Memories of Beijing Ten Years Past

Below is a brief note from a friend abroad about his trip to Beijing and his experiences there with the retail gold trade which I found to be interesting. It is a sharp contrast to my last trip there over ten years ago.

The last time I was in Beijing was in 1998, and it must seem to be a different world there now. Back then there were few cars and a sea of bicycles. As a friend and I took a pedicab back from the Forbidden City to our hotel, it did seem as though we were in an ocean of moving people, bicyclists weaving about in ever shifting traffic patterns, with order maintained by some unspoken set of rules and deferences. There was no air pollution to speak of, and the sky was a deep blue, and the breeze crisp even on a sunny day.

Beijing was a sharp contrast to the great cities of the south. Vibrant Hong Kong nestled on the coast, and Shanghai, an expanding mass of grey on gray, concrete bristling with construction cranes. The sprawling capital seemed almost pristine, delicate. Especially if you did not see the huddle of one story concrete block villages on the outskirts of the main thoroughfares. But even they were more rural and underdeveloped than squalid like similar dwellings of the lower caste workers in the West. There was no litter or disorder, anywhere.

A major access highway was being constructed for the Olympics which the city hoped to host, which they did roughly ten years later. We marveled at the complete lack of heavy machinery, the mass of hand tools, and spiderworks of tied bamboo scaffolding.

The hotel was marvelous, with the kind of extravagant niceties that only a developing country can effortlessly provide to the prospective export trade. A twenty piece orchestra of excellent musicians in the spacious hotel lobby while you drink your coffee and tea in the afternoon is something that one rarely sees in a European hotel. And in the States, it is always impersonal, mass produced, and perfunctory. Welcome to the cult of death. Have a nice day.

Lovely people really, but the hardships of the countryside marked the faces of the peasants as we traveled outside the city to the Great Wall with our guide, Big Mah, so noted by his stature, which was average by European standards. The Wall itself runs the hilltops, clinging to mountainsides with remarkable tenacity. One does not walk the wall except for brief spans, and then you climb. The inclination is astonishing and the steps really large blocks, so it is an effort to lift your legs high enough from one to the next.

We labor to the top, to obtain a souvenir 'chop' on our paperwork at the summit, a symbol of our resolve. We are oddities again, some of the few Westerners. Crowds though of Chinese tourists exploring their heritage.

I am tired and sweating, regretting the lunch I ate earlier that day before the climb, and shamed by a young Buddhist monk who bounds up the incline like a gazelle, enigmatic smile spreading across his face, large straw hat in a fluid motion with his robes. I wonder why he is there. Do monks go on vacation? All he carries is a small leather purse and a stick.

Beyond that top point is the Wall unrestored, a shambles really, a recognizable collection of stone but not much more. Hardly a wall, more like a resilient pile of manmade things with a sort of quiet endurance, waiting for its renewal and the restoration provided by a Ten Year Plan, or not.

The visit to the cloisonné factory revealed a large showroom with small shops in the back staffed by women, intent as they worked in appalling, dirty conditions on ancient looking machinery. No health and safety inspections here. This is the ideal capitalism as Bill Gates described it after his own visit to the People's Republic. Keep your head down and your mouth shut.

At the tombs of the emperors we saw great stone rooms, empty of any furnishings or artifacts, stripped of all decadence during the Cultural Revolution. At least they have not despoiled the tomb of the great Qin Shi Huangdi, which sits in brooding solitude under its man made mountain on the plain. Is it truly superstition that prevents its excavation, or a fearful respect for what is recorded to have been the labor of tens of thousands of men in burying their first great Emperor in what is said to have been astonishing opulence, rivaling and perhaps surpassing that of the Pharaohs.

At the nearly deserted Friendship Store we watched a man slowly and painstakingly painting the insides of small medicine bottles with intricate strokes from a brush that seemed to consist of a few hairs. I have several of them still, on a shelf in my study. I sometimes wonder what became of him, and his quiet obeisance to art and the dignity of craftsmanship. It is good to surround yourself with little reminders of people whom you have known, for their spirits are all that will remain when the last stars flicker out.

There were few tourists, and my Italian chief engineer and I would draw more than a few stares from the passersby as we walked down the broad avenue towards Tiananmen Square. There was a McDonalds but it was closed for lack of interest. Groups of people crowded around what looked like newspapers posted on public boards, a primitive version of the Internet cafe.

We watched a football match one evening in the hotel bar via satellite, Italy versus the Czech Republic. I pretended to sympathize with my friend in the Italian loss, which for him was disgrazia e disonore, for the Italians to lose to such a team as mine, but I secretly reveled in the win. There was nothing else to do, as they had no grappa on hand to ease his suffering. It was the only thing that would absolve such an indignity, except time.

As a guest of the government we dined one evening in an official restaurant, with doors guarded by soldiers. Dinner was a treat, but the attempts to playfully intimidate me with a still lively lobster 'sushi' were misspent, as I had done my time in Tokyo and the small places off the Ginza playing that same game with my Japanese friend Shino san. I am a citizen of the world, and nothing is alien to me except sin.

Afterwards they had group karaoke and dancing marked by a charming innocence. The old gold toothed host challenged me to a drinking contest, with something that tasted like distilled kerosene served in a heavy white ceramic teapot that in Chinese was called the alcoholic's friend. I refused to be shamed into it and deferred, as I had to get up at 5 AM the next day for a flight that could not be missed, as it only ran twice a week as a nonstop to Scandinavia. If missed, it meant a lengthy flight with a connection through Bombay. No time for hangovers.

One of the young ladies remarked about a recent film she had seen, The Bridges of Madison County. I had never seen it, and still haven't. She was impressed that American men could be so sensitive, as she had been led to believe that we were barbarians. I did not have the heart to tell her that despite some finer moments, we really are. And so are hers.

Everywhere the clerks were polite but restrained, obviously pained to please, but especially when changing money. Slogans in Chinese were everywhere, urging the populace to work hard to achieve the award of hosting the Olympic games, to the point of civic obsession.

The airport was a nightmare of people and traffic. The line to enter the departure area was a clotted mass of people surging towards a tiny female guard. After facing down her fierce glare and outstretched hand, I learned what was required from a young German tourist with backpack and halting English, directing me to first purchase a departure tax coupon at the other end of the terminal. Don't panic, just get it done.

Once past that narrows of official release, there were piles of luggage and a small stand, barely a cardboard table and marked by a tiny sign, where one checked in for the non-stop flight to Copenhagen. I was so worried about missing the flight that I took my carry-on to the gate and sat on it, forgetting to exchange my Chinese money on departure, in violation of their currency controls. The money was a key plank in their ten year plan, like the exhortations on the walls.

It's all different now. China seems to be making the great leap forward. I have heard that the sea of bicycles is gone, replaced by impersonal masses of metal moving in linear formations. They even have smog in the city, an innocence lost.

And where is the West going? Is there some force that is causing the wealth of the people to seek a level, flowing from West to East, to bring all to the lowest common denominator? Or are the elite powers merely leveling the common people under their governance and the will to power? Are the great world civilizations converging around the individual, to crush his spirit?

And what price freedom.

Just returned last night from Beijing. While on standby at airport from 11:30 AM until 6:30 PM (all classes of all half-hourly flights of all airlines were overbooked and loaded full, and so asia mile / marco polo gold membership were ineffective in attempts to cut in the queue). Beijing-HK air travel business must be good.

To kill time, I extracted paper cash from atm network and exchanged same for little one troy ounce monetary gold wafer at airport sub-branch of bank of china. The staff were courteous, and the sub-branch manager spent 5 minutes with me to explain the way to buy and sell back gold.

Each wafer is individually numbered, and registered.

China is progressing fast in its re-engagement with gold. Wonderful. It is interesting that gold seems to be everywhere now at the China retail level, legally bought, kept, sold back, and all tax free, at transparent pricing, in alignment with gold reform that was two decades in planning, implementation, and rollout.

Now that is market capitalism, which the US banking system is now sadly lacking. A free market is not dominated by opaque complexity, endless frauds and limited choices, with high rents extracted by government license, feeding on productive effort, placing toll booths across fundamentally simple transactions with a nightmarish private bureaucracy and regressive taxation. That is feudalism, or more recently, crony capitalism.

Capitalism is about the creation and the adding of value, satisfying customer demands, thereby making them -- happy. It is not the taking of inordinate fees through legalistic snares and artificial complexity, obstacles and contrivances, government sanctioned monopolies and corporate racketeering.

The Banks and politicians no longer respond to the people, their customers, because they have merged their interests to the exclusion of all others, serving themselves, undermining the fundamental basis of social relationships and trust. The starting point of regulatory reform is no longer what the people need, but rather, what Wall Street requires. This is the same model as the US health care system. The corruption starts its financiers, but has its roots in Washington.

And so perhaps we may have a global recovery, even prosperity, and a return to the discipline of the market, if we bury our would-be emperors, the Banks, with their terra cotta army of regulators and politicians.

Interesting Volatility in the Silver Market - Silver Wheaton

Interesting action in Silver Wheaton, SLW, today, one of the stronger and more prominent silver plays in stocks. As spot silver remained weak, down most of day, SLW started climbing off its lows reached around noon ahead of the FOMC announcement.

At one point late in the day around 3 PM SLW was UP almost the same percentage as ZSL, the 2x ultra short silver ETF, which was 1.86% higher! Now that offered some interesting speculation and food for thought. Is there anyone in this market except for daytraders and wiseguys? lol.

At some point I expect the silver market to absolutely explode to the upside because of the severe imbalances in supply and demand being created by the paper manipulation in the futures markets. But perhaps not yet. JPM is holding a heavy short position, and they will play games with it until prohibited from doing so. They certainly will not be forced to take a loss by either the exchange or the regulators.

Still, the divergence was worth noting today, perhaps if only to sell some puts to provide a foothold in this crazy market and hedge some risk to further price fluctuations.

The big swing today looked like either short covering or arbitrage, absent any specific news.

"Silver Wheaton has quickly positioned itself as the largest silver streaming company in the world. The company has entered into seventeen agreements where, in exchange for an upfront payment, it has the right to purchase all or a portion of the silver production, at a low fixed cost, from high-quality mines located in politically stable regions."

I obviously hold a position in this stock on the long side. Hedged, I should add, along with any mining and precious metals positions I now hold. I take the hedges off when I think the correction is over, and buy longs very slowly and on daily weakness, as we saw on SLW ahead of the Fed announcement today. I also like to try and 'strip beta' out of stocks like this on an intra-day basis.

I think this is the first time I have ever commented on a specific stock. I ordinarily do not do that, and do not intend to change that habit, but this seemed exceptionally odd price action and I wanted to throw it out there so readers might note it, and even forward any rumours or news or legitimate reason for this kind of countertrend action.

US Cattle Herd Drops to 1958 Levels

Ranchers are culling the herds as corn prices soar and wholesale prices for beef and milk drop.

My personal view is that this is a manifestation of economic distortions and malinvestment due to government interferience in a variety of feed markets over a number of years, as well as paper speculation driving prices in a way that is not connected with physical supply and demand.

Is there a significant change in American dietary habits and an oversupply of beef and milk? It does not seem as though the retail prices of milk and beef are dropping in concert with this, which may be dampening demand.

Let them eat iPads and CDO's.

BusinessWeek
U.S. Cattle Herd Falls to 1958 Low as Losses Climb, Survey Says
By Whitney McFerron

Jan. 27 (Bloomberg) -- The U.S. cattle herd may have shrunk to the smallest size since 1958, as mounting losses during the recession spurred beef and dairy producers to cull animals, analysts said.

Wholesale choice-beef prices averaged $1.4071 a pound last year, the lowest level since at least 2004, as U.S. job losses climbed and meat demand waned. Corn, the main ingredient in livestock feed, jumped to a record $7.9925 a bushel in 2008 on the Chicago Board of Trade, and prices averaged about $3.79 last year, the third-highest annual average since at least 1959.

“There’s not much incentive to be building herds,” said John Nalivka, the president of Sterling Marketing Inc., a livestock-industry consulting company in Vale, Oregon. “Costs of production across the cow-calf sector and in dairy have gone up in the past two years, and prices have come down” for beef and milk, he said.

Futures prices for feeder cattle, the young animals that ranchers sell to feedlots to be fattened for slaughter, averaged 96.821 cents a pound last year on the Chicago Mercantile Exchange, the lowest level since 2003. Feeder-cattle futures for March settlement rose 0.2 percent yesterday to 98.975 cents a pound on the CME.

Slaughter-ready cattle futures for April delivery dropped 0.9 percent yesterday to 89.325 cents a pound.

Rancher Losses

Cattle ranchers in the southern Great Plains lost about $34 on every breeding cow they owned last year, following losses of about $18 a head in 2008, according to Jim Robb, the director of the Denver-based Livestock Marketing Information Center, an industry- and government-funded researcher.

U.S. beef production may total 25.45 billion pounds (11.54 million metric tons) in 2010, which would be the smallest amount since 2005, Robb said. The USDA forecasts output at 25.58 billion pounds.

“We’re forecasting that beef production in 2010 won’t be the smallest since 1958, because the average animal processed now weighs twice as much,” Robb said.

The number of young female beef cattle held back for breeding in the U.S. may have fallen to 5.45 million animals, down 1.4 percent from 5.526 million a year earlier, according to the average analyst estimate.

Dairy Cuts

Dairy farmers may be holding back 4.313 million young replacement cows for breeding, down 2.2 percent from 4.41 million at the same time last year, according to the average analyst estimate. The dairy herd is shrinking partly because of industry-funded cow culls last year aimed at supporting prices.

The so-called Cooperatives Working Together program removed about 252,000 dairy cows from production since December 2008, according to a statement on the group’s Web site.

“Last year was a terrible year for milk prices,” said Ron Plain, a livestock economist at the University of Missouri in Columbia. He said the industry-funded culling program is “one of the reasons why we’re down so much on milk-cow numbers from a year ago.”

The price of class III milk, used to make cheese, tumbled to a six-year low last year of $9.24 per 100 pounds, after global demand slowed. The price has rebounded 57 percent since then to $14.54 yesterday on the CME.

A Tale of Two Economies and The Myth of Recovery: Thoughts Before the State of the Union Address

Economist Michel Hudson frames the current situation with the US national economy in his most recent essay, The Myth of Recovery, in a way that is strikingly different from the conventional view.

Sometimes we become locked into a model of thinking that leads us to engage in repeated errors, because of a flaw in the model, and not in the actual detailed decisions that lead us to those errors.

I think it is worth reading, and herein is a protracted excerpt from it. It cuts to the heart of what we have said, that there will be no sustained recovery until the real wage increases. The outsized financial sector is strangling the real recovery by diverting resources to itself, and taxing whatever is provided to the real economy.

Mike Hudson takes a more Keynesian approach than I would because of his background and training. That is a legitimate difference. My personal approach would begin with a reform and reshaping of the financial system first and foremost, and a recognition that the current structure of global trade is a game that is rigged against the American working class.


There are two economies – and the extractive FIRE sector dominates the “real” economy

When listening to the State of the Union speech, one should ask just which economy Obama means when he talks about recovery. Most wage earners and taxpayers will think of the “real” economy of production and consumption. But Obama believes that this “Economy #1” is dependent on that of Wall Street. His major campaign contributors and “wealth creators” in the FIRE sector – Economy #2, wrapped around the “real” Economy #1.

Economy #2 is the “balance sheet” economy of property and debt. The wealthiest 10 per cent lend out their savings to become debts owed by the bottom 90 per cent. A rising share of gains are made in extractive ways, by charging rent and interest, by financial speculation (“capital gains”), and by shifting taxes off itself onto the “real” Economy #1.

John Edwards talked about “the two economies,” but never explained what he meant operationally. Back in the 1960s when Michael Harrington wrote The Other America, the term meant affluent vs. poor America. For 19th-century novelists such as Charles Dickens and Benjamin Disraeli, it referred to property owners vs. renters. Today, it is finance vs. debtors. Any discussion of economic polarization between rich and poor must focus on the deepening indebtedness of most families, companies, real estate, cities and states to an emerging financial oligarchy.

Financial oligarchy is antithetical to democracy. That is what the political fight in Washington is all about today. The Corporate Democrats are trying to get democratically elected to bring about oligarchy. I hope that this is a political oxymoron, but I worry about how many people buy into the idea that “wealth creation” requires debt creation. While wealth gushes upward through the Wall Street financial siphon, trickle-down economic ideology fuels a Bubble Economy via debt-leveraged asset-price inflation.

The role of public spending – and hence budget deficits – no longer means taxing citizens to spend on improving their well-being within Economy #1. Since the 2008 financial meltdown the enormous rise in national debt has resulted from the reimbursing of Wall Street for its bad gambles on derivatives, collateralized debt obligations and credit default swaps that had little to do with the “real” economy. They could have been wiped out without bringing down the economy. That was an idle threat. A.I.G.’s swap insurance department could have collapsed (it was largely in London anyway) while keeping its normal insurance activities unscathed. But the government paid off the financial sector’s bad speculative debts by taking them onto the public balance sheet.

The economy is best viewed as the FIRE sector wrapped around the production and consumption core, extracting financial and rent charges that are not technologically or economically necessary costs.

Say’s Law of markets, taught to every economics student, states that workers and their employers use their wages and profits to buy what they produce (consumer goods and capital goods). Profits are earned by employing labor to produce goods and services to sell at a markup. (M – C – M’ to the initiated.)

The financial and property sector is wrapped around this core, siphoning off revenue from this circular flow. This FIRE sector is extractive. Its revenue takes the form of what classical economists called “economic rent,” a broad category that includes interest, monopoly super-profits (price gouging) and land rent, as well as “capital” gains. (These are mainly land-price gains and stock-market gains, not gains from industrial capital as such.) Economic rent and capital gains are income without a corresponding necessary cost of production (M – M’ to the initiated).

Banks have lent increasingly to buy up these rentier rights to extract interest, and less and less to promote industrial capital formation. Wealth creation” FIRE-style consists most easily of privatizing the public domain and erecting tollbooths to charge access fees for basic necessities such as health insurance, land sites, home ownership, the communication spectrum (cable and phone rights), patent medicine, water and electricity, and other public utilities, including the use of convenient money (credit cards), or the credit needed to get by. This kind of wealth is not what Adam Smith described in The Wealth of Nations. It is a form of overhead, not a means of production. The revenue it extracts is a zero-sum economic activity, meaning that one party’s gain (that of Wall Street usually) is another’s loss.

Debt deflation resulting from a distorted “financialized” economy

The problem that Obama faces is one that he cannot voice politically without offending his political constituency. The Bubble Economy has left families, companies, real estate and government so heavily indebted that they must use current income to pay banks and bondholders. The U.S. economy is in a debt deflation. The debt service they pay is not available for spending on goods and services. This is why sales are falling, shops are closing down and employment continues to be cut back.

Banks evidently do not believe that the debt problem can be solved. That is why they have taken the $13 trillion in bailout money and run – paying it out in bonuses, or buying other banks and foreign affiliates. They see the domestic economy as being all loaned up. The game is over. Why would they make yet more loans against real estate already in negative equity, with mortgage debt in excess of the market price that can be recovered? Banks are not writing more “equity lines of credit” against homes or making second mortgages in today’s market, so consumers cannot use rising mortgage debt to fuel their spending.

Banks also are cutting back their credit card limits. They are “earning their way out of debt,” making up for the bad gambles they have taken with depositor funds, by raising interest rates, penalties and fees, by borrowing low-interest credit from the Federal Reserve and investing it abroad – preferably in currencies rising against the dollar. This is what Japan did in the “carry trade.” It kept the yen’s exchange rate down, and it is lowering the dollar’s exchange rate today. This threatens to raise prices for imports, on which domestic consumer prices are based. So easy credit for Wall Street means a cost squeeze for consumers.

The President needs a better set of advisors. But Wall Street has obtained veto power over just who they should be. Control over the President’s ear time has been part of the financial sector’s takeover of government. Wall Street has threatened that the stock market will plunge if oligarch-friendly Fed Chairman Bernanke is not reappointed. Obama insists on keeping him on board, in the belief that what’s good for Wall Street is good for the economy at large.

But what’s good for the banks is a larger market for their credit – more debt for the families and companies that are their customers, higher fees and penalties, no truth-in-lending laws, harsher bankruptcy terms, and further deregulation and bailouts.

This is the program that Bernanke has advised Washington to follow. Wall Street hopes that he will be kept on board. Bernanke’s advice has helped bolster that of Tim Geithner at Treasury and Larry Summers as chief advisor to convince Pres. Obama that “recovery” requires more credit.

Going down this road will make the debt overhead heavier, raising the cost of living and doing business. So we must beware of the President using the term “recovery” in his State of the Union speech to mean a recovery of debt and giving more money to Wall Street Jobs cannot revive without consumers having more to spend. And consumer demand (a hateful, jargon word, because only Wall Street and the Pentagon’s military-industrial complex really make demands) cannot be revived without reducing the debt burden. Bankers are refusing to write down mortgages and other debts to reflect the ability to pay. That act of economic realism would mean taking a loss on their bad debts. So they have asked the government to lend new buyers enough credit to re-inflate housing prices. This is the aim of the housing subsidy to new homebuyers. It leaves more revenue to be capitalized into higher mortgage loans to support prices for real estate fallen into negative equity.

The pretense is that this is subsidizing the middle class, but homebuyers are only the intermediaries for government credit (debt to be paid off by taxpayers) to mortgage bankers. Nearly 90 per cent of new home mortgages are being funded or guaranteed by the FHA, Fannie Mae and Freddie Mac – all providing a concealed subsidy to Wall Street.

Obama’s most dangerous belief is in the myth that the economy needs the financial sector to lead its recovery by providing credit. Every economy needs a means of payment, which is why Wall Street has been able to threaten to wreck the economy if the government does not give in to its demands. But the monetary function should not be confused with predatory lending and casino gambling, not to mention Wall Street’s use of bailout funds on lobbying efforts to spread its gospel.

Deficit reduction

It seems absurd for politicians to worry that running a deficit from health care or Social Security can cause serious economic problems, after having given away $13 trillion to Wall Street and a blank check to the Pentagon. The “stimulus package” was only about 5 per cent of this amount. But Obama has announced that he intends on Tuesday to close the barn door by proposing a bipartisan Senate Budget Commission to recommend how to limit future deficits – now that Congress is unwilling to give away any more money to Wall Street.

Republican approval would set the stage for Wednesday’s State of the Union message promising to press for “fiscal responsibility,” as if a lower deficit will help recovery. I suspect that Republicans will have little interest in joining. They see the aim as being to co-opt their criticism of Democratic spending plans. But in view of the rising and well-subsidized efforts of Harold Ford and his fellow Corporate Democrats, the actual “bipartisan” aim seems to be to provide political cover for cutting spending on labor and on social services. Obama already has sent up trial balloons about needing to address the Social Security and Medicare deficits, as if they should not be financed out of the general budget by taxpayers including the higher brackets (presently exempted from FICA paycheck withholding).

Traditionally, running deficits is supposed to help pull economies out of recession. But today, spending money on public services is deemed “bad,” because it may be “inflationary” – that is, threatening to raise wages. Talk of cutting deficits thus is class-war talk – on behalf of the FIRE sector.

The economy needs deficit spending to avoid unemployment and poverty, to increase social spending to deal with the present economic shrinkage, and to maintain their capital infrastructure. The federal government also needs to increase revenue sharing with states forced to slash their budgets in response to falling tax revenue and rising unemployment insurance.

But the deficits that the Bush-Obama administration have run are nothing like the familiar old Keynesian-style deficits to help the economy recover. Running up public debt to pay Wall Street in the hope that much of this credit will be lent out to inflate asset prices is deemed good. This belief will form the context for Wednesday’s State of the Union speech. So we are brought back to the idea of economic recovery and just what is to be recovered.

Financial lobbyists are hoping to get the government to fill the gap in domestic demand below full-employment levels by providing bank credit. When governments spend money to help increase economic activity, this does not help the banks sell more interest bearing debt. Wall Street’s golden age occurred under Bill Clinton, whose budget surplus was more than offset by an explosion of commercial bank lending.

The pro-financial mass media reiterate that deficits are inflationary and bankrupt economies. The reality is that Keynesian-style deficits raise wage levels relative to the price of property (the cost of obtaining housing, and of buying stocks and bonds to yield a retirement income). The aim of running a “Wall Street deficit” is just the reverse: It is to re-inflate property prices relative to wages.

A generation of financial “ideological engineering” has told people to welcome asset-price inflation (the Bubble Economy). People became accustomed to imagine that they were getting richer when the price of their homes rose. The problem is that real estate is worth what banks will lend – and mortgage loans are a form of debt, which needs to be repaid.