26 April 2009

Weekend reading:yuan swaps,money printing and commodity bulls

HONG KONG - The Chinese government's decision this month to let exporters in a small number of cities settle their overseas trade in yuan rather than in US dollars has far-reaching implications, according to economists, even though the immediate impact is minimal.

The trading hubs of Shanghai at the mouth of the Yangtze River and Guangzhou, Shenzhen, Zhuhai and Dongguan in the Pearl River Delta further south can use the yuan in overseas trade settlement, a State Council, or cabinet, meeting chaired by Premier Wen Jiabao said. The two deltas are the base for most of China's export-oriented industry.

The settlement scheme is voluntary and of benefit to relatively

small groups, said Pauline Loong, senior vice president in charge of China policy and risk research at CIMB-GK Securities (HK) Ltd, but "the implication is far-reaching. The scheme extends the use of the Chinese currency outside of the mainland. We see this as the first step on the road to full liberalization of China's capital account and full convertibility for the renminbi," one term for the Chinese currency, also known as the yuan.

Most international trade is carried out in US dollars. The Chinese scheme is aimed at reducing the risk from exchange-rate fluctuations and giving impetus to declining overseas trade, a statement posted on the Chinese government website said. Further details of related regulations will be released as early as possible, the statement said.

China's exports plunged 25.7% year-on-year in February as overseas consumer demand fell away amid the deepening global financial and economic crisis.

The move to allow international trade settlement in yuan in select cities is in line with the government's gradual approach to currency liberalization, said Jing Ulrich, China equities chairwoman at JP Morgan. Beijing earlier allowed companies in Hong Kong and Macau to use yuan to settle deals with partners in Guangdong and the Yangtze Delta.


Sports fans, $300 billion is just a down payment on the "quantitative easing" they will eventually need to do. They can't announce what they are really going to do or the market would throw up. But we are going to get quarterly or semi-annual announcements, saying, we are going to do another $300 billion here, another $500 billion there. Pretty soon it will be a really large total number.

When we first started out with TALF and everything, it was a couple hundred billion, and now we just throw the word trillions around and it just drips off of our tongues and we don't even think about it. A trillion is a lot. It's a big number. And the total guarantees and backups and all this stuff we are into -- I saw an estimate of $10-12 trillion. That's a lot of money.

Understand, the Fed is going to keep pumping money until we get inflation. You can count on it. I don't know what that number is; I'm guessing maybe as much as $2 trillion. I've seen various studies. Ray Dalio of Bridgewater thinks it's about $1.5 trillion. It's some very big number way beyond $300 billion, and they are going to keep at it until we get inflation.

Side point: what happens if the $300 billion they put in the system comes back to the Fed's books because banks don't put it into the Libor market because they are worried about credit risks? It does absolutely nothing for the money supply. Okay? It's like, goes here, goes back there -- it doesn't help us. The Fed has somehow got to get it into the financial system. They've got to figure out how to create some movement.

Will it create an asset bubble in stocks again? I don't know, it could. Dennis [Gartman] talked about being nervous yesterday. I would be nervous about stock markets both on the long side, as I think we are in a bear market rally, but also there is real risk in being short. Bill Fleckenstein will be here tonight. He is a very famous short trader. He closed a short fund a couple of months ago. He says he doesn't have as many good opportunities, and basically he's scared of being short with so much stimulus coming in. So it's going to work, at least in terms of reflation, but the question is, when? A year? Two years?


Commodities to rocket......

For all these reasons, commodities stocks have great potential going forward. I suspect that a year from now, 2 years from now, investors will look back at this still-neglected sector and marvel at its stock-price appreciation since. And this is really saying something, since the best years stock markets ever witness in history occur immediately after the worst years. So after the disastrous 2008, 2009 is due to be a huge up year (approaching 50%) for the general stock markets. Commodities stocks should easily double, triple, or quadruple these already large stock-market gains!


IMF predicts world recession will deepen:

The International Monetary Fund has slashed growth forecasts for every major country and urged governments to take forceful action to ensure the world economy's recovery from a severe recession.

Taleb on medicine and markets

How long can something be held as wrong before its practice is discontinued? A long, very long time, much longer than we think. We've know that "modern finance" and economics represented a danger to society [since 1961, with close to 400 blowup episodes including the crash of 1987] to no avail --and this blowup of the banking system will not bring any relief. Even the fact that I may have made the point in what may turn out to be the ALL TIME bestseller in economics and philosophy of science [ and the mother of all empirical evidence] might not help displace the charlatans. Some ideas from the history of Medicine (Medicina, soror philosophiae!).

Noga Arikha "Just Life in a Nutshell: Humours as common sense", in The Philosophical Forum Quarterly, XXXIX, 3:

When William Harvey demonstrated the mechanism of blood circulation in the 1620s, humoral theory and its related practices should have disappeared, because the anatomy and physiology on which it relied was incompatible with this picture of the organism. In fact, people continued to refer to spirits and humors, and doctors continued to prescribe phlebotomies, enemas, and cataplasms, for centuries more --even when it was established in the mid-1800, most notably by Louis Pasteur, that germs were the cause of disease.

See also Arikha's book (it was swallowed by my uncatalogued library so I am ...reordering it).

The most complete compendium is in Wooton Bad Medicine: Doctors Doing Harm Since Hippocrates.

p 184 [...] why doctors for centuries imagined that their theories worked when they didn't; why there was a delay of more than two hundred years between the first experiments designed to disprove spontaneous generation and the final triumph of the alternative, the theory that living creatures always come from other living creatures; why there was a delay of two hundred years between the discovery of germs and the triumph of the germ theory of disease; why there was a delay of thirty years between the germ theory of putrefaction and the development of antisepsis; why there was a delay of sixty years between antisepsis and drug therapy. [he explains elsewhere that there was no money in microscopy, which delayed implementation...]

Elsewhere Wooton shows how surgeons resisted anesthesia (because it was considered cheating), how doctors in France were still bleeding patients at the end of the 19th century, yet: In 1851 [...] Dietl showed that bloodletting tripled the death rate in a pneumonia.

p 240- Pasteur had a sensible distrust of doctors. p 14 I took it for granted that in an open argument, good ideas would always defeat bad ideas. [...] Peer group pressure often halt progress in its track.[...] Despite the brilliant work of philosophers and historians of science, no one has really worked out how to write a history that takes account of this. p 293 Shapin tells us that "The Harvard biochemist L.J. Henderson [1878-1942] was supposed to have remarked "that it was only sometime between 1910 and 1912 ...that a random patient, with a random disease, consulting a doctor chosen at random, had, for the first time in the history of mankind, a better than 50-50 chance of profiting from the encounter."'

Also, something that explains why I am going nuts.

By 1861 [Semmelweiss] was denouncing those who had not adopted his views as murderers.

James Le Fanu: The Rise and Fall of Modern Medicine (1999) talks of "collective deception".

I call this the translational problem because of a great paper by Ioannides (my hero) et al. Life Cycle of Translational Research for Medical Interventions in Science (Sept 5, 2008) --they show how long it takes from initial scientific paper to implementation --and how the cycle is lengthening. But my problem is that the gap knowledge/practice is not curable --the arrow goes from practice to knowledge.

New books on medical history: Gloria Origgi have me a book on Semmelweiss by ... Louis Ferdinand Celine! (merci mille fois). Also Francois Lebrun Se soigner autrefois Médecins, saints et sorciers aux XVIIe et XVIIIe siecles, Georges Vigarello Histoire des pratiques de santé, Jackie Pigeaud La maladie de l'ame, Collectif (Centre Jean Palerne): Rational et irrationel dans la médecine ancienne et médiévale. I also got a long paper by Gerd Gigerenzer on medical practice and conditional probability (I guess it is the misunderstanding of Type 2 error that is costing us so much).

Also I consider the work of Gary Taubes (and soon the book by Art DeVany) as documents in the history of medical errors.


Thanks to Duncan of http://www.learntotradefutures.com

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