The Australian market rallied yesterday in the face of global weakness...because of 'hope' the People's Bank of China will lower reserve requirements...and further stimulate an already historically unbalanced economy.
Meanwhile, over in the land of reality, all signs point to a continuing slowdown in China's housing market. The chart below shows the year-on-year growth rate of various residential property activity indicators.
Residential floor space sold is down 20 per cent on last year. Total 'floor space starts' is approaching zero growth. And while floor space under construction and residential property investment is still strong, the rate of growth is in decline.
The conclusion? The residential property boom is over. We are now in the bust phase.
But then, we read more conflicting evidence. The Financial Times tells us that following the traditional winter slowdown, steel production in China hit a record high in April. Ore Iron prices have increased nearly 10% this year.
We think of loading up on BHP [ASX: BHP] and RIO [ASX: RIO] as we scan the rest of the article. Then, reality hits:
'In the first quarter, a group of 80 steel mills monitored by CISA (China Iron and Steel Association) reported record losses of Rmb1bn ($159m) due to low steel prices and weak steel demand.'
China's importing a lot of iron ore and churning out record amounts of steel but it's unprofitable - and therefore phony - growth.
And at the foot of the article we notice this quote from ANZ analyst Nicholas Zhu:
'At Qingdao port two days ago I saw inventory everywhere...It was from India and from Brazil. Pellet and lumps and fines were all piled up.'
Moments later the same paper screams: 'Bulging Chinese Inventories Undermine Copper'. It's ominous opening sentence reads:
'There is more copper in China than at any other time in history.'
We know China buys stuff just to keep the factories going. Profit and loss are of secondary concern to a regime that owes its existence and wealth to an employed and compliant society.
The question for Aussie investors, is when will the music stop in China? When does economic reality set in and force the country to respond to the true underlying signals of supply and demand? How long can a command economy take orders without rebelling?
We don't have the answer to this or any other questions about what is going on in the global economy. All we can offer at the end of another inconclusive week is more questions.
But we can say this: All is not right with the world. We are not recovering. We are digging a deeper hole for ourselves. Markets are manipulated everywhere you care to look. And if you don't believe that you're not looking, or caring.
The manipulation is designed to deceive. And a deceived investor is one that will eventually lose their wealth and with that their freedom.
The reason why nothing makes sense is because EVERYTHING is screwed up. Individually, we are encouraged to spend money we don't have in order to improve the economy and living standards of everyone. Savings are discouraged. Spending is revered...
...Except if you've already borrowed and spent too much. In which case you need to save and be austere...and cut back on essential services so you can borrow in the future.
We have no idea what's going on. The more we read, the less we know. Our only advice is: work hard, think for yourself, never believe a politician or a central banker...and buy gold.
Hope for the best and expect the worst...
Until next week...
for The Daily Reckoning Australia
From the Archives...
What the News on Bond Yields Say About the "Resolved" Eurozone Crisis
2012-04-13 - Eric Fry
The Art of Selling Stocks
2012-04-12 - Chris Mayer
Misguided Faith in an Economic Recovery
2012-04-11 - Joel Bowman
Beware the Big Government Debt Switcheroo
2012-04-10 - Dan Denning
The Discount Rate: Borrowers, Lenders and Bonds
2012-04-09 - Nick Hubble