“What I am about to say is true. But under this system we are not allowed to speak the truth… Lies are required to maintain political harmony… the Chinese regime is in a serious economic crisis – on the brink of bankruptcy… every province in China is Greece.” (emphasis added)
Larry Lang, Professor of Finance, Chinese University of Hong Kong
Widely held opinion about emerging markets has it that Asia in general, and China (with its 1.3 billion people) in particular, will be the great growth engine, which prospers while the over-indebted U.S. and Eurozone languish in the slough of despond.
Indeed, that opinion also sees Asian economies, and especially China’s, as assisting, if not entirely rescuing, the Eurozone and U.S., via Asia’s putative ever-increasing demand.
Alas, it ain’t necessarily so. According to Professor Lang, this rosy view is an illusion because:
- The Chinese debt is 36 trillion Yuan with interest of two trillion/year
- Official reports of inflation at 6.2% are bogus. The real rate is 16%.
- There is serious excess capacity in the economy, private consumption is only 30% of economic activity, the Chinese PMI hit a record low of 50.7 in July, 2011
- Official GDP of 9 percent is fabricated. Real Chinese GDP has dropped 10% y.o.y.
- Tax rates are too high, the effective business tax rate is 70% and individual tax rate over 80%
For those who care to do the research, much of the foregoing has been amply documented elsewhere.
China does have great overcapacity, a real estate bubble, and several insolvent or near-insolvent provinces.
As Gordon Chang international lawyer and Forbes.com Columnist notes:
“Car sales have decreased nearly 5% since last year…
The one thing that people say is "These Chinese leaders are so great at economic management because they got through 2008-2009 and they had enormous double-digit growth while the rest of us were suffering." Well yes, they did that, but they did that at great cost.
And so for instance in 2009, the first full year of their stimulus plan, they dumped something like $1.1 trillion into a then $4.3 trillion economy. And so did they create growth? Yes, they did, but they also created a stock market bubble, a property market bubble, and inflation. And they have yet to deal with the property market and the inflation problems. Those are dislocations that they do not have the answers to. I would rather have our economic problems than theirs any day of the week…
… of the rich and the super-rich, they talk about leaving China… They are getting passports, they are putting their families offshore, and this is of concern because this is a leading indicator.”
“Gordon Chang: The Reasons For China's Imminent Bust”
So China is and will continue to be deleveraging (at the very least)… So much for China’s continuing to be a great growth engine so far, for example, as consumption of basic building materials is concerned.
But there is one exception – China’s 1.3 billion (and growing by 20 million/yr.) people will continue to consume agricultural products and that will continue to bolster those prices.
Overall though, China and the Eurozone, and the U.S. are all deleveraging.
And this has bullish consequences short to medium term for the U.S. Dollar and U.S. Treasuries.
Consider the factors which militate in favor of U.S. Treasuries and U.S. Dollar strength in the short to medium term.
- Eurozone and U.S. budget and debt crises generate a flight from risk
- Stock markets have been volatile and weak, generating a flight to the U.S. Dollar and Bonds
- U.S. savings are increasing and there is generally a credit crunch
- The Euro as a currency is under attack, and is weakening.
- A Flight from the Euro and Euro denominated assets is bullish for the U.S. Dollar and Treasuries
We expect the aforementioned trends to continue for a few months.
But why has gold not more robustly manifested itself as a safe haven in all these crises. Why has its price declined recently?
All the foregoing reasons plus, mainly, Cartel* price suppression helps explain gold’s recent price weakness.
*We encourage those who doubt the scope and power of Overt and Covert Interventions by a Fed-led Cartel of Key Central Bankers and Favored Financial Institutions to read Deepcaster’s December, 2009, Special Alert containing a summary overview of Intervention entitled “Forecasts and December, 2009 Special Alert: Profiting From The Cartel’s Dark Interventions - III” and Deepcaster’s July, 2010 Letter entitled "Profit from a Weakening Cartel; Buy Reco; Forecasts: Gold, Silver, Equities, Crude Oil, U.S. Dollar & U.S. T-Notes & T-Bonds" in the ‘Alerts Cache’ and ‘Latest Letter’ Cache at www.deepcaster.com. Also consider the substantial evidence collected by the Gold AntiTrust Action Committee at www.gata.org, including testimony before the CFTC, for information on precious metals price manipulation. Virtually all of the evidence for Intervention has been gleaned from publicly available records. Deepcaster’s profitable recommendations displayed at www.deepcaster.com have been facilitated by attention to these “Interventionals.” Attention to The Interventionals facilitated Deepcaster’s recommending five short positions prior to the Fall, 2008 Market Crash all of which were subsequently liquidated profitably.
Since deleveraging in China, the U.S. and Eurozone creates the appearance of deflation, gold-as-inflation-hedge is less in demand.
But the reality is that hyperinflationary pressures trump and overwhelm deflationary pressures. Thus we are already on the threshold of hyperinflation* and that is bullish for gold prices.
How so? Because the inflationary impact of all the stimulus (both via money “printing” and credit creation facilitation) provided by The Fed, The ECB, and Eurozone Nations’ Central Banks far exceeds the deflationary impact of all the deleveragings.
Consider the inflation the world has experienced in food and energy in recent months. Specifically, for example, consider the real numbers** for the U.S. economy.
**Shadowstats.com calculates key statistics the way they were calculated in the 1980s and 1990s before official data manipulation began in earnest. Consider
Bogus Official Numbers vs. Real Numbers (per Shadowstats.com)
Annual U.S. Consumer Price Inflation reported November 16, 2011
3.53% / 11.12% (annualized October, 2011 Rate)
U.S. Unemployment reported November 4, 2011
9.0% / 22.9%
U.S. GDP Annual Growth/Decline reported October 27, 2011
1.62% / -2.89%
U.S. M3 reported November 10, 2011 (Month of October, Y.O.Y.)
No Official Report / 2.62%
Note especially CPI of 11.12% -- a hyperinflationary threshold level. (For this reason we have designed a high-yield portfolio aimed at achieving a total return (gain plus yield) in excess of real inflation (see note 1 below)).
And there are two other ongoing developments indicating we are headed in a hyperinflationary direction.
First, with yields moving up to dangerous levels on French and Spanish as well as Italian debt the ECB will be constrained to massively print money and buy sovereign debt. This is good for gold prices.
As well, the $15 trillion U.S. debt load is unpayable. Thus, similarly, The Fed will have to conduct another overt (covert QE3 is already ongoing) QE in 2012. This too will be price positive for gold.
In sum, short to medium term we are bullish on the U.S. Dollar and U.S. Treasuries, bearish on China (but for agriculture demand and demand in related key sectors). And of course we are bullish on gold, in a form which we have recommended because it is less susceptible to price manipulation.
Given all the foregoing gold as safe haven with profit potential is increasingly attractive.
