China’s Minsky Moment? – John Mauldin

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serious volatility.

The Bigger They Come…

Over the last 50 years, every investment boom coupled with excessive credit growth has ended in a hard landing, from the Latin American debt crisis of the 1980s, to Japan in 1989, East Asia in 1997, and the United States after both the late-1990s internet bubble and the mid-2000s housing bubble.

The lesson is always the same, and it is hard to avoid. Economic miracles are almost always too good to be true. Broad-based, debt-fueled overinvestment (misallocation of capital) may appear to kick economic growth into overdrive for a while; but eventually disappointing returns and consequent selling lead to investment losses, defaults, and banking panics. And in the cases where foreign capital seeking strong growth in already highly valued assets drives the investment boom, the miracle often ends with capital flight and currency collapse.

John and I talk about China constantly and always reach the same conclusion. We really have no way of knowing whether the country will suffer a modest slowdown or a hard landing, but we both agree with George Soros that “The major uncertainty facing the world today is not the euro but the future direction of China.”

To be clear, China doesn’t have to experience a deep recession in order to disrupt global growth. A slowdown to 2-3% real GDP growth and a corresponding decline in China’s import demand could fire demand shocks across emerging Asian economies like India and Indonesia, commodity producers like Australia and South Africa, and even deteriorating economies in the Eurozone like France and Italy.

The investor’s dilemma is that there is really no way to know what is happening in China today, much less what will happen tomorrow. The primary data is flawed at best, manipulated at worst, and there seem to be a lot of inconsistencies when we compare official data to more concrete measures of economic activity.

Even China’s new premier, Li Keqiang, believes China’s GDP numbers are “man-made” and therefore unreliable, according to a US diplomatic cable released by WikiLeaks in 2010. For what it’s worth, that same cable suggests the premier is more interested in measurements like electricity consumption (officially expected to rise by 7% in 2014), rail cargo volumes (officially expected to rise by 2% in 2014), and bank loans (officially expected to stall in 2014) … which are all showing potential signs of fatigue.

From an investment perspective, China’s predicament can teach us one valuable lesson. The most important risks are often the ones you cannot easily anticipate, and thorough diversification may be your only defense. As the Chinese say, “Precaution averts perils.”


John here. I think Worth did a good job of outlining the issues. I might add that I think a Chinese slowdown and possible move up the manufacturing value chain would be particularly disruptive to Germany at a time when the Eurozone might be under pressure from a deteriorating France. As Shakespeare once wrote, “When sorrows come, they come not single spies, but in battalions.” I see the situation in China as the domino that could topple and trigger another global crisis. Let us hope that they can find a path through a very difficult economic landscape. This way be dragons indeed!

For the record, I have been consistently saying for several years that when the Chinese allow their currency to float it will get weaker, perhaps materially so, not stronger, for a period of time. When they recently widened the bands, the renminbi did indeed weaken, and it seems to have been allowed to do so to teach those who were relentlessly trying to push the currency higher a hard lesson. When currencies float, they can move two ways. I believe the Japanese yen is on a very long and volatile ride to 200 to the dollar, but it will test the patience and resolve of all who try to trade it. The same resolve will be needed for trading the Renminbi. China is going to be a rough ride for anyone who thinks they can actually figure it out in advance.

Cafayate, South Africa, New York, Europe, and San Diego

I am in Cafayate, Argentina, which is in the northernmost province. While still in the tropics, it is at 5,500 feet, so the weather is almost perfect year-round and especially at this time of year. Some of the best wine grapes in Argentina grow here. Sunday orMonday we leave for Bill Bonner’s hacienda at almost 10,000 feet, up some of the roughest tracks I have ever been on, but the arrival is worth the adventure. At least this year we rented an appropriate vehicle for the drive. I don’t quite want to admit that I might not have chosen well the last time (since I didn’t know what lay in store for me), but I will suggest that you not buy a used rental car that comes out of Argentina. Getting towed out of rivers and sand dunes was challenging. And the roads were so rough and rocky that I drove on a flat tire for a few miles, since I couldn’t tell the difference in road feel, and the tire was shredded beyond recognition.

A week from Monday I head back to Dallas – for eight hours – before I take off for 12 days in South Africa. That will mean three straight nights in airplanes, a first for me. I will need that vacation resort, with lots of massages and hydrotherapy, to unwind me. I’m going to try something new this trip and post a few pictures and comments to Twitter.Follow me if you like. After South Africa I’m back home for like a day before I have to run up to New York to do some videos. Then it’s back home for a few weeks (or so it appears) before I head to Amsterdam, Brussels, and Geneva. I’ll come home for a few days and then head to San Diego for our Strategic Investment Conference – one of my real highlights of the year. And then I’ll be home for more than two whole weeks before heading to Tuscany for a few weeks of vacation. Whew. I will be ready to relax at the end of all that travel.

As I settled into my seat on the flight to Buenos Aires, who should sit down next to me but Kyle Bass, who was on a trip further south in Argentina to scope out what he sees as real opportunity. I should remind readers that Kyle and I will be doing a webinar onMonday, March 31, at 10 Central, sponsored by my partners at Altegris Investments. It is limited to qualified US investors. You can go to and sign up, and someone from Altegris will call and make sure you get an invitation. I hate to limit it, but that is the rule. (In the regard, I am president and a registered representative of Millennium Wave Securities, LLC, member FINRA and SIPC. And read the risk disclosures!)

And as you know, Jack Rivkin, one of the most savvy and got-it-together writers and investors I know, recently assumed the position of CIO at Altegris. What you may not know is that Jack has started posting Altegris updates on investments, economic factors, market conditions, etc., which can be found here. These are interesting reads, with timely information – most notably Jack’s urgent focus on the need for an unconstrained approach to fixed-income. You should check this out now … and periodically going forward.

I am finally at the Grace Hotel in Cafayate, which has just opened, and I am delighted with my room and its panoramic view of the vineyards and majestic red mountains in the background. On the way here Olivier Garret and I stopped at a natural amphitheater in the canyon that towered some 700-800 feet high. There was a local musician over to the side, and I encouraged him to give us a song. He strummed a few chords and then in a lilting tenor voice sang us a local folk tune that should be performed on a national stage. The natural acoustics amplified it better than a thousand Bose speakers. It was amazing. Then he put down his guitar and picked up his flute. The sound was surreal, like the finest surround sound I have ever heard but stepped up a magnitude. I stopped, closed my eyes, and just took in the moment. Anywhere else, maybe, and he was just another flute player. But here he was a god. Maybe he should stay and avoid that big-city stage. It was the best 100 pesos I will spend this trip. Which, if he doesn’t spend it soon, won’t buy much, with Argentina’s raging inflation. But that was a problem for another day. In the moment there was just the magical

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