Chinese Treasuries Fall as Reflationary Wave Ends, Dollar Steadies

China's holding of U.S. treasuries peak ahead of the U.S. dollar bull market that starts in 2014. Then Chinese holdings decline through 2016 as outflows persist. China cracks down on the Anbangs, closes up the capital account, and the reflationary wave kicked off by the PBoC in early 2016 lifts the economy and eventually the capital account. China ended the reflation late last year, now U.S. treasury holdings are falling again. And the media still misinterprets the information.

Bloomberg: China's Holdings of U.S. Treasuries Drop to Six-Month Low
China’s holdings of Treasuries fell to the lowest level since July as investors soured on U.S. fixed-income securities and the dollar at the start of the year.

America's Top Export is Fiat; Software Eats the Trade Deficit Too

If you believe the argument that says automation and robotics will dominate production, if you believe that universal basic income is something to consider because there's a risk of widespread mass unemployment, then you also expect production will eventually be concentrated in fewer and fewer hands (and even no hands if the machines take over). This is usually discussed in domestic terms, but it will also happen internationally. We should expect some nations will see their exports soar and other nations become chronic trade deficit nations or simply become relatively poorer as their economies fall behind. Domestically, the fear is that high-skill white collar labor is next, with lawyers, accountants, financial analysts, writers and such in line to see their jobs automated. Internationally, developing nations that lack highly-advanced sectors will also fall behind as their economies cannot keep pace.

The U.S. has a massive trade deficit because it prints the reserve currency. It's really the #1 export of the United States. Pieces of paper with no value except that other people accept them because the United States is the pre-eminent military, political and economic power in the world. Path dependency could secure that status through many years of decline, but eventually the U.S. will lose this status. The U.S. could collapse the trade deficit at any moment by extracting itself from this role. A long-term global agreement to increase the use of foreign currencies, allowing the dollar to slowly fade away as a share of global finance. Of course, this would weaken the U.S. dollar and make exports more competitive and imports more expensive. It will have a similar impact to passing tariffs. Using tariffs is a way of keeping reserve status (for a time, and only if it doesn't blow up global trade) and mitigating the costs to the long-term health of the economy.

The U.S. can also help itself by dominating in advanced manufacturing, artificial intelligence and software. It needs large domestic industries for applied research though. The software to run an automated steel mill needs a steel mill to automate.

As an advanced manufacturing economy, the U.S. would become like Germany, Japan and China (if there's no major wars or serious national decline, these four nations might produce an unbelievable sum of global GDP in 2100). Instead of buying stuff as a consequence of reserve currency demand, it will offer credit to its buyers (as it did in the 1920s).

The current system is unsustainable. Tariffs aren't a long-term solution, but they are a step in the direction of the future. (They're also close to inevitable in a democracy where unemployed workers can vote. Either that or UBI.) The U.S. must produce more, either because the dollar will lose reserve currency status or because it simply does produce more through advanced manufacturing. Otherwise it goes into terminal decline. I view tariffs as a step towards the death of the dollar as reserve currency. Washington and Wall Street refuse to give that up willingly, so the only way to push things forward is to put the U.S. in a better position when the dollar crisis hits. Or break the global trading system and negotiate the end of reserve currency status as part of a major renegotiation of the global financial and trading systems.

Real Estate M&A Picks Up in China as Small Players Exit

iFeng: 多家中小房企卖地产项目转行,楼市并购整合提速
Recently, several other housing companies have announced their bid farewell to the real estate industry. On March 12, Zhujiang Holdings changed its name to Beijing Grain Holdings. The company has successively disposed of its property business. On March 9, Zhongtian Finance (formerly Zhongtian City Investment) sold its property business for 24.6 billion yuan, completely from real estate. Turn to the financial industry. The industry believes that the small and medium-sized housing enterprises bid farewell to the real estate industry is affected by the external environment and internal demand and other factors, with the continuous increase in the concentration of the real estate industry, mergers and acquisitions between housing companies frequently appear, in the future, more and more small and medium-sized housing prices will be forced Faced with the acquired situation.

...In Yan Yuejin's view, besides withdrawing, real estate mergers and acquisitions will continue to heat up, and small and medium-sized homeowners may also face the dilemma of being acquired or even shutting down. In this process, the concentration of the entire real estate industry will further increase, and the real estate industry presents a situation of large-scale accumulation and frequent mergers and acquisitions.

According to statistics, starting from last November, from the listing of major property rights exchanges, the number of real estate objects has increased significantly. Analysts inside the industry said that after a new round of regulation, there will inevitably be a wave of equity trading. Late last year, developers began to “clean up” their assets, and some sold off assets that did not meet their own development, and others simply withdrew from the industry. As a result, frequent and intensive real estate equity transactions began to take place in major property rights exchanges.

For small and medium-sized housing enterprises, the main reason for selling shares is to reduce profits and financial pressure, after all, selling some assets is easier than selling a house, and funds are quickly recovered.


Trade Rebalacing: After China, Germany

ZH: Albert Edwards: "Trump Will Soon Turn His Protectionist Fire On Germany. That Will Be Messy"
Making matters worse, everyone knows that it is Germany's FX subsidy courtesy of the EUR - which replaced the far stronger Deutsche Mark - that makes Berlin one of the biggest currency riggers in the world. In fact, "a Chinese official commented a few years back that Germany, not China, was actually the world's biggest currency manipulator - in tying its currency to far weaker economies, the real DM is massively undervalued."

Ironically, Germany is aware of what is coming, and as Edwards writes, he agrees with former German Finance Minister Schäuble, who correctly pointed out that it was the ECB's QE policies that exacerbated the trade situation, in stimulating capital flight from the eurozone that (by identity) has increased the overall trade surplus by depressing the euro.

As a result, Edwards expects Trump to "soon turn his protectionist fire on both Germany and the EU. That will be messy."

...So what happens next? Using Japan as a template for the "economic and financial Ice Age unfolding in the west" Edwards made one major contrarian prediction: "to those in the noughties who said a bust in the US and Europe would be nothing like the 90s bust in Japan, I agreed. I thought it would be much worse because the west did not enjoy Japan's high levels of equality and social cohesion."

Looking at recent events, it appears that when confronted with Japanese-style pain, he's been right: western electorates' anger is boiling over... the only thing keeping social sanity in check are near record high stock prices. That, too, will go soon one central banks finally end their daily manipulation some time over the next year.

In that context, Edwards concludes, he has "always viewed competitive devaluation and trade war as a likely endgame of the predicament we find ourselves in. It's just coming sooner than I expected!"
One lost decade is one too many.

Currency devaluation was always the end point assuming governments and central banks do not allow widespread debt default. The only question was when: would the governments/central banks act proactively or wait until a crisis? Many thought 2008 was that crisis, but central banks could not restart lending. All they did was monetize the existing monetary base. The potential for inflation is there, but it requires private sector credit growth. Ten years have passed, but the balance sheets are still impaired. Nothing has been solved then, and voters are reacting in frustration.

Chinese Developers Plan Fundraising Blitz in March

iFeng: 3月份多家上市房企公布融资计划
“Under the general trend of regulation and control of the property market, housing companies are increasingly concerned about the safety of the capital chain. Under the conditions of domestic financing, overseas financing is increasingly valued.” Zhang Dawei, chief analyst of Centaline Real Estate, analyzed that, for the whole year of 2017, the overseas financing of housing enterprises totaled 38.86 billion U.S. dollars, an increase of 176% year-on-year to 14.06 billion U.S. dollars in 2016.

“In 2017, the domestic financing data of housing enterprises continued to be sluggish. From a trend point of view, the total amount of domestic financing of housing enterprises in the whole year is decreasing, mainly because domestic financing is more difficult.” Zhang Dawei said that in this context, this trend will continue in 2018, and even more companies will start looking for financing opportunities overseas.
Overseas financing plummeted 75 percent in the first two months of 2018 according to the NBS report.

Look Beyond the Horizon: The U.S. Will Be A Developing Nation

Like a bankruptcy, nations collapse slowly and then all at once. Once a nation loses its edge and starts falling behind, it appears to be doing well because its currency remains strong or it uses debt financing. This is used to finance consumer spending, not to develop cutting edge technology. The people are concerned with who has how much, not how to create more. When the currency falls or the debt devalues, the nation is suddenly poorer and can no longer afford its lifestyle. It also finds itself behind the competition. It requires a serious retrenchment and extraordinary effort to catch up, effectively what a developing nation goes through to move from poor to middle class to wealthy.

There are signs the United States is in trouble. It has only one aluminum plant that can produce metal for fighter jets. It's industrial base was hollowed out. It doesn't maintain its nuclear arsenal, and that means the United States no longer produces enough plutonium-238 for space exploration. If the U.S. doesn't start making more, it will run out in a couple of decades.

PopSci: Plutonium-238 Is Produced In America For The First Time In Almost 30 Years
Plutonium-238 is the fuel that is driving the Mars rover Curiosity across the Martian landscape. It flew the New Horizons spacecraft to Pluto and beyond, and is still powering the Voyager probe into the depths of space 38 years after it was launched. It's a fuel that is in high demand and very short supply.

Last year, it came to light that there was only enough plutonium-238 to make three more batteries for NASA missions, a potentially devastating shortfall, and one that NASA has been working to remedy. Now, it seems like there is hope. This week, the Department of Energy (DOE) announced that in collaboration with NASA, they have succeeded in producing plutonium-238, the first time the substance has been made on American soil in 27 years.

...Plutonium-238 started out as a byproduct of the nuclear bomb-making process, but eventually as nuclear weapons ceased to be manufactured, the supply dried up, first in the United States, then in Russia. There is now only about 77 pounds left in the United States, and only about half of that is still of high enough quality to be used on space missions. The DOE and NASA hope that next year they will be able to produce 12 ounces of plutonium-238, eventually scaling up to producing 3.3 pounds per year.
The above article is from 2015. This next one is from 2017.

Space.com: Production of Plutonium Spacecraft Fuel Could Boom in Early 2020s
NASA's current RTG design, known as the Multi-Mission Radioisotope Thermoelectric Generator, requires 10.6 lbs. (4.8 kg) of Pu-238. So, currently, the U.S. has enough Pu-238 to power just three or four more deep-space missions.

The DOE recently started a new Pu-238 production program, which manufactured a 1.8-ounce (50 grams) sample of the stuff at the Oak Ridge National Laboratory (ORNL) in Tennessee in late 2015. If everything goes according to plan, this pipeline should begin churning out the amount that NASA has requested — 3.3 lbs. (1.5 kg) of Pu-238 every year — by 2023, DOE officials have said.

...Assuming the current DOE manufacturing effort proceeds as planned, NASA won't face a Pu-238 shortage anytime soon, said David Schurr, deputy director of the space agency's Planetary Science division.

"That's clearly enough through 2030," Schurr told Space.com. (He declined to forecast any further into the future, saying not enough is known yet about NASA's post-2030 plans.)
This does not inspire confidence.

The U.S. has also lost its edge in semiconductors.

ZH: Did "China" Just Buy The Most Important Company In The World?
In the aftermath of last night stunning announcement that Japan's Internet giant SoftBank would acquire UK-based ARM Holdings, a company which makes chips present in virtually every mobile and "connected" device, for $32 billion, sending the semiconductor sector surging, questions emerged why the company is doing this.

On one hand, even the founder of ARM Holdings himself, Hermann Hauser said, told the BBC he believes its imminent sale to Japanese technology giant Softbank is "a sad day for technology in Britain". Hauser said the result of the Softbank deal meant the "determination of what comes next for technology will not be decided in Britain any more, but in Japan".

...ARM Holdings (ARMH) holds the keys to the future of electronics That's not hyberbole.

Not only does ARMH dominate the world of mobile devices, it is rapidly penetrating all electronics: from consumer electronics to the computer network.

ARMH designs and licenses semiconductors. Their designs are the core of the critical components of consumer electronics: smartphones, tablets, TVs, and so on. For example, most of today's tablets and phones run on Qualcomm chips: they did $26B in sales last year. These chips re-package ARMH designs.

As electronics continue to penetrate everything from cars to refrigerators, they use ARM designs. The Internet of Things (IOT) uses ARMH technology.

Like a spider in the web, ARMH sits firmly at the heart of the future of all electronics.

...Softbank = China

Softbank is a Japanese company best known for owning Yahoo Japan and Sprint.
With their background in telecommunications and the internet, why would they want to buy a major semiconductor company? And why, with $89B in debt, is Softbank adding another $31B?

The answer: Softbank is not what they appear. What isn't as well known is that Softbank is actually a major player in China's internet economy.
For starters, they bankrolled Alibaba. They control 32% of Alibaba, and through Alibaba, they dominate the Chinese internet economy because Alibaba has invested in the top internet companies in China: Weibo, for example.

Although based in Japan, Softbank is very much a Chinese company.

The Verge: ARM's idea of 'China speed' helps explain why it's so hard to compete with Chinese phone makers
Ahead of this week's unveiling of the new ARM Cortex-A75 and A55 CPUs, ARM hosted a preview event at its hometown of Cambridge, England, where its representatives talked about the changing demands for processor power and how its new designs would address them. It was there that I first heard Ian Hutchinson, director for channel marketing at ARM, talk about "China speed" and what it means for his business. The Huawei Mate 9, he pointed out, was released with Mali-G71 graphics just eight months after ARM delivered that graphics processor design to its partners. The typical time taken to go from the raw design to a full retail product is at least a year, according to Hutchinson, so Huawei chopped a full third off the turnaround time.

...I have heard from multiple people familiar with how Chinese companies operate that their prevailing business culture is one of utmost speed. Decisions that would take American and European companies weeks, if not months, turn into action and engineering prototypes within days in China. That's partially down to the shorter physical distance between the decision makers and the manufacturing facilities, but more than that, it's an expression of a particular Chinese version of the "move fast and break stuff" attitude endorsed in Silicon Valley.
China is also leading in quantum communications.

Inside Science: Is China the Leader in Quantum Communications?

In China, there is a full on race to dominate in technology. In the United States, there is race.

Quartz: The people running Silicon Valley are pretty much all white or Asian men
In a blog post releasing the data, Facebook pledges to hire from underrepresented communities through recruitment and partnering with organizations working toward that same goal. “As these numbers show, we have more work to do – a lot more,” writes Facebook’s head of diversity, Maxine Williams. “But the good news is that we’ve begun to make progress.”
Progress in China and progress in America are two very different things.

ShenWan: China Wants Foreign Companies to Issue A-Shares

The merger of bank and insurance regulators shifts regulation from institutions to the market according to Shenwan's chief economist.

iFeng: 申银万国杨成长:“银保合并”是从管机构转变为管市场
According to Yang Geng, member of the National Committee of the Chinese People's Political Consultative Conference and chief economist of the Shenwan Hongyuan Securities Research Institute, there are five major characteristics of the State Council’s institutional reforms. Behind the “mergers and bankers merger” is the shift from financial supervision to controlling the market from the past. Separate operations, separate supervision, and the development of combined supervision and unified supervision.

At the same time, the reform plan also proposes to reform the state taxation and taxation management system and merge provincial and provincial taxation and land taxation agencies. Yang Geng said that merging the national tax and the local tax will increase the efficiency of taxation, and at the same time reduce some aspects of corporate taxation, which is conducive to the efficient and orderly administration of tax collection, and local integration.

Referring to the recent hot-selling "China Securities Exchange," he believes that this is a good thing for improving the A-share market structure and allowing domestic investors to understand the enterprise more clearly and is also an inevitable choice for enterprises.
The article goes into some detail. One interesting item: China wants foreign companies to list domestically:
Third, from a development perspective, we welcome overseas listed high-quality companies to return to the A-share market. This has two effects on the A-share market:

First, change the industrial structure of listed companies in the A-share market. China’s economic growth is undergoing a transformation. The role of the new economy, new business models, new models, technology-based companies, and Internet companies is increasing. However, at the current market value of listed companies, traditional industries still account for a major proportion, including banks, real estate, and steel. Coal and so on. Therefore, speaking from the perspective of market value ratio, it cannot fully reflect and represent changes in the industrial structure of listed companies, and it will also affect the effectiveness of market structure. After they returned, the proportion of the new economy, new forms of business, and new technologies increased, and the A-share market could play a better role.

In addition, the international market has pricing in foreign countries. “Return A” will accelerate the valuation of China’s science and technology, new internet companies and international standards, and promote the domestic market’s investment valuation concepts in the new economy, new business models, and new technology markets. The perfection of investment methods.

Background on the regulator merger:

FT: China to merge banking, insurance regulators

Reuters: Exclusive: China's regulators compete to look tough as political pressure mounts


Bitcoin, Cryptos Flirting With Major Support

Bitcoin is the key here, if it holds these charts will recover. Bitcoin is holding around $8,000, but if that breaks, the next major support level is around $4,000.