"Abenomics" at Work: McDonald Japan to Sell 1,000 Yen ($10) Quarter Pounder Burgers for a Limited Time

I said I would be the world number one.

Everybody laughed and said it was impossible.

That's OK. That's even better.

Surprise will be bigger.

Bite.

Japanese bubble is already here. What will be next? Tiramisu with gold flakes, again?

For those Japanese who were born after the last bubble burst (1990), here's your chance for a taste of bubble. Get it before it bursts, again.

The man in the commercial is Keisuke Honda, a 27-year-old midfielder who plays in the Russian Premier League.

Tweet

Morgan Stanley Sees Bubbly China

and it's just fine and dandy with them.

Their latest on the Global Economic Forum is "Policy-Driven Decoupling: Upgrading Our 2009-10 Outlook", July 17, 2009 by Qing Wang, Denise Yam, CFA & Steven Zhang , Hong Kong.

"The Chinese economy staged a stronger-than-expected rebound in 2Q09, with real growth reaching 7.9%Y, up from the trough of 6.1% in 1Q09. On a seasonally adjusted basis, we estimate that the economy grew by a strong 4.5%Q (+19% annualized), accelerating from 1.5% in 1Q09 and the trough of 0.4% in 4Q08. We attribute the better-than-expected economic performance to the maintenance of the growth-boosting policy stance, which made possible a much-accelerated realization of the real stimulative effect from the multi-trillion renminbi fiscal package and expansionary monetary and credit policy, which we originally expected to materialize only in 2H09. In particular, policy-driven monetary and credit expansion, which has been consistently surprising on the upside, has enabled the significant pick-up in domestic investment. The Rmb1.53 trillion new loans made in June sent money and loan growth to new record-highs of 28.5%Y (M2) and 34.4%Y, respectively. Credit creation in 1H09 totaled Rmb7.37 trillion, three times the amount in the year-ago period, and exceeding the 2008 total (Rmb4.91 trillion) by 50%, helping to finance the 35.7%Y growth in fixed asset investment (nationwide) in 2Q09, up from 28.8% in 1Q (33.5% in 1H)."

So the Morgan Stanley analysts are basically saying that the Chinese stimulus is working miracles, unlike those in the Western nations. So where is this "domestic", "fixed asset" investment going, which is the result of "policy-driven monetary and credit expansion"?

Their summary does mention "the strong recovery in property sector", but the detailed discussion oddly starts with domestic consumer consumption (which the analysts say resilient) offsetting external weakness (i.e. export). I take it to mean it has stopped going down. Export has cratered because the U.S. and Europe are not buying anytime soon.

Then they talk about "policy-driven decoupling", meaning China has forced the banks to lend by lowering the interest on the reserves (they don't mention this) so the market is awash with new credits looking for places to go. And they are going places.

"Specifically, sustained and stronger-than-expected credit growth in recent months has continued to buoy sentiment and helped to deliver: a) an accelerated rollout of public infrastructure projects; b) more resilience in private consumption and private manufacturing sector capex despite weak exports; and c) an increasingly convincing recovery in property investment. These positive developments, together with the steady asset price reflation, are serving to compensate for the prolonged weakness in external demand."

The newly created money is going to public infra projects (not the most efficient use of money in any country, particularly in China), private manufaturing sector capital expenditure (without demand from export, that means overcapacity being built), and property investment. The money apparently make Chinese citizens feel good, as an important side effect.

The Morgan Stanley analysts call these developments "positive", and happy to see "the steady asset price reflation". It's the bubble time again!

Didn't we just popped one gigantic bubble based on asset price inflation? And these analysts are hailing the reflation of the same bubble and misallocation of capital?

They also say that despite rapid increase in M2 (28.5%), there is no need to worry about inflation at least for the next 12 months. And yet they talk about steady asset price reflation. So if I try my best to understand the Morgan Stanley economists, China is in a wonderful situation:

• The stimulus is working, thanks to the government's monetary and economic policies, and money is going to infra, capacity build-up, and real estate market (wonder why they don't mention stock market);
• Chinese citizens are happy that the asset price is being reflated without food price going up;
• Export will resume its growth in the 4th quarter because of renminbi's peg to the weakening U.S. dollar and because of tepid demand to be coming from the U.S. and Europe;
• M2 is growing rapidly but there will be no price inflation for at least for 12 months even if asset prices are reflating.

That foreign hot money is back in China I have little doubt. China's purchase of U.S. Treasuries jumped in May by $38 billion. China's central bank has been busy absorbing the U.S. dollar that has been entering their country; their foreign reserve recently topped $2 trillion.

I can't picture a worse scenario than to have a central planning and have a flood of hot money coming in.

Morgan Stanley recently announced that it plans to repackage a downgraded collateralized debt obligation backed by leveraged loans into new securities with AAA ratings. The firm seems to want the return of good old bubble, so it's little wonder it is cheering the new (old) bubble in China.

Tweet

New Bubble Machine - Carbon Emission Allowance

Congressional Budget Office (CBO), in its analysis of the climate bill titled "The Estimated Costs to Households From the Cap-and-Trade Provisions of H.R. 2454" says the following about the emission allowance under the Cap and Trade provision of the bill:

"CBO estimates that the price of an allowance, which would permit one ton of GHG emissions measured in CO2 equivalents, in 2020 would be $28.2. H.R. 2454 would require the federal government to sell a portion of the allowances and distribute the remainder to specified entities at no cost. The portions of allowances that were sold and distributed for free would vary from year to year. This analysis focuses on the year 2020, when 17 percent of the allowances would be sold by the government and the remaining 83 percent would be given away. Entities that received allowances could sell them or use them to meet their compliance obligations."

One of the big problems (there are many) with the Cap and Trade way of reducing the pollution (whether it's sulphur dioxide or nitrogen oxide or carbon dioxide) is how the initial allowance is priced and allocated. Initial allowance will be arbitrarily set by the government, both allowance amount and price. And when the allowance is not auctioned off entirely but is given away free to certain companies/industries as seen appropriate by the government, the entire process is screaming "manipulation", "corruption", "collusion".

So, entities that received free allowances from the government could sell them for profit if they don't need them. Get them for free, sell them for some price: infinite return on the money. Or they can choose to keep them, waiting for future price appreciation as the emission limit gets lower and lower. Some entities may get 4 free allowances for 1 paid allowance, others may get 2 free for 1 paid, yet others may get 10 free for 1 paid. Who knows? No one knows.

Is it just me, or do you also see a dot-com bubble era practice of investment banks giving pre-IPO shares to certain people at a low price so that these people can turn around and sell after IPO for filthy profits?

Now comes valuable middlemen (like Goldman Sachs) who will offer to manage the allowances. I can envision a whole set of derivatives coming out of this allowances business. Futures market, options on the futures to start. Then, to smooth out the allowance cost over the years and hedge against allowance price fluctuation, they will develop an allowance swap, much like interest rate swap. Since the number of allowances are set to decrease over the years, the price of allowances is assumed to be increasing all the time. So what better product, if they can package it right, to sell to pension funds and college endowments who want to hold long positions only (like they did during the oil bubble in 2008)?

Just like CDS, at some point there will be buyers and sellers of derivatives on allowances without underlying commodity (in this case, source of pollution), even if there is no intrinsic value to the allowance other than what the government mandates. (U.S. dollar bill does not have intrinsic value either, other than as a piece of paper and the word from the Federal Reserve "Trust us".)

No wonder big businesses support this bill. If E.U.'s experience is any indication, the carbon emission will not decrease because of the cap and trade (in E.U.'s case, it decreased by 3% but not due to the cap and trade; it is due to the recession), but the taxpayers will be presented with increased energy bills and attendant price increase on just about every product with no appreciable benefit.

This is the new bubble that the government wants to blow. It is set to feed on the money of people who have hardly any say in the matter: the taxpayers money. So the bubble will keep on blowing at the expense of the taxpayers until they realize they've been had.

Tweet