Outstanding article on China from Stratfor. The image that many have of China's economic growth and political freedom are at odds with the facts. This article does a great job of showing where things have been, where they are now, and where they may be going.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Showing posts with label China. Show all posts
Showing posts with label China. Show all posts
Tuesday, August 18, 2015
Friday, August 14, 2015
China is looking increasingly desperate
Paper was first invented in China. So was paper money, and thus runaway inflation. It is interesting to see China return to its historical roots this week with the significant devaluation of its currency, the renminbi.
China's actions make it look desperate. The Chinese economy is slowing down, perhaps more rapidly than the communist party in China would like. They have tried spurring stock market growth, and then propping up the stock market to prevent it from falling. Now, they are devaluing the currency to try to get the economy jump-started.
Real economic growth comes from productivity, not from printing currency, redistributing wealth, spurring stock market speculation, or punishing those profiting from stocks falling. All of China's, or Europe's, or America's, or Japan's attempts to get growth from someplace other than productivity (which isn't in the government's wheelhouse) are doomed to failure.
Devaluing the renminbi is an attempt to make Chinese goods cheaper for foreigners to buy. That "works" as long as no other country decides to devalue their currency, too. And, it assumes that market participants are too stupid to adjust prices based on currency manipulation, which history and academic research has been shown not to be the case.
It should come as little surprise that communist dictators misunderstand how a free market works. China is running the risk of not only disrupting the world economy with its actions, but also definitely proving to Chinese people that they don't know what they are doing. The risks and the results are real, and will be felt worldwide.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
China's actions make it look desperate. The Chinese economy is slowing down, perhaps more rapidly than the communist party in China would like. They have tried spurring stock market growth, and then propping up the stock market to prevent it from falling. Now, they are devaluing the currency to try to get the economy jump-started.
Real economic growth comes from productivity, not from printing currency, redistributing wealth, spurring stock market speculation, or punishing those profiting from stocks falling. All of China's, or Europe's, or America's, or Japan's attempts to get growth from someplace other than productivity (which isn't in the government's wheelhouse) are doomed to failure.
Devaluing the renminbi is an attempt to make Chinese goods cheaper for foreigners to buy. That "works" as long as no other country decides to devalue their currency, too. And, it assumes that market participants are too stupid to adjust prices based on currency manipulation, which history and academic research has been shown not to be the case.
It should come as little surprise that communist dictators misunderstand how a free market works. China is running the risk of not only disrupting the world economy with its actions, but also definitely proving to Chinese people that they don't know what they are doing. The risks and the results are real, and will be felt worldwide.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, July 31, 2015
China and Greece: sound and fury signifying nothing?
Just a couple of weeks ago, you couldn't look at the news without seeing dire predictions about Greece leaving the European Union or China's stock market tanking. Now, it seems like these perils have passed and there's nothing to worry about. That's unlikely the case.
I'm an optimist by nature, and I tend to think things will work out in the long run. That does not, however, make me a Pollyanna. I don't think that problems in Greece or China are the end of the world. But, I also think it's naive to think that such issues were insubstantial and likely to fade with so little hardship.
Greece still can't pay back its loans, and they are still demonstrating little desire to reform. European lenders still want their loans repaid, and seem unlikely to grant Greece forgiveness for large amounts of debt. In other words, the situation hasn't really changed, and therefore still requires careful observation.
China's stock market did not tank because of some bizarre conspiracy. Like all markets that have been artificially pumped up, it must necessarily deflate. Any attempts to defy that natural process are doomed to fail one way or the other. The underlying issue of China's economy slowing down has not changed. The political and economic consequences are non-trivial and demand watching.
Markets have a natural ebb and flow, just like nature. And, just like nature, those ebbs and flows are largely unpredictable over the short term. That doesn't mean you can't see broader themes evolving. It was easy to see that the tech bubble of the late 1990's would pop, but impossible to predict when. It was easy to see that the housing market of the mid 2000's would burst, but impossible to predict precisely when.
Greece and China have real problems that will eventually reverberate throughout the global economy. I don't know precisely when these issues will loom large, but I do know they haven't been resolved. This is not a good time to ignore those risks.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
I'm an optimist by nature, and I tend to think things will work out in the long run. That does not, however, make me a Pollyanna. I don't think that problems in Greece or China are the end of the world. But, I also think it's naive to think that such issues were insubstantial and likely to fade with so little hardship.
Greece still can't pay back its loans, and they are still demonstrating little desire to reform. European lenders still want their loans repaid, and seem unlikely to grant Greece forgiveness for large amounts of debt. In other words, the situation hasn't really changed, and therefore still requires careful observation.
China's stock market did not tank because of some bizarre conspiracy. Like all markets that have been artificially pumped up, it must necessarily deflate. Any attempts to defy that natural process are doomed to fail one way or the other. The underlying issue of China's economy slowing down has not changed. The political and economic consequences are non-trivial and demand watching.
Markets have a natural ebb and flow, just like nature. And, just like nature, those ebbs and flows are largely unpredictable over the short term. That doesn't mean you can't see broader themes evolving. It was easy to see that the tech bubble of the late 1990's would pop, but impossible to predict when. It was easy to see that the housing market of the mid 2000's would burst, but impossible to predict precisely when.
Greece and China have real problems that will eventually reverberate throughout the global economy. I don't know precisely when these issues will loom large, but I do know they haven't been resolved. This is not a good time to ignore those risks.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, July 10, 2015
China: more important than Greece
While most of the world was overly focused on Greece, bigger things were afoot in China.
First, the Chinese economy is the 2nd largest in the world. What happens in China matters for the world economy. In contrast, Greece's economy is but 2% of the European economy. Although Greece's problems are likely to become broader problems in Portugal, Spain, Italy and France, by itself Greece doesn't have a big impact on the world economy.
Second, China's economy is still essentially run by a communist central planning authority. They are giving some free market principles a try, but they have maintained a firm grip on the most important things. How they react to the inevitable ups and downs any economy faces is important for understanding how the world economy will do in coming years and decades.
Over the last year, the Chinese government has been showing they aren't ready for prime time. First, they have reacted to economic slowing--inevitable in any economic system, whether capitalistic, communistic, socialistic, etc.--with attempts to prop things up. As usual, such attempts look good in the short term but fail over time. Governments just aren't any good at allocating capital.
Second, they are misreading market reactions and have basically lost their cool. After trying to use free markets to boost their economy, they are now trying to prevent markets from clearing by forcing large stockholders to hold instead of selling. There is nothing that spooks markets more than a government's attempts to force the outcome they want instead of the natural equilibrium that would otherwise exist.
This a classic reversal of cause and effect. Stock markets, like all markets, react to news by adjusting prices to make supply and demand match at market clearing prices. Any attempt to prevent that mechanism from operating in the short term leads to disastrous effects in the long run. Markets are effects, not causes, contrary to how many politicians and historians like to interpret the facts.
The more the Chinese government continues to overreact and try controlling outcomes, the more world markets will overreact as a result. Such impacts will be much worse than letting markets find equilibrium. Just witness commodity price swings in reaction to Chinese intervention and you can get a flavor for how nasty things can get.
I think what is going on in China should be watched much more closely than what is happening in Greece. The stakes and consequences are much greater.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
First, the Chinese economy is the 2nd largest in the world. What happens in China matters for the world economy. In contrast, Greece's economy is but 2% of the European economy. Although Greece's problems are likely to become broader problems in Portugal, Spain, Italy and France, by itself Greece doesn't have a big impact on the world economy.
Second, China's economy is still essentially run by a communist central planning authority. They are giving some free market principles a try, but they have maintained a firm grip on the most important things. How they react to the inevitable ups and downs any economy faces is important for understanding how the world economy will do in coming years and decades.
Over the last year, the Chinese government has been showing they aren't ready for prime time. First, they have reacted to economic slowing--inevitable in any economic system, whether capitalistic, communistic, socialistic, etc.--with attempts to prop things up. As usual, such attempts look good in the short term but fail over time. Governments just aren't any good at allocating capital.
Second, they are misreading market reactions and have basically lost their cool. After trying to use free markets to boost their economy, they are now trying to prevent markets from clearing by forcing large stockholders to hold instead of selling. There is nothing that spooks markets more than a government's attempts to force the outcome they want instead of the natural equilibrium that would otherwise exist.
This a classic reversal of cause and effect. Stock markets, like all markets, react to news by adjusting prices to make supply and demand match at market clearing prices. Any attempt to prevent that mechanism from operating in the short term leads to disastrous effects in the long run. Markets are effects, not causes, contrary to how many politicians and historians like to interpret the facts.
The more the Chinese government continues to overreact and try controlling outcomes, the more world markets will overreact as a result. Such impacts will be much worse than letting markets find equilibrium. Just witness commodity price swings in reaction to Chinese intervention and you can get a flavor for how nasty things can get.
I think what is going on in China should be watched much more closely than what is happening in Greece. The stakes and consequences are much greater.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, September 05, 2014
China: how will its mass urbanization impact the global economy
China's impact on the global economy is hard to overstate.
Not only is it the world's second largest economy (by country, not region), but also the source of a huge amount of incremental growth over the last 15 years.
I've seen estimates that over 50% of the demand for iron ore and copper comes from China. Almost 50% of worldwide steel is produced in China. I once read that China has used as much concrete in 2011 and 2012 as the U.S. used in the 20th century! I don't know if such estimates are specifically accurate, but their magnitude gives you a flavor of how China has impacted the global economy. In short, the economic crisis since 2008 would have looked a lot worse without China.
Given that, it's important to consider the impact of China on future economic growth.
One of the dynamics going on in China is the move from a more production-based to a consumption-based economy. China is approximately 34% consumer-based versus 70% in the U.S. China has built an economy, predominantly from the top down, that has mostly produced goods for other countries, like the U.S., Europe and Japan. But that source of growth was limited. You can only take market share for so long before you need to become your own source of growth.
China is trying to make that transition, but getting a command and control economy to do that without large disruptions is very difficult.
One aspect of such a transition is having hundreds of millions of Chinese farmers move from the hinterland to cities. In cities, they can work in factories and produce much more than they can on the farm. That higher productivity leads to higher consumption, thus achieving China's goals.
But, how do you move hundreds of millions of people from farm to city. In the west, and Japan, that transition took place over many decades, and mostly organically (by organically, I mean through free market forces, not through government fiat). Those transitions led to disruptions, just as it will in China.
China, however, is trying to do this much more quickly and on a much more massive scale. China wants to move around 235 million people to cities over the next 20 years. For perspective, that's the size of the 10 largest cities in the world now (from Tokyo at 37 million to Mexico City at 20 million). Can you even imagine trying to regrow 10 of the largest cities in the world, over the next 20 years? (for more information, read Stratfor's article on the subject)
Achieving such a task is Herculean, and it will impact the global economy.
How? I don't know. It could all happen smoothly, which I consider unlikely. It could occur with either international or domestic war, as such pressures have created throughout history. It could happen in fits and starts with massive swings in economic growth from boom to bust. No one knows, really, but it bears watching.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Not only is it the world's second largest economy (by country, not region), but also the source of a huge amount of incremental growth over the last 15 years.
I've seen estimates that over 50% of the demand for iron ore and copper comes from China. Almost 50% of worldwide steel is produced in China. I once read that China has used as much concrete in 2011 and 2012 as the U.S. used in the 20th century! I don't know if such estimates are specifically accurate, but their magnitude gives you a flavor of how China has impacted the global economy. In short, the economic crisis since 2008 would have looked a lot worse without China.
Given that, it's important to consider the impact of China on future economic growth.
One of the dynamics going on in China is the move from a more production-based to a consumption-based economy. China is approximately 34% consumer-based versus 70% in the U.S. China has built an economy, predominantly from the top down, that has mostly produced goods for other countries, like the U.S., Europe and Japan. But that source of growth was limited. You can only take market share for so long before you need to become your own source of growth.
China is trying to make that transition, but getting a command and control economy to do that without large disruptions is very difficult.
One aspect of such a transition is having hundreds of millions of Chinese farmers move from the hinterland to cities. In cities, they can work in factories and produce much more than they can on the farm. That higher productivity leads to higher consumption, thus achieving China's goals.
But, how do you move hundreds of millions of people from farm to city. In the west, and Japan, that transition took place over many decades, and mostly organically (by organically, I mean through free market forces, not through government fiat). Those transitions led to disruptions, just as it will in China.
China, however, is trying to do this much more quickly and on a much more massive scale. China wants to move around 235 million people to cities over the next 20 years. For perspective, that's the size of the 10 largest cities in the world now (from Tokyo at 37 million to Mexico City at 20 million). Can you even imagine trying to regrow 10 of the largest cities in the world, over the next 20 years? (for more information, read Stratfor's article on the subject)
Achieving such a task is Herculean, and it will impact the global economy.
How? I don't know. It could all happen smoothly, which I consider unlikely. It could occur with either international or domestic war, as such pressures have created throughout history. It could happen in fits and starts with massive swings in economic growth from boom to bust. No one knows, really, but it bears watching.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Wednesday, January 23, 2013
China syndrome
Some people think China will grow strongly forevermore. That would lead to significant changes in both the political and economic landscape going forward.
Others think China will run into a brick wall because governments are terrible capital allocators. That, too, would lead to significant changes on the political and economic front.
In other words, China will have a large impact on the future of politics and economics no matter what. You can't think about the short, intermediate or long term without some attention to China.
With that in mind, I highly recommend a recent piece from GMO (a very good investment firm) regarding China.
It points out the same problems highlighted in a book called Red Capitalism: that China's growth is built on a shaky and corrupt financial system.
I hold the opinion that China is headed for trouble, although I have no idea when that trouble will come about (just like I saw the dot-com bubble and the housing/credit bubble coming, but couldn't predict when each would pop).
China's trouble could be long term stagnation like Japan experienced over the last 20 years, or economic collapse like Europe and the U.S. experienced in 2008-2009, or outright revolution. I really don't know.
But, I do know it's important to think about ahead of time.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Others think China will run into a brick wall because governments are terrible capital allocators. That, too, would lead to significant changes on the political and economic front.
In other words, China will have a large impact on the future of politics and economics no matter what. You can't think about the short, intermediate or long term without some attention to China.
With that in mind, I highly recommend a recent piece from GMO (a very good investment firm) regarding China.
It points out the same problems highlighted in a book called Red Capitalism: that China's growth is built on a shaky and corrupt financial system.
I hold the opinion that China is headed for trouble, although I have no idea when that trouble will come about (just like I saw the dot-com bubble and the housing/credit bubble coming, but couldn't predict when each would pop).
China's trouble could be long term stagnation like Japan experienced over the last 20 years, or economic collapse like Europe and the U.S. experienced in 2008-2009, or outright revolution. I really don't know.
But, I do know it's important to think about ahead of time.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Tuesday, February 28, 2012
China article
Despite its all-too-common use of the ridiculous term, "state capitalism," this article outstandingly spells out the case for China to experience an economic crisis in the next 5-10 years: Time Magazine, Why China Will Have an Economic Crisis.
China can and might change course, but it's current path is one we've seen before and will end in tears.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
China can and might change course, but it's current path is one we've seen before and will end in tears.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Monday, December 26, 2011
All eyes on China
There are many candidates for focus next year. The one that makes all the headlines is, of course, Europe. Its economy, as a whole, is still the largest in the world, after all. If that economy collapsed, or the European Union came apart, or the currency union changed dramatically, then it would, without doubt, impact the global economy. But, a lot of what's happening in Europe is already discounted in market prices. News on the front page is rarely a big mover of markets because markets anticipate change more than react to it. And, although Europe's economy is large, it doesn't contribute much to global growth. There's a small chance that Europe is the big mover of markets next year, but I doubt it will be.
Japan is a dark horse that may have a big impact on the global economy next year. Its economy is still #4 behind Europe, the U.S. and China, but hasn't grown in 22 years. The issue from Japan isn't earthquakes or tsunamis, but debt. Japan is the most indebted country in the world if you compare its overall debt to the size of its economy. The amazing thing is that they pay the lowest interest rates in the world on that debt. The reason rates are so low is that the Japanese are so willing (and compelled) to buy Japanese government debt. When retirees start to outnumber savers, though, Japan will have to start raising debt at much higher interest rates. If markets start to anticipate that inevitable transition next year, Japan could be the big mover of markets. I doubt it will be, though, because I don't think that crisis will come to a head for another couple of years.
The Middle East is, as always, another dark horse that could greatly impact global markets. Although the Arab Spring is making the headlines, the greater concern involves ancient rivalries between Arabs and Persians, and between Iran and Israel. If Iran succeeds in creating unrest between Shia and Sunni on the Arabian Peninsula, or if Israel becomes increasingly worried about and takes action regarding Iran's nuclear program, then oil prices will rocket and the global economy will tank. Like Japan's issues, these are unlikely to come to a head next year. But, unlike Japan's issues, the Middle East is unlikely to face an inevitable conclusion in the short to intermediate term.
The good old U.S. of A. is another place to focus next year. It's an election year, so many both inside and outside North America will be curious to see how our political field changes and how that could impact the global economy. The U.S. economy is huge, but is growing so slowly that it has less impact on the global economy than it did five or ten years ago. In my opinion, our political transition is unlikely to change things much, so I doubt it'll have a big impact on markets. Not only is Congress unlikely to tackle our debt issues during an election year, but the Fed is also running low on monetary ammunition.
China, I think, is the most likely candidate to move markets next year. It is both the world's 3rd largest economy and the fastest growing. It is also the biggest supplier of goods to Europe and the U.S., the 1st and 2nd largest economies. It has a huge impact on emerging market growth, too, because so many emerging economies supply China with the raw materials and other inputs that fuel their manufacturing powerhouse. In 2013, China is going to go through a major political change (every 5 years, there's a major changing of the guard) that's likely to be anticipated by markets in 2012. At the same time, China is trying to tamp down high inflation and an overly-exuberant real estate market. Add all these factors together with a bunch of global investors over-focused on Europe, and you have a high probability that China is the one moving markets next year.
I'm not alone in doing this, but I'm watching with great interest what happens to oil and copper prices and on the Shanghai Stock Exchange. Oil futures (which are high, but not outrageously so) seem to be reflecting concerns in the Middle East more than growth in China or emerging markets. Copper has fallen over 20% since last spring, but has not yet declined to global recessionary levels. Shanghai, like copper, has been falling since spring, and is down at levels last seen in the spring of 2009, when U.S. markets were hitting bottom.
I don't really know what will happen in markets next year, but I'm watching China with greater interest than Europe. If China tanks, the world economy will follow; if China thrives, markets are likely to do much better than expected.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Wednesday, September 28, 2011
The China Premise
In analyzing financial markets and the economy, almost everyone holds a premise that's the proverbial elephant in the room: what will happen with China.
For those who believe global growth will have severe problems, their premise is that China is most likely an accident waiting to happen. Those who believe the opposite, that global growth will take off again, almost certainly hold the view that China is a growth machine that will pull the whole world forward.
If someone holds a view on commodities, currencies, stocks, bonds or gold, I can almost guarantee that behind their view is a premise about what will happen in China.
That premise may be explicit. Jim Rogers, a noted commodity investor who once worked for George Soros, is a China bull and makes no bones about it. He moved his family to Singapore and is having his daughter learn Mandarin Chinese because he thinks she won't be able to succeed without it.
Jim Chanos, the famous and successful short seller, is on record saying China is a bubble that will soon pop. He's putting his money where is mouth is, too.
Some hold their premise implicitly. I've heard many agriculture and base metal investors insist that prices can only go up. They may not lay out the case explicitly, but if you ask them you'll find they see endless growth and demand from China.
Others are certain that debt deflation (the unwinding of bad loans) will keep the global economy in the tank for a decade or more. Once again, they may not come right out and say it, but if you ask them, you'll almost certainly find that they assume China can't keep growing fast enough to overcome bad debt.
The most intellectually honest will admit they don't know what will happen. After all, it's up to the Chinese. I agree with the bears that China's command and control economy will end badly (the history on this subject doesn't leave much room for doubt)--IF it stays on its current path. But, that's a big IF.
I also agree with the bulls that China has a lot of runway simply playing catch-up with developed markets, and IF they foster free market reforms (rule of law, representative government, property rights, flexible labor markets, private allocation of capital, etc.), then they can be a huge growth story for a VERY long time. Once again: big IF.
Perhaps the best path is not to guess.
If you could invest and do well regardless of whether China tanks or soars, wouldn't that seem the best path? Granted, if you knew how the story would end, you would make more money betting boldly in that direction. But, is anyone really certain they know what will happen and--more importantly for investors--when?
What happens in China will impact world markets. In the short run, this spells opportunity whether boom or bust. I think making a guess on this over the next few years is a fool's errand. It's better, instead, to prepare for either outcome because getting the timing right is impossible (or lucky).
Making explicit one's China premise is important to understanding one's view of world markets and the economy. More important than one's premise, however, is whether its based on sound reasoning or gut feel and conjecture.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
For those who believe global growth will have severe problems, their premise is that China is most likely an accident waiting to happen. Those who believe the opposite, that global growth will take off again, almost certainly hold the view that China is a growth machine that will pull the whole world forward.
If someone holds a view on commodities, currencies, stocks, bonds or gold, I can almost guarantee that behind their view is a premise about what will happen in China.
That premise may be explicit. Jim Rogers, a noted commodity investor who once worked for George Soros, is a China bull and makes no bones about it. He moved his family to Singapore and is having his daughter learn Mandarin Chinese because he thinks she won't be able to succeed without it.
Jim Chanos, the famous and successful short seller, is on record saying China is a bubble that will soon pop. He's putting his money where is mouth is, too.
Some hold their premise implicitly. I've heard many agriculture and base metal investors insist that prices can only go up. They may not lay out the case explicitly, but if you ask them you'll find they see endless growth and demand from China.
Others are certain that debt deflation (the unwinding of bad loans) will keep the global economy in the tank for a decade or more. Once again, they may not come right out and say it, but if you ask them, you'll almost certainly find that they assume China can't keep growing fast enough to overcome bad debt.
The most intellectually honest will admit they don't know what will happen. After all, it's up to the Chinese. I agree with the bears that China's command and control economy will end badly (the history on this subject doesn't leave much room for doubt)--IF it stays on its current path. But, that's a big IF.
I also agree with the bulls that China has a lot of runway simply playing catch-up with developed markets, and IF they foster free market reforms (rule of law, representative government, property rights, flexible labor markets, private allocation of capital, etc.), then they can be a huge growth story for a VERY long time. Once again: big IF.
Perhaps the best path is not to guess.
If you could invest and do well regardless of whether China tanks or soars, wouldn't that seem the best path? Granted, if you knew how the story would end, you would make more money betting boldly in that direction. But, is anyone really certain they know what will happen and--more importantly for investors--when?
What happens in China will impact world markets. In the short run, this spells opportunity whether boom or bust. I think making a guess on this over the next few years is a fool's errand. It's better, instead, to prepare for either outcome because getting the timing right is impossible (or lucky).
Making explicit one's China premise is important to understanding one's view of world markets and the economy. More important than one's premise, however, is whether its based on sound reasoning or gut feel and conjecture.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Wednesday, March 16, 2011
China Rising?
So much ink has been spilled--especially over the last several years--about the rise of China that I wanted to devote a blog to the subject.
I won't bury the lead: I believe China is more likely another Japan than another United States on the rise. My goal is not so much to tell the future--I don't know what will happen--as much as it is to cast doubt on the overwhelming consensus of China's inevitable rise to supremacy.
What consensus you might ask? That China's economy will inevitably surpass the U.S.'s in the next 10, 20, or 30 years; that China will surpass the U.S. in technological superiority; that China will surpass the U.S. militarily; that China will surpass the U.S. in every way possible, it seems.
All of these things very well may come to pass. But, it is not written in the stars, and the consensus view is almost entirely built on an extrapolation of current trends--a technique of forecasting which is almost never accurate.
As an interesting illustration of forecasting difficulty, I'd like exhibit #1 to be Paul Kennedy's excellent book, The Rise and Fall of the Great Powers. Now, granted, this book came out in 1987, when Japan's ascendancy was widely accepted as given, but it's a wonderful example of how someone extremely knowledgeable in a specific field can suffer from the biases of extrapolation.
In his book, he speaks of the 5 centers of power at the time: the U.S., the U.S.S.R., Japan, China and the European Economic Community. He spells out how clearly Japan is surpassing or going to surpass the U.S. in computers, robotics, telecommunications, automobiles, trucks, ships, biotechnology and aerospace.
Please understand, he was writing in 1987, when Japan Inc. was thought to be unbeatable, buying up property all over the world, technologically unstoppable. He didn't know Japan would fall into an economic funk a mere two years later where Japan's economy wouldn't grow for the next 22 years (nor did he see the fall of the U.S.S.R. coming, and even seems to poo-poo the idea). So much for Japan Inc. and extrapolation of the past.
But, really, how could anyone really think that Japan would surpass the U.S. in computers and software? Or biotechnology and aerospace? Yes, Japan has definitely done better in robotics, automobiles and ships, but to provide such a long and overwhelming list as a historian? A bit naive, I think.
The consensus view on China reminds me in many ways of the view 20 years ago of Japan. Don't get me wrong, Japan and China are very different stories, but people's perception seems to be similar.
Just as China's centrally planned economy and "state capitalism" (an oxymoron if there ever was one) is seen as the wave of the future and a better way to govern, so Japan's Ministry for International Trade and Industry (MITI) and it's coordination of economic activity was seen as a huge advantage over the U.S.'s capitalism.
Just as China's production of engineers and scientists is seen as an unstoppable force, so was Japan's. Just as China's high research and development budget is seen as superior, so was Japan's.
Just as China's high national savings rate is seen as an advantage over the U.S.'s consumption, so was Japan's. Just as China's superiority in aptitude tests is seen as intellectually over-powering the U.S.'s poor scores, so was Japan's.
I believe people make these extrapolations because they don't really understand the sources of growth. They simply expect the recent past to keep going, but it almost never does.
Just as Japan's extraordinary growth came from adopting western technology and industry and having huge western markets to sell to, so does China's. If either Japan or China had had to create these industries from scratch, as the U.K. and U.S. had done, the growth would never have materialized. And, just as Japan's economy has demonstrated over the last 20 years, if China ever has to rely on it's own consumers and businessmen for innovation and growth, you'll see growth fall off a cliff.
Neither Japan nor China invented the Bessemer process, or assembly lines, or transistors, or binary computer logic, or almost any of the other major innovations which allowed them to grow. They got it all from the west.
And, this brings me back to my blog of two weeks ago, where I said that return on capital is the most important concept in finance. You see, neither Japan nor China view return on capital as a primary concept. Japanese businessmen are frequently on record saying that the U.S.'s focus on shareholder returns is ridiculous. China is a communist state that sees returns on investment as a mere means to other ends.
The U.S. and U.K., at least during periods of innovation, let returns on capital as determined by individuals allocate resources, instead of some central planning bureaucracy. The U.S. and U.K., thanks to intellectual greats like Adam Smith (a moral philosopher, not economist), recognized that human potential was unlocked when individuals were able to pursue their self-interest, as long as there was a rule of law and, specifically, protection of property rights.
Good luck finding that intellectual framework in Japan or China.
In forecasting the future, this return on capital concept is vital to accuracy.
If the U.S. abandons its focus on return on capital (as the U.K. has in most ways done), good-bye growth and innovation, good-bye technological and military superiority, good-bye world leadership.
If Japan adopts a focus on return on capital at the individual level, which I believe is possible over time (perhaps in the next decade) welcome back growth and innovation.
If China adopts a focus on return on capital at the level of the individual--an unlikely route, in my opinion--it can become a leading state. Without that focus, growth will eventually crash and burn as it did in Japan (China is witnessing a boom in real estate, just as Japan did before its crash--coincidence?).
Forecasting China or U.S. over the next 30 years seems a bit silly without a focus on return on capital, but the consensus opinion is that it's a done deal--China will be supreme.
I beg to differ because I don't believe large population, numbers of engineers, test scores or central planning are the lifeblood of growth, but the innovation of individuals who produce high returns on capital for their own benefit.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
I won't bury the lead: I believe China is more likely another Japan than another United States on the rise. My goal is not so much to tell the future--I don't know what will happen--as much as it is to cast doubt on the overwhelming consensus of China's inevitable rise to supremacy.
What consensus you might ask? That China's economy will inevitably surpass the U.S.'s in the next 10, 20, or 30 years; that China will surpass the U.S. in technological superiority; that China will surpass the U.S. militarily; that China will surpass the U.S. in every way possible, it seems.
All of these things very well may come to pass. But, it is not written in the stars, and the consensus view is almost entirely built on an extrapolation of current trends--a technique of forecasting which is almost never accurate.
As an interesting illustration of forecasting difficulty, I'd like exhibit #1 to be Paul Kennedy's excellent book, The Rise and Fall of the Great Powers. Now, granted, this book came out in 1987, when Japan's ascendancy was widely accepted as given, but it's a wonderful example of how someone extremely knowledgeable in a specific field can suffer from the biases of extrapolation.
In his book, he speaks of the 5 centers of power at the time: the U.S., the U.S.S.R., Japan, China and the European Economic Community. He spells out how clearly Japan is surpassing or going to surpass the U.S. in computers, robotics, telecommunications, automobiles, trucks, ships, biotechnology and aerospace.
Please understand, he was writing in 1987, when Japan Inc. was thought to be unbeatable, buying up property all over the world, technologically unstoppable. He didn't know Japan would fall into an economic funk a mere two years later where Japan's economy wouldn't grow for the next 22 years (nor did he see the fall of the U.S.S.R. coming, and even seems to poo-poo the idea). So much for Japan Inc. and extrapolation of the past.
But, really, how could anyone really think that Japan would surpass the U.S. in computers and software? Or biotechnology and aerospace? Yes, Japan has definitely done better in robotics, automobiles and ships, but to provide such a long and overwhelming list as a historian? A bit naive, I think.
The consensus view on China reminds me in many ways of the view 20 years ago of Japan. Don't get me wrong, Japan and China are very different stories, but people's perception seems to be similar.
Just as China's centrally planned economy and "state capitalism" (an oxymoron if there ever was one) is seen as the wave of the future and a better way to govern, so Japan's Ministry for International Trade and Industry (MITI) and it's coordination of economic activity was seen as a huge advantage over the U.S.'s capitalism.
Just as China's production of engineers and scientists is seen as an unstoppable force, so was Japan's. Just as China's high research and development budget is seen as superior, so was Japan's.
Just as China's high national savings rate is seen as an advantage over the U.S.'s consumption, so was Japan's. Just as China's superiority in aptitude tests is seen as intellectually over-powering the U.S.'s poor scores, so was Japan's.
I believe people make these extrapolations because they don't really understand the sources of growth. They simply expect the recent past to keep going, but it almost never does.
Just as Japan's extraordinary growth came from adopting western technology and industry and having huge western markets to sell to, so does China's. If either Japan or China had had to create these industries from scratch, as the U.K. and U.S. had done, the growth would never have materialized. And, just as Japan's economy has demonstrated over the last 20 years, if China ever has to rely on it's own consumers and businessmen for innovation and growth, you'll see growth fall off a cliff.
Neither Japan nor China invented the Bessemer process, or assembly lines, or transistors, or binary computer logic, or almost any of the other major innovations which allowed them to grow. They got it all from the west.
And, this brings me back to my blog of two weeks ago, where I said that return on capital is the most important concept in finance. You see, neither Japan nor China view return on capital as a primary concept. Japanese businessmen are frequently on record saying that the U.S.'s focus on shareholder returns is ridiculous. China is a communist state that sees returns on investment as a mere means to other ends.
The U.S. and U.K., at least during periods of innovation, let returns on capital as determined by individuals allocate resources, instead of some central planning bureaucracy. The U.S. and U.K., thanks to intellectual greats like Adam Smith (a moral philosopher, not economist), recognized that human potential was unlocked when individuals were able to pursue their self-interest, as long as there was a rule of law and, specifically, protection of property rights.
Good luck finding that intellectual framework in Japan or China.
In forecasting the future, this return on capital concept is vital to accuracy.
If the U.S. abandons its focus on return on capital (as the U.K. has in most ways done), good-bye growth and innovation, good-bye technological and military superiority, good-bye world leadership.
If Japan adopts a focus on return on capital at the individual level, which I believe is possible over time (perhaps in the next decade) welcome back growth and innovation.
If China adopts a focus on return on capital at the level of the individual--an unlikely route, in my opinion--it can become a leading state. Without that focus, growth will eventually crash and burn as it did in Japan (China is witnessing a boom in real estate, just as Japan did before its crash--coincidence?).
Forecasting China or U.S. over the next 30 years seems a bit silly without a focus on return on capital, but the consensus opinion is that it's a done deal--China will be supreme.
I beg to differ because I don't believe large population, numbers of engineers, test scores or central planning are the lifeblood of growth, but the innovation of individuals who produce high returns on capital for their own benefit.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, November 19, 2010
The week that was...
Most weeks, I choose one topic on which to spout my thoughts and opinions. But, this week, there were just too many interesting things to ponder, so here are 8 brief points of interest.
1) Earnings season is over and the results were better than expected. Revenues didn't dazzle, meaning that end demand is slow, but cost cuts more than made up the difference. This just goes to show that companies and the stock market can do well even in a slow economy.
2) Economic numbers continue to improve. Unemployment claims improved, railroad loadings are up, leading economic indicators surprised on the upside as did the Philly Fed's survey. The economy is improving ever so slowly, but it is improving.
3) There's been a lot of speculation that the Fed's quantitative easing program is merely an attempt to puff up the stock market to get rich people to spend, thus improving the overall economy. Andy Kessler and Don Coxe made convincing arguments that the Fed is really worried about real estate and the financial institutions that depend on real estate values, and thus quantitative easying may be an attempt to support bank balance sheets. Why did the economy roll over in 2008? Oh, that's right, real estate values tanked and financial institutions froze up.
4) The mortgage documentation mess promises to have much more lasting impacts than most realize. This issue goes to the heart of real estate titles and ownership, and the dinosaurs are going toe to toe to find out who will eat losses. If the banks end up losing this fight, like they should, then we could be right back into a 2008 crisis again. See 3) above.
5) Ireland will likely take a bailout from the European Union (EU). If you think this means Ireland is in a weak position, think again. When you owe the bank $10,000, it's your problem; when you owe it $10 billion, it's the bank's problem. The EU is more worried about Greece, Portugal, Spain and Italy than Ireland, so they are hoping to draw a line in the sand at Ireland (after Greece). Ireland has the stronger hand in this game. Oh, and by the way, why is another bailout in Europe good news for markets?
6) China is working hard to slow down their economy, mostly by slowing bank lending, because food inflation is making the natives restless. China may succeed more than world markets anticipate. Initially, markets will probably take that hard. But, over time, this will lower the prices of input commodities, thus improving developing economies. This may be a case where slowing for them is good news for us.
7) Many state and local governments in the U.S. look like Portugal, Ireland, Italy, Greece and Spain in terms of fiscal health. When these issues hit the front page, likely next year or the year after, it will rattle markets and lead to huge bailouts by the federal government. This will be good in the long run (because budgets are out of touch with reality), but I don't think many people, especially investors, are paying attention to the short term impacts.
8) Long term bond yields spiked over the last couple of weeks. An almost 5% decline in the 10 year U.S. Treasury bond over a couple of weeks should be a wake up call for investors who think bonds are risk free. It should also give pause to equity investors who should know that stocks should go down when long term bond yields spike. But, why worry about that, the market is rallying!
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
1) Earnings season is over and the results were better than expected. Revenues didn't dazzle, meaning that end demand is slow, but cost cuts more than made up the difference. This just goes to show that companies and the stock market can do well even in a slow economy.
2) Economic numbers continue to improve. Unemployment claims improved, railroad loadings are up, leading economic indicators surprised on the upside as did the Philly Fed's survey. The economy is improving ever so slowly, but it is improving.
3) There's been a lot of speculation that the Fed's quantitative easing program is merely an attempt to puff up the stock market to get rich people to spend, thus improving the overall economy. Andy Kessler and Don Coxe made convincing arguments that the Fed is really worried about real estate and the financial institutions that depend on real estate values, and thus quantitative easying may be an attempt to support bank balance sheets. Why did the economy roll over in 2008? Oh, that's right, real estate values tanked and financial institutions froze up.
4) The mortgage documentation mess promises to have much more lasting impacts than most realize. This issue goes to the heart of real estate titles and ownership, and the dinosaurs are going toe to toe to find out who will eat losses. If the banks end up losing this fight, like they should, then we could be right back into a 2008 crisis again. See 3) above.
5) Ireland will likely take a bailout from the European Union (EU). If you think this means Ireland is in a weak position, think again. When you owe the bank $10,000, it's your problem; when you owe it $10 billion, it's the bank's problem. The EU is more worried about Greece, Portugal, Spain and Italy than Ireland, so they are hoping to draw a line in the sand at Ireland (after Greece). Ireland has the stronger hand in this game. Oh, and by the way, why is another bailout in Europe good news for markets?
6) China is working hard to slow down their economy, mostly by slowing bank lending, because food inflation is making the natives restless. China may succeed more than world markets anticipate. Initially, markets will probably take that hard. But, over time, this will lower the prices of input commodities, thus improving developing economies. This may be a case where slowing for them is good news for us.
7) Many state and local governments in the U.S. look like Portugal, Ireland, Italy, Greece and Spain in terms of fiscal health. When these issues hit the front page, likely next year or the year after, it will rattle markets and lead to huge bailouts by the federal government. This will be good in the long run (because budgets are out of touch with reality), but I don't think many people, especially investors, are paying attention to the short term impacts.
8) Long term bond yields spiked over the last couple of weeks. An almost 5% decline in the 10 year U.S. Treasury bond over a couple of weeks should be a wake up call for investors who think bonds are risk free. It should also give pause to equity investors who should know that stocks should go down when long term bond yields spike. But, why worry about that, the market is rallying!
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, August 06, 2010
Beggar thy neighbor
I was surprised this week to read several reports that Europe announced improving production and business confidence, particularly out of Germany. Several European companies announced better than expected earnings, too.
After all, weren't financial commentators the world over (including yours truly) prattling on a couple of months ago that Europe was coming apart at the seams?
And then I remembered the phrase "beggar thy neighbor." It refers to the political policy of devaluing one's currency and/or erecting trade barriers to boost one country's economy at the expense of other economies.
It's called beggar thy neighbor because it only works as long as your neighboring countries don't react (hence the begging). If they erect their own trade barriers or devalue their currency, then the game is up and everyone ends up worse off. Like most boondoggles, it only seems to work as long as you focus on the surface and not the aggregate.
Because I have a sarcastic sense of humor, I couldn't help but be amused by all the Germans who were coldly saying, a few short months ago, that the Club Med countries should be dumped from the euro currency and even the European Union. Now that the Club Meds have caused the euro to drop, Germany seems to be making out like a bandit.
The main reason is that Germany is mostly an export economy (like China and Japan). In fact, China overtook Germany only last year as the world's largest exporter. Germany's economy would grind to a halt if it weren't selling to others. Not surprisingly, the euro dropping benefited them most.
But, it won't last too long. Even now, U.S., Japanese and Chinese politicians are most likely forming policies that will lead to our own devalued currencies or new trade barriers that will eliminate the euro advantage. The effort will succeed in kicking Europe--particularly German--in the shins, but it won't make anyone better off.
In the long run, people adjust to currency changes. Over time, a burger in Asia, Europe and America will cost about the same in real value. Buyers and sellers adjust the prices they are willing to pay and receive until things are back to the way they were. Currency depreciations don't work for long, and trade barriers just reduce everyone's standard of living.
Beggar thy neighbor doesn't work, unless of course your goal is to get elected in the short run. It may be the only thing less productive than re-arranging deck chairs on the Titanic.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
After all, weren't financial commentators the world over (including yours truly) prattling on a couple of months ago that Europe was coming apart at the seams?
And then I remembered the phrase "beggar thy neighbor." It refers to the political policy of devaluing one's currency and/or erecting trade barriers to boost one country's economy at the expense of other economies.
It's called beggar thy neighbor because it only works as long as your neighboring countries don't react (hence the begging). If they erect their own trade barriers or devalue their currency, then the game is up and everyone ends up worse off. Like most boondoggles, it only seems to work as long as you focus on the surface and not the aggregate.
Because I have a sarcastic sense of humor, I couldn't help but be amused by all the Germans who were coldly saying, a few short months ago, that the Club Med countries should be dumped from the euro currency and even the European Union. Now that the Club Meds have caused the euro to drop, Germany seems to be making out like a bandit.
The main reason is that Germany is mostly an export economy (like China and Japan). In fact, China overtook Germany only last year as the world's largest exporter. Germany's economy would grind to a halt if it weren't selling to others. Not surprisingly, the euro dropping benefited them most.
But, it won't last too long. Even now, U.S., Japanese and Chinese politicians are most likely forming policies that will lead to our own devalued currencies or new trade barriers that will eliminate the euro advantage. The effort will succeed in kicking Europe--particularly German--in the shins, but it won't make anyone better off.
In the long run, people adjust to currency changes. Over time, a burger in Asia, Europe and America will cost about the same in real value. Buyers and sellers adjust the prices they are willing to pay and receive until things are back to the way they were. Currency depreciations don't work for long, and trade barriers just reduce everyone's standard of living.
Beggar thy neighbor doesn't work, unless of course your goal is to get elected in the short run. It may be the only thing less productive than re-arranging deck chairs on the Titanic.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Tuesday, June 22, 2010
Renminbi redux.
The Chinese finally decided to let their currency, the renminbi (or yuan), "float" against the U.S. dollar. (For background, please see my prior post: Renminbi revaluation). I put the word float in quotes because it will be highly controlled and not a float in the free market sense.
Political leaders the world over, but especially in the U.S., have been pushing for this revaluation for some time. I doubt it will generate the outcome such leaders hope for. My expectation is higher interest rates and commodity prices in the long run that will eventually make our problems here and abroad worse instead of better.
An interesting question to ask, then, is: why did the Chinese finally do what everyone wanted them to do?
The most obvious answer, and the one that will satisfy most political leaders, is that China bowed to U.S. or international pressure. I doubt that's the case. Right now the rest of the world depends on China as much as or more so than the other way around.
Another suggestion, mostly from political thinkers, is that China is assuming its position on the world stage and having an independent currency is part of that. Although more feasible than caving to pressure, I think this argument misses the mark, too. I believe China desires a prominent position in the world, but I don't think it would sacrifice a piece of its low cost edge in order to get it.
No, I think the real reason behind revaluation is inflation in China.
In fighting financial problems over the last decade, the U.S. Federal Reserve has printed a lot of dollars. That printing has led to higher prices, especially for food and the key inputs to production (copper, iron ore, oil, etc.).
This impacts first world countries much less than third world countries. The first world spends somewhere around 20% of their income on such things as food. The third world, including China, however, spends much closer to 60%.
When the price of an apple doubles and it's less than 20% of your income, you complain a bit, but it doesn't cause a significant problem.
When the price of food doubles and it's 60% of your income, you riot in the streets.
That's the situation I think China is facing. They'd like to keep their currency on par with the dollar to maintain their low cost competitive advantage (with significant margin to spare), but not at the expense of having inflation cripple its poorest people.
I believe China's goal is to grow to first world standards of living without causing a revolution. That's a very delicate goal to achieve, especially with centralized planning and in the short time period they want to achieve it.
They won't get there if their economy slows too much, or if they have high inflation.
I don't think China is caving to pressure from the west or seeking the prestige of an independent currency. I believe they are walking a tight rope, and inflationary threats were making them lean way too far in one direction.
Revaluation, for them, is a practical economic matter, not purely a political one.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
The Chinese finally decided to let their currency, the renminbi (or yuan), "float" against the U.S. dollar. (For background, please see my prior post: Renminbi revaluation). I put the word float in quotes because it will be highly controlled and not a float in the free market sense.
Political leaders the world over, but especially in the U.S., have been pushing for this revaluation for some time. I doubt it will generate the outcome such leaders hope for. My expectation is higher interest rates and commodity prices in the long run that will eventually make our problems here and abroad worse instead of better.
An interesting question to ask, then, is: why did the Chinese finally do what everyone wanted them to do?
The most obvious answer, and the one that will satisfy most political leaders, is that China bowed to U.S. or international pressure. I doubt that's the case. Right now the rest of the world depends on China as much as or more so than the other way around.
Another suggestion, mostly from political thinkers, is that China is assuming its position on the world stage and having an independent currency is part of that. Although more feasible than caving to pressure, I think this argument misses the mark, too. I believe China desires a prominent position in the world, but I don't think it would sacrifice a piece of its low cost edge in order to get it.
No, I think the real reason behind revaluation is inflation in China.
In fighting financial problems over the last decade, the U.S. Federal Reserve has printed a lot of dollars. That printing has led to higher prices, especially for food and the key inputs to production (copper, iron ore, oil, etc.).
This impacts first world countries much less than third world countries. The first world spends somewhere around 20% of their income on such things as food. The third world, including China, however, spends much closer to 60%.
When the price of an apple doubles and it's less than 20% of your income, you complain a bit, but it doesn't cause a significant problem.
When the price of food doubles and it's 60% of your income, you riot in the streets.
That's the situation I think China is facing. They'd like to keep their currency on par with the dollar to maintain their low cost competitive advantage (with significant margin to spare), but not at the expense of having inflation cripple its poorest people.
I believe China's goal is to grow to first world standards of living without causing a revolution. That's a very delicate goal to achieve, especially with centralized planning and in the short time period they want to achieve it.
They won't get there if their economy slows too much, or if they have high inflation.
I don't think China is caving to pressure from the west or seeking the prestige of an independent currency. I believe they are walking a tight rope, and inflationary threats were making them lean way too far in one direction.
Revaluation, for them, is a practical economic matter, not purely a political one.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, June 18, 2010
Look east, young man...
In trying to read the economic Tarot cards, most are focused on the U.S. and Europe.
At first glance, this is quite understandable. The European economy is the largest in the world, followed closely by the U.S. But, that's not where the action is.
Indeed, the world economy increasingly turns on the axis of #3: China.
If you want to know where things are going, look east.
I say this for two reasons: 1) markets have been increasingly led by action in China, and 2) fundamental economic reality is being driven most by China.
When the economies and stock markets of the world turned positive in 2008 and 2009, it happened first in China.
All other markets are reacting to what happens in China, too. When China hints they may let the renmimbi appreciate, markets shout "how high?" When China hints its trying to subdue real estate speculation, markets shutter the world over.
The simple fact of the matter is markets are reacting increasingly to news from China.
You may think of markets as being speculatively fueled, but a look at underlying economic reality provides a basis for these flighty reactions.
China is the world's third largest economy, passing Japan within the last two years.
The Chinese economy is--by far--the fastest growing large economy.
China became the world's largest export economy, passing the former #1, Germany, just last year.
Demand from China is driving the markets for the most basic inputs to production. Watch the price of shipping, iron ore, copper, steel, oil, or almost anything else, and you'll most likely find news from China caused prices to jump or dive.
China has become the manufacturer to the world. You can't consume what hasn't been produced, so China is holding the economic cards, now. If you don't believe it, watch Chinese workers striking Honda or demanding hiring wages from purchasers like Apple and Hewlett Packard. This wasn't happening a year ago because China didn't hold the cards. They do right now.
Finally, China's economy is the only large economy whose government isn't in a fiscal straight jacket. The U.S., Europe and Japan are all hand-cuffed by borrowing and spending too much. China's government is almost certainly making uneconomic investments, but they have the ability to invest whereas the other large economies' governments are out of ammunition (or soon will be).
If you want to know where things are going economically, look east.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
In trying to read the economic Tarot cards, most are focused on the U.S. and Europe.
At first glance, this is quite understandable. The European economy is the largest in the world, followed closely by the U.S. But, that's not where the action is.
Indeed, the world economy increasingly turns on the axis of #3: China.
If you want to know where things are going, look east.
I say this for two reasons: 1) markets have been increasingly led by action in China, and 2) fundamental economic reality is being driven most by China.
When the economies and stock markets of the world turned positive in 2008 and 2009, it happened first in China.
All other markets are reacting to what happens in China, too. When China hints they may let the renmimbi appreciate, markets shout "how high?" When China hints its trying to subdue real estate speculation, markets shutter the world over.
The simple fact of the matter is markets are reacting increasingly to news from China.
You may think of markets as being speculatively fueled, but a look at underlying economic reality provides a basis for these flighty reactions.
China is the world's third largest economy, passing Japan within the last two years.
The Chinese economy is--by far--the fastest growing large economy.
China became the world's largest export economy, passing the former #1, Germany, just last year.
Demand from China is driving the markets for the most basic inputs to production. Watch the price of shipping, iron ore, copper, steel, oil, or almost anything else, and you'll most likely find news from China caused prices to jump or dive.
China has become the manufacturer to the world. You can't consume what hasn't been produced, so China is holding the economic cards, now. If you don't believe it, watch Chinese workers striking Honda or demanding hiring wages from purchasers like Apple and Hewlett Packard. This wasn't happening a year ago because China didn't hold the cards. They do right now.
Finally, China's economy is the only large economy whose government isn't in a fiscal straight jacket. The U.S., Europe and Japan are all hand-cuffed by borrowing and spending too much. China's government is almost certainly making uneconomic investments, but they have the ability to invest whereas the other large economies' governments are out of ammunition (or soon will be).
If you want to know where things are going economically, look east.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, April 09, 2010
Renminbi revaluation.
Be careful what you wish for, you just might get it.
The U.S. Congress has been trying to get the Chinese to allow their currency, the renminbi (or yuan), to appreciate versus the U.S. dollar. Timothy Geithner, our Treasury Secretary, rushed off to the far east to broker such a deal a couple of days ago.
Whereas most see this as a wonderful beginning, I believe it will end in tears.
Chinese currency is called renminbi. The word means "people's currency" (in direct contradiction of those who believe China has anything to do with capitalism). It's more commonly and historically called the yuan (which means round, after the shape of coins).
The Chinese peg their currency to the dollar. This means they buy and sell dollars and yuan to keep the 2 currencies marching in lockstep. The yuan was pegged to the dollar from 1997-2005 at 8.27 yuan to the dollar. It was allowed to float somewhat freely ("managed peg") from 2005 to 2008, where it appreciated (in a very controlled manner) from 8.27 to 6.83 (fewer yuan to dollars means the yuan is going up in value). That managed peg lasted until the crisis of 2008, when it was put back on a fixed peg at 6.83 yuan to the dollar, and remains there still.
The Chinese are not mean-spirited in pegging their currency. They partially do it to maintain their trading relationship to the U.S. It's easier to conduct trade, both for people in the U.S. and China, when you know what the exchange rate will be. They also peg their currency because they are a controlled economy. In other words, they don't have the mechanisms to let their economy manage itself because it's not a free market.
Many think this gives China an unfair advantage (sarcastic comment: just like it gives Alabama an unfair advantage over Michigan to have the dollar in Alabama the same as the dollar in Michigan). Such folks believe we must force China to remove its peg so we can compete more "fairly" (unless, of course, the people in Congress think they are losing, then they don't want it to be fair).
I don't believe forcing China to revalue its currency will be all good news.
It will be good for U.S. companies who compete with China. If Chinese and U.S. companies are competing for the same business, China has an advantage by manipulating its currency. But, China does not compete with the U.S. for high-end manufacturing, they compete with the U.S. at the low end, mostly. So, it will benefit low-end manufacturing in the U.S.
But, this will be bad for U.S. consumers. Letting the yuan appreciate will make all those Chinese goods we buy cost more (and we buy a LOT of Chinese goods). It also means China will have a more valuable currency to compete with U.S. dollars in buying goods all over the globe. In other words, it will lead to higher prices for commodities, goods, probably everything.
A small minority of U.S. businesses, with buddies in the Congress, will benefit at the expense of the vast majority of U.S. consumers and higher-end U.S. businesses. Isn't that nice.
The fallout will not be pretty, to be frank. It's bad for bonds because it means higher interest rates. And, those higher rates will hit U.S. consumers, U.S. businesses, and, of course, the biggest debtor of all: the U.S. government.
It will be good for commodity investments. It will be good for U.S. businesses in competition with Chinese businesses. That seems like more downside than upside to me.
To top it off, it won't solve the U.S.'s fiscal problems--it will make them worse. Higher interest rates and inflation will not reduce the U.S.'s debt, or reduce our burden of future social programs. Nor will it help employment. For every new job in low end manufacturing, we'll lose 2 or more elsewhere. It will lead to larger public finance problems, and sooner.
The U.S.'s problem is that it spends too much and it pays with debt. That's not China's fault. We need to save more, spend less, and make products that others want. We won't beat China with low-end manufacturing, but we can at the high-end. But, a depreciating dollar relative to an appreciating yuan won't help that.
No, getting the Chinese to allow the yuan to appreciate will not help the U.S., it will help China. Is that what we really want?
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Be careful what you wish for, you just might get it.
The U.S. Congress has been trying to get the Chinese to allow their currency, the renminbi (or yuan), to appreciate versus the U.S. dollar. Timothy Geithner, our Treasury Secretary, rushed off to the far east to broker such a deal a couple of days ago.
Whereas most see this as a wonderful beginning, I believe it will end in tears.
Chinese currency is called renminbi. The word means "people's currency" (in direct contradiction of those who believe China has anything to do with capitalism). It's more commonly and historically called the yuan (which means round, after the shape of coins).
The Chinese peg their currency to the dollar. This means they buy and sell dollars and yuan to keep the 2 currencies marching in lockstep. The yuan was pegged to the dollar from 1997-2005 at 8.27 yuan to the dollar. It was allowed to float somewhat freely ("managed peg") from 2005 to 2008, where it appreciated (in a very controlled manner) from 8.27 to 6.83 (fewer yuan to dollars means the yuan is going up in value). That managed peg lasted until the crisis of 2008, when it was put back on a fixed peg at 6.83 yuan to the dollar, and remains there still.
The Chinese are not mean-spirited in pegging their currency. They partially do it to maintain their trading relationship to the U.S. It's easier to conduct trade, both for people in the U.S. and China, when you know what the exchange rate will be. They also peg their currency because they are a controlled economy. In other words, they don't have the mechanisms to let their economy manage itself because it's not a free market.
Many think this gives China an unfair advantage (sarcastic comment: just like it gives Alabama an unfair advantage over Michigan to have the dollar in Alabama the same as the dollar in Michigan). Such folks believe we must force China to remove its peg so we can compete more "fairly" (unless, of course, the people in Congress think they are losing, then they don't want it to be fair).
I don't believe forcing China to revalue its currency will be all good news.
It will be good for U.S. companies who compete with China. If Chinese and U.S. companies are competing for the same business, China has an advantage by manipulating its currency. But, China does not compete with the U.S. for high-end manufacturing, they compete with the U.S. at the low end, mostly. So, it will benefit low-end manufacturing in the U.S.
But, this will be bad for U.S. consumers. Letting the yuan appreciate will make all those Chinese goods we buy cost more (and we buy a LOT of Chinese goods). It also means China will have a more valuable currency to compete with U.S. dollars in buying goods all over the globe. In other words, it will lead to higher prices for commodities, goods, probably everything.
A small minority of U.S. businesses, with buddies in the Congress, will benefit at the expense of the vast majority of U.S. consumers and higher-end U.S. businesses. Isn't that nice.
The fallout will not be pretty, to be frank. It's bad for bonds because it means higher interest rates. And, those higher rates will hit U.S. consumers, U.S. businesses, and, of course, the biggest debtor of all: the U.S. government.
It will be good for commodity investments. It will be good for U.S. businesses in competition with Chinese businesses. That seems like more downside than upside to me.
To top it off, it won't solve the U.S.'s fiscal problems--it will make them worse. Higher interest rates and inflation will not reduce the U.S.'s debt, or reduce our burden of future social programs. Nor will it help employment. For every new job in low end manufacturing, we'll lose 2 or more elsewhere. It will lead to larger public finance problems, and sooner.
The U.S.'s problem is that it spends too much and it pays with debt. That's not China's fault. We need to save more, spend less, and make products that others want. We won't beat China with low-end manufacturing, but we can at the high-end. But, a depreciating dollar relative to an appreciating yuan won't help that.
No, getting the Chinese to allow the yuan to appreciate will not help the U.S., it will help China. Is that what we really want?
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, March 26, 2010
China crazy!
Need further proof that people are going nuts over China? Simply adding "China" to a company's name has led to beating the market by 31% (for 18 listed companies so far in 2010). This is the finding of Professor Wei Wang of Queen's School of Business and reported by Jason Zweig in the Wall Street Journal this week.
The last time this happened was between 2004 and 2007, when adding the words "oil" or "petroleum" led to an 8% boost in stock performance.
Before that, it was the technology bubble from 1998 to 1999, when adding ".com" to a company's name led to 53% out-performance of other technology stocks.
In the late 1960's, a company's stock would soar if it added "-tronics" or "-dyne" to its name.
I'm sure if we went back to the 1800's, we'd find the same thing for "canal" and "railroad" companies.
It's a story as old as markets. People fall for the hype only to find they've invested in little more than smoke and mirrors.
I don't mean to say that no company is China is worth its salt. Nor am I saying that all oil, .com, or -tronics companies are pure puffery.
But, when simply changing the name of your company to reflect the latest craze leads to serious out-performance, you know there's a bubble afoot.
China, too, may not live up to the hype.
Is China a huge and growing market? Yes, indeed. Will China's economy have a huge and growing impact on the world economy? Unequivocally, yes.
But, that doesn't mean every investment in China will do well. In fact, it might be a good idea to pull back on the China hype and consider other less bubbly alternatives.
Perhaps a case history can be instructive, here. The last time people went country-crazy was the mid to late 1980's. Then, it was Japan, Inc. Do you remember how Japan was buying up real estate in New York, Hawaii and California, and how almost everyone was convinced the Japanese way of doing everything was better?
Fast forward to 2010, and Japan has been in a 20 year off-again, on-again recession. Their stock market peaked at almost 39,000 in late 1989 only to fall below 8,000 twice in the last 20 years (down over 80%). Even now, their market is around 11,000, down over 70% from it's peak of over 20 years ago!
Can you imagine if the Dow Jones Industrial Average were at 4,250 19 years from now!? That was the Japanese hype experience.
China's story may not look much better 10 or 20 years from now, either.
Before jumping into the hype machine, remember the lessons of history. Extreme hype is almost always a bad sign.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Need further proof that people are going nuts over China? Simply adding "China" to a company's name has led to beating the market by 31% (for 18 listed companies so far in 2010). This is the finding of Professor Wei Wang of Queen's School of Business and reported by Jason Zweig in the Wall Street Journal this week.
The last time this happened was between 2004 and 2007, when adding the words "oil" or "petroleum" led to an 8% boost in stock performance.
Before that, it was the technology bubble from 1998 to 1999, when adding ".com" to a company's name led to 53% out-performance of other technology stocks.
In the late 1960's, a company's stock would soar if it added "-tronics" or "-dyne" to its name.
I'm sure if we went back to the 1800's, we'd find the same thing for "canal" and "railroad" companies.
It's a story as old as markets. People fall for the hype only to find they've invested in little more than smoke and mirrors.
I don't mean to say that no company is China is worth its salt. Nor am I saying that all oil, .com, or -tronics companies are pure puffery.
But, when simply changing the name of your company to reflect the latest craze leads to serious out-performance, you know there's a bubble afoot.
China, too, may not live up to the hype.
Is China a huge and growing market? Yes, indeed. Will China's economy have a huge and growing impact on the world economy? Unequivocally, yes.
But, that doesn't mean every investment in China will do well. In fact, it might be a good idea to pull back on the China hype and consider other less bubbly alternatives.
Perhaps a case history can be instructive, here. The last time people went country-crazy was the mid to late 1980's. Then, it was Japan, Inc. Do you remember how Japan was buying up real estate in New York, Hawaii and California, and how almost everyone was convinced the Japanese way of doing everything was better?
Fast forward to 2010, and Japan has been in a 20 year off-again, on-again recession. Their stock market peaked at almost 39,000 in late 1989 only to fall below 8,000 twice in the last 20 years (down over 80%). Even now, their market is around 11,000, down over 70% from it's peak of over 20 years ago!
Can you imagine if the Dow Jones Industrial Average were at 4,250 19 years from now!? That was the Japanese hype experience.
China's story may not look much better 10 or 20 years from now, either.
Before jumping into the hype machine, remember the lessons of history. Extreme hype is almost always a bad sign.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, February 19, 2010
As fragile as China.
As I've remarked before (here and here), much of the current worldwide economic recovery is due to China. For that reason, the greatest sensitivity to continued recovery is what happens in and with respect to China.
This recovery is as fragile as China (meaning delicate plates as well as the country).
Demand from China has driven up commodity prices and kept production flowing from manufacturing-based economies. For evidence, look no further than companies like Caterpillar and the land-office business they are doing in the far east.
If something were to go wrong in China, the economic impacts would reverberate throughout the global economy.
What could go wrong? If you haven't noticed, there have been a lot of political issues surfacing between China and the U.S.
This includes the U.S.'s desire for China to allow it's currency, the yuan/renminbi, to appreciate. This would make U.S. manufacturers more competitive with China. China has no interest in making itself less competitive, so this creates a lot of tension between the U.S. and China.
And then, there's the spat between Google and China over censorship and hacking. It shows the inherent conflicts that exist between a command and control government like China's and free market enterprises like Google.
Of course, there's also the Dalai Lama. He represents the Tibetan government in exile and China doesn't like his concerns being heard by the most powerful nation in the world. President Obama met with the Dalai Lama this week, infuriating China.
Then, there's also our insistence on selling high-end weapons to Taiwan, whom China considers to be an errant state. It would be like Russia selling arms to Alaska, with Alaska being quite clear it would like to secede from the union.
So, there are a lot of political issues going on between the U.S. and China, not to mention they hold a ton of U.S. national debt. It's a touchy situation.
China, too, has its own internal problems. Approximately 700 million people live in poverty in the Chinese interior while another 600 million are growing rapidly nearer the coast. Growth and trade has been great to the 600 million and less so to the 700 million. That is why some 20 million Chinese, a year, are moving from the hinterland to the coast looking for work.
This dynamic means that China simply can't let growth slow too much. If it does, they will have a revolution in short order. Such is the history of China over the last...oh...2,000 years.
China is an island, geopolitically, and it has repeatedly cycled between external growth/interaction and internal strife/revolution. Until they change their political system from centralized command and control, as it's been for 2 millennia, this external/internal cycle will continue.
This internal dynamic is the main reason why China won't let its currency appreciate, and why they are working so hard to stimulate worldwide growth. China needs worldwide growth because they need someone to sell their low cost goods to.
The problem is that political tensions with large economies like the U.S., Europe and Japan are all working against this process. And, of course, the U.S., Europe and Japan all have major internal issues of their own that make them less than conciliatory towards China.
With all that on the table, how long until we see Chinese fragility? I don't know, and neither does anyone else. But, it's reasonable to assume the game can go on for several more years.
If China plays their cards right, then perhaps they can keep the game going long enough for the rest of the world to work out its problems and start growing again on its own.
If they slip up, though, which seems highly likely over the next five years, then that fragility could crack the delicate plate and lead to worldwide consequences.
We'd all like to see China succeed. If they do, then the world economy gets bailed out of its experiment with too much leverage. If not, it could lead to another major economic upheaval.
For now, expect China to keep the game in play. It should be good for stronger economic growth than most are forecasting. But, when the end-game arrives, it won't be pretty.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
As I've remarked before (here and here), much of the current worldwide economic recovery is due to China. For that reason, the greatest sensitivity to continued recovery is what happens in and with respect to China.
This recovery is as fragile as China (meaning delicate plates as well as the country).
Demand from China has driven up commodity prices and kept production flowing from manufacturing-based economies. For evidence, look no further than companies like Caterpillar and the land-office business they are doing in the far east.
If something were to go wrong in China, the economic impacts would reverberate throughout the global economy.
What could go wrong? If you haven't noticed, there have been a lot of political issues surfacing between China and the U.S.
This includes the U.S.'s desire for China to allow it's currency, the yuan/renminbi, to appreciate. This would make U.S. manufacturers more competitive with China. China has no interest in making itself less competitive, so this creates a lot of tension between the U.S. and China.
And then, there's the spat between Google and China over censorship and hacking. It shows the inherent conflicts that exist between a command and control government like China's and free market enterprises like Google.
Of course, there's also the Dalai Lama. He represents the Tibetan government in exile and China doesn't like his concerns being heard by the most powerful nation in the world. President Obama met with the Dalai Lama this week, infuriating China.
Then, there's also our insistence on selling high-end weapons to Taiwan, whom China considers to be an errant state. It would be like Russia selling arms to Alaska, with Alaska being quite clear it would like to secede from the union.
So, there are a lot of political issues going on between the U.S. and China, not to mention they hold a ton of U.S. national debt. It's a touchy situation.
China, too, has its own internal problems. Approximately 700 million people live in poverty in the Chinese interior while another 600 million are growing rapidly nearer the coast. Growth and trade has been great to the 600 million and less so to the 700 million. That is why some 20 million Chinese, a year, are moving from the hinterland to the coast looking for work.
This dynamic means that China simply can't let growth slow too much. If it does, they will have a revolution in short order. Such is the history of China over the last...oh...2,000 years.
China is an island, geopolitically, and it has repeatedly cycled between external growth/interaction and internal strife/revolution. Until they change their political system from centralized command and control, as it's been for 2 millennia, this external/internal cycle will continue.
This internal dynamic is the main reason why China won't let its currency appreciate, and why they are working so hard to stimulate worldwide growth. China needs worldwide growth because they need someone to sell their low cost goods to.
The problem is that political tensions with large economies like the U.S., Europe and Japan are all working against this process. And, of course, the U.S., Europe and Japan all have major internal issues of their own that make them less than conciliatory towards China.
With all that on the table, how long until we see Chinese fragility? I don't know, and neither does anyone else. But, it's reasonable to assume the game can go on for several more years.
If China plays their cards right, then perhaps they can keep the game going long enough for the rest of the world to work out its problems and start growing again on its own.
If they slip up, though, which seems highly likely over the next five years, then that fragility could crack the delicate plate and lead to worldwide consequences.
We'd all like to see China succeed. If they do, then the world economy gets bailed out of its experiment with too much leverage. If not, it could lead to another major economic upheaval.
For now, expect China to keep the game in play. It should be good for stronger economic growth than most are forecasting. But, when the end-game arrives, it won't be pretty.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, January 29, 2010
China Pullback.
As I highlighted in the Stimulus Withdrawal section of my most recent client letter, when the governments of the world get serious about withdrawing monetary and fiscal stimulus, things could get ugly.
So far this year, the S&P 500 is down around 3% on a price-only basis. This may be a "healthy correction" in process, but it's curious why the correction started just recently.
There has been a lot of speculation about why. The most popular explanation is, of course, political. President Obama and former Fed Chairman Paul Volcker are threatening to take a hatchet to the big bad bailout banks (tip of the hat to Donald Coxe).
Large bank stocks have sold off, and regional bank stocks have done well. So, there is some substance behind the political claim. But, bank stocks have not been the most significant component of the sell off. In fact, one can more reasonably look at commodities to see what may be going on.
Oil and copper prices are off around 12% since their peaks in early January. Natural gas prices are off around 14%. Could it be that the threat to large U.S. banks is causing a sell-off in commodities? Doubtful. Or, is it a reflection of a more fundamental pull-back in economic activity. And, if so, why?
Okay, enough teasing. China decided to rein in credit expansion by raising bank reserves and increasing borrowing costs. I think markets are reacting to this credit tightening because they understand that China, and other emerging markets with respect to China, are providing the marginal units of growth to the world economy.
Not surprisingly, the Shanghai Composite is off 8.4% since January 21st. Perhaps the U.S., Europe and Japan are no longer leading the world economy, and markets are reflecting what is happening in the far east.
What will happen now? I don't know, and neither does anyone else. But, what China decides to do going forward with respect to government stimulus and credit creation is likely to drive markets for some time to come.
Unless you know someone with close ties to the highest levels of Chinese government, I don't think anyone will be able to guess what will happen next, either.
This is no time to be overly bold or assume that timing the market is possible. It's up to the whims of Chinese politicians in my opinion.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
As I highlighted in the Stimulus Withdrawal section of my most recent client letter, when the governments of the world get serious about withdrawing monetary and fiscal stimulus, things could get ugly.
So far this year, the S&P 500 is down around 3% on a price-only basis. This may be a "healthy correction" in process, but it's curious why the correction started just recently.
There has been a lot of speculation about why. The most popular explanation is, of course, political. President Obama and former Fed Chairman Paul Volcker are threatening to take a hatchet to the big bad bailout banks (tip of the hat to Donald Coxe).
Large bank stocks have sold off, and regional bank stocks have done well. So, there is some substance behind the political claim. But, bank stocks have not been the most significant component of the sell off. In fact, one can more reasonably look at commodities to see what may be going on.
Oil and copper prices are off around 12% since their peaks in early January. Natural gas prices are off around 14%. Could it be that the threat to large U.S. banks is causing a sell-off in commodities? Doubtful. Or, is it a reflection of a more fundamental pull-back in economic activity. And, if so, why?
Okay, enough teasing. China decided to rein in credit expansion by raising bank reserves and increasing borrowing costs. I think markets are reacting to this credit tightening because they understand that China, and other emerging markets with respect to China, are providing the marginal units of growth to the world economy.
Not surprisingly, the Shanghai Composite is off 8.4% since January 21st. Perhaps the U.S., Europe and Japan are no longer leading the world economy, and markets are reflecting what is happening in the far east.
What will happen now? I don't know, and neither does anyone else. But, what China decides to do going forward with respect to government stimulus and credit creation is likely to drive markets for some time to come.
Unless you know someone with close ties to the highest levels of Chinese government, I don't think anyone will be able to guess what will happen next, either.
This is no time to be overly bold or assume that timing the market is possible. It's up to the whims of Chinese politicians in my opinion.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Monday, July 20, 2009
China's precarious position
One of the major reasons for the market's continued rally is China.
China has been buying up commodities, especially copper, and that has caused a resurgence in the price of copper. Because copper is such a fundamental unit in overall economic demand, many are taking the surge in copper prices as a sign that underlying economic demand is rebounding and set to run for quite some time.
But, is the demand from China fundamental, or is it due solely to economic stimulus from China's government? Even if it is due to government stimulus, does that mean such demand will or will not continue? These questions are not easy to answer.
China's banking system is not very sound because so many loans are given out as political favors. On the other hand, the Chinese save a huge percentage of their income, some say 20-40%, which is three to seven times higher than here in the U.S. (and that's the highest U.S. saving rate of around 6% since the 1990's). Savings become investment over time, and investment can make up for a lot of bad loans.
China is also experiencing political unrest. China's highly centralized government is fighting to balance the interests of 600 million people living on the east coast (who benefit from free trade) with the interests of 700 million people living in China's interior (who are mostly dirt-poor farmers). This is a delicate balancing act, and, without high economic growth, likely to get much more difficult.
China's economy is very dependent on exporting products. Because worldwide demand is down so much, China has little to export. They are trying to shift their economy more from exporting to internal demand, but this will take a lot of time and effort, and success is by no means assured.
If China succeeds in their efforts to keep growth going, then expect higher commodity prices and increasing growth for the world economy. If China can't keep the growth engine going, then expect commodity prices to tank and for the world economy to muddle along.
China is likely to be the main driver of short to intermediate economic growth for some time.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
One of the major reasons for the market's continued rally is China.
China has been buying up commodities, especially copper, and that has caused a resurgence in the price of copper. Because copper is such a fundamental unit in overall economic demand, many are taking the surge in copper prices as a sign that underlying economic demand is rebounding and set to run for quite some time.
But, is the demand from China fundamental, or is it due solely to economic stimulus from China's government? Even if it is due to government stimulus, does that mean such demand will or will not continue? These questions are not easy to answer.
China's banking system is not very sound because so many loans are given out as political favors. On the other hand, the Chinese save a huge percentage of their income, some say 20-40%, which is three to seven times higher than here in the U.S. (and that's the highest U.S. saving rate of around 6% since the 1990's). Savings become investment over time, and investment can make up for a lot of bad loans.
China is also experiencing political unrest. China's highly centralized government is fighting to balance the interests of 600 million people living on the east coast (who benefit from free trade) with the interests of 700 million people living in China's interior (who are mostly dirt-poor farmers). This is a delicate balancing act, and, without high economic growth, likely to get much more difficult.
China's economy is very dependent on exporting products. Because worldwide demand is down so much, China has little to export. They are trying to shift their economy more from exporting to internal demand, but this will take a lot of time and effort, and success is by no means assured.
If China succeeds in their efforts to keep growth going, then expect higher commodity prices and increasing growth for the world economy. If China can't keep the growth engine going, then expect commodity prices to tank and for the world economy to muddle along.
China is likely to be the main driver of short to intermediate economic growth for some time.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Sunday, May 27, 2007
Will China Tank?
The Chinese stock market has been on a tear over the last 2 1/2 years. My question is: how long will it last?
The Chinese economy has been growing at over 10% for many years, so the fundamentals seem strong. But, has any market gone straight up without temporary setbacks along the way? Not that I know of.
Chinese investors have been piling into the market any way they can. Some are even borrowing against their homes to participate in the frenzy. Does that type of mania end well?
In addition, China is not fully a market economy, and it's still run by a communist party which doesn't fully recognize human rights, much less voting rights. And those government folks are trying like crazy to slow down the stock market now. Do you think they'll just give up and join the party? Not likely.
Timing the market seems like a fools errand to me, but markets in that type of frenzy seldom end well. I'm neither long nor short Chinese stocks, but after the 10% drop in the Chinese stock market last February, I can't help but wonder how the Chinese stock market may impact other world markets. I don't know when, but at some point, we'll find out.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
The Chinese stock market has been on a tear over the last 2 1/2 years. My question is: how long will it last?
The Chinese economy has been growing at over 10% for many years, so the fundamentals seem strong. But, has any market gone straight up without temporary setbacks along the way? Not that I know of.
Chinese investors have been piling into the market any way they can. Some are even borrowing against their homes to participate in the frenzy. Does that type of mania end well?
In addition, China is not fully a market economy, and it's still run by a communist party which doesn't fully recognize human rights, much less voting rights. And those government folks are trying like crazy to slow down the stock market now. Do you think they'll just give up and join the party? Not likely.
Timing the market seems like a fools errand to me, but markets in that type of frenzy seldom end well. I'm neither long nor short Chinese stocks, but after the 10% drop in the Chinese stock market last February, I can't help but wonder how the Chinese stock market may impact other world markets. I don't know when, but at some point, we'll find out.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
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