China in the Shadows

[ProdigyofZen]

Re: China in the Shadows

I was thinking a lot in this "sudden stop" matter. In the first place because it has been a tragic event here. We had two chapters ; one in 1982 (thanks Paul Volcker for that), the other in 2002. Both shared some common featurres: abrupt currency devaluation, intense capital flight, financial crises, asset deflation, deep gdp fall, unemployment explosion (nearing 20%), etc.

You forget the most important locus to why you had a sudden stop event: US Monetary Policy.

So, my speculation goes, there shall not be any catastrophic outcome till inflation becomes a real problem. Which at this time does not seem to be happening

Perhaps.....

[ProdigyofZen]

Re: China in the Shadows

if we want to carry that analogy forward, who do we nominate to play germany's early 20th century role? russia?

No one. The simple fact is it took two great calamities within a 15 year period to produce Hitler. When analyzing WWII and the German mentality few people realize the economic impact of 1) German hyperinflation from 1920 to 22 and the antecedents leading up to it (including war reparations from WWI and WWI itself) where entire generations of capital was wiped out and 2) worldwide economic depression destroying what little recovery Germany had after the hyperinflation.

Those conditions are no longer extant in the current world.

[thriftyandboringinohio]

Re: China in the Shadows

... and least everyone forgets they only have 3.6T in US $ reserves. ...

According to this source

http://www.baldingsworld.com/

China has already spent half of that amount, $1.3 trillion, propping up its stock market.
That number does not include spending on anything else.

And from this source
http://qz.com/96895/the-scary-realit...s-debt-crisis/

That $3.4 trillion in forex reserves? Irrelevant
So what can the Chinese government do about this? One thing the PBOC can’t do is use its foreign exchange reserves to bail out the banks. This is often assumed to be an option, but it isn’t. The PBOC’s $3.4 trillion in foreign exchange reserves are denominated in various currencies; selling them for yuan would strengthen the yuan, killing China’s export trade. It would also be massively deflationary, as it would reduce the amount of yuan in circulation. That would worsen the current liquidity squeeze unless balanced by a form of reverse sterilization, like lowering the required reserve ratio (RRR)...

[touchring]

Re: China in the Shadows

However, I have my doubts that the Chinese economy is anywhere near as resilient today as the USA economy was in the 1930s.

I have similar thoughts as well before the Sichuan earthquake but after the Sichuan earthquake where thousands of children were killed in shoddy constructed schools. A financial crisis cannot be worst than that earthquake?


http://www.theguardian.com/world/200...ils-death-toll

[GRG55]

Re: China in the Shadows

I have similar thoughts as well before the Sichuan earthquake but after the Sichuan earthquake where thousands of children were killed in shoddy constructed schools. A financial crisis cannot be worst than that earthquake?


http://www.theguardian.com/world/200...ils-death-toll

Depends on what we mean by "crisis" I suppose. I think China is going to be the catalyst, but I don't think it will be the source. There's lots of acutely stressed nations today that are in far worse shape than China. If a crisis comes, I don't think anybody can predict what the trigger source will be. In 2007 the first indications of a problem came from two investment funds run by BNP Paribas bank, and the first bank run was a little known UK mortgage lender inappropriately named Northern Rock.

[thriftyandboringinohio]

Re: China in the Shadows

If there is one thing I've learned here at iTulip, it's that doomed situations can carry on far longer than anyone expects before the situation collapses.
Folks around iTulip were talking about the US housing bubble and the subprime lending situation several years before 2008 finally arrived.

[GRG55]

Re: China in the Shadows

If there is one thing I've learned here at iTulip, it's that doomed situations can carry on far longer than anyone expects before the situation collapses.
Folks around iTulip were talking about the US housing bubble and the subprime lending situation several years before 2008 finally arrived.

Yep. And we've been talking about a China bubble and bust around here for at least 5 years now.

The world's Central Bankers applied "global chemotherapy" after the 2008/09 financial crisis. The patient survived. The side effects look like they may be very interesting as they become more apparent...

[touchring]

Re: China in the Shadows

No one. The simple fact is it took two great calamities within a 15 year period to produce Hitler. When analyzing WWII and the German mentality few people realize the economic impact of 1) German hyperinflation from 1920 to 22 and the antecedents leading up to it (including war reparations from WWI and WWI itself) where entire generations of capital was wiped out and 2) worldwide economic depression destroying what little recovery Germany had after the hyperinflation.

Those conditions are no longer extant in the current world.

Hitler is insane. Is Putin insane?

WWIII has already started. ISIS is taking over Syria, Iraq and Libya. It's just that MSM don't write about it.

ISIS resembles a zombie plague, you firing at them but they keep coming at you and exploding into pieces. Can humans fight a zombie army that does not care about their own lives?

[Southernguy]

Re: China in the Shadows

"That $3.4 trillion in forex reserves? Irrelevant
So what can the Chinese government do about this? One thing the PBOC can’t do is use its foreign exchange reserves to bail out the banks. This is often assumed to be an option, but it isn’t. The PBOC’s $3.4 trillion in foreign exchange reserves are denominated in various currencies; selling them for yuan would strengthen the yuan, killing China’s export trade. It would also be massively deflationary, as it would reduce the amount of yuan in circulation. That would worsen the current liquidity squeeze unless balanced by a form of reverse sterilization, like lowering the required reserve ratio (RRR)... "

Very bad economic reasoning, IMHO. The solution of a debt deflation situation is monetary emission to "paper" debts. China has been doing that for quite some time with success.....so far.
The same applies to China-1929 USA analogies. The latter crisis was artificially enhanced by blind adherence to gold standard. And China passed through the crises with the help of the "great wall of money", EJ dixit.
Obviously USA abandonded such ways in 2008.
That's not to say that it the Chinese government seems to be losing the firm grip it had on the economy so far.
The fall in oil prices is taking a toll in so many places around the globe there is a feeling we are traveling uncharted waters.

[Milton Kuo]

Re: China in the Shadows

Is the future of IBM really that bleak? I see that they are still earning good profits even though revenue has fallen slightly.

IBM may not be a star performer, but their valuation is reasonable and their core business (government contracts) is extremely stable.

If the price falls by another 20%-30%, it maybe very attractive.

I speculated above that IBM is going to try to increase the amount of business it does with the government. One other area I forgot to mention (but is government-ish) is health care. I believe IBM is looking to productize Watson as some sort of expert system that can be used in medical diagnosis. But that has been speculated for years and it's still not clear to me how good Watson really is, when it will be shipped, and how far along competitors such as Google are in releasing a competing product.

Other than that, what does IBM really have for the future? Mainframes are still around but there is no growth in that business and the number of mainframes is very likely decrease in the future as companies move to different platforms. The enterprise software offerings are rather awful but since almost all enterprise software is bad, maybe I'll be wrong on this and IBM will be succeed here by dint of being the least worst vendor. IBM can continue bodyshopping with Professional Services but there are plenty of competing bodyshops out there with similar capability.

IBM has sold the PC server business to Lenovo (good idea, I think) and they sold the ThinkPad line to Lenovo in 2004 (bad idea.) More and more, I wonder what business machines the International Business Machines corporation is going to be selling in the future.

[jk]

Re: China in the Shadows

I wonder what business machines the International Business Machines corporation is going to be selling in the future.

i thought the whole idea was to give up on hardware and just do services.

[don]

Re: China in the Shadows

image: http://3.bp.blogspot.com/-QqUgALdTP0...et%2BMoves.png

from Steen Jakobsen, chief economist for Saxo Bank in Denmark.

Net Moves 11 Days After China's Yuan Devaluation

Interesting times, no . . . .

[touchring]

Re: China in the Shadows

I speculated above that IBM is going to try to increase the amount of business it does with the government. One other area I forgot to mention (but is government-ish) is health care. I believe IBM is looking to productize Watson as some sort of expert system that can be used in medical diagnosis. But that has been speculated for years and it's still not clear to me how good Watson really is, when it will be shipped, and how far along competitors such as Google are in releasing a competing product.


Other than that, what does IBM really have for the future? Mainframes are still around but there is no growth in that business and the number of mainframes is very likely decrease in the future as companies move to different platforms. The enterprise software offerings are rather awful but since almost all enterprise software is bad, maybe I'll be wrong on this and IBM will be succeed here by dint of being the least worst vendor. IBM can continue bodyshopping with Professional Services but there are plenty of competing bodyshops out there with similar capability.


IBM has sold the PC server business to Lenovo (good idea, I think) and they sold the ThinkPad line to Lenovo in 2004 (bad idea.) More and more, I wonder what business machines the International Business Machines corporation is going to be selling in the future.

I would agree on Thinkpad.

Perhaps Warren Buffett just wanted to pick a tech company that is reasonably valued and meet his criteria that the company must exist in another 30 years. IT services, government contracts and body shop business are mundane but are bread and butter and will always be required. The same cannot be said of Apple products or even the Google search engine as they can be replaced by new and better technology.

[Milton Kuo]

Re: China in the Shadows

I would agree on Thinkpad.

Perhaps Warren Buffett just wanted to pick a tech company that is reasonably valued and meet his criteria that the company must exist in another 30 years. IT services, government contracts and body shop business are mundane but are bread and butter and will always be required. The same cannot be said of Apple products or even the Google search engine as they can be replaced by new and better technology.

If Buffett wanted to load up on government cheese, he could have invested in things that I'm assuming he would have an easier time understanding: Lockheed Martin, Raytheon, General Dynamics. Or if he wanted pure bodyshopping, SAIC. To the best of my knowledge, prior to his current stake in IBM, Buffett has never owned shares in IBM going back to its heydey in the 1950s and 1960s when Thomas Watson Jr. did an excellent job of running the company.

On Apple and Google, I think there is a risk that Apple stumbles due to the kind of company it is. However, I feel Google is different. Its restructuring as a holding company, Alphabet, suggests to me that it is looking to make inroads into many different verticals in an effort to diversify and grow the company beyond its relative one-trick pony status. Larry Page is still young and his vision for the company (pursue huge business opportunities that dramatically change things) makes me believe that Google will likely hit at least one more home run. The self-driving car and the work Google is doing in health care are examples of the kind of risk Google is taking that may pay off big in the future.

I don't see any of that kind of big thinking at IBM. I believe one of the big pushes at IBM is cloud computing. That idea is actually quite old and Amazon, Microsoft, and Google have a very substantial head start and substantial amounts of IP developed over many years by thousands of developers. IBM only has its somewhat tarnished brand as a selling point for its cloud services, in my opinion. Why would I choose an IBM cloud over Amazon's, Microsoft's, or Google's? That's the same question other corporation customers will likely ask.

[Milton Kuo]

Re: China in the Shadows

i thought the whole idea was to give up on hardware and just do services.

That would diverge from what originally made IBM so successful. A modified razor handle/razor blade approach. In IBM's day, they would sell gold-plated razor handles at a high price (mainframes, typewriters, terminals, printers, etc.) that were of exceptional quality. Then they would sell the razor blades of professional and support services and other add-ons.

Without custom hardware or custom software product to differentiate themselves, IBM is going to have a difficult time selling to anyone who is not an existing customer who is somehow already locked-in to an IBM solution.

And Professional Services is a low margin business that is not difficult to replicate. One way to increase margins is to use a lot of offshore labor, which IBM already does, and that affects quality of service as many customers have found out.

So, yes, the idea is to give up hardware and just do services. However, depending on how whole-hog IBM goes for that strategy, that is exactly why IBM has a bleak future unless they are given a lot of government cheese.