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The Daily Reckoning | Monday, June 14, 2010 A likely beneficiary should China's property bubble go "pop!" The biggest (and emptiest?) shopping mall in Asia, Plus, Bill Bonner on the fading effects of stimulus spending, beltway leeches and plenty more... ------------------------------------------------------- Propping Up a Dead Economy A Faux Recovery Based on Economic Stimulus Joel Bowman Reporting from Taipei, Taiwan... More money! More stimulus! And more borrowing from the future to combat the errors of the past... President Obama wants another $50 billion, presumably to keep the economy "stimulated." We "must take these emergency measures..." he wrote in a letter to congressional leaders, or else risk "...massive layoffs of teachers, police and firefighters." Are you scared yet, fellow reckoner? Well, you should be, but not because of the reasons Mr. Obama cites. The whole "emergency measure" line reminds your editor of a story; something about a boy and a wolf... It ended with a lot of crying, if we remember correctly. "That ought to hit 'em where it hurts," we can almost here the Feds saying. Go for the "safety net" jobs; the ones a free market society supposedly could not support on it's own. The government would have us think that if it didn't pay people to keep the streets clean and the buildings up to fire code, then the nation would descend into a murderous rage of crime and scorching flames. We are supposed to believe that the only thing standing between free citizens and Dante's Inferno is the vigilance and service of Inner Beltway busybodies. Don't buy it for a second. If asked whether he would prefer a private contractor coming to his rescue during a bank robbery or a member of Baltimore's finest, your editor would take the "profiteer" every time. Besides, it's the state that's robbing your savings account, not some junkie miscreant down the road. But back to our topic... The "recovery," it seems, is waning...just as the effects of the economic stimulus are fading. Consumer spending is falling, according to the most recent figures. Mortgage defaults are creeping steadily higher. Debts - at both the state and federal level - are ballooning. And the overall jobs situation - not including census "workers" - is worsening. That all sounds about right to us. After all, dead men don't walk. The unemployed don't spend. And even if they did, spending is no way to prosperity anyway. In days or yore, "consumption" was considered a disease. Today, welfare statists consider it to be an unalienable right: "Life, Liberty, The Pursuit of Happiness...and a brand new blender!" ..or something like that. But even the world's largest economy can't prop up a dead man forever, no matter how many kitchen appliance vouchers it bribes its citizens with. This is a Weekend at Bernie's recovery, in other words, not a Chariots of Fire one. It is simulated at the public's expense; not stimulated by the private sector's toils. And that trend - from private wealth production to public wealth destruction - is a worrying one indeed. As Austrian School luminary, F.A. Hayek, astutely observed: "If government relieves us of the responsibility of living by bailing us out, character will atrophy. The welfare state, however good its intentions of creating material equality, can't help but make us dependent. That changes the psychology of society." If President Obama is not careful, the price of his economic recovery will be enough to send the nation broke(er). The Daily Reckoning Presents Is China Undervalued Right Now? Chris Mayer During the past few years, China has become an increasingly compelling destination for investment capital. But with the recent weakness in the Chinese stock market - and serious cracks showing in the façade of China's economy - does it make sense to invest in China right now? One money manager I know thinks so. In fact, he thinks that some of China's US-listed stocks are trading at low enough valuations to triple in 2010 regardless of how the economic situation unfolds... I'll introduce him to you in a minute. There are two parts of the macro backdrop that are important to understand about China. First, there has been a tremendous increase in bank lending since the end of 2008 - it's up something like fourfold. And we know from experience that when banks grow that fast, bad things tend to happen later. What happens when banks grow that fast is that they slide down the credit-quality spectrum. In short, they make tomorrow's bad loans. Secondly, we know that the Chinese government has put in place a huge stimulus plan. And again, we know from experience that when governments invest money, you inevitably wind up with "bridges to nowhere" and all kinds of boondoggles. The money doesn't flow to its best economic uses, but to political ends. In Beijing, you can see some tangible effects of this. I recently visited, for instance, the largest mall in Asia. It was built six years ago by state-run enterprises. They put it on the western edge of the city, about 40 minutes from Tiananmen. Real estate people thought it was a bad idea. It was too far away...and too big. Well, the pros turned out to be right. And today, the place is virtually empty. It was almost eerie walking through there. There were lines of bright shops with neatly dressed attendants and shelves full of the latest products from the world's best brands. But there were no customers. This place has over 10,000 free parking spaces. There is over 1.8 million square feet of retail space here - over 167,225 square meters. That's about three times the base of the Great Pyramid at Giza. It makes you wonder. Why did this place ever get built? And boy, are they losing their shirts. But then you wonder about the shops themselves. Why do they stay? How can they possibly make money here? It's all very strange. But then you go 30 minutes into town and visit another big mall packed with people. The parking lot is so full you have to wait to get in. When one car leaves, they let one in. The residential property market also feels bubbly - a lot of construction going on despite widespread tales of empty apartment buildings. One rationale we heard from people here is that the Chinese view property as a store of wealth. We heard stories of how people buy brand-new apartments and don't even attempt to rent them out. They just hold onto them. Interestingly, besides property, the Chinese also like gold as a store of wealth. China is the world's largest consumer of gold (and its largest producer), only recently passing India. So if there is a property burst, gold should be a winner. In fact, while I was here, CCTV News - China's big television network - reported that China is seeing a surge in gold buying recently as people here start to get nervous about a potential property bubble. As you can see, China's economic picture is complex - as it is everywhere, really. The US economic picture is equally murky and uncertain. However, in some ways, you don't have to figure it all out. I met with a money manager here - a low-key guy whom I cannot name. Yet his fund is up over 1,000% in 10 years. He knows the China market as well as anyone. He was short the market - that is, he was betting it would fall - as late as January, but he is now buying again. As he told us, there are some Chinese stocks that are also listed in the US that trade at very low multiples of earnings. Some of them, when you net out the cash, trade for as little as 3 times earnings. As he says, you don't really need to have a positive view on China to buy these. When asked about the China bubble, he told me. "I don't really care. I know I can buy some stocks that could well double in six months, regardless." Though even here, the market is tricky. You really have to know what you are doing. There are bad auditors and shady accounting practices here, as in the US. And there can be big gaps in quality between certain names. It's a market for which it helps to know people on the ground who know the quality of the management teams. Chris Mayer, for The Daily Reckoning Joel's Note: Getting to know those people, and the ins and outs of the companies they invest in, was part of the reason for our recent research trip to China. We wanted some "boots-on-ground" insights...the kind you can't get unless you actually visit the place and see it for yourself. Chris, our "value man" on the trip, was particularly interested in gathering names of cheap companies with high growth potential. Some of the "investment seams," as he calls them, are kind of quirky...and definitely NOT the kind of thing you'll hear about on CNBC. In any case, Chris has written up a 20-page special China report for his Mayer's Special Situations readers. If you'd like to grab a copy, we suggest you take advantage of a $1, one-month trial deal we've got going right now. Or...you could just buy a pack of gum. Your call. Bill Bonner Government Spending and the Façade of a Successful Economy Bill Bonner Reckoning from Baltimore, Maryland... I've got to admit it's getting better... A little better all the time. - The Beatles Another Monday...another week... Are we getting better? And what will this week bring? More evidence that things are improving? On Friday we got word that consumer sales had fallen in May...from the month before. That is, they didn't get better; they got worse. It was no big deal except that the there's supposed to be a recovery. And May was important. Because the major stimulus efforts are coming to an end. Economists wanted to see how the economy would hold up without the government holding it up. Well, it didn't hold up very well. If the government gives you money to buy a house or to trash your car, well...if there's enough money in it you go along with the gag. But what kind of economy is it where the government gives you money to buy things? It's a phony...a fraud...an imposter... ..the government is impersonating a successful economy. And where do the feds get any money in the first place? One way or another they have to get it from you and other citizens/investors/taxpayers - the same people who didn't want to buy the thing in the first place... There is no question that many of the numbers were getting a bit better since the big blow up in '07-'09. Unemployment was still getting worse, but not as fast as it had been. Housing prices seem to have stabilized after a big drop. And consumer spending had been gradually recovering. The big question was whether the numbers would continue to improve as the feds' stimulus programs tapered off. Was all that spending really stimulating the real economy...or just simulating one? We got a preliminary answer on Friday. Numbers are notoriously dishonest and unreliable. The 5 is obviously crooked. An 8 just takes you round in circles. And the zero? It claims to be nothing at all. But if it is nothing, why have a symbol to represent it? Something funny about it. Numbers tell one story one month and another the next. One month the economy is in decline; the next it's growing. Remember, too, that the numbers are controlled by goons working for the Federal government. Can you trust 'em? We don't. We don't trust any numbers. Not even the ones we made up ourselves. But getting back to the markets, George Soros says they are 'eerily' similar to those during the lead up to the Great Depression. At first, of course, people didn't know what to make of it. The US had the strongest economy in the world. It had surpassed Britain as the world's biggest economy before the turn of the century. By 1929, the US had the world's biggest trade surplus...its tallest building...its most profitable businesses and fastest-growing wages. Imagine what it must have been like at the turn of the century. You get off the boat in New York. Your mouth drops open. There was not a single commercial building in the Old World that rose above 6 or 7 storeys. And here were hundreds of buildings up 20 storeys...30 storeys...reaching up so high, they called them 'sky-scrapers'... ..People were building railroads and bridges...and new 'auto- mobiles'...and electrifying the cities... ..and there just seemed to be no end. This was the place to make your fortune! Everybody was talking business. Everybody was getting rich. And some were getting super rich. It must have been like China today! Then, when the US market cracked in 1929, people thought it just a temporary set back. They couldn't understand or believe that the economy that had been such a great success for so many years could suddenly lose traction and begin slipping backward. They thought it was improving... They thought it was getting better... Did you read those comments we quoted last Thursday? Take another look. They show you how hard it is to realize when things have turned a corner...when they're NOT getting better any more.... "While the crash only took place six months ago, I am convinced we have now passed through the worst - and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us." - Herbert Hoover, President of the United States, May 1, 1930 "...by May or June the spring recovery forecast in our letters of last December and November should clearly be apparent..." - Harvard Economic Society (HES) May 17, 1930 "Gentleman, you have come sixty days too late. The depression is over." - Herbert Hoover, responding to a delegation requesting a public works program to help speed the recovery, June 1930 "...irregular and conflicting movements of business should soon give way to a sustained recovery..." - HES June 28, 1930 "...the present depression has about spent its force..." - HES, Aug 30, 1930 "We are now near the end of the declining phase of the depression." - HES Nov 15, 1930 "Stabilization at [present] levels is clearly possible." - HES Oct 31, 1931 "All safe deposit boxes in banks or financial institutions have been sealed...and may only be opened in the presence of an agent of the IRS." - President F.D. Roosevelt, 1933 If we had more time, we'd find quotes from the current era too. Right now, we can only remember a couple of lines from Henry Paulson. When the "subprime" mortgage debacle began, he said it was "contained." And then, when it became obvious that it wasn't contained at all, he told the public that he couldn't imagine any "scenario in which the public would be called upon to bail out Wall Street." Practically the next day, Lehman Bros. went broke and the biggest taxpayer-financed bailout in history began. And now, these same people tell us that the economy is improving...that it is getting better. And they've got the numbers to prove it! And more thoughts... So, what is going on in Japan? The government has gotten by for the last 20 years by borrowing from its own citizens. It now has the biggest debt-to-GDP ratio in the world. As the private sector de-leveraged the public sector borrowed and spent - the same thing that is happening in America today. And maybe Richard Koo is right. Maybe this did prevent a deeper recession in Japan. Unemployment never rose over 5%. And the economy never actually suffered sustained negative growth levels. But so what? Investors still lost 3/4 of their money. And now Japan's prime minister has a warning. All those savers who put their money in Japanese government bonds for the last 20 years may soon wish they had bought gold. From Yahoo! Finance: Japan PM warns of Greece-like debt crisis Japan's new prime minister warned Friday that his country could face a financial mess like the one that has crippled Greece if it did not deal urgently with its swelling national debt. While Japan is on firmer financial footing than Greece because most of its debt is held domestically, Prime Minister Naoto Kan's blunt talk appeared designed to push forward his agenda, which may involve raising taxes. Speaking in his first address to Parliament after taking office Tuesday, Kan said Japan, the world's second-largest economy, cannot continue to let government debt swell while state finances are under pressure from an aging and declining population. "It is difficult to sustain a policy that relies too heavily on issuing debt. As we have seen with the financial confusion in the European community stemming from Greece, our finances could collapse if trust in national bonds is lost and growing national debt is left alone," he said. Japan has the largest public debt among industrialized nations at 218.6 percent of its gross domestic product in 2009, according to the International Monetary Fund. *** We're on our way down to Florida. More and more of our friends are moving to the Sunshine State. The reason: taxes. State and local levies together add about 10 percentage points to your tax rate in Maryland. Not worth worrying about if you don't have much income. But high earners have figured out that they can save a substantial amount of money by expatriating, within the US. That is, all you have to do is to leave the Old Line State and they can knock about 20% off their total tax bill. Our ancestors have been in Maryland for 300 years. But there's a time to put an end to everything. Besides, it's not the same state we knew as a child. Today, Maryland is a prosperous place - largely because it is a parasite on the rest of the nation. Last year, taxpayers sent about $2 trillion to the Washington DC metropolitan area. Investors lent it about $1.6 trillion more. And much of this money sticks around. The capitol beltway is crowded with big, expensive cars. Restaurants are packed. Housing prices are higher than in the rest of the nation. So are salaries. Maryland has become a fat leech. Regards, Bill Bonner, for The Daily Reckoning ------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com Recovery Flops! Central planners don’t create wealth. They can only move it around, robbing Peter to pay Paul. This only ‘stimulates’ an economy if Paul uses the resources better than Peter. Don’t make us laugh. In most cases, Paul is the same clown who made the bad bets in the first place. Oil Spill Leadership Crisis Heavenly Recovery or Hellish Correction? Insufficient Silver to Supply China’s Growing Demand Most people have never heard of “the invisible hand” of the market, which is the surprising result of everyone working to get money with which to satisfy their own selfish interests, and it ends up benefiting everybody, a result that is so glorious that it seems that things are being guided by some “invisible hand.” Inflation Corroded Copper Coins Re-Animating a Debt Dog World Spotlight on South Africa South Africa takes to the world stage today as it hosts the first World Cup to be played on the African continent. For the next 30 days, the eyes of the globe will be watching Rooney, Cristiano Ronaldo, Maicon and Messi battle it out for world soccer supremacy. China Downplays Role of Gold in its Forex Holdings Rising Private Sector Leverage