China's Economy is Still Soaring

Front and center this morning, the big news from last night was that China’s fourth quarter GDP beat the estimates! China’s economy grew at a 9.8% pace in the fourth quarter. OK… I have to ask this with a snicker in my voice… Where are all those pundits/economists that predicted a collapse of the Chinese economy a year ago? For those of you keeping score at home, for all of 2010, China’s economy grew at a 10.1% pace. OK… Remember when I told you that a customer of mine, who had done business in China for over 20 years, told me to only believe half of what the Chinese reports to the public? So… If that’s true, the 4th quarter GDP was 4.9%! Still… It certainly hasn’t collapsed, nor has it even moderated, which is what the Chinese government was hoping for.

So… That means the wink and nod has been given to commodities… And as I look at the currencies, I’m shocked that the Aussie dollar (AUD) is back below parity… I would have thought this GDP report would mean smooth sailing for the Aussie dollar… Now, I know that the markets are going to be calling for another rate hike by the Chinese in another attempt to moderate their economy… But, the previous rate hikes didn’t do the job, right?

The currency strength we saw yesterday remains intact this morning, although the figures for each respective currency are off a bit… The euro (EUR) traded well above the 1.35 handle yesterday, but has slipped back through the figure this morning, albeit barely… As it trades at 1.3490 right now…

The US housing data yesterday was awful… And once again, I saw a well-known economist on TV saying that housing had bottomed… Hmmm… That’s about a dozen different times now since 2008 that we’ve heard someone saying that housing had bottomed. One of these times the forecaster will be correct… Unfortunately, I don’t believe this will be the time. Housing Starts for December fell 4.3%, and had the worst monthly performance since October of 2009, when we were probably hearing the 5th or 6th person tell us housing had bottomed.

Look folks, it’s one vicious cycle… The economy, housing, unemployment… They are all dependent on the other, and none of them are doing well… This rot on housing’s vine is a huge indicator that the US economy is weak… It has a pulse, and that’s good… But it’s weak…very weak…

Well… The big meeting between the Presidents of China and the US took place yesterday… I got a kick out of watching and seeing the text of the press conference… The Chinese President, Hu, just smiled a lot and kept repeating that the US and China are going to work to improve this, that and the other things… Nothing like the grenade he threw from left field on the dollar prior to his visit to Washington DC. Now, he left that to his Commerce Minister, Chen, who said, “the US trade deficit with China isn’t a result of the value of the Chinese currency. US controls on certain exports to China have exacerbated the deficit.”

The US just needs to be patient, folks… China will move on its own timetable, but more and more we’re seeing a consumer driven economy in China, with the newfound middle class driving the economy. And that middle class will be wanting the stuff from the western world… And the renminbi (CNY)? It will continue to gain versus the dollar, but on China’s timetable, not from the wishes and demands of lawmakers in Washington DC.

The New Zealand dollar/kiwi (NZD) is much weaker this morning than it was yesterday. Last night, New Zealand’s latest inflation report was not as robust as the currency traders were looking for (higher interest rates would be the result of a stronger inflation report), and so all the buys that were put on ahead of the report, were unwound.

And In Japan… Japan’s Economic Minister, Kaoru Yosano, was doing his best to point out the real problem in Japan, which seems to be Hush-Hush with the Japanese government, and the markets just keep looking the other way… What I’m talking about is the Japanese debt… Yosano said, “If we keep going with no fiscal discipline, allowing the stock of public debt to grow larger or continuing to borrow more than we receive in tax revenue, international confidence in Japan could be gradually eroded.”

Whew, I had to do a double check on that statement, because I wasn’t sure if he was talking about Japan or the US!

Speaking of debt here in the US… The ratings agency, Fitch, issued a report on the US and debt… Here’s what Fitch had to say about that… “Record US Budget deficits due to stimulus measures and a lack of a plan to reduce debt may undermine confidence in the dollar and raise inflation concern. The US fiscal metrics will be the worst of any AAA rated sovereign.”

That’s right… We’re now the “worst AAA rating”… Great! One of these days, the fact that the size of the US economy, and the fact that the US dollar is the world’s reserve currency isn’t going to imply a higher debt tolerance, as it does now… And guess where we are headed here in the US very soon? We’re headed to a showdown on raising the debt ceiling… I wonder how that will all play out… You have to wonder if back room deals will be the call to order on raising the debt ceiling… No wait, no wondering needed, we all know that back room deals will be made… That seems to be the way we get things done these days… And that’s all I’m going to say about that!

On the emerging markets front… An interesting comment was made yesterday by an emerging market Central Bank Governor… Poland’s Central Bank Governor, Marek Belka, said that the Polish zloty, “retains substantial potential to appreciate, with the scope of possible gains oscillating around 10%!” Hey, folks… When was the last time you heard a central banker make a statement like that? Talk about possible appreciation? Most of the time, all we hear about are the knucklehead central bankers who want to “weaken their currency”… Not talk about possible appreciation! And not only talk about it, but embrace it! So… Kudos to Poland… Here’s hoping the Central Bank Governor is bang on! And they erect a statue of him someday!

Oh… And get this! Belka’s comments must have been a wink and nod to his buddies, and family to buy zloty… You see, this morning, the Polish Central Bank raised interest rates 25 basis points (1/4%).

Gold and silver spent two days in the sun, and then the shades were pulled on them again yesterday afternoon… Again, the Chinese GDP performance should have geared these two precious metals higher, but NOOOOOOOO! I guess the price manipulators were at it again… So… Gold and silver are both down versus the dollar, and looking pretty sickly, folks… Last week, I bought more silver… I just thought that the price had dropped so much that it was time to buy on the dip… See? I practice what I preach! But, if I liked silver at $28.75, I’m going to love it at $28.50! HA! Seriously… This is a dip… Unfortunately, the dip is not on terra firma right now… But, as we all know from watching gold and silver for the past 10 years, things can change in a heartbeat, and before you know it gold is setting new record all-time highs…

Now, certainly there’s a chance that this scenario won’t happen again, like it has for the last 10 years… And that’s the little legal beagle that sits on my right shoulder talking to me… The little sarcastic devil-may-care what I type guy sits on my left shoulder… Both are telling me what I should write, and what I shouldn’t! Stop it! Either let me write, or don’t!

Then there was this… Big Al Greenspan is back in the news… The former Cartel chairman, and someone I despise, is talking about the stock market these days… Remember back in his day, when he said that stocks were irrational, and they went on to rally strong for about five more years? Well, according to the interview by The Wall Street Journal’s Kelly Evans, Greenspan believes that “stocks are cheap if earnings are to continue higher”… Whoa there partner! Big Al has really told us something here, eh? NOT!

I will say this, folks… Don’t know if you’ve seen this or not, but margin debt in brokerage houses is up 24% in the past year… And the funding of hedge funds? It’s increasing again… Hedge funds are reporting that they have increased their leverage to within 10% of the peak in 2008… Here in St. Louis, there’s a famous rock station that used to run a commercial of a father and daughter listening to the station, and the Rolling Stones song “Brown Sugar” comes on, and the dad gets up and starts playing the air guitar, and the daughter cries, “Mom, he’s doing it again!”… If it were the bad things that get into stock markets, I would be saying, “Markets, they’re doing it again!”

To recap… The currency strength that we saw yesterday morning has backed off a bit, but the bias to sell dollars remains, albeit a weaker bias this morning. China’s fourth quarter GDP was an impressive 9.8%, with the overall GDP for 2010 an equally impressive 10.3%… So much for the calls of an economic collapse in China, eh? Aussie dollars and the other commodity currencies have backed off yesterday’s highs, as the markets believe that China will hike rates in yet another attempt to moderate their economy… And gold and silver are getting sold again…

Chuck Butler
for The Daily Reckoning