China, Thin Ice, and the Lessons from Japan

$60 oil……

I love it. When oil hit $40 a barrel everyone said it would cripple the economy and now we are 50% higher. But as soon the economy gets hit, whether it is later this year or two years hence, those same broken-clock pundits will be bellowing, “I told you so!!!!”

There is an almost nationwide consensus that oil is “too high”. But sitting around arguing with free market prices is pure intellectual arrogance. The fact is that nobody on this planet KNOWS where prices (stock, bond, real estate, and commodities) are going or what is causing them to move or what level of prices our economy can withstand. Yet this doesn’t stop talking heads from surmising, projecting, or blaming.

$40 oil is too high. $60 oil is too high. China is causing oil to spike. SUVs are the cause.

There is no oil left in Saudi Arabia. Oil companies are lying about their reserves.

Fears of terrorism is pushing oil up (they don’t say this anymore).

The war in Iraq is driving oil up. Alan Greenspan is inflating oil from his interest rate policies.

So much noisy opinion and so little fact.

If a family of four has one box of cookies in the house and it gets consumed, then maybe someone could analyze individual demand components. But oil is a global, highly politicized commodity that is consumed in multitudinous ways all subject to their own sets of dynamic variables.

It is just way too multivariate to study.

About China…

It is estimated that 25% of Chinese banks loans are non-performing i.e. bad.

Remember how Japan was going to eviscerate our economy back in the late 1980s? They work harder, save more money, have superior office desk configurations…..etc. We had to suffer through the semi-apocalyptic Rising Sun by Michael Crighton. What happened?



Well there was no integrity to their financial system – in fact there still isn’t. Japanese corporations prop up failing businesses with the profitable ones and banks won’t pull lines of credit for defaulters. Their system is just too rigid and anti-Darwinian. The result is a steady 15 year decline in Japanese real estate and its stock market.

I am not predicting the same for China, but I predict a definite hiccup in their economy. (At which time I am going to dump some money in Jim Roger’s commodity fund.)

Chinese stocks are tumbling and real estate has cooled off. Remember this is communist country and the transition to capitalism won't be smooth.

We will see if their economy can prove more resilient, flexible, and dynamic when the going gets tough. It is one thing to be hard working and have low labor costs, but if not backed by a solid banking sector....