Michael Pettis: China can only maintain high GDP growth levels by rebalancing

“GDP growth rates over the next few years of 7.5 percent, or even 7 percent, will be impossible to achieve. Until now, such gaudy statistics have been produced by ballooning investment. With so much of that investment now creating less economic value than debt, China has experienced an unsustainable expansion in credit. The country is perilously vulnerable to a chaotic adjustment…

…For China to successfully rebalance its economy toward a healthier and more sustainable model, the measure that really matters is how fast median household income is growing.

Why? Consider what it means for China to rebalance. With household consumption at an astonishingly low 35 percent of GDP, in order to raise that figure to even 50 percent of GDP within a decade — still by far the lowest proportion of any major economy in the world — consumption growth would have to exceed GDP growth by close to four percentage points every year.

An average annual growth rate of 7.5 percent, in other words, would require growth in consumption to exceed 11 percent. How could China possibly get citizens to start spending that much faster? In fact, consumption now contributes less to GDP growth in China than it did during the first half of 2012.” (emphasis mine)

My comment: This last part is truly incredible. The Chinese government has publicly stated for the last few years that they want to rebalance the economy towards household consumption and away from infastructure/capital spending. It does not bode well for China that households aren’t contributing more to GDP even as the investment-led growth model appears to be finally hitting the wall. Prepare for some difficult adjustments.

Hans-Werner Sinn: Germany should not assume the obligations of Southern Europe’s debts

“…the risk posed by mutualisation of debt through eurobonds is much greater, as US history shows. After the US mutualised state debts in 1791 and, again, after the second war against Britain in 1813, states went on borrowing binges. A credit bubble emerged that burst in 1837 and pushed more than half of all states into insolvency. As Harold James of Princeton has shown, the only result of debt mutualisation was strife.”


“The market valuation of a typical great business might appear quite expensive at first glance. However, it helps to remember that in the case of great businesses, the cost of omission will usually be greater than the cost of commission.

Here is a quote from a Fortune article about investing in Coca-Cola, dated December 1938: ‘Several times every year a weighty and serious investor looks long and with a profound respect at Coca-Cola’s record but comes regretfully to the conclusion that he is looking too late.'”

What makes for good investment management


“What makes for good [investment] management is –

(a) contentious, but well thought through opinions,

and in direct contrast,

(b) doubt sufficient to make sure the downside is always well covered

This is a schizoid requirement. People who have both these features are strange – flat out weird.  People with only (a) are engaging but dangerous.

“Nexstar Broadcasting Group and Mission Broadcasting to Acquire Communications Corporation of America and White Knight Broadcasting, Owners of 19 Television Stations in Ten Markets, for $270 Million in Accretive Transaction”

Some news from a company we’ve owned since last fall. The consolidation in this industry continues, as this is the second big transaction announced in a few weeks after a lot of activity in 2011 and 2012. The purchase price of less than 6 times cash flow (after cost-saving synergies) looks good and Nexstar is currently trading at a lower pro-forma multiple than prior to the announcement of the transaction.

Disclosure: Long NXST

Charles Gave on France

“France has economic problems that are particular to its political culture. While speculative excesses in Spain and Ireland were concentrated in an over-built, over-geared real estate sector, French exuberance was a civil service affair. (Remember the adage: too many houses in Spain, too many factories in Germany, too many civil servants in France)…As a result France is the only country that we follow which has seen the public sector grow faster than the private sector in every year since 1987!” (emphasis mine; h/t Zero Hedge)