Keqiang OKThe Dual Dragon Is Taking A Deep, Slow Breath; Prefers Quality Over Quantity

Chinese Prime Minister Li Keqiang sent a “warning shot” (alt) this week to companies steeped in debt and risk-hungry investors when he said that “China was likely to see a series of defaults as the government accelerates financial deregulation.”  Meanwhile, “a raft of data out Thursday added to the evidence that China’s economy is losing speed early in 2014.”  Here’s what some economists are saying: “We expect Beijing to ramp up spending on infrastructure and social welfare projects…” “Benign inflation leaves Beijing plenty of policy flexibility to cushion the growth slowdown,” “Many of China’s domestic growth drivers remain in place, notably consumption, urbanization and services; and global demand growth is on an improving trend, which will help China’s economy this year.”  Two directors from the Fung Global Institute argue that “any strategy for mitigating the threat of a sharp slowdown [in China’s economy] must account for the dual nature of China’s economy.  On the one hand, Chinese cities are becoming increasingly modern and globally engaged…On the other hand, half of China’s population remains rural, delivering a large share of income from agricultural activities…This duality has positive implications for China’s economic prospects…China has an even larger and more diversified economic base than many realize — implying a degree of growth momentum that would be difficult to lose.”  Furthermore, China must address another dual dragon: its “two-tiered credit system”.  If China can merge the higher tier (easy-credit fuel for shadow banking) with the lower tier (set by the Central bank), “this will inevitably trigger some defaults and erode the quality of banks’ loan portfolios, [but] the end result — a more balanced and healthy economy — will be more than worth it.”  Also, China’s “bond-market” needs some work: “The bulk of Chinese government debt is held by state-owned banks, which are under great pressure to keep it until maturity…the government uses banks as ATMs to bankroll stimulus efforts without having to worry about risk, volatility or capital flight.  And for their obedience, banks are assured a stable return.”  “This artificially constructed bond market hides a large degree of risk borne by the banks and, ultimately, the state…As long as inflation remains under control, the banks will be happy to hold government bonds to maturity.  But if inflation spins out of control…”

Still Feels Like A Recession

“This week, an NBC News/Wall Street Journal poll of American adults found that 57 percent still think the economy is in recession.  It’s not hard to see why.  People don’t take this as a technical economic research question; they take it to mean, ‘Is the economy good?’”  Furthermore, “Two trends are responsible [for this perception of economic recession].  The labor market is still slack (debatable), meaning millions who would like to work can’t, and those who do work have limited ability to demand higher wages (i.e. it takes the most powerful man in the world, and even then…).”  Meanwhile, “10 percent of U.S. renters say they would like to buy a home in the next year, according to a new report from Zillow, which surveyed renters in the nation’s 20 largest housing markets.  If all the renters who said they wanted to buy a home in the next year actually did, that would represent more than 4.2 million first-time home buyer sales, about twice the number of first-timers in 2013.”

Active Managers: Put Me In, Coach!

Here’s an interesting piece from Bloomberg on behavioral finance and the rise of “coaching” on Wall Street: “Coaches in the financial world are borrowing techniques from as far afield as sports, Eastern philosophy and neuroscience to improve their clients’ returns.  In addition, a new crop of software companies has sprung up to provide reams of statistics that the companies say can help investors and their coaches uncover hidden strengths and weaknesses.”  And guess what?  They aren’t cheap: “coaches don’t like talking about what their services cost, although they say clients should expect to pay from $400 to $1,000 an hour.  Some coaches, like [Denise Shull], charge a retainer as well as ask for a bonus amounting to a slice of the client’s profit.”  Meanwhile, Barry Ritholtz discusses the recent reporting of a “rash of suicides within the financial community” and concludes that “this morbid fascination of suicides…may be nothing more than random fluctuations in data.”  Also, the “French 35 hour workweek” might be a myth.

USA: Have You Been To The Mall Lately?

“During the past several months, more retailers have reported declines in customer visits, while fewer have boasted gains.  Despite this headwind, some retailers — or retail categories — have been able to successfully motivate consumers to visit their stores.”  These retail categories include: 1) Healthy lifestyle (e.g. Whole Foods, GNC), 2) Housing-related (e.g. Home Depot), 3) Warehouse clubs (e.g. Costco), 4) Fast casual restaurants (e.g. Chipotle), 5) Dollar stores and 6) “Fast-fashion” retailers (e.g. H&M).

SF: Is San Francisco New York?

“In many ways, San Francisco is the nation’s new success theater.  It’s the city where dreamers go to prove themselves — the place where just being able to afford a normal life serves as an indicator of pluck and ability.”

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