, could have repaired that much damage to this economy in just four years,” he said.

Clinton has continued to sharpen the message he delivered in Charlotte, unveiling a new summation of the argument in Orlando. He told supporters there that they needed to get out to register voters: “Get out there and talk to people for shared prosperity over trickle down. For ‘we’re all in this together’ over ‘you’re on your own.’ For cooperation over conflict. And for arithmetic over illusion,” he said.

Although Clinton’s wife, Secretary of State Hillary Clinton has spent the day dealing with the fallout from the death of four state department workers, including J. Christopher Stevens, the U.S. ambassador to Libya, the former president did not mention foreign policy or the attack overseas