Walking the long, windy road toward the demise of the dollar, we spy another mile marker today: China is officially putting their money where their mouth is.

After clamoring for a reserve alternative all year, the Chinese government agreed to a $50 billion currency-diverse deal with the IMF today. Back in June, the deal seemed imminent. This morning, it finally came to fruition.

In their deal with the IMF — the first of its kind for any nation, ever — China buys $50 billion worth of bonds denominated in Special Drawing Rights, which will represent a basket of global monies. (That basket will be a split between the dollar, euro, pound and yen… not exactly the gems of the global currency batch.)

Still, it’s probably a win for China on several fronts: They get to ditch the dollar (sort of) without making a big geopolitical stink. In fact, since their funds will prop up the IMF’s rescue coffer, China gets to play the global good guy for once — while also purchasing some political influence over the IMF.

Russia and Brazil have each promised to buy $10 billion of these bonds, as well.
The U.S. dollar has already given back gains made earlier this week. The panic on Monday and Tuesday helped bump the dollar index up to just shy of 79. But the buzz has worn off, and the DX is right back to where it started the week, around 78.3.
Gold, on the other hand, has done nothing but rise this week. The spot price inched up, thanks to its “safe haven” status, and then accelerated skyward as the dollar fell. The spot price is up to $985 this morning, from $950 and change on Monday. That’s a three-month high.
“Over the past four decades, September has been the best time for gold in terms of its month-over-month price appreciation,” Frank Holmes reminds us in his latest Daily Reckoning essay. “You can see this on the chart below — in a typical year, the price of gold in September rises 2.5% above its August price. The gold price has risen in 16 of the 20 Septembers since 1989, by far the best success ratio of any month of the year.

“What accounts for this predictable trend?

“September kicks off several of the planet’s most potent gold-demand drivers:

• The post-monsoon wedding season in India and Diwali, one of the country’s most important festivals
• Restocking by jewelry makers in advance of the Christmas shopping season in the United States
• The holy month of Ramadan in the Muslim world, whose end in late September is marked by a period of celebration and gift giving
• And in China, the week-long National Day celebration starting Oct. 1 and the run-up to the Chinese New Year in early 2010.

“Based on the long-term record, this may represent a good time for investors who want to establish or add to a gold or gold stock position in advance of seasonal demand growth. The guidance provided by historical patterns may improve the chances for investment success, but of course, there are no guarantees that this September will follow the well-established trend.”
For stocks, traders took a breather after Tuesday’s sell-off and finished yesterday around break-even. This morning, the S&P 500 opened just a bit higher, thanks mostly to this:
Chinese banks lent more money in August than many had anticipated, the China Securities Journal reported this morning. At $24 billion, that’s right around July’s level.

If you recall, it was a rumor that Chinese lending had slowed even further in August that sent stocks around the world plummeting Monday. Thus, this “not so bad” report shot the Shanghai Composite up 4.8% today, and has helped other worldly indexes start off in the black. (Whether more easy money in China is a good thing… well… traders can save that for another day.)
“Market prices should reflect underlying demand and supply,” notes Chris Mayer. “As in a vegetable stand, the prices come from the buying and selling of people in the market.

“But with all the artificial stimulus money floating around, here and abroad, you can never be sure of what you see. Is this a real recovery or is it an artificially ripened tomato, and hence an imposter? When the stimulus money stops flowing, will the recession get worse?

“CNN’s bailout tracker reports that U.S. government stimulus has totaled $2.8 trillion so far this year, with another $8.2 trillion in commitments. Most of this money has gone to the financial sector. Some of it has gone to infrastructure projects and to consumers (“cash for clunkers,” for example).

“That is a lot of money. It is hard to say how all of this spending has artificially boosted economic activity in some sectors of the economy. It is obvious that such spending cannot continue indefinitely.

“Take a look at this next chart, which shows you how the stimulus spending reaches a peak sometime in early 2010 at $57 billion and then takes a dive.

“Of course, the government can always decide to spend more. But as it is now, this is a pattern of spending we can expect to distort the various sectors it flows to. You can see also on the chart where the money goes, including that big red layer that goes toward highways and transportation.

“We may yet see a surge in business activity as we get to 2010. But after that, we’ll see if this seeming recovery in the making is real or manufactured by funny money.”

If the latter scenario occurs, wouldn’t you want a portfolio full of companies in essential industries… like water, food and energy? That’s part of the reasoning behind Chris’ latest project: The Primeval Portfolio. Check it out here.
Whether real or artificial, hopes of recovery got a firm slap this morning, courtesy of the data patch. Here’s the quick and dirty:

• The U.S. service sector contracted for the 11th month in a row, the ISM said today. After Monday’s ISM manufacturing gauge, which showed surprise growth, traders had their fingers crossed for a score above 50 in today’s ISM service sector reader. Not so, said the group. Their index stood at 48. In other words, 70% of our economy was still shrinking in August
• Retail sales fell 2.9% in August, the 12th straight month of decline. Despite of the “back to school” rush, only low-cost brands showed signs of life last month… Costco, BJ’s, Gap, Aeropostale, Target and T.J. Maxx all outperformed
• Jobless claims from last week came in at 570,000, worse than the Street expected. Coupled with yesterday’s worse-than-expected ADP jobs report, the outlook is none too rosy for tomorrow’s government employment data
• Personal bankruptcies shot up 24% in August, year over year, putting the U.S. on track for over 1.4 million filings this year.

And here’s the one statistic that troubled us the most this morning: Student debt grew 25% in the 2008-2009 school year, says the latest from the Department of Education. So much for “the great deleveraging.”

Total student loans outstanding exceeded $75 billion during the period, up from roughly $60 billion the year before. An estimated 66% of U.S. college students borrow money for school, with the average individual debt load of $23,186 by graduation.

So let’s get this straight… the next generation is borrowing more than ever, at a faster rate then ever, during extremely worrisome credit conditions, heading into the worst employment environment in recent history, while on the verge of inheriting the biggest federal debt burden the world has ever known?
“Don’t let the recovery pundits fool you,” urges our currency adviser, Bill Jenkins. “As just about everyone knows, the stock market crashed in a big way in 1929. What most don’t realize is that it rallied 15 times before it hit bottom fours years later, having lost 90% of its value.

“And the truth is, when adjusted for inflation, the market didn’t break even again until 1960. (If you’re a ‘buy-and-hold’ investor, you MUST account for inflation. It is the single biggest ‘invisible’ tax in our wonderful Fed-managed economy.)

“But before people could get too happy with making money again, along came President Johnson and the ‘Great Society.’ I don’t know who it was so great for — the market began crashing again in ’66. Once again, adjusted for inflation, it didn’t get back to break-even for another 30 years.

“So 30 years from the Great Depression to the Great Society. Then 30 years from the Great Society to the Great Depression II. Each of the peaks resulted in 10-15 years of declines.

“We are now in just the second year of this disaster. We are witnessing an almost-perfect copy of the first Great Depression. And there are more nasty little secrets in the economy, waiting like ticking time bombs to explode. We will see more businesses in trouble, more banks failing, more foreclosures and more commercial real estate losses.

“At the end of June alone, there were over 5,300 commercial properties in the United States in default. That’s more than double the number from the end of 2008 — and there are still six months to count. Still think American companies are recovering? What will a 300% rise in commercial defaults do for jobs? Profits? Banks?

“So don’t let the recovery pundits fool you, even though they’re out in force.”
“I’ve recently moved to Florida from South Carolina,” a reader writes, “and we decided to rent the first year here, for several reasons. But now that we’re here, we’re thinking of staying renters for a while. My wife and I realized that by living in Florida and — here’s the key part – renting, we’re saving about $15,000 per year.

“After we read the news about Florida losing population for the first time in 50 years, it got us thinking — what are the prospects for Florida? I don’t think they’re as sunny as they used to be.

“Here’s how our savings add up:

• Don’t have to pay property tax, which is 2% of the purchase price where we are (Palm Beach County) — so that’s $10,000
• No homeowners insurance in Hurricane Alley, which saves us another $2-3,000
• No homeowners association fees, which are $3000 per year in the neighborhood we’re currently residing. Many neighborhoods are higher.

“Add it up and we’re saving $15,000-plus as renters. I don’t think we’re missing out on any home price appreciation, so tell me, why do I want to own a home in Florida?”

The 5: We’re not the right people to ask. This editor’s been renting a condo in one of Baltimore’s more swanky/artsy neighborhoods for over two years now. It’s close to the city — but quiet — with a great park in the backyard and the sexiest pool in Baltimore. It’s not without faults, but we really like it.

Despite it being one of the city’s finer locales, the condo’s owner — who got together with some friends and made an investment in the building during the bubble — hasn’t rented the apartment at a profit for years… if ever.

The idea of owning a home has its merits, but watching him sink underwater on this place has been tough (he’s a really nice guy) as well as educational. Of course, we don’t have “a place of our own,” and we’re not “building equity,” “establishing credit” and all the other mortgage broker sales pitches. But after watching all this go down, that seems like a risk worth taking.

Source:  China’s New Investment, Student Debt, The Faux Recovery and More!

At least the Europeans are owning up to the fact; in the U.S. investors are still pretending that the emperor’s new clothes are real. The pan-European Dow Jones Stoxx 600 index is down 1.2%, down the second day in four.

Shanghai stocks have also taken a bath. They’ve suffered their worst fall since November. This time, the worry is that the Chinese government will tighten its loosey-goosey monetary policy. According to MarketWatch, “The Shanghai Composite Index dropped 5.8% to 2,830.63, closing below the 3,000-point level for the first time since the end of June.”

Japanese shares are also down, despite recent data showing that the Japanese economy expanded during the second quarter. Japan’s Nikkei 225 Average fell 2.2% in today’s trading in Tokyo, after ending at its highest level since October on Friday.

Is this tidal wave of losses and bad news going to hit US shores? It wouldn’t surprise us in the least, dear reader. We’ve been calling the end of this sucker’s rally for months now – sooner or later we’ve got to be right! Our bet is it won’t survive September.

As we pointed out in last Tuesday’s Notes, options traders are now betting that the VIX – the widely watched volatility index – will spike 13% over the next five weeks – the biggest spread since August 2008… just before the S&P 500 saw its worst two-month plunge in 21 years.

But it’s just a hunch… Anything could happen in the Twilight Zone economy. Every time we look at the US stock market shooting higher we’re reminded of horror-movie zombies clambering out of their graves and shuffling around in search of human flesh.

We think the analogy is apt. According to the tenets of voodoo, where the zombie myth originated, a “bokor” (an African or Haitian sorcerer) can revive people from death and take control of them.

In the case of the US stock market, the bokor is none other than Ben Bernanke; the magic reviving ingredient, of course, is the excess liquidity he’s pumping into the economy.

As we pointed out on Wednesday, a study by Deutsche Bank economist Sebastian Becker shows that excess liquidity – measured as a rising stock of money to GDP – is now being created in the US, British, Japanese, Canadian and euro zone economies faster than in the late 1990s stock-market bubble and the subsequent housing boom.

The more we think about the zombie analogy, the more we like it. We recall the work of Harvard ethnobotanist Wade Davis, author of The Serpent and the Rainbow.

It’s a spooky tale, but in 1982 Davis traveled to Haiti on the trail of real-life zombies. He made the controversial claim that Haitian bokors turned living people into zombies by administering two special powders into the bloodstream. This from Wikipedia:

The first, coup de poudre (French: ‘powder strike’), includes tetrodotoxin (TTX), the poison found in the pufferfish. The second powder is composed of dissociatives such as datura. Together, these powders were said to induce a death-like state in which the victim’s will would be entirely subject to that of the bokor.

In our view, Mr Market is in a “death-like state” right now. All that excess liquidity is fuzzing up his brain, and he can’t help but shuffle along thanks to the twin “coup de poudres” of monetary and fiscal stimulus.

How else do you explain investors’ brain dead belief that we’re back in a secular bull market? As Gluskin Sheff’s David Rosenberg pointed out last week:

With every 1 in 8 Americans with a mortgage either in arrears or in the foreclosure process; 1 in 4 homeowners “upside down” on their mortgage; 1 in 6 either unemployed or underemployed; and 1 in every 7 housing unit in the United States sitting vacant right now, it will be interesting to see exactly what sort of recovery we end up with.

In among the “green shoots” there’s still plenty of really ugly data emerging. US foreclosure data for July has hit a record of 360,149. That’s up 7% month-on-month and up a truly shocking 32% year-on-year.

US July retail sales news was almost as bad. Last month’s sales were expected to rise by 0.8% month-on-month. Instead, they came in at -0.1%. The problem is July was supposed to be a positive month because of the feds’ “cash for clunkers” program.

Then you’ve got corporate revenues. Pick up a newspaper and you’d be forgiven for thinking that corporate revenues are up. But the reality is that earnings are beating estimates thanks to cost-cutting, not top-line revenue growth.

The truth is corporate revenues were down -10% in the second quarter. When the market started its recovery in 2003, revenues are up 13% in the first quarter. And they continued to rise into the bull run that followed.

Still, 27 out of 47 economists surveyed recently by the Wall Street Journal say the recession has ended. Problem is they’re probably the same 27 economists who thought the US economy wasn’t in trouble following the August 2007 subprime collapse!

Here’s what the mainstream either doesn’t know or doesn’t want to let on it knows. On average unemployment rises for five years following a financial crisis. That means another 2.5 years of rising jobless rates and contracting consumer spending.

But that’s not what really scares us, dear reader. Downturns are to be expected; the economy is cyclical after all. What scares us is the black magic being used by the feds to ‘fix’ things – the economic voodoo of the government’s printing presses. This from underground investor Porter Stansberry in today’s DailyWealth:

There is no way for an economy to outrun a printing press. The Fed has the power to create an unlimited amount of money or credit and the power to inject that money into the economy in any way it sees fit.

Let’s look at the numbers. Let’s assume the total collateral damage of the banking crisis turns out to be $5 trillion. Yes, that’s a huge hit – roughly half the output of our economy each year. It’s the equivalent of sending every American household a bill for $50,000 – due immediately. However, in less than a year, the Feds have already created nearly $4 trillion in new money and credit. The hole in the system has already been plugged. It only took a few months.

The fight between inflation and deflation is over. Deflation was knocked out in the first round.

The big risk is what happens next. Having turned on the presses to save the day, who will have the political clout and the desire to shut them off? Barack Obama’s budget calls for annual deficits in excess of $1 trillion for the next eight years. Thus, by the end of this year, not only will all of the damage from the mortgage collapse ($5 trillion) be replaced by new money and credit, there will be significant inflationary pressures in the economy.

The good news in our economy this year, so soon after such a major collapse, means we will certainly have a massive inflation during 2010 and 2011. There’s no such thing as a free ride. Bailing out the banks will carry a heavy price for anyone who doesn’t have the resources or the knowledge to escape the dollar.

What should investors do to protect themselves? That’s the easy part. According to Porter the best way to survive and prosper in the coming inflation is to own plenty of gold bullion and “assets that will run higher in an inflationary environment, like transportation and energy assets.” Porter also recommends owning some good farmland.

Here at Notes, we think it’s a lot more practical, however, to own a good quality agriculture fund. We like PowerShares DB Agriculture Fund (NYSE: DBA).

Here it comes, slowly but surely: “We sincerely hope the U.S. fiscal deficit will be reduced, year after year,” China’s Assistant Finance Minister Zhu Guangyao said overnight after talks with Treasury Secretary Geithner. Could he lay it out any more clearly than this? “The Chinese government is a responsible government, and first and foremost our responsibility is the Chinese people, so of course we are concerned about the security of the Chinese assets.”

The Chinese now own over $801 billion in U.S. debt, nearly double their holdings at the start of 2007 and by far the world’s largest stash of American paper.
“We are committed,” responded Tim Geithner, “to taking measures to maintaining greater personal saving and to reducing the federal deficit to a sustainable level by 2013.” We have no idea what he might mean by that… the CBO still projects a $1.8 trillion budget deficit this year, $1.4 trillion next year, $984 billion in 2011 and $633 billion by the end of 2012. That makes the Bush administration look like penny pinchers, and is certainly not even in the realm of “sustainable.”
The U.S. government issued another $42 billion in 2-year notes today, the first of this week’s record $115 billion debt issuance.
“Debt is the story of today’s economy,” says Chris Mayer, echoing a theme of this year’s Investment Symposium. “There is still too much of it. Yet the mainstream view seems to be that more of same is the elixir to see us out of this bust. In fact, debt issuances by governments are hitting new records.

“The U.S. government is spending money hand over fist. That’s not new. The U.S. is hoping more foolish foreign central banks will line up and absorb the deluge for pitiful interest rates. The 2-year note sells for a yield of 1.1%.

“Maybe Washington will pull it off. But one day, people are going to demand a better rate to take the government’s paper. At some point, the market’s appetite for puny yields will go away. When that happens, interest rates will rise significantly and debt prices will crash. It’s not a matter of if, only when. To continue at this pace is clearly unsustainable.

“The crazy thing is that the U.S. government is not alone. Emerging markets are also issuing record levels of bonds. The Financial Times reports this morning that ‘the surge in issuance this year [hit] its highest point since records began in 1962.’ The biggest issuers include China, Brazil, Russia, South Korea and some of the Gulf states.

“Incredibly, most seem to look at these debt issuances as positives for the global economy. The FT, for instance, opined (in the middle of its news story) that the debt sales were ‘an encouraging sign for the world economy.’

“It’s a weird paradigm that thinks growing debt levels are a good thing for the global economy, but it is a mainstream view. Economists, lost in their models and abstract curves, preach the benefits of stimulus — printing money and spending and borrowing. And people seem to eat this up.”
Quick perspective: China’s Internet population grew 13.4% in the first half, to 338 million, says government-run China Internet Network Information Center. That’s more than the whole population of the U.S. Yet penetration rates there are just over 25%, compared with 75% in the U.S.
Here’s a headline we can’t resist: “Home Prices Rose in May,” trumpets The New York Times this morning. We understand… they’ve got papers to sell and a hell of a mortgage. But in reality, the U.S. housing market is only decaying at a slower pace. Today’s S&P/Case-Shiller home price index reading is par for the course for the last quarter… home prices and sales are still falling, just no longer accelerating into the abyss.

May registered a 16.8% annual decline in S&P’s 10-City Composite, with its 20-City just a bit worse. Even though that’s still a far cry from home price appreciation, May marks the fourth month in a row in annual return improvement. So raise your glass for a toast… here’s to four months of, ummm, home prices not registering record annual declines. (Better make it a double.)

“To put it in perspective,” says David Blitzer, steward of the index, “this is the first time we have seen broad increases in home prices in 34 months. This could be an indication that home price declines are finally stabilizing.

“While many indicators are showing signs of life in the U.S. housing market, we should remember that on a year-over-year basis, home prices are still down about 17% on average across all metro areas, so we likely do have a way to go before we see sustained home price appreciation.”
Stocks managed to eke out a small gain yesterday, even though blue chip earnings were a bust. Traders clung to the new home sales jump and shrugged off bad numbers from Honeywell, Aetna and Verizon. The S&P 500 inched up 0.3%.
“The stock market has abandoned rationality,” declares Dan Amoss. “Sure, it usually rallies ahead of evidence of measurable progress in the economy, but the rally from March to May had already priced in a strong ‘V-shaped’ recovery, which will, obviously, not happen. At best, we’re in for years of stagnation and lower living standards as society inflates away, pays down or writes off bad debts.

“The recent rally, starting on July 13, has raised the bar for corporate earnings over the next few quarters even higher, setting market participants up for another round of disappointment.

“In the financial, REIT and consumer discretionary sectors, the market completely detached from reality. Part of this can be explained by the growth of program trading based on backward-looking statistical inputs, part by the triumph of technical analysis over critical analysis, and part by the herd behavior of fund managers.

“Regarding the triumph of technical analysis over critical analysis, ridiculous notions like the following are clearly driving the market higher: ‘We just broke through ‘resistance’ at 950 on the S&P 500, so therefore, it’s a mathematical certainty that we’ll go to 1,050 or 1,100.’ This kind of ‘analysis’ is dangerous. When we all start watching and reacting to charts and stop thinking critically about what stocks are intrinsically worth based on reasonable assumptions about the future, the adjustment process back to reality can be violent and painful. The 1987 crash is a case in point.”

We’re putting the final touches on a new special report from Dan on the next big-name company to blow up. We’ve got to keep the details under our hat for a little while longer, but for now, let’s just say it’s a very significant and influential bank. More to come…
The SEC added more restrictions to short selling today.The process of naked shorting — selling stocks short without locating shares to borrow — is now officially illegal. It’s a reasonable rule, but we doubt it will make much of a difference… remember that the SEC has enforced a temporary ban on naked short selling since September 2008. Ironically, the worst of the credit crisis sell-offs came right after the ban.

But here’s one that gets us a little nervous: The SEC said it is “increasing transparency around short sales.” Essentially, the commission is going to require institutional-size shorters to provide daily trading reports, which it will make public one month in arrears (without the names of the investors or institutions). From a reporter’s perspective, it’ll certainly be interesting. But why are we keeping tabs on something that’s supposed to be legal? Will rabid buyers get the same treatment?
Speaking of short plays, the U.S. dollar is still in hot water.The dollar index briefly made a new 2009 low this morning of 78.3. Having found support there in the past, the index was quick to bounce back to a still-low 78.7.
The dollar’s spring back put the hurt on gold. After holding steady for the last week or so around $955 an ounce, the spot price is down to $944 as we write.
Crude oil is declining too. The light sweet variety is down a buck and change today, to $66 a barrel.
Sugar is the commodity du jour. At 18.45 cents a pound, sugar’s up 56% in 2009, to a three-year high. There’s a shortfall of the stuff in India, interestingly the world’s largest sugar consumer. And recent dollar weakness/energy price appreciation has added fuel to the fire.
Finally, the truth comes out: “I was not going to be the Federal Reserve chairman who presided over the second Great Depression,” Ben Bernanke told PBS at a recent town hall-style interview. We imagine the appearance was designed to boost his public image and cement his coming reappointment… looks like that might have backfired.

“Did he really think that comment through?” asks Byron King. “It’s so reminiscent of President Nixon, many years past… ‘I’m not going to be the first American president to lose a war,’ said Milhous of the police action in Vietnam. Goes to show you… just wait awhile and these public officials will give you grist for the mill.”

A few more quotes from the interview that we’ll be keeping on file:

“I have a lot of confidence that within a few years that we will be not only back on track but that we will be growing strongly again.

For the next couple of years, “inflation will be quite low.

And just for the mental image: “I had to hold my nose and stop those firms from failing.”
In the mailbox today, the sarcasm floweth:
“C’mon, admit it, you’re wrong,” writes a reader responding to yesterday’s 5. “Just ask Cramer: The bottom was in March. The housing bottom was hit a month ago… green shoots poppin’ up everywhere… Look at all them positive bottom lines. Soon we will be living in a carbon-free world with inexpensive health care for all, while maidens paid for by the government with our grandchildren’s bucks slowly drop grapes into our mouths.

“We can live in housing paid for by the government on land owned by the government. I wonder if we get a choice of color for our tents. Will they furnish chemical toilets or will we even have a pot to piss in? The recession is over… cause the depression starts and the Chinese take possession of Amerika in lieu of payment for what is owed.”
“You guys are so far off base!” claims another. “The ‘cash for clunkers’ program is another cash cow for Goldman Sachs: Securitize buying up thousands of ‘85 Chevys from Grandma, who has never heard about the program; sell them to Uncle Sam (aka GM/Chrysler); and give away the purchased upgrades for a charitable deduction. Everybody wins.”

Source:  China Warns (Again), The Housing Faux-Recovery, Three Sectors to Short and More!

“The Chinese government is a responsible government, and first and foremost our responsibility is the Chinese people, so of course we are concerned about the security of the Chinese assets.”

The Chinese now own over $801 billion in U.S. debt, nearly double their holdings at the start of 2007 and by far the world’s largest stash of American paper.

“We are committed,” responded Tim Geithner, “to taking measures to maintaining greater personal saving and to reducing the federal deficit to a sustainable level by 2013.” We have no idea what he might mean by that… the CBO still projects a $1.8 trillion budget deficit this year, $1.4 trillion next year, $984 billion in 2011 and $633 billion by the end of 2012. That makes the Bush administration look like penny pinchers, and is certainly not even in the realm of “sustainable.”

The U.S. government issued another $42 billion in 2-year notes today, the first of this week’s record $115 billion debt issuance.

“Debt is the story of today’s economy,” says Chris Mayer, echoing a theme of this year’s Investment Symposium. “There is still too much of it. Yet the mainstream view seems to be that more of same is the elixir to see us out of this bust. In fact, debt issuances by governments are hitting new records.

“The U.S. government is spending money hand over fist. That’s not new. The U.S. is hoping more foolish foreign central banks will line up and absorb the deluge for pitiful interest rates. The 2-year note sells for a yield of 1.1%.

“Maybe Washington will pull it off. But one day, people are going to demand a better rate to take the government’s paper. At some point, the market’s appetite for puny yields will go away. When that happens, interest rates will rise significantly and debt prices will crash. It’s not a matter of if, only when. To continue at this pace is clearly unsustainable.

“The crazy thing is that the U.S. government is not alone. Emerging markets are also issuing record levels of bonds. The Financial Times reports this morning that ‘the surge in issuance this year [hit] its highest point since records began in 1962.’ The biggest issuers include China, Brazil, Russia, South Korea and some of the Gulf states.

“Incredibly, most seem to look at these debt issuances as positives for the global economy. The FT, for instance, opined (in the middle of its news story) that the debt sales were ‘an encouraging sign for the world economy.’

“It’s a weird paradigm that thinks growing debt levels are a good thing for the global economy, but it is a mainstream view. Economists, lost in their models and abstract curves, preach the benefits of stimulus — printing money and spending and borrowing. And people seem to eat this up.”

Source:  China Turns it Up Another Notch

Conveniently, the second-quarter jump — plus revised GDP growth expectations of 8% in the third quarter and 9% in the fourth — puts China perfectly on track for the 8% annual growth they promised earlier this year.

Looking through the fine print of today’s data… oy, these are some la-la land numbers:

• New lending in the first half soared 201% compared to the year before
• First-half property sales up 53% per annum
• Chinese home prices are growing at a 10% annualized pace
• First-half auto sales up 17% per annum
• Retail sales up 15% in the first half
• Inflation down 1.1% from a year ago.

Of course, not all is well over there. Exports, the backbone of the Chinese economy, are down 22% so far this year. Construction starts, another staple of Chinese growth, just ended 11 straight months of decline. But still, today’s numbers show nothing short of a V-shaped recovery for China. Too good to be true? Maybe.

But here’s one more amazing Chinese stat for today, one we don’t doubt: China’s official foreign reserves now exceed a record $2.13 trillion. At least $763 billion of this sea of money is pure U.S. debt. In spite of all the global turmoil and market ups and downs, China has remained the world’s steadiest accumulator of sovereign debt — namely American Treasuries… a fact of life that will surely haunt us one day.

By the way, another Chinese debt auction failed this morning. That’s the third time in the last two weeks that the Chinese government was unable to sell as much debt as it planned. In order to continue financing their rabid growth, maybe they’ll have to start selling some assets — like, call us crazy, American IOUs.

Source:  China Booms… Too Good to be True?

That’s because wealthy populations tend to eat more meat than poor ones, while also eating more fresh fruits and veggies. The diet becomes more diverse, less centered on consuming base grains.

The demand for grains doesn’t diminish, though, because the need to produce meat increases the demand for grains exponentially. Depending on who’s doing the math, five to ten pounds of grain goes into every pound of beef that lands on a dinner plate.

China’s population is also increasing, of course, which is further boosting demand for grains. There are some special issues with China, too. It holds only 10% of the world’s arable land, but 20% of the population. And its arable land resource is in decline. There were about 121 million hectares in service at the end of 2008. That’s down from 133 million hectares as recently as 1988. Increasingly, because of water shortages, desertification, development, urban migration, pollution and a host of other reasons, China is growing less of its own food and relying more on foreign suppliers.

The Chinese government is not happy about that trend and has made food production a priority. In fact, recently, the Chinese premier laid out a number of goals for China:

• Boost Chinese grain production by 50 million tonnes by focusing on increasing the yield per acre
• Subsidize agriculture – which the government does by giving farmers subsidies for irrigation equipment and new seeds and for improving crop yields and crop quality
• Invest in the infrastructure of agriculture – for water supplies, roads and the like.

So it would seem a good idea to be around Chinese agriculture in some way.

Let’s back up a bit and look again at how the dietary pattern has changed. I’ve written about how China consumes a lot more grains before. China is now also one of the largest consumers of fruits and vegetables.

That China is now a consumer of size in the world of fruits and veggies is a relatively new development. China is also a big producer of fruits and veggies. According to the FAO, China produces nearly half of the world’s vegetables and 16% of the world’s fruit. China is today a major exporter of these goods to other Asian countries, supplanting U.S. suppliers.

Well, fruits and veggies have an interesting angle when it comes to fertilizers…

You know if you’ve been reading this letter that the three main nutrients are nitrogen, phosphate and potash. Farmers use fertilizers to boost yields and improve crop quality. Perhaps not surprisingly, China is the largest consumer of fertilizers in the world, with about 25% of global demand.

China is self-sufficient in nitrogen and phosphate. As a result, its application rates are on par with those of farmers in Europe and America. But China is not self-sufficient in potash. The country has few developed potash mines. As a result, it consumes around 12-15 million tonnes per year, but produces only 3 million tones.

Therefore, China relies on imports of potash to obtain most of its supply. But Chinese farmers could use a lot more of this unique fertilizer. In fact, China’s potash “application rates” are half what they are in the West. Quite simply, the Chinese need to use more potash to boost their crop yields to where the U.S. and Europe are.

Potash is an important nutrient because it controls the plants’ water intake, reduces water loss, increases root growth and improves drought resistance. Clearly, crop yields are higher and crop quality is better with the application of potash.

Yet last year, China’s consumption of potash fell. It will probably decline slightly again this year. That’s incompatible with the goals – and the need – of increasing crop yields and quality.

Potash prices soared in 2008 and Chinese farmers pushed back by buying less. The price of potash is cheaper now, but not by all that much. In any event, the Chinese farmers can afford it, as the economic return from using potash is compelling. This two-year decline in potash consumption is unprecedented. And its effects on crop yields and production will not be good.

Most of the potash suppliers that deal in the Chinese markets believe that Chinese demand will pick up later this year as the Chinese burn through their existing inventories of potash and look forward to the 2010 planting season. The Chinese will be hard-pressed to match the record production of 2008 without potash. The quirky thing about potash is that it tends to stay in the soil and you can skip a year, maybe even two, but no more than that.

So potash is also going to be a good way to invest in China’s food story. But there is another layer here.

You see, you can’t use potash directly to grow fruits and veggies. These crops – tomatoes, avocados, melons, etc. – are sensitive to chloride and salt. So you have to modify the potash and remove the chlorine. These potash-based fertilizers, potassium sulphate (SOP) and potassium nitrate (NOP), are ideal for fruits and veggies.

As it turns out, you also need SOP and NOP to grow tobacco. Tobacco is fussy about what fertilizer it will take without messing up its taste or combustibility. It also needs a lot of potash. Yet again, chlorine is a detriment. Chlorine makes the leaves taste sour and can destroy the commercial value of a crop. As with fruits and veggies, you need SOP and NOP.

Selling SOP and NOP to China’s tobacco farmers is also a good business. For one thing, China has the largest population of smokers on the planet, some 350 million. Since potash represents less than 1% of the cost of making cigarettes, the tobacco growers are less price sensitive. What they really want is a quality product consistently delivered.

One of the companies I’m following is the largest producer of SOP and NOP in China and serves both the fruit and veggie market and the tobacco growers. But there are really many ways to get a hand in the Chinese agricultural story. Watch this space.

Source: Buy What China Buys, Part II

The Dow crashed 1.4 points yesterday, wiping out Monday’s 1.3 point moonshot. Desperate for something beyond these 0.014% “swings,” the market’s putting China in the driver’s seat today… and these guys still have quite a lead foot:

Chinese auto sales soared 34% in May, year over year. According to the China Association of Automobile Manufacturers, the Red Nation scooped up 1.12 million vehicles last month, outpacing any nation in the world. Consider the course of the last 12 months, and then look at this chart… is China even part of the global slowdown?

We don’t want to get too excited about this growth, as much of these sales are a product of Chinese government stimulus. But I.O.U.S.A. is certainly throwing a bunch of money at this crisis as well, and the same meausre of auto sales here fell 34% in May… so they must be doing something right over in Beijing.

Chinese property sales rose 45% in the first five months of 2009 compared to the same period in 2008, their National Bureau of Statistics announced today. Heh, notice a trend?

Again, these numbers are manipulated by government intervention… but 45%? That’s pretty big. We also note that real estate investment over the same period rose 6.8%, a rise the U.S. certainly can’t claim.

Thus, the market story today is “buy whatever China wants.” Namely, commodities. Oil’s up to $71, a 2009 high. Copper is at an eight-month high of $2.36 a pound. Aluminum, lead, zinc and nickel are all in the same boat.

Stocks like Alcoa and Exxon Mobil helped the Dow to open up 1%.

“Buy what China needs, but can’t make enough of for itself,” Chris Mayer urges, taking this investment theme to the next level.

“In other words, as an investor, buy what the Chinese have to buy. Conversely, don’t compete with China. Sell what the Chinese make plenty of. This next chart captures the idea. It shows China’s ability to produce a commodity against its demand for that commodity.

“You want to be in the lower left-hand part of the chart. In short, the very best places to be are in potash, soybeans, iron ore and oil. In these commodities, China’s share of world production is low. For potash, China represents less than 5% of global production, as shown by the vertical axis. It is also not self-sufficient. As the horizontal axis shows, China’s production of potash is little more than 20% of its domestic demand.

“As for soybeans, China was once the world’s largest exporter. In 1995, it flipped to a net importer and has been the largest importer of soybeans in the world since 2000. Much of its supply is in the hands of companies such as Archer Daniels Midland, Bunge and Cargill.

“More broadly, this speaks to China’s growing demand for food, and its growing dependence on foreign suppliers to keep its rice bowls full. This is why we see China in recent months making deals for food.”

And it’s also why Chris has selected a few worthy stocks in this tiny sector for his Capital & Crisis readers. Get the tickers, here.

Global oil reserves have fallen for the first time in a decade, says BP today, throwing another feather in oil’s cap. Reserves totaled 1.25 trillion barrels at the end of 2008, reads the company’s annual Statstical Review of World Energy. A year earlier, reserves totaled 1.26 trillion barrels.

Thus, at the current rate of consumption, production and supply the world has enough barrels in reserve to last 42 years, says BP.

American oil supplies declined by 4.4 million barrels last week, the Energy Department said late this morning. That’s yet another bullish indicator for crude today, as the Street was expecting an 800,000 barrel increase in inventory.

Higher oil prices helped bump up the U.S. trade deficit to $29.2 billion in April, the Commerce Department reports today. The deficit is up for the second straight month, this time by 2.2%. But the global crisis’ damper on international trade and U.S. consumption is still in full effect… the trade deficit is on track to exceed “only” $361 billion this year, about half of 2008’s.

“Sell bonds, buy energy,” is Dan Denning’s latest pair trade.

“It’s not technically a new decade yet. But if the trade of the last decade was to sell stocks and buy gold, then maybe the best trade for the next 10 years is to sell bonds and buy energy. Gas, coal, oil, conventional, unconventional, renewable, alternative. You have a whole portfolio of choices.

“Gold is no longer as low as it once was. But it’s still not as high as we expect it to go before it starts to look foolish. Meanwhile, today’s government bond market looks an awful lot like the stock market circa 2000. You’re seeing a generational high in bonds. It’s another version of the “high-low” strategy.

“This time around, though, we would add energy stocks to the mix, along with gold… There is probably some truth to the fact that oil’s latest move is driven by investment demand more than, say, demand growth in the real economy. But investors ARE looking for ways to profit from U.S. dollar weakness. Oil is liquid and popular. In the long run, it’s the smaller-than-expected oil supply growth that will drive the market.”

But before anthoer bull market in energy and commodites kicks in… don’t you think we’re due for a bit more pain?

“It’s the dumb money,” writes Bill Bonner, “that thinks you can correct a generation-long period of credit growth in 24 months…with less than 10% unemployment.

“Stocks have now been in a rally for three months. The longer this goes on, of course, the dumber money gets. People come to think the bounce is a permanent bull market.”

“Why would this be the recovery?” asked Goldman Sachs CEO Lloyd Blankfein this morning, clearly puzzled by the idea. “There is no reason to think this is it … So many things have to be sorted out.

“I think it’s going to be a long protracted recession.”

Thus, we’re surprised that traders in Chicago are now giving 70% odds that the Fed will raise interest rates to 0.5% by November. We suspect the Fed will be pumping nearly free cash into this economy into 2010, at least. Perhaps this is Chicago’s way of saying there’s just too much money floating around.

With that in mind, today’s the big day for the U.S. Treasury market. The Treasury will announce the results of its $19 billion auction of 10-year notes today at 1 p.m. Eastern. If it doesn’t go well, it could get ugly for the government’s stimulus plans, mortgage rates, stocks, the dollar, etc. Check us out tomorrow for the details.

Before the auction, the yield on a 10-year note rose to 3.9%, its highest level since November 2008

The dollar is nervously trading up today, along with stocks. The dollar index bottomed (for now) around 79.5 and trades just above 80 as we write.

Heh, and what’s with the dollar strength? Looks like China is controlling nearly every asset class this morning:

“Nobody is talking about dumping the dollar. I don’t think this is realistic,” said China’s Vice Foreign Minister He Yafei. The world’s largest holder of dollar reserves wants the U.S. to know it won’t be selling them… not soon, anyway.

Gold is just a bit weaker today, down $10, to $950 and change.

“I agree with the reader who wrote to you about outrageous executive salaries,” a reader writes, responding to yesterday’s inbox. “Your rather smug-sounding advice was to sell the stocks of companies whose executives’ salaries offended the reader.

“Come on, guys, not reasonable advice, although that’s probably the only remedy that came to your mind. It really is a vast old boys’ network. We outsiders rarely know the true scope of their ‘I’ll scratch your back if you scratch mine’ mutual aggrandizement system, and it’s hard in some sectors to find good stocks whose CEOs are not part of this piggish rip-off system. It’s a clever in-joke kind of thing, and it won’t be ended without punitive action from someone from outside who has serious clout, someone like the president. It certainly won’t be reformed because a few disgruntled stockowners sold their stocks… and it should be reformed. I too find these overcompensated executives arrogant, offensive, not worth what they are paid and assuredly not nearly so brainy as they pretend to be.”

The 5: We received many e-mails like yours. Sorry, but we still don’t get it.

If you don’t like the CEO’s salary in the first place, don’t buy the stock. If it changes for the worse, vote your proxies. Still bad? Sell the stock. If you rode a stock all the way down while the CEO cashed in, that’s a shame…and we can sort of understand you feeling cheated and outraged. But are you really going to go cry to Big Brother? We support initiatives for shareholders’ legal rights and activist investors that put shareholders first. But man… isn’t the government meddling with us enough already?

And we argue there are plenty — plenty — of great stocks out there with CEOs worth investing in. This morning we gathered some of Agora Financial’s long-term investing advisers for an off-the-cuff poll: How many companies in your portfolio are paying their CEOs so much that you feel like shareholders are getting screwed?

Chris Mayer: “I can think of two, but in both cases, the CEOs are exceptionally talented and bring a long-term track record of success.”

Jim Nelson: “Less than 40%. Some are barely making six figures.”

Greg Guenthner: “Since I deal with penny stocks, I really don’t have to worry about ‘fat cat’ CEOs. Most have very moderate salaries when compared to the big boys out there, and some are even paid what could be considered ‘working man’ money.”

Patrick Cox: “None.”

Byron King’s out in Colorado at the American Association of Petroleum Geologists convention… we suspect he’d say much of the same.

“Ultimately, stockholders are the voters who put the directors on the board,” writes our last reader. “Considering that they are also voters in national, state and local elections, is it any wonder that boards of directors screw the stockholders as they do?! Rule by sheeple.”

Cheers,

Ian Mathias

Source: China Leads the Way, The Trade of the Next Decade, CEO Pay and More!

There’s always a bull market somewhere, the cliche goes. Today — and so far in 2009 — Shanghai’s been a surprisingly good spot to place your bets.

The Shanghai Composite climbed another 6% yesterday. Rumor has it the Chinese government is considering doubling its own economic “stimulus” package, from around $580 billion to $1 trillion… maybe more.

There are a couple data points being published lately that have traders excited. The Chinese purchasing managers’ index, for example, rose to 49 in February, just a hair short of the contraction/growth score of 50 and an improvement from November’s record-low score of 38.

The Chinese sovereign wealth fund has been pumping money into its biggest banks, too. And with the fall of financial giants here in the U.S., those Chinese banks are becoming, umn, relevant. Middle-class demand for goods and housing, while slowed, is still growing.

A record 20% of all U.S. residential mortgages were “underwater” in December. That means more than 8.3 million mortgages carried more debt than the value of the home they were borrowed against. The “sand states” — California, Nevada, Arizona and Florida — have it worst. For example, 50% of all Nevada mortgages were underwater in the last month of the year.

“The accelerating share of negative equity, combined with deteriorating economic conditions, means that mortgage risk will continue to increase until home prices and the economy begin to stabilize,” said Mark Fleming, chief economist of First American CoreLogic, which published the survey. No word on what happens if they don’t.

Private American companies shed 697,000 jobs in February, ADP claims today. The payroll management company’s gauge of monthly employment registered 83,000 more schlubs kicked to the curb than the Street expected… and marks the 14th straight month of decline.

The Bureau of Labor Statistics (BLS) is expected to announce 650,000 job losses in February. If ADP’s report is any indicator (and that’s a big “if”), Friday’s BLS report will be worse than expected as well.

Regardless of the accuracy of either report, you can get a pretty fair look at the employment scene by charting both. Look very closely and you might spot a trend.

Even we’re getting bummed out by these numbers.

Doing its part, the U.S. auto industry had its worst month in 27 years during February. Sales crashed 41% year over year, to an annual pace of “just” 9.1 million. That’s the slowest pace since 1981… amazing, especially considering there were around 75 million fewer Americans back then.

A year ago, yearly sales exceeded 15 million cars and trucks.

Tired of driving their own hybrids to Washington, GM execs are now pleading with European governments for bailout bucks over the phone. The degenerates’ case: Without a multibillion-dollar boost, up to 300,000 Europeans will lose their jobs when GM’s EU plants run out of money. Hmmn… that sounds familiar, doesn’t it?

GM is asking Germany for $4 billion in exchange for partial ownership of European operations. The FT says the automaker is also in talks with the U.K., Spain and Poland. Just what the global economy needs, eh? A global shakedown.

The stock markets opened decidedly higher this morning. After stumbling to a small loss yesterday, the Dow popped up 100 points at the opening bell today… for… umm… no real reason at all. Other than this curious sound bite:

“What you’re now seeing is profit and earning ratios starting to get to the point where buying stocks is a potentially good deal,” newly elected president turned financial adviser Barack Obama said yesterday, “if you’ve got a long-term perspective on it.”

Here’s a question: How many of the retiring baby boomers with gutted portfolios and bitch-slapped pension plans have a long-term perspective “on it”? Solid, like Barack.

“We are quite confident,” added Fed head Ben Bernanke yesterday before Congress, “that we can raise interest rates, reduce the money supply and do that all in a timely way to avoid any inflationary consequences.”

The chairman marched to Capitol Hill yesterday to defend his multitrillion-dollar campaign to save us from ourselves. He insisted that he “had no choice” but to bailout AIG, and soothed lawmakers with assurances like this: “If there’s a single episode in this entire 18 months that has made me more angry, I can’t think of one other than AIG.”

Grr…

And as the Fed chairman massaged Congress with one hand, the other quietly orchestrated the first day of the Term Asset-Backed Securities Loan Facility (TALF). (That sounds dirty, doesn’t it?)

Between his printed dollars and taxpayer dough lent from the Treasury, the program to rekindle student, auto, credit card and eventually mortgage loans will have a war chest exceeding $1 trillion.

“The question facing every investor today,” writes Eric Fry, “and the one that could wield a very large influence over one’s investment fortunes — is whether deflation or inflation will hold sway during the next couple of years.

“To preview our conclusions: We’re betting on inflation.

“No one knows, least of all Ben Bernanke or Timothy Geithner, if the Fed will conjure up one dollar too many. And no one knows if the Fed could ever coax its magical deflation-fighting dollars back into the cauldron, once their services were no longer needed.

“At least, in theory, no one knows…

“In reality, everyone knows: The excess dollars will never return to the cauldron. They will escape into the economy at large, where they will run rampant, and cause the price of eggs to increase to $10 a dozen…or $20…or maybe even $100…

“And what if inflation arrives much sooner than expected? What if the widely anticipated deflation never materializes? The holders of long-dated Treasuries would fare very, very poorly. And the nonbuyers of gold would be very chagrined, at best. So consider this two-part question:

“1) Is the 2.89% yield of a 10-year Treasury so thoroughly compelling that it justifies risking an enormous capital loss (if inflation appears sooner than expected)?

“2) Are commodity plays at their current depressed quotes so thoroughly risky investors should continue to shun them, no matter the price?”

Oil has snapped back $3, to $44 a barrel. Most of the buying support today comes from the Far East, as the latest momentum from China gives traders hope that the world’s second biggest user of the gooey black stuff is still guzzling away.

But gold isn’t getting any love today. The spot price fell another couple bucks overnight, now at $910 an ounce.

“The monetary and banking problems driving gold higher for months have not disappeared,” James Turk assures us. “They will remain for the foreseeable future because the imprudent lending by banks will take years to unravel, highlighting the essential need for a safe haven for one’s money.

“Gold is the safest of safe havens because it does not have counterparty risk. Gold also preserves purchasing power, which is an attribute that will become increasingly important in the months ahead as all the new money being printed by central banks around the world takes its inflationary toll.

“Gold has not yet made a new record high in U.S. dollars, but I expect one soon.”

After hitting a fresh three-year high yesterday, the dollar index is still holding strong today. It scores just under 89.

“I get asked all the time,” notes EverBank’s Chuck Butler, “how long will this dollar strength last. I said some time ago that I believed that by late summer/early spring, the credit markets might be showing signs of unlocking, and that could bring the risk takers back out from under their respective rocks, and that a return to the fundamentals would bring about an end to the dollar strength. The end of July marks one year of dollar strength, when the you-know-what hit the fan with subprime loans and this whole lockdown of credit and liquidity caused a huge deleveraging in the markets.

“While I still believe this thought has merit, I also have to figure in the fact that the previous stimulus plans didn’t work, the money was wasted on Wall Street buddies and cronies… And now we need another one, but only this new one is centered on the wrong things. So I’ll be watching for signs. If none appears, then I’ll have to go back to the drawing board.

“So in an environment when ‘bad news’ rewards the dollar… and the bad news just keeps coming along, that’s not a good sign for a reversal of dollar strength right now. When what used to be called 100-year events now happen almost weekly.”

“The reader commenting that the best thing for China, et al., to do,” writes our first reader today, “would be to cut Americans off from funding and provide tough love may be missing a big implication. If an unreformed alcoholic is TOLD to stop drinking and his bottle is forcibly removed, do they graciously thank you or come up swinging?

“I believe that if America had its funding removed, we would be fighting World War III within weeks. Ever better to maintain the facade BUT take advantage of opportunities within the charade.”

“If I have time to read only one of the many, many e-letters that I get daily,” writes another reader, ”The 5 is that one. Keep up the great work!”

“Many thanks for continuing the best daily read around anywhere,” says a third.

And a fourth: “You guys are the best…love your timely and wisdom-filled 5 Min. letter.”

“Thank you!” writes a fifth. “Your ongoing thoughts on the markets are ALL excellent, even the ones I don’t agree with. Your thoughts make me think, and sometimes differently to my original thoughts.”

The 5: Thank you! You’ve always been gracious to The 5, but lately, we’ve been getting an awful lot of one-line thank you notes. We’re starting to get suspicious. How about some criticism? If there’s anything you think we’ve been missing or would like to see more of in our daily digest, by all means… let us have it: 5minforecast@agorafinancial.com

And seriously, thanks for reading. It’s our pleasure.

China Bucks the Trend, GM Goes to Europe, Inflation Prediction, Jobs and More!

Mingchun Sun, chief China economist for Nomura International PLC, said the Chinese government could formally announce the bigger spending plan in March or April.

Since the original stimulus proposal was announced, state and local governments unleashed a long list of projects previously held back because of initial concerns of keeping growth from getting out of control, Sun said. And with a surge in bank lending in January, China is better suited to finance more infrastructure investments.

“Looked at from the perspective of demand and financing capacity, I don’t think it will be a big problem to get to 7-8 trillion yuan,” Sun said in estimating the size of the eventual stimulus, Reuters reported. “It could be even higher.”

So far, several Chinese leaders have hinted that an increase in spending is on the way.

On Monday, the Communist Party’s council said that it would bolster investment to support growth, Reuters reported. A day later, President Hu Jintao said that China would take additional steps to boost domestic demand.

More spending could set off an investment boom similar to that of the early 1990s.

“This may be a harbinger of another investment boom. The only similar big encouragement made by the central government was by the late leader Deng Xiaoping and thanks to that the economic situation took a big turn for the better,” Sun said.

Deng’s decision to push growth also caused inflation to peak at 24.1% in 1994, Bloomberg reported.

Two years ago, Sun forecast that China’s gross domestic product (GDP) growth would slow to 8% in 2009.

Source: Economist: China Stimulus Could Double in Three Years

“I think it will take only three to four years for China to overtake Japan as the second-largest economy in the world,” Merrill Lynch economist Ting Lu, told the Associated Press. Catching up with the United States could take decades, he added.

In a complicated recalculation, the Chinese government yesterday (Thursday) revised its growth figures for 2007 from 11.9% to 13%, bringing its estimated gross domestic product (GDP) to $3.4 trillion – about 3% larger than Germany’s $3.3 trillion for the same year, based on World Bank estimates.

The news came sooner than expected, confirming a seismic shift in global economic power. It took just two years to complete the move from fourth to third after China overtook Britain in 2005.

Germany’s per capita GDP, at $38,800, is still far ahead of China’s $2,800 per capita GDP in 2007, as the country has wide disparities of wealth and poverty. Chinese officials say more than 100 other countries have a higher income per person, the Associated Press reported.

China set out on the road from communist central planning to a market-style economy in 1979 when its GDP was just $300 billion – one-tenth of the 2007 level – according to the International Monetary Fund.

Now, it has set its sights on Japan. Although the world’s top economies – the United States and Japan – are suffering through a withering recession, even the most pessimistic growth estimates for China’s GDP in coming years run about 5%.

If China were to maintain its current level of growth, it would overtake Japan – with a current GDP of $4.3 trillion – in just a few short years.

The U.S. economy, the world’s largest, was about $13.8 trillion in 2007. At its current rate, it would take China just 18 years to depose the United States as the world’s No. 1 economy, according to the Washington Post.

However, the question of whether or not China will continue to grow at its current pace has been complicated by the global recession, which has resulted in massive layoffs and waves of factory closures, especially in southeastern China, the center of its export-driven economy.

Michael Santoro, author of the 2008 book “China 2020,” told CNN. China will have other problems to overcome if it is to maintain its rapid expansion.

“It’s no longer sufficient for China to become a manufacturer of sneakers or toys and the like,” Santoro said. “Now they’re looking to become players in the area of pharmaceuticals and foods and other high value-added products, where safety and quality are important characteristics for improving in the global economy.”

Independent economists estimate China’s economy grew by another 9% in 2008 despite the global downturn. Figures for 2008 are expected to be released this month.

But economists have slashed 2009 forecasts to as low as 6%. That would be the highest of all the world’s major economies, but still worries communist leaders who need to satisfy a public already concerned over thousands of recent manufacturing layoffs.

But don’t expect China to sit by twiddling its thumbs while the recession hammers its economy.  In a Money Morning Outlook 2009 report we described how the People’s Republic has already announced a $586 billion (4 trillion yuan) spending package.

To put that in perspective, this plan amounts to a staggering 20% of China’s gross domestic product (GDP). Compare that to the $1 trillion in U.S. bailouts, which equate to about 8% of GDP.

And in further response, China’s State Council on Wednesday laid out a new plan to boost its steel and auto industries – including about $1.5 billion to develop alternative-fuel vehicles.

Source: China Now the World’s No. 3 Economy, Supplanting Germany