Is PAGE dead on PBOC ban on non-Shanghai gold exchanges?

Mineweb (ex-Reuters) is reporting that “Gold exchanges in China outside of two in Shanghai are to be banned, authorities said in a statement released on Tuesday.”

Looks like the much hyped Pan Asia Gold Exchange is dead. Not sure where this leaves those who claimed that it “will ultimately destroy the remaining short positions in both gold and silver”.

I will come back to this story but for the moment I want to see how the pumpers and hype merchants spin it, or unspin what they said before.

I also find it interesting that this story breaks at the same time as China Daily reports that “China should further diversify its foreign-exchange portfolio and make more gold purchases when the metal’s price dips but is still at a relatively high level, a senior central bank official said on Monday.”

What is China’s game re gold? How can we weave these two stories into a coherent explanation?

Economic Events on December 28, 2011

At 7:45 AM Eastern time, the weekly ICSC-Goldman Store Sales report will be released, giving an update on the health of the consumer through this analysis of retail sales.

At 8:55 AM Eastern time, the weekly Redbook report will be released, giving us more information about consumer spending.

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Uncomfortable times in real estate in store?

Patrick Chovanec has a fascinating article in Foreign Affairs, titled China’s Real Estate Bubble May Have Just Popped. This is interesting and important from two points of view.

First, bad news for China is bad news for the world economy. We are already in a bleak environment, with difficulties in Europe, Japan, the US, and India. It will not be pretty if China runs into trouble as well. I am reminded of the feeling of carefully watching real
estate in the United States in 2006
, with a sense that the future of the world economy was going to turn on how it turned out.

Second, it made me think about real estate in India. As with China, one often sees buyers of real estate in India have the notion that
this is a safe financial asset. This is a questionable proposition. Real estate is perhaps not an asset
class with a positive expected return in the first place; and it is certainly not a convenient asset class with features like liquidity,
transparency, diversification and easy formation of low-volatility diversified portfolios. I find it hard to explain the prominence of
real estate in the portfolios of even educated people in India.

In the article, Chovanec says:

For more than a decade, they have bet on longer-term demand trends by buying up multiple units — often dozens at a time — which they then leave empty with the belief that prices will rise. Estimates of such idle holdings range anywhere from 10 million to 65 million homes; no one really knows the exact number, but the visual impression created by vast `ghost’ districts, filled with row upon row of uninhabited villas and apartment complexes, leaves one with a sense of investments with, literally, nothing inside.

This has not happened in India. So in this sense, the situation in India is not as dire. But his second key message seems uncomfortably

As 2011 progressed, developers scrambled for new lines of financing to keep their overstocked inventories. They first relied on bank loans (until they were cut off), then high-yield bonds in Hong Kong (until the market soured), then private investment vehicles (sponsored by banks as an end run around lending constraints), and finally, in some
cases, loan sharks. By the end of last summer, many Chinese developers had run out of options and were forced to begin liquidating inventory. Hence, the price slashing: 30, 40, and even 50 percent discounts.

Part of this looks familiar. There is a lot of leverage in Indian real estate development and speculation. Real estate speculators and
developers are finding themselves in a bit of a scramble hunting for credit. One hears about very high interest rates being paid by
developers. Other sources of financing are also weak. This reminds me of the dark days before the global crisis, when borrowing by real estate companies was the canary in the coal mine.

If business cycle conditions and financial conditions worsen, the problems of borrowing by real estate developers and speculators will get worse. How might this turn out? Perhaps the borrowers will merely get uncomfortable. Or, a few firms could really get into trouble, and start liquidating inventory. That would have substantial repercussions.

Suppose there is a situation where there are many people who have speculative positions in real estate, but significant selling of
inventory has not yet begun. The longs would then be nervously looking at each other, wondering who would be the first one to sell, to take a better price and exit his position. The ones who sell late would get an inferior price. In such a situation, conditions could change sharply in a short time.

On a longer horizon, I would, of course, be delighted if real estate prices are lower. This would help shift the supply function of
labour, reduce the cost of setting up new businesses, etc. But that’s more about the long-term policy changes, which would remove barriers for converting land into built-up housing, while rising vertically into the sky with FSI in Indian cities ranging from 5 to 25.

Interesting History

Walter E. Williams, on the federal income tax:

During the legislative debate before enactment of the 16th Amendment, Republican President William Taft and congressional supporters argued that only the rich would ever pay federal income taxes. In fact, in 1913, only one-half of 1 percent of income earners were affected. Those earning $250,000 a year in today’s dollars paid 1 percent, and those earning $6 million in today’s dollars paid 7 percent. The 16th Amendment never would have been enacted had Americans not been duped into believing that only the rich would pay income taxes. It was simply a lie to exploit American gullibility and envy.

I believe it was either last year, or possibly in the spring of this year, when conservatives got their panties in know over how 49% of all taxpayers paid no income taxes (though, funnily enough, all taxpayers still paid their FICA and other payroll taxes). The theory was that there would arise a class of professional voters, who would simply elect officials to pay take money from the rich and give it to the more-deserving poor, of which said professional voters just so happened to be a part.

The reality appears to be a bit different, at least historically speaking. When the income tax was first enacted, it only applied to the rich, who comprised 0.5% of the population. Thus, the percentage of the population paying the income tax increased 100-fold over 98 years to 51%. If the theory of professional voters were true, the percentage of taxpayers should have at least remained stable (or even decreased) while the tax rates should have remained stable or increased. Reality, as it were, is markedly different.

In spite of all the attempts at class warfare in the last one hundred or so years, the poor still get screwed over by the rich. This is probably because there is a strong correlation between a general form of stupidity and poverty,* as well as a strong correlation between wealth and general intelligence. In essence, the wealthy are generally intelligent enough to figure out how to make things work to their advantage (hence their wealth). If one is cunning enough to convince people to buy something they don’t need, it seems plausible that one could also sell someone a political policy that works to their disadvantage.

The historical norm has been that poor people pay quite a bit in taxes, and the wealthy are often the beneficiaries of those taxes (think of the feudal system as a general model of this). The idea that those who are intelligent enough to become quite wealthy won’t also be intelligent enough to protect their wealth is, quite frankly, absurd, and the idea that somehow the poor will manage to “reappropriate” wealth from the rich is even more absurd.

* Two quick notes: a lack of education generally correlates to stupidity, which in turn correlates to lower income (as evidence by the myriad statistics showing that high school dropouts earn less than those with a high school diploma, bachelor’s degree, etc.) Also, shorter time horizons also correlate to stupidity as well.

Most Stable Region of Pittsburgh

So in the spirit of the end of year retrospectives we will be having all week this came to mind.  In October I pointed out that for the Pittsburgh region, it was the highest employment count for an October ever.  Same for November.  Following from that, I was thinking a bit about some analysis by the folks at the parent of the business times which showed Pittsburgh among a small set of regions that are at their decade high employment peaks.

That analysis might be misread a bit.  It is not that Pittsburgh is among the top employment gainers over the decade.  We are one of a few regions currently hitting their decade high peaks.  Lots of regions have had more growth over the decade, but many have dropped a lot from those peaks in recent years. In lots of ways it is a reflection of the relative stability here, not a lot of job growth.

So I made a graphic of the employment change for the 50 largest MSAs (currently, by employment) over the last decade.  So with November 2001 as a baseline, below is what those trends looks like; Pittsburgh is in red.  It works out, and I calculated this explicitly that Pittsburgh is in a sense the single  most stable employment time series among all 50 regions.  Stable as defined by the difference in this time series between the peak and trough over the decade.  The difference between the peak and trough for Pittsburgh works out to 6.67 across the decade, which works out to the lowest range for any of the 50 regions.

Economic Events on December 27, 2011

At 9:00 AM Eastern time, the monthly S&P/Case-Shiller home price index report will be released.  Given that most economists don’t expect the overall U.S. economy to improve until housing prices end their decline, the market will be watching this number closely.

At 10:00 AM Eastern time, the monthly report on Consumer Confidence for December will be released.  The consensus index level is 59, which would be a 3 point increase from last month’s number.

Also at 10:00 AM Eastern time, the State Street Investor Confidence Index will be released, which looks at changes in the amount of equities held in the portfolios of institutional investors.

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Anecdote vs. Data

Let me make some introductions.  Data meet news, news meet data.

I just caught this headline.. but the Patriot News had article over the weekend: Marcellus Shale industry brings ‘tsunami of jobs’ to Pa.. which really was more of an anecdotal story focused on a woman getting a job in the drilling industry here in Pennsylvania.

Yet below is what the state’s own data days about women working in Pennsylvania in these industries.  I’ve seen virtually no news that really looks into just how one sided this looks.  Given the coverage like above, you might think it was a tsunami of jobs for women.  Maybe someone wants to go the next step and work out similar gender breakdowns for new hiring in the same industries in say Texas and Oklahoma and see how Pennsylvania compares.

New Hires by Gender in Mining, Quarrying, Oil and Gas Extraction Industries
Pennsylvania, 1st Half of 2010

Source: LEHD, which is a collaboration of state labor agencies and BLS.

Is Foreign Trade a Big Deal?

Hale and Hobijn find that the vast majority of goods and services sold in the United States are produced here. In 2010, total imports were about 16 percent of U.S. gross domestic product, and of that, 2.5 percent came from China. A total of 88.5 percent of U.S. consumer spending is on items made in the United States, the bulk of which are domestically produced services – such as medical care, housing, transportation, etc. – which make up about two-thirds of spending. Chinese goods account for 2.7 percent of U.S. personal consumption expenditures, about one-quarter of the 11.5 percent foreign share. Chinese imported goods consist mainly of furniture and household equipment; other durables; and clothing and shoes. In the clothing and shoes category, 35.6 percent of U.S. consumer purchases in 2010 were items with the “Made in China” label.

Foreign trade sound much less important when discussed as a percentage of GDP instead dollars. 16% sounds like a relatively small amount, but once you put that in dollar terms it becomes $2.24 trillion dollars.* Obviously, this is a significant chunk of change, roughly equal to the mandatory spending of 2010 federal budget (and equivalent to roughly two-thirds of the total federal budget). Given that unemployment wavered between 16.5% and 17.1% that year (and was likely higher, given how the government manipulates those statistics), it seems reasonable to conclude that it having even half of those imports produced at home would have had a pretty positive impact on unemployment.**

Much of what China sells us has considerable “local content.” Hale and Hobijn give the example of sneakers that might sell for $70. They point out that most of that price goes for transportation in the U.S., rent for the store where they are sold, profits for shareholders of the U.S. retailer, and marketing costs, which include the salaries, wages and benefits paid to the U.S. workers and managers responsible for getting sneakers to consumers. On average, 55 cents of every dollar spent on goods made in China goes for marketing services produced in the U.S.

But why not have, if possible, one hundred cent of dollars be paid to Americans? Saying that the effects of foreign trade aren’t that bad is little consolation to those who are unemployed.

Going hand in hand with today’s trade demagoguery is talk about decline in U.S. manufacturing. For the year 2008, the Federal Reserve estimated that the value of U.S. manufacturing output was about $3.7 trillion. If the U.S. manufacturing sector were a separate economy – with its own GDP – it would be tied with Germany as the world’s fourth-richest economy. Today’s manufacturing worker is so productive that the value of his average output is $234,220, three times higher than it was in 1980 and twice as high as it was in 1990. That means more can be produced with fewer workers, resulting in a precipitous fall in manufacturing jobs, from 19.5 million jobs in 1979 to a little more than 10 million today.

The problem with the technology argument is that it fails to account for the impact of governmental interference. Of course, it is impossible to tell with any degree of certainty how much the government, by its interference, has encouraged manufacturers to pull forward their demand for machines to replace workers. It also fails to account for foregone manufacturing in light of a) regime uncertainty, b) the regulatory thicket that is the federal code, and c) the monstrosity that is the corporate tax code. Basically, there is no reason to assume that manufacturing would be as automated if there was actually a free market, nor is there any reason to assume that there would be as few manufacturing jobs if there were no federal regulations.
Now, as has been mentioned at this blog many times before, federal policy has been directly responsible for the current economic malaise. The federal government has hamstrung domestic businesses while simultaneously giving foreign businesses a free pass for trade. The direct effect of this schizophrenic policy has been to subsidize foreign businesses at the expense of domestic businesses. This has also contributed to a high unemployment rate. While free trade is the undoubtedly preferable state of being, it makes no sense to allow this while simultaneously hamstringing domestic businesses. The government must level the playing field, most preferably by deregulating domestic businesses. In the event this cannot be accomplished, the government should ensure that foreign businesses adhere to same labor and environmental regulations faced by domestic businesses or at least pay the difference.
As Walter Williams states:

The bottom line is that we Americans are allowing ourselves to be suckered into believing that China is the source of our unemployment problems when the true culprit is Congress and the White House.

* The GDP of the united states for 2010 was approximately $14 trillion; 16% of this is $2.24 trillion.
** Keep in mind that, during 2010, the welfare/unemployment budget was nearly $600 billion. Half of the imports would have been $1.12 trillion, nearly double the welfare budget. I’ll let you draw your own conclusions from this.

Unsegregated Allocated

Following on from this post from 2009 where I identified five types of storage (Segregated Allocated, Unsegregated Allocated, Unsegregated Physical Backed, Unallocated Fully Hedged, Unallocated Unhedged), we now have confirmation that “Allocated” metal at a bullion bank is unsegregated from this interview with Kyle Bass (42 minute mark) where he talks about bars being all over the place when they did an audit.

The unsegregated nature of bullion bank allocated is why Bob Pisani picked up the wrong bar in his visit to the GLD vault as part of a HSBC promo.

This unsegregated storage is not necessarily a problem and would not make a difference in any bankruptcy of a custodian as the key “segregation” is the specific bar numbers and weights in the client name. Whether bars belonging to two different clients sit together on the same pallet or are on separate pallets separated by air, I cannot see making a difference.

Economic Events on December 23, 2011

At 8:30 AM Eastern time, the Durable Goods Orders report for November will be released. The consensus is that there was an increase of 1.9% from the previous month.

Also at 8:30 AM Eastern time, the monthly Personal Income and Outlays report for November will be released. The consensus for Personal Income is an increase of 0.2% over the previous month and the consensus Consumer Spending index change is an increase of 0.3%.

At 10:00 AM Eastern time, the New Home Sales report for November will be released. The consensus is that 314,000 new homes were sold last month, which would be 7,000 more than the prior month.