Bearing Inflation

Posted by Jeff 30/10/2015 0 Comment(s) The Bearing Market,

There are a lot of factories in China that want to sell bearings, as I outlined here.  In the near-term this will probably lead to deflation in the bearing market, but things could be different in the not-too-distant future.


China is awesome at many aspects of capitalism.  You can buy anything in the markets there, there is a lot of competition and surprisingly few monopolies.  In many ways, it is the competitive free-for-all that capitalist puritans dream of.


But capitalism is still pretty new there and in their banking system, ponzi schemes abound.  My Chinese mother-in-law --a very lovely and intelligent woman--fell victim to the best ponzi scheme I have ever heard of: The Great Ant Wine Ponzi Scheme.  The Great Ant Wine Ponzie Scheme was simple and elegant and contained some classic elements of snake oil salesman chicanery.  First, the good word was spread about the amazing health benefits of ant wine using a handsome and very famous movie star.  Second, demand for the wine was declared to be so high that enough ants couldn't be raised.  Third, people were urged to invest money in the ant wine company and then given boxes of ants to raise!  A certain amount of money invested in the company, would yield a person a box of ants to be fed (preferably on a diet of egg-yolk and cake).  Every three months, someone would come by, give money for the old box of ants and drop off a new box full of ants.  


Or maybe full of ants.  Apparently, a lot of people never even opened their boxes.  At first, of course, people opened their boxes and dilligently fed their ants.  But then they noticed that the ant box courier would never open the box to check and see if the ants were there or if they had multiplied.  They would just take the box, give money and drop off a new box.  Easy money.  Apparently, you could make a 30 to 60% return by raising ants.


Obviously, this was a scheme that was destined to fail badly and it did.  It ended back in 2007 with 200,000 defrauded investors (who consisted largely of peasants and unemployed factory workers) marching in the streets of Shenyang and being met by riot police.  In fact, the investors knew better.  My mother-in-law would always watch the public parades and festivals on TV to see if the ant-wine company president would still be up on the podium next to the leaders of the communist party.  If he was, she knew the ants in her box were still worth something.


The Chinese aren't alone in wanting money for nothing.  Were the hopes and dreams of the ant wine investors really any different from those Americans who speculated in the beanie baby market?  


And just as American banks and investment institutions have filled up their balance sheets with lord knows what kind of derivatives, junk bonds and sub-prime loans, the balance sheets of Chinese banks are similarly encumbered with lots and lots of loans that, if the truth of their value were to be told--would probably have to be written off.


The Chinese banking sector is little understood in the West, but one thing seems clear: the profits of many Chinese commodity companies are no longer great enough to even cover the interest on their loans. Which could have a dramatic impact on the bearing market in the months and years to come.   As struggling companies close, supplies will start to shrink and markets will become tighter and tighter.  Without special financing many of the bearing companies that currently exist in China would not exist and as loans start coming due, many will probably have to go out of business.  As bearing companies start to close, balance will be restored to the market and raise bearing prices off of their current lows.


And bearing companies probably can't raise new capital by selling ants--because that would just be ridiculous.  


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