Everyone Wants To Hear From Janet Yellen, But She Probably Won't Say Anything Important Anytime Soon

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Australia's Manufacturing Sector Shows Some Major Improvement

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China's Cash Crunch: This Isn't The Country's Lehman Moment, But It Signals A Change Of Momentum

The Economist

MANY commentators, including this newspaper, like to compare China’s economy with America’s, the world’s biggest, which it is on course to rival in size if not in sophistication. Recently, however, parallels between the two economies have started to look more ominous. China suddenly seems to be exactly five years behind America. After several years of excessive credit, much of it in the shadows of the banking system, China’s financial institutions stopped lending to each other this month; on June 20th interbank interest rates briefly soared to 25%. The crunch seemed horribly reminiscent of America’s financial crisis in 2008, from which it has yet to recover in full.

Two questions emerge from this. Is China’s economy in as much trouble as America’s was in 2008? And have the authorities done the right thing? The answer to both is: not really. A lot depends on China now pushing through reforms.

The pros and cons of already owning your bad banks

China’s economy certainly has some worrying excesses. Credit has been rising much faster than GDP, and property prices, especially in coastal cities, have been soaring. That is often a sign of trouble. Sharp rises in lending, accompanied by property booms, set the stage for America’s crisis in 2008 and many others like it. In those cases, when rash investments turned sour banks went bust, lending stalled and confidence evaporated. Governments had to step in, recapitalising some banks and urging others to resume lending.

Yet China’s situation is different in important ways. It has an extraordinarily high savings rate. Unlike America in 2008, the country as a whole is living well within its means. Its banks are subject to pretty stringent rules: their loans cannot exceed 75% of their deposits, and, unlike many countries, China is already implementing the global prescriptions on bank capital known as Basel 3. And the state already owns the biggest banks. That has its drawbacks (too many loans have gone to state-favoured firms), but a bonus is that, when those loans turn bad, the state does not need to nationalise anything: it can tell the banks to keep lending while it decides how to allocate the losses and when. In effect, China’s state can serve as a bankruptcy judge for the economy, keeping creditors in check, spreading the pain in an orderly fashion and, above all, preserving the value of the economy as a going concern.

China’s cash crunch also came about for a different reason. In 2008 America’s interbank market froze because banks refused to lend to each other. China’s froze last week because the central bank itself refused to lend. Despite the need of some banks for cash as the end of the quarter approached, the central bank sat on its hands, allowing rates to spike and signalling its determination to restrain the reckless growth of credit.

Letting interbank rates spike is a brutally effective, if crude, way to punish overstretched lenders; it may also have sent a useful message to profligate local governments. But it risks punishing everyone else, too (see article). As a result of the central bank’s abstention, rumours swirled about bank defaults and ATMs running out of cash. On June 24th China’s stockmarkets suffered their worst day in years; the Shanghai composite index fell by 5.3%. The central bank’s inaction threatened to endanger the confidence that makes banking possible. Fortunately, the authorities eventually woke up to the danger, moving to calm the markets on June 25th.

The priorities now should be to start cleaning up the financial system and rebalancing the economy. Letting banks raise interest rates on deposits would help them attract funds that are now disappearing into the shadow banking system. Introducing deposit insurance would also help distinguish protected deposits from unprotected, shadowy alternatives.

The government also needs to cool some overheated industries and liberate others. It should suppress speculative demand for housing by imposing an annual property tax on the market value of homes, broadening a pilot tax in Chongqing and Shanghai. And it should do more to encourage private investment in industries, from railways to telecoms, that are now dominated by state-owned enterprises. That would free China’s banks to lend to other sources.

Such reforms will take time to work and will slow the economy in the short term. Growth may run at only 6% next year, according to Dragonomics, a research firm—a sharp reduction from the double-digit rate that China has become accustomed to, and significantly below the government’s target for this year of 7.5%. That may cause a flurry of anxiety in Beijing. Yet the alternative is more wasteful lending and unproductive spending. China is a resilient economy that has grown its way out of problems in the past. But if it lets bubbles expand, then comparisons with America may become more apposite.

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Here's How You Can Play The Recent Precious Metals Squeeze

REUTERS/David Gray

A small-scale miner holds his gold that was melted together at a processing plant located around 100km (62 miles) north of the Mongolian capital city Ulan Bator April 5, 2012.

$('.icon-tooltip').tooltip();Ouch! That is really the only way to describe the last 9 months for investors in precious metals and mining stocks. The damage that has been done to the price of these investments is on a level that we haven’t seen in nearly two decades. Both institutional and retail investors have been shunning these hard assets due to fears of global deflation. Taking a look at some of the biggest exchange traded funds in this sector shows just how bad the carnage has been since their 2012 high. SPDR Gold Shares (GLD) -31%iShares Silver Trust (SLV) -47%MarketVectors Gold Miners (GDX) -59%MarketVectors Junior Gold Miners (GDXJ) -67%Investors typically flock to gold for one of two reasons: 1) as a safe haven hard asset or 2) as a hedge against future inflation. The biggest threat to gold and silver right now is the potential for a global deflationary environment in which consumer spending and global demand continues to taper off.

Emerging market nations such as China and India have previously been large buyers of precious metals, however the slowdown in their economies have put the brakes on further outsized spending. In addition, the strengthening of the U.S. dollar acts as a headwind for the price of these precious metals. Despite these devastating losses and continued downward momentum, many investors still hold high allocations in these ETFs.

So how do you play this sector that is continuing to get squeezed?

If you have been following my commentary over the last several weeks then you have likely used a risk management approach to selling all or a portion of your holdings. GLD showed a clear line of support on the chart that was violated and ultimately led to further downside momentum.

However, I believe that the valuations in gold are starting to look more attractive, which is why I am watching this sector closely for a new buying opportunity.

via Investor Place

If you have been diligent about sticking with your trading discipline, then you are likely in an excellent spot to look at re-entering this sector with a portion of your portfolio. One of my favorite tells for establishing a new position in an asset class that has been beaten to a pulp is media headlines.

Remember that headlines are most exuberant at market tops and most desolate at market bottoms. Right now the news is pretty bleak, which may be signaling that we are close to a bottom in precious metals.

If you do start to leg back into either gold or silver with your portfolio, I would consider doing so with small allocations that you average into over time. No one is going to be able to perfectly call the bottom in this sector, but by using these dips to your advantage you will have a greater chance for successfully navigating these choppy waters.

I am still recommending that you avoid mining stocks at this juncture because of their higher volatility and uncertain fundamental outlook.

No matter how you play the precious metals sector, I would recommend that you use a stop loss or similar risk management game plan for your portfolio. Even the staunchest gold bugs should not let conviction override their investment discipline in this volatile environment.

David Fabian is the Chief Operations Officer and Managing Partner of Fabian Capital Management. To get more investor insights from Fabian Capital, visit their blog here, or click here to download their latest special report The Strategic Approach to Income Investing.

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The Cost Of Mining Gold [INFOGRAPHIC]

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STEPHEN ROACH: The Federal Reserve And The People's Bank Of China Are On The Same Path

REUTERS/Jo Yong-Hak

Stephen Roach, Morgan Stanley Asia Chairman and Yale University professor, speaks to the media during a news conference at the 11th World Knowledge Forum in Seoul October 12, 2010.

$('.icon-tooltip').tooltip();NEW HAVEN – It was never going to be easy, but central banks in the world’s two largest economies – the United States and China – finally appear to be embarking on a path to policy normalization. Addicted to an open-ended strain of über monetary accommodation that was established in the depths of the Great Crisis of 2008-2009, financial markets are now gasping for breath. Ironically, because the traction of unconventional policies has always been limited, the fallout on real economies is likely to be muted. The Federal Reserve and the People’s Bank of China are on the same path, but for very different reasons. For Fed Chairman Ben Bernanke and his colleagues, there seems to be a growing sense that the economic emergency has passed, implying that extraordinary action – namely, a zero-interest-rate policy and a near-quadrupling of its balance sheet – is no longer appropriate. Conversely, the PBOC is engaged in a more pre-emptive strike – attempting to ensure stability by reducing the excess leverage that has long underpinned the real side of an increasingly credit-dependent Chinese economy.

Both actions are correct and long overdue. While the Fed’s first round of quantitative easing helped to end the financial-market turmoil that occurred in the depths of the recent crisis, two subsequent rounds – including the current, open-ended QE3 – have done little to alleviate the lingering pressure on over-extended American consumers. Indeed, household-sector debt is still in excess of 110% of disposable personal income and the personal saving rate remains below 3%, averages that compare unfavorably with the 75% and 7.9% norms that prevailed, respectively, in the final three decades of the twentieth century.

With American consumers responding by hunkering down as never before, inflation-adjusted consumer demand has remained stuck on an anemic 0.9% annualized growth trajectory since early 2008, keeping the US economy mired in a decidedly subpar recovery. Unable to facilitate balance-sheet repair or stimulate real economic activity, QE has, instead, become a dangerous source of instability in global financial markets.

With the drip-feed of QE-induced liquidity now at risk, the recent spasms in financial markets leave little doubt about the growing dangers of speculative excesses that had been building. Fortunately, the Fed is finally facing up to the downside of its grandiose experiment.

Recent developments in China tell a different story – but one with equally powerful implications. There, credit tightening does not follow from determined action by an independent central bank; rather, it reflects an important shift in the basic thrust of the state’s economic policies. China’s new leadership, headed by President Xi Jinping and Premier Li Keqiang, seems determined to end its predecessors’ fixation on maintaining a rapid pace of economic growth and to refocus policy on the quality of growth.

This shift not only elevates the importance of the pro-consumption agenda of China’s 12th Five-Year Plan; it also calls into question the longstanding proactive tactics of the country’s fiscal and monetary authorities. The policy response – or, more accurately, the policy non-response – to the current slowdown is an important validation of this new approach.

The absence of a new round of fiscal stimulus indicates that the Chinese government is satisfied with a 7.5-8% GDP growth rate – a far cry from the earlier addiction to growth rates around 10%. But slower growth in China can continue to sustain development only if the economy’s structure shifts from external toward internal demand, from manufacturing toward services, and from resource-intensive to resource-light growth. China’s new leadership has not just lowered its growth target; it has upped the ante on the economy’s rebalancing imperatives.

Consistent with this new mindset, the PBOC’s unwillingness to put a quick end to the June liquidity crunch in short-term markets for bank financing sends a strong signal that the days of open-ended credit expansion are over. That is a welcome development. China’s private-sector debt rose from around 140% of GDP in 2009 to more than 200% in early 2013, according to estimates from Bernstein Research – a surge that may well have exacerbated the imbalances of an already unbalanced Chinese economy.

There is good reason to believe that China’s new leaders are now determined to wean the economy off ever-mounting (and destabilizing) debt – especially in its rapidly expanding “shadow banking” system. This stance appears to be closely aligned with Xi’s rather cryptic recent comments about a “mass line” education campaign aimed at addressing problems arising from the “four winds” of formalism, bureaucracy, hedonism, and extravagance.

Financial markets are having a hard time coming to grips with the new policy mindset in the world’s two largest economies. At the same time, investors have raised serious and legitimate questions about Japan’s economic-policy regime under Prime Minister Shinzo Abe, which unfortunately relies far more on financial engineering – quantitative easing and yen depreciation – than on a new structural-reform agenda.

Such doubts are understandable. After all, if four years of unconventional monetary easing by the Fed could not end America’s balance-sheet recession, why should anyone believe that the Bank of Japan’s aggressive asset purchases will quickly end that country’s two lost decades of stagnation and deflation?

As financial markets come to terms with the normalization of monetary policy in the US and China, while facing up to the shortcomings of the BOJ’s copycat efforts, the real side of the global economy is less at risk than are asset prices. In large part, that is because unconventional monetary policies were never the miracle drug that they were supposed to be. They added froth to financial markets but did next to nothing to foster vigorous recovery and redress deep-rooted problems in the real economy.

Breaking bad habits is hardly a painless experience for liquidity-addicted investors. But better now than later, when excesses in asset and credit markets would spawn new and dangerous distortions on the real side of the global economy. That is exactly what pushed the world to the brink in 2008-2009, and there is no reason why it could not happen again.

This article was originally published by Project Syndicate. For more from Project Syndicate, visit their new Web site, and follow them on Twitter orFacebook.

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