Tuesday, June 7, 2011

SocGen - Dylan Grice: China's 'Great Suppression'

Excellent reading.
It goes a long way to defend my USDCNY 3y Calls.

Dylan Grice goes straight to the point sharing with us what happens when there's financial suppression, when the level of interest rates are maintained far below the growth rate of a country: misallocation of capital.

If you compare China to previous crashes.... it looks to me like there is a pattern.

With dazzlingly clever new ways of creating credit, asset prices rose, the economy boomed and more people were tricked into thinking they were talented speculators than was strictly healthy. It was fun while it lasted, at least while no one realised it was just credit inflation. Few knew how much was real and how much was illusory, and fewer cared. Until they did.
And about China specifically:
Of course, China is different. It has unparalleled administrative control over its economy.
Therefore, its suppression is greater than anything any industrializing economy has yet managed. But why will suppression work this time? Is having tighter control of the levers the same as having tighter control of the machine? I’m writing this on a plane half way across the Atlantic. If the crew were somehow simultaneously incapacitated and I ended up being nominated to try and fly us to Boston, I’d have tight control over the levers too. But since I have no idea what effect the levers have, I’d still have no control over the machine.
The economic machine is no different. No one really knows how it works, at least not with the precision required to smooth out its natural fluctuations. I don’t, you don’t, our central bankers don’t, and ’the men in grey suits’ who ‘control’ China’s economy don’t either. Their use of the levers might suppress volatility for a time and give the impression of stability, as it did during the ’Great Moderation’, but like everything else in China, where the private sectors isn’t private, the bond market doesn’t price risk, and the Communist Party isn’t communist, appearances can be deceptive.

SocGen Popular Delusions - 2011 06 07 - Dylan Grice - China's Great Sup Pres Ion Suicidal Monetary Policy a...

*Disclaimer: charts and data are presented as I receive/see them. Sources are usually not checked for validation and my own calculations are of 'back of the envelope'-type. I am aware that some math that I do myself might be wrong and/or misleading to some extent. In financial markets the rate of change of economic data is often more important than the actual level and the perception of 'what is priced in' is more important than 'what is actually going to happen'. This is actually the way people pick entry and exit points. So... yes, sometimes you might say 'This guy is an idiot, this is way wrong!' with a high conviction, being right. Not to worry. Markets are made of expectations and the clash of conviction between its participants. Portfolio managers know that being an idiot is sometimes profitable and being smart is often a bad choice. It is all reality, sometimes good, sometimes bad. By the way: corrections to my analysis and intelligent debate is welcome. theintriguedtrader AT gmail do com

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