Weekend Reading – Focus on China

I love being able to write my weekend reading post and discuss some broader topics beyond trading, you people really have no idea how much I love it.  After all, it was my study of international relations / global economics that really led to my desire to become a trader.  I sat there and asked myself, how can I be involved in all of these things at once, satiate my competitive drive, and make good coin, the answer was obvious.  On top of that I’m able to witness and participate in the ascent of globalization, a few billion people coming out of the dark and into the global economy, and the rapid development of technology at a pace never seen before, it’s crazy how connected we are all becoming.

Anyway, the main issues out there right now is China and whether Mr. Chanos is going to be right sooner than the market can render him insolvent on his short China call.  China is the main growth driver of the global economy at this point, and has all but single handedly produced a rebound in commodity prices.  There are facts.  The demand for raw materials in China is real, they are building stuff over there, and experiencing their own housing boom.  We’ve seen stories of whole cities which have been build in the desert from scratch but which are not occupied.  China is betting that its middle class will grow into these new digs over the next 10 years and support property values.  Problem is, that middle class has not come to fruition as of yet, and Chinese growth is starting to look like a big game of Jenga.  I won’t call China a bubble because they have everything on their side including, a rising (maybe) middle class, huge deposits of natural resources, a cheap labor force, huge currency reserves, and an attractive foreign investment climate.  But, they have taken a gamble do doubt on their people eventually deciding to start spending money instead of their current 40% savings rate.  An economy can not be built on building things forever, at some point their people must consume.  How quickly this catches up will be the deciding factor as to whether China crashes or not.

It will also be the deciding factor as to whether the global economy will crash or not.  We have gotten just a little taste of what will happen if commodity prices collapse, just take a look at the chart above.  The $XLB ran into obvious long term resistance, but more often than not large levels like these often correspond to fundamental inflection points, that’s just how it works people.  That level is going to be a hard nut to crack.  Is the materials sector oversold short term, sure.  Is the materials sector oversold long term, hahahahaha, not a chance in hell.  Those who reside in the “deflation round 2″ camp need not look any further than this chart, it’s a classic long term bearish pattern and it all hinges on China.  If their people don’t begin to consume, the infrastructure growth will stop, the banks will raise interest rates, asset prices will plummet, and the whole world will be thrown back into round 2 of deflation.  The Chinese government is going to have a hell of a time convincing their people to spend money, good luck to them.

Here is your weekend reading:

China has real estate fever, let’s hope it ends better than ours (Business Week)

No surprise here, China is leading the world in renewable energy production and manufacturing (NYT)

Momentum strategies work on the intermediate term time frame, here’s a statistical analysis of one strategy (Dorsey Wright)

They didn’t invent populism yesterday, but that doesn’t mean it won’t destroy us (NYT)

Want an investment thesis, try the Chinese electric grid build out, unlike ours, it will happen (Business Week)

High momentum has gotten crushed, they are shooting the leaders one by one (Bespoke)

Turkey wants respect, and deserves it, Israel better listen the fuck up, because these guys are the pass through in any economic or peace deal with the region (NYT)

Is this a repeat of the July pullback fake out? (Vix and More)

Why most traders fail, a great post that everyone should read (SMB Capital)

Do you know that there are still people out there who believe the United States had a direct hand in 9/11 (WSJ)

A must read for any small business leader, how to motivate your employees to take responsibility for projects (Mark Pincus)

The shorts in Netflix are on the run, but I believe the company may have issues with its business model longer term (WSJ)

I tend to agree with this scenario regarding a housing recovery (Washington Post)

This fusion project just keeps inching along, I’ve linked to it before, someday we will wake up and have an unlimited source of clean power, that day may be closer than you think, and it will change everything (BBC News)

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