Wednesday, August 15, 2007

hedge funds, china slowdown?

a few observations about conditions now vs the 1920s into the 1930s

-there is more wealth concentration
-there was lots of unregulated use of leverage
-there is a blowup that has hurt the real estate values of the average american... in the 1930s, mortgage debt and deflation crushed farmers. is something simliar going to happen now, or will the fed allow inflation to soften the blow before a subsequent collapse of the dollar?
-there could be a developing xenophobia with mexican immigration, toxic chinese imports and islamic terrorism.
-we may also have a fed not willing to cut rates quickly, which could mash asset values for a little while.

this environment, where lots of people dont feel as if they are growing richer, seems ripe for a political attack on the hedge funds. they took the people's money in the form of public pension funds etc and levered it up using the people's money. much trust was placed in them, and they used it to get spectacularly rich by riding a ponzi scheme where assets only held their value because no one tried to sell them.

the end result was a bubble in housing that now has hurt ordinary people and roiled the stock market. it's time for regulation. they simply cannot be allowed to exert influence like that over our banks and rating agencies.


my other observations relate to china. these defects are causing an historic moment that could transform the society. they can either find a way to put aside the traditional deferential culture, where a subordinate would never challenge a senior engineer with "this bridge will fall down"... instead the Tuojiang River Bridge in Fenghuang collapses and kills more than 20.

add in lead contamination, sick pigs at home and bad seafood abroad. suddenly the chinese state is facing a problem of public opinion unique in its history. just 40 years ago, it could starve millions in the great leap forward, but now has to apologize for killing a few dogs and cats in the US? the eyes of the world are focusing on them. can they actually pull off this new great leap forward?

this also raises the question of when this chinese stock runup will end. perhaps we have the last leg of an elliot wave, meaning the big move has happened, but another surge higher remains.

but after that, you have to wonder how much more staying power this rally has. I think development will continue in china, but not at such a pace. there will be a correction heading into the olympics, or after... one also has to wonder if beijing is above propping up its own stock market. after all, with the yuan still relatively undervalued, what could be better than selling dollars now? it makes me think chinese stocks have one more move up. the state has to be feeling a little scared right now, but at a certain point the liquidity conditions should permit another blast higher. after that I think they will let the yuan move higher and then they will accept something of a slow down. it's foolish because it would have been better to slow exports earlier to free up capacity for all the building.

but after that, I wonder if much of the global stock market rally won't be over for a while, though healthcare and some tech, industrials and utilities should continue to gain.

the other thing I noticed and havent had time to study, but must weigh in on is this from nyt:

WASHINGTON, Aug. 15 — The Bush administration, struggling to find a way to keep Gen. Pervez Musharraf in power amid a deepening political crisis in Pakistan, is quietly prodding him to share authority with a longtime rival as a way of broadening his base, according to American and Pakistani officials.

all I know is it could cripple him and create a conflict where neither of them have control. then if the taliban-like guys take over there, now there could be a nuclear state sensing a religious axe to grind with india. suddenly this whole EM story is over.

still, these things are far enough off, for now. it should be months before things really get bad. I think there will be a bounce and another rally higher... but I fear that afterwards, people will realize how far markets like china have moved and there will be a pause for a year or two before EM takes off again. I think global growth is a real story. but the markets can't just keep blasting higher the whole way through...

of course, the other possibility is that this IS the end of the rally. we've seen our top for now. not many think that now. but one has to wonder about it. I get nervous when everyone expects one thing.