You can rely on Richard Daughty to carry on fighting the brave fight - I really think it's pro bono publico, as I don't see any attempt to turn his work into sales leads for him.
Yesterday's essay continues with the theme of global credit expansion to keep up with the seemingly unstoppable increase of dollars. I suppose that wouldn't be so bad, if it weren't for two considerations:
1. Inflation is unevenly spread, and the 10+ % money supply increase is inadequately reflected in your bank savings interest, so your money is rotting away there. You then have the unenviable task of deciding where else to store your wealth to stop it shrinking.
2. While our governments continue to turn the currency into used bus tickets, the trade imbalances deteriorate, and the international wealth transfers and the world's economic instability worsen.
Will America always be able to make the interest payments on its rapidly-swelling debt? Or is she prepared to see the debt turn into foreign ownership of the economy?
There's a century-old Punch cartoon that shows a plumber sitting on the step of a middle-class house. A passing colleague asks him how the job is going, and he replies that he's taken the house in payment for his work.
Tuesday, June 19, 2007
Monday, June 18, 2007
Mr Buffett takes a train
Seeking Alpha reports today that Warren Buffett now shares George Soros' recently-discovered liking for railways - perhaps this illustrates a transport energy-efficiency theme.
A contrarian's advice on crash-proofing
The Contrarian Investors' Journal is also waiting for a crash and considering strategies.
More on Marc Faber
I missed this article from May 23 about Faber's recent recommendations - some on currency, but also some on commodities, e.g. gold versus oil.
Contrarian update
Let's take a look at the 6 contrarians favoured by Investment U:
Jim Rogers reportedly (today) likes farmland in Latin America, because of the water supply (I think Bill Bonner has gotten into this, too)
Marc Faber is sounding very cautious and cash-oriented at the moment, though I have previously quoted a report of his investments
John Templeton is quoted as stating the principle “invest at the point of absolute pessimism,” a point which surely hasn't yet been reached
Sam Zell has sold a real estate business (Equity Office Partners) to Blackstone - which makes the Chinese a part owner of New York, and the Daily Reckoning thinks Zell did rather better out of the deal than Blackstone. Zell is reportedly buying the Tribune media group
Eduardo Elsztain is in Argentine real estate
George Soros' recent portfolio is reported here and the same source reports his purchase of rail companies recently - an indication of moving towards more conservative value investing?
... and Steve Sjuggerud, also mentioned in the Investment U article that named the above, is tipping shares in a gold mining venture.
Jim Rogers reportedly (today) likes farmland in Latin America, because of the water supply (I think Bill Bonner has gotten into this, too)
Marc Faber is sounding very cautious and cash-oriented at the moment, though I have previously quoted a report of his investments
John Templeton is quoted as stating the principle “invest at the point of absolute pessimism,” a point which surely hasn't yet been reached
Sam Zell has sold a real estate business (Equity Office Partners) to Blackstone - which makes the Chinese a part owner of New York, and the Daily Reckoning thinks Zell did rather better out of the deal than Blackstone. Zell is reportedly buying the Tribune media group
Eduardo Elsztain is in Argentine real estate
George Soros' recent portfolio is reported here and the same source reports his purchase of rail companies recently - an indication of moving towards more conservative value investing?
... and Steve Sjuggerud, also mentioned in the Investment U article that named the above, is tipping shares in a gold mining venture.
Bulls AND bears buy bargains
If you read the IU article linked to the end of the previous post, you'll see one of the fabulously successful contrarian investors is John Templeton. You'll also see that the foundation of his fortune was investing in low-priced shares in 1939. The macro view DOES have a bearing on investment decisions.
Earlier, I quoted the new Chinese owner of the ThyssenKrupp steelworks, who expects the steel market to collapse again sometime and this is one reason why he bought the works at bargain cost - to survive when others go under because of debt.
Speaking of debt, Bill Bonner opined this week:
A credit expansion is always followed by a credit contraction. And this credit expansion has led to the world’s first, and biggest, planetary bubble. When it corrects, it will be the world’s first, and biggest, planetary bust. So keep your eyes on our Crash Alert flag, dear reader. We may be early. But we won’t be wrong.
Earlier, I quoted the new Chinese owner of the ThyssenKrupp steelworks, who expects the steel market to collapse again sometime and this is one reason why he bought the works at bargain cost - to survive when others go under because of debt.
Speaking of debt, Bill Bonner opined this week:
A credit expansion is always followed by a credit contraction. And this credit expansion has led to the world’s first, and biggest, planetary bubble. When it corrects, it will be the world’s first, and biggest, planetary bust. So keep your eyes on our Crash Alert flag, dear reader. We may be early. But we won’t be wrong.
Ignore the bulls AND the bears?
A stimulating article from Investment U about how some of the greatest investors admit they can never predict what the market will do. Their strategy is to buy businesses whose shares are worth much less than the assets, then sell when the share price catches up with the asset value.
I suggest you add Investment U to your favourites, for a good read round. And have a look at today's IU article on 6 top contrarian investors.
I suggest you add Investment U to your favourites, for a good read round. And have a look at today's IU article on 6 top contrarian investors.
Sunday, June 17, 2007
A cheerfully dissenting view
Rachel Beck of the Associated Press is determined to see the sunny side, quoting past history to show that interest rate hikes don't need to mean stock drops. And if investors' mood is less bullish, that means buying opportunities come up. And as long as the average yield on the S&P 500 is higher than that on Treasuries, etc.
However, what will the average yield on stocks be, when consumers buy fewer goods and services? And shouldn't the yield be significantly higher, to compensate for investor risk? And how long does it take for a less bullish mood to end? These soothing words don't quite reassure me, somehow.
However, what will the average yield on stocks be, when consumers buy fewer goods and services? And shouldn't the yield be significantly higher, to compensate for investor risk? And how long does it take for a less bullish mood to end? These soothing words don't quite reassure me, somehow.
The Sunday Telegraph gets bearish
Looking at the recent fortunes of US Treasury bonds, "Sunday Business" Editor Dan Roberts thinks the turning point has come:
I'm sticking my neck out and saying that the time has come. The writing is on the wall...What follows next may turn out to be mild turbulence or the start of a steeper nosedive. Either way, it seems a prudent time to adopt the brace position...
I'm sticking my neck out and saying that the time has come. The writing is on the wall...What follows next may turn out to be mild turbulence or the start of a steeper nosedive. Either way, it seems a prudent time to adopt the brace position...
How will China dump the dollar?
Peter Schiff says in Friday's Market Oracle that although Alan Greenspan thinks the Chinese must continue to hold US bonds since there is no-one else to sell them to...
...the Chinese do not have to sell, they only need to stop buying and let their existing bonds mature. Then the U.S. government, not the Chinese, will be the ones forced to find new buyers for its debt.
Most of the debt that the Chinese own is short-term. Therefore all the Chinese need to do is simply not re-purchase new Treasuries when the U.S. pays them for their existing notes. Perhaps Greenspan should rent a copy of the 1981 Kris Kristofferson movie “Rollover,” where the fear that Arab countries would not rollover maturing treasuries sent gold prices soaring.
Of course, even if the Chinese decide to cash out, they will be repaid in dollars, for which they will actually have to find buyers.
[...] To expect 1.3 billion hard-working, underpaid Chinese to indefinitely subsidize 300 million wealthy, over-consuming Americans is absurd. [...] When the Chinese finally wake up the American dream will disappear.
Finding someone to accept the dollars sounds a bit easier, especially if you are prepared to be a bit generous in the exchange. If you were the Chinese, what would you do?
Following this line of argument, if there is less demand for US Treasuries, their price drops and therefore their yield (the ratio of interest to purchase price) increases, which means higher interest rates. Which will make many debtors very uncomfortable or insolvent, and which will also force consumers to cut back on discretionary spending.
Lower demand means more unemployment, I guess, and a falling dollar means imports will cost more; also, exports will be cheaper to foreigners, who can therefore afford to pay more, so rasing the cost of those items in dollars. So, slumpflation for Americans?
But if countries across the world have been inflating their money supply to keep pace with the USA, maybe they will deflate in concert, too. So, maybe simply a deflationary slump, a worldwide bust?
I look forward to reading some expert who can explain the least painful way out of this. Breaking up factories to reduce oversupply?
No wonder no-one wants to be the first to burst the balloon.
...the Chinese do not have to sell, they only need to stop buying and let their existing bonds mature. Then the U.S. government, not the Chinese, will be the ones forced to find new buyers for its debt.
Most of the debt that the Chinese own is short-term. Therefore all the Chinese need to do is simply not re-purchase new Treasuries when the U.S. pays them for their existing notes. Perhaps Greenspan should rent a copy of the 1981 Kris Kristofferson movie “Rollover,” where the fear that Arab countries would not rollover maturing treasuries sent gold prices soaring.
Of course, even if the Chinese decide to cash out, they will be repaid in dollars, for which they will actually have to find buyers.
[...] To expect 1.3 billion hard-working, underpaid Chinese to indefinitely subsidize 300 million wealthy, over-consuming Americans is absurd. [...] When the Chinese finally wake up the American dream will disappear.
Finding someone to accept the dollars sounds a bit easier, especially if you are prepared to be a bit generous in the exchange. If you were the Chinese, what would you do?
Following this line of argument, if there is less demand for US Treasuries, their price drops and therefore their yield (the ratio of interest to purchase price) increases, which means higher interest rates. Which will make many debtors very uncomfortable or insolvent, and which will also force consumers to cut back on discretionary spending.
Lower demand means more unemployment, I guess, and a falling dollar means imports will cost more; also, exports will be cheaper to foreigners, who can therefore afford to pay more, so rasing the cost of those items in dollars. So, slumpflation for Americans?
But if countries across the world have been inflating their money supply to keep pace with the USA, maybe they will deflate in concert, too. So, maybe simply a deflationary slump, a worldwide bust?
I look forward to reading some expert who can explain the least painful way out of this. Breaking up factories to reduce oversupply?
No wonder no-one wants to be the first to burst the balloon.
Saturday, June 16, 2007
European sclerosis and a Chinese freebooter
I have just begun reading James Kynge's book, "China shakes the world". He takes as his starting-point the move of the enormous ThyssenKrupp steelworks from the German Ruhr to China in 2002. Lessons are leaping off the page immediately:
1. German steelworkers expected a 30-odd hour working week; the Chinese demolition team worked 12-hour shifts, seven days a week and unmade the factory in a third of the estimated time. The Chinese didn't use safety harnesses and looked like acrobats.
2. The political project of a united Germany had incurred costs that led to higher taxes, which slowed the economy at an already critical time, the late 90s.
3. The Germans were willing to sell the steel plant for its scrap value, because the market for that commodity was in a slump in 2000. But the Chinese man (Shen Wenrong) who bought it could see several things: the slump would eventually come to an end; the plant produced high-quality steel that emerging Chinese car factories would need; buying a second-hand factory meant he could get into production faster and more cheaply.
The writer points out that if the Germans had waited until 2004, the market in steel would have recovered so far that the plant would have been profitable again, in Dortmund, where iron had been made for nearly 200 years.
Doubtless Kynge intends us to see this as a symbolic example: a Europe more concerned with unification and workers' rights, than with global competitiveness; regulation and taxation hobbling the economy; stupid, short-sighted management. (This, by the way, is the Europe that my country seems determined to marry, sans pre-nuptial contract.)
Shen not only foresaw the resurgence of steel, but expects it to collapse again. In 2004 he said:
When the next crash in world steel prices comes, and it will certainly come in the next few years, a lot of our competitors who have bought expensive new equipment from abroad will go bust or be so weighed down by debt that they will not be able to move. At that time you will see that this purchase was good.
Industry and thrift, as per Benjamin Franklin (or indeed any late eighteenth-century enterpreneur). And long-sighted strategy, without the benefit of an MBA. Shen has a tiny desk, takes information by word of mouth and on A4 paper (not plasma screens), and makes fast, one-man decisions all day.
Yet what he does, is no more than what our people once did here.
1. German steelworkers expected a 30-odd hour working week; the Chinese demolition team worked 12-hour shifts, seven days a week and unmade the factory in a third of the estimated time. The Chinese didn't use safety harnesses and looked like acrobats.
2. The political project of a united Germany had incurred costs that led to higher taxes, which slowed the economy at an already critical time, the late 90s.
3. The Germans were willing to sell the steel plant for its scrap value, because the market for that commodity was in a slump in 2000. But the Chinese man (Shen Wenrong) who bought it could see several things: the slump would eventually come to an end; the plant produced high-quality steel that emerging Chinese car factories would need; buying a second-hand factory meant he could get into production faster and more cheaply.
The writer points out that if the Germans had waited until 2004, the market in steel would have recovered so far that the plant would have been profitable again, in Dortmund, where iron had been made for nearly 200 years.
Doubtless Kynge intends us to see this as a symbolic example: a Europe more concerned with unification and workers' rights, than with global competitiveness; regulation and taxation hobbling the economy; stupid, short-sighted management. (This, by the way, is the Europe that my country seems determined to marry, sans pre-nuptial contract.)
Shen not only foresaw the resurgence of steel, but expects it to collapse again. In 2004 he said:
When the next crash in world steel prices comes, and it will certainly come in the next few years, a lot of our competitors who have bought expensive new equipment from abroad will go bust or be so weighed down by debt that they will not be able to move. At that time you will see that this purchase was good.
Industry and thrift, as per Benjamin Franklin (or indeed any late eighteenth-century enterpreneur). And long-sighted strategy, without the benefit of an MBA. Shen has a tiny desk, takes information by word of mouth and on A4 paper (not plasma screens), and makes fast, one-man decisions all day.
Yet what he does, is no more than what our people once did here.
Post #100: Hang onto your kettle!
There's a heartening anecdote from the Depression, and an old (2002) article from ThisIsMoney repeats it. 2002, you may remember, was gloomy for investors, and the article looks back to 70 years earlier. Following the Wall Street Crash of 1929, the market took three years to hit bottom, and in 1932 investors were losing hope:
...In New York's patrician Union League Club, members amused themselves by wallpapering an entire room with now 'worthless' stock certificates.
...Bear markets usually end when people have given up all interest in the market. By the later 1930s, members of new York's Union League club were holding kettles to the wall to steam off their stock certificates. They had become valuable again.
Some would say that a bear market has already recommenced, but it's disguised by monetary inflation. The dollar and pound figures distract us from the loss of real value, and the world economy continues to be mismanaged while the temporary fixes hold. Financial history suggests we should prepare for crisis, but also for eventual recovery.
UPDATE:
ThisIsMoney seems to have got the first date wrong (it was March 1934), also the city (Chicago, not NY) and missed out a very vivid follow-up! See the contemporary Time article here.
...In New York's patrician Union League Club, members amused themselves by wallpapering an entire room with now 'worthless' stock certificates.
...Bear markets usually end when people have given up all interest in the market. By the later 1930s, members of new York's Union League club were holding kettles to the wall to steam off their stock certificates. They had become valuable again.
Some would say that a bear market has already recommenced, but it's disguised by monetary inflation. The dollar and pound figures distract us from the loss of real value, and the world economy continues to be mismanaged while the temporary fixes hold. Financial history suggests we should prepare for crisis, but also for eventual recovery.
UPDATE:
ThisIsMoney seems to have got the first date wrong (it was March 1934), also the city (Chicago, not NY) and missed out a very vivid follow-up! See the contemporary Time article here.
Friday, June 15, 2007
Modern Portfolio Theory: what mix of assets should I have?
Many financial advice firms are now fans of Modern Portfolio Theory, which earned Dr Harold Markowitz the Nobel prize in Economics. Explanations can get highly mathematical - the one I've linked to here is a bit more layman-friendly.
But the underlying principle is quite understandable: you can achieve similar investment returns with less risk, by diversifying your assets.
Even within one asset class, such as shares, some items rise and fall together, others move in opposite directions, still others seem to have no particular relationship. If all your shares are in different banking companies, that is still a bet limited to one sector, so it's a relatively risky position in equities.
Risk reduction also means a mix of asset types. A cautious investor may think cash is best, but in effect that is betting on only one horse in the race. Adding some "risky" assets can reduce the risk of the overall portfolio. "Playing safe" is therefore not necessarily the safest way to play it.
But the underlying principle is quite understandable: you can achieve similar investment returns with less risk, by diversifying your assets.
Even within one asset class, such as shares, some items rise and fall together, others move in opposite directions, still others seem to have no particular relationship. If all your shares are in different banking companies, that is still a bet limited to one sector, so it's a relatively risky position in equities.
Risk reduction also means a mix of asset types. A cautious investor may think cash is best, but in effect that is betting on only one horse in the race. Adding some "risky" assets can reduce the risk of the overall portfolio. "Playing safe" is therefore not necessarily the safest way to play it.
A tip for financial googlers
Some may find this helpful: if you are Googling for recent information about people like Marc Faber and Peter Schiff, you'll find the main search page is wonderful, but its results are arranged in likely order of relevance, not date.
But Google News (two stops along the toolbar) will let you re-order for freshness. Google News tends to omit some things in the cyber universe (e.g. blogs), but it does include online newsfeeds and some comment sites.
But Google News (two stops along the toolbar) will let you re-order for freshness. Google News tends to omit some things in the cyber universe (e.g. blogs), but it does include online newsfeeds and some comment sites.
Inflation special - and forecast for the dollar drop
Please read practically everything in today's edition of The Daily Reckoning Australia - excellent stuff about inflation and the migration of wealth, worth copying and pasting into a handy Word document for your re-reading. Tom Au expects the dollar to drop against major currencies by 20%.
Thursday, June 14, 2007
The natural resources chorus
Doug Casey at "Financial Sense" today reviews asset classes and considers all of them over-valued, excepting natural resources. On Monday, The Mogambo Guru repeated his refrain of "gold, oil and silver", and in an old article of 2005 maintained that even though there may be fluctuations, gold will win against paper. A couple of weeks ago, Antal Fekete noted that physical gold was disappearing fast into private hoards, as it did before the fall of the Roman Empire. Today's Daily Mail article already cited re Diana Choyleva, quotes Julien Garran at Legal & General saying that the "infectious growth environment" of Russia and the Middle East "will, in due course, strain the world's resources and cause inflationary pressure to build."
So how should we bet? Can we beat the mathematics-trained investment gunslingers who are superglued to their computer screens and supported by their massive commercial databases? Perhaps we shouldn't try to get the timing perfect, and instead, work out what asset/s are likely to preserve the value of our savings in the medium to long term. But the answer may not be entirely conventional, in these interesting times.
So how should we bet? Can we beat the mathematics-trained investment gunslingers who are superglued to their computer screens and supported by their massive commercial databases? Perhaps we shouldn't try to get the timing perfect, and instead, work out what asset/s are likely to preserve the value of our savings in the medium to long term. But the answer may not be entirely conventional, in these interesting times.
Diana Choyleva warns of market turmoil, too
Diana Choyleva of Lombard Street Research is reported today warning of inflation and castigating the Bank of England for failing to raise interest rates earlier and faster. Well, actually she has been saying this for a while now, and some of our bears have been warning us for much longer. And this is still news-at-the-back, as though there is anyone in this country that does not stand to be affected!
Mark Skousen warns of market turmoil
I have just received an email from Investment U, featuring an article by Mark Skousen, who says that he recently attended a pre-book launch talk by Alan Greenspan. The Federal Reserve's ex-Chairman's memoir "The Age of Turbulence: Adventures in a New World" is due out in September.
Reportedly, Greenspan spoke of the scary periods in 1987 and 2001, and his surprise at the resilience of the US economy. Skousen notes two important points from the talk: Greenspan's enthusiasm for the future of the European Union under its more conservative economic leadership, and surprise at the low global interest rates that have helped to drive up the markets. Skousen suggests that interest rates may be on the rise, and the recently increased yield on the 10-year US Treasury bond seems to bear the same interpretation.
For investors, Skousen suggests using stop-loss triggers on share holdings (in a real emergency, will they work as intended?), gold and silver coin to pay your way if the worst comes, and a large amount of cash. Definitely a bear, and with a reputation for prescience: if you look at his website, you'll see that Skousen advised his readers to get out of stocks 6 weeks before the crash of October 1987 - "one of the few advisors to anticipate the crash".
I have to say that I expected it too, but I wasn't an adviser at the time; and I also anticipated the Far East slide of 1997 and the falls post-2000. Not because I'm a genius, nor on account of insider whispers: being naturally wary, I looked and listened for warnings from experts. And so, if I may suggest, should you.
Reportedly, Greenspan spoke of the scary periods in 1987 and 2001, and his surprise at the resilience of the US economy. Skousen notes two important points from the talk: Greenspan's enthusiasm for the future of the European Union under its more conservative economic leadership, and surprise at the low global interest rates that have helped to drive up the markets. Skousen suggests that interest rates may be on the rise, and the recently increased yield on the 10-year US Treasury bond seems to bear the same interpretation.
For investors, Skousen suggests using stop-loss triggers on share holdings (in a real emergency, will they work as intended?), gold and silver coin to pay your way if the worst comes, and a large amount of cash. Definitely a bear, and with a reputation for prescience: if you look at his website, you'll see that Skousen advised his readers to get out of stocks 6 weeks before the crash of October 1987 - "one of the few advisors to anticipate the crash".
I have to say that I expected it too, but I wasn't an adviser at the time; and I also anticipated the Far East slide of 1997 and the falls post-2000. Not because I'm a genius, nor on account of insider whispers: being naturally wary, I looked and listened for warnings from experts. And so, if I may suggest, should you.
Wednesday, June 13, 2007
Is modernisation good for India?
I am grateful to a respondent to my earlier post, "Have we overlooked India?" and I think the exchange is relevant to India's future generally. The visitor says:
I am wondering where we are heading in so called modern era. Example in textile machinery, one airjet can replace 100 handlooms, this means 100 peolple are displaced by a single machine. I am from Handloom city of Panipat (India). Earlier a person with 20 handlooms was happy and feeded his family well. Now even 50 looms are not enough because of the increased cost of living in so called modern era and people are getting trapped in vicious cycle of high cost, loans and increasing capacity.
My reply:
Yes, I am sure that this is extremely difficult and in fact English weavers suffered the same way nearly 200 years ago, which is why some of them turned to wrecking the machines that were harming their trade. But it didn't succeed in halting the changes. On the other hand, people in Britain are now materially much better off, so in the long run industrialisation is to everyone's advantage.
I suppose that the best thing that can be done is for government to support people who have been affected by modernisation, and help them to re-train in new areas of work. If you look at the post after the one you commented on, I give a link to Cafe Hayek. That writer points out that if saris can be made more cheaply, then sari-buyers will have more money left over to buy other things, so there will be demand for items that they could not have afforded before.
I think you cannot stop change happening, but governments can help manage the transition and far-sighted individuals can take advantage of new business opportunities.
I am wondering where we are heading in so called modern era. Example in textile machinery, one airjet can replace 100 handlooms, this means 100 peolple are displaced by a single machine. I am from Handloom city of Panipat (India). Earlier a person with 20 handlooms was happy and feeded his family well. Now even 50 looms are not enough because of the increased cost of living in so called modern era and people are getting trapped in vicious cycle of high cost, loans and increasing capacity.
My reply:
Yes, I am sure that this is extremely difficult and in fact English weavers suffered the same way nearly 200 years ago, which is why some of them turned to wrecking the machines that were harming their trade. But it didn't succeed in halting the changes. On the other hand, people in Britain are now materially much better off, so in the long run industrialisation is to everyone's advantage.
I suppose that the best thing that can be done is for government to support people who have been affected by modernisation, and help them to re-train in new areas of work. If you look at the post after the one you commented on, I give a link to Cafe Hayek. That writer points out that if saris can be made more cheaply, then sari-buyers will have more money left over to buy other things, so there will be demand for items that they could not have afforded before.
I think you cannot stop change happening, but governments can help manage the transition and far-sighted individuals can take advantage of new business opportunities.
Michael Panzner on bond yields
Michael Panzner commented in Monday's Seeking Alpha on the increased yield of the US Treasury 10-year bond. He sees it as another straw in the wind - "goodbye to the good old days". Ironically, in the ad box next to his article, a message flashed up, promising to double investors' money in the China boom. Fear meets greed.
Naturally, each day that disaster doesn't strike is taken as further confirmation that Panzner is wrong. I shouldn't count on that: exact timing isn't possible, but I haven't seen a refutation of his threat analysis, or a relatively painless solution.
Naturally, each day that disaster doesn't strike is taken as further confirmation that Panzner is wrong. I shouldn't count on that: exact timing isn't possible, but I haven't seen a refutation of his threat analysis, or a relatively painless solution.
Tuesday, June 12, 2007
The banks cause market bubbles, too
I plan to review Richard Duncan's book "The Dollar Crisis" soon - it's not just time constraints that are the problem, but trying to condense his arguments.
Essentially, Duncan sees the unlimited creation of credit as the mischief-maker in economics. Since the dollar is not restricted by valuation against gold, the government can print as much money as it wants.
But even when there was a gold standard, credit could still be multiplied, because banks lend out many times more cash than they've been given to look after. Banks only retain whatever fraction they (and the regulators) feel is essential to deal with likely withdrawals by depositors.
Then when bad times come, they multiply the problems by cutting back on credit - remember the old saying, "Banks lend you an umbrella when the sun shines and want it back when it starts raining"? I recall hearing (in the recession of the early 90s) of a businessman with a big turnover and a £3.25 million overdraft facility, who received a payment from a customer for £3 million. Acting on head office orders, the bank manager promptly reduced the overdraft to £250,000 and hurriedly left for the day, while the now-ruined businessman grabbed a shotgun and went looking for him at his office.
Have a look at this article by Wladimir Kraus in the archive of the Luwig von Mises Institute, criticising "fractional reserve banking".
Essentially, Duncan sees the unlimited creation of credit as the mischief-maker in economics. Since the dollar is not restricted by valuation against gold, the government can print as much money as it wants.
But even when there was a gold standard, credit could still be multiplied, because banks lend out many times more cash than they've been given to look after. Banks only retain whatever fraction they (and the regulators) feel is essential to deal with likely withdrawals by depositors.
Then when bad times come, they multiply the problems by cutting back on credit - remember the old saying, "Banks lend you an umbrella when the sun shines and want it back when it starts raining"? I recall hearing (in the recession of the early 90s) of a businessman with a big turnover and a £3.25 million overdraft facility, who received a payment from a customer for £3 million. Acting on head office orders, the bank manager promptly reduced the overdraft to £250,000 and hurriedly left for the day, while the now-ruined businessman grabbed a shotgun and went looking for him at his office.
Have a look at this article by Wladimir Kraus in the archive of the Luwig von Mises Institute, criticising "fractional reserve banking".
Should India move away from hand-made goods?
Speaking of the potential benefits of industrial capital, I note an article today in Cafe Hayek about machine-made saris, balancing the loss to the traditional weaver with the gain to many buyers.
Have we overlooked India?
Indian respondents to Mr Venkatesh's article worry about the movement of the dollar relative to the rupee. But just as America's problem is not the dollar but its national economic fundamentals, so perhaps India should raise her eyes to a more distant prospect. The country has a well-established democracy and an independent judiciary; respect for law, family and property rights; many millions of fluent English speakers (don't worry, the call centres will eventually overcome problems of Western vernacular); and a famously entrepreneurial culture.
India may not be sitting on a vast coalmine, like China, but natural resources aren't everything. It's not natural resources (other than mountain ranges) that preserved Swiss independence, but the history and character of the Swiss. As to commerce, I forget which mega-businessman said he could lose all he had, but so long as he kept his staff he'd get it all back again.
If India avoids over-reliance on its low wage advantage and continues towards more intensively capitalised production, then it too can be a powerhouse in the new world economy. Remember that recently, the British Swan Hunter shipyard has itself been shipped to India.
India may not be sitting on a vast coalmine, like China, but natural resources aren't everything. It's not natural resources (other than mountain ranges) that preserved Swiss independence, but the history and character of the Swiss. As to commerce, I forget which mega-businessman said he could lose all he had, but so long as he kept his staff he'd get it all back again.
If India avoids over-reliance on its low wage advantage and continues towards more intensively capitalised production, then it too can be a powerhouse in the new world economy. Remember that recently, the British Swan Hunter shipyard has itself been shipped to India.
Planning for the dollar drop
The bear view continues to spread. Greg Peel at Australian financial news site FN Arena today rehashes the article by Mr Venkatesh I covered yesterday.
The IHT article from March 28 last year was significant in that the Asian Development Bank was then urging countries to appreciate their currencies in concert when the dollar falls, so as to minimise the additional disruptive effect of national economic rivalry in the region. I guess that contingency plans are indeed being formulated.
The point of my own coverage is not to add to the gloom-and-doom, but so that readers may make their own plans to survive and thrive in the coming changes. Some will do well. What is your strategy?
The IHT article from March 28 last year was significant in that the Asian Development Bank was then urging countries to appreciate their currencies in concert when the dollar falls, so as to minimise the additional disruptive effect of national economic rivalry in the region. I guess that contingency plans are indeed being formulated.
The point of my own coverage is not to add to the gloom-and-doom, but so that readers may make their own plans to survive and thrive in the coming changes. Some will do well. What is your strategy?
Monday, June 11, 2007
To sum up... from India
A chartered accountant from India today summarises the general bear case about USA trade deficits and the future of the dollar. Mr Venkatesh apportions some blame to Asian countries, for choosing to keep their currencies weak in order to sustain their trading advantage.
The article is well worth reading in full, in particular the comments on oil and the threat of trading crude in Euros rather than dollars. It is also worrying that...
On March 28, 2006, the Asian Development Bank is reported to have issued a memo, advising members to be ready for a collapse of the US dollar. [see the International Herald Tribune report here.]
Since end March 2006, the US Federal Reserve has stopped publishing the quantum of broad money [...] This is the worst possible signal that the US Federal Reserve could have sent to the world.
[The rise in commodity prices] has led to inflation across the globe. No wonder countries are forced to increase their interest rates to fight inflation. This has triggered an interest rate hike across continents and the US is finding it extremely difficult to sustain its current borrowing programme: it hardly has any elbow room to manoeuvre.
The author says that the US can neither raise interest rates much further, because of the cost of servicing debt, nor lower them, because that may deny it fresh supplies of credit.
Either we are witnessing a global meltdown of the US dollar, or a controlled US dollar devaluation (read, revaluation of other currencies). If it is a global meltdown the global economy is doomed, if is an orderly devaluation, it is damned.
The article is well worth reading in full, in particular the comments on oil and the threat of trading crude in Euros rather than dollars. It is also worrying that...
On March 28, 2006, the Asian Development Bank is reported to have issued a memo, advising members to be ready for a collapse of the US dollar. [see the International Herald Tribune report here.]
Since end March 2006, the US Federal Reserve has stopped publishing the quantum of broad money [...] This is the worst possible signal that the US Federal Reserve could have sent to the world.
[The rise in commodity prices] has led to inflation across the globe. No wonder countries are forced to increase their interest rates to fight inflation. This has triggered an interest rate hike across continents and the US is finding it extremely difficult to sustain its current borrowing programme: it hardly has any elbow room to manoeuvre.
The author says that the US can neither raise interest rates much further, because of the cost of servicing debt, nor lower them, because that may deny it fresh supplies of credit.
Either we are witnessing a global meltdown of the US dollar, or a controlled US dollar devaluation (read, revaluation of other currencies). If it is a global meltdown the global economy is doomed, if is an orderly devaluation, it is damned.
Sunday, June 10, 2007
Dollar's rise only temporary
Chris Gaffney in Friday's Daily Pfennig comments on the recent rise in the dollar and puts it down to a sell-off in emerging market equities and some selling of gold to settle cash calls. He says the money is only "parked" in the dollar and will be off again soon:
The dollar will continue to trend down versus the currencies of economies that are better off.
As investors move away from riskier assets, the countries with strong balance sheets will begin to trade at a premium.
This refocusing on fundamentals suggests a return to sanity is on its way - initially not pleasant.
The dollar will continue to trend down versus the currencies of economies that are better off.
As investors move away from riskier assets, the countries with strong balance sheets will begin to trade at a premium.
This refocusing on fundamentals suggests a return to sanity is on its way - initially not pleasant.
US Commerce Department figures: the good news is bad news
The US Commerce Department reported on Friday a narrowing of the trade deficit in April.
What is remarkable is the positive spin on the story. When you look at the figures, exports increased by $0.25 billion, but imports fell $3.6 billion. So 94% of the improvement is simply down to reduced demand for imports. This could be interpreted as a sign that Americans are tightening their belts, rather than improving their trade.
And how do we factor the dollar's exchange rate into these import and export figures? How do the numbers actually translate into quantities of physical goods?
Also, it's still a deficit, and at $58.5 billion in one month, divided by the USA's estimated (CIA, July 2007) population of 301 million, that's $194 bucks worse off per head. Or, given the average US household size (2.59), it's $6,037 per household per year. AAA statistics show you could run a small sedan on what you're losing to overseas trade.
What is remarkable is the positive spin on the story. When you look at the figures, exports increased by $0.25 billion, but imports fell $3.6 billion. So 94% of the improvement is simply down to reduced demand for imports. This could be interpreted as a sign that Americans are tightening their belts, rather than improving their trade.
And how do we factor the dollar's exchange rate into these import and export figures? How do the numbers actually translate into quantities of physical goods?
Also, it's still a deficit, and at $58.5 billion in one month, divided by the USA's estimated (CIA, July 2007) population of 301 million, that's $194 bucks worse off per head. Or, given the average US household size (2.59), it's $6,037 per household per year. AAA statistics show you could run a small sedan on what you're losing to overseas trade.
Is the bear view becoming more generally accepted?
Friday's CNBC echoes familiar themes: Leburn of Weiss Capital Management tips high-dividend stocks in financially strong companies (as per Peter Schiff's book); David Tice favours cash (see Marc Faber recently), maybe with precious metals to protect against the dollar's decline; the stockmarket looks volatile (maybe kept up for a time by inflation).
US dollar needs to fall; intellectual property needs protection
An interesting report from China Daily yesterday. The American Chamber of Commerce there is asking for less pressure to revalue the renminbi and more for structural reforms in China.
The value of the renminbi is not the answer to everything. If the Chinese yuan rises against the dollar, then Chinese imports will cost more, and America might well cut back; but US industrial exports could be slow to grow because of eroded manufacturing capacity. And a weaker dollar would mean foreigners could bid more for US products (including foodstuffs), so creating price inflation in the US while production lags behind demand.
And there is also the question of just how much the dollar would have to drop to make US products globally competitive anyway. What you could see is Chinese light industrial manufacturers suffer a contraction, losing business to countries that have even lower wage costs, such as Vietnam. When the dust has settled, America's balance of trade crisis could simply have widened from US-China to US-Far East.
So it's not so much the renminbi that has to rise, but the dollar to fall.
Also interesting to see intellectual property rights come to the fore. As America sees her economic strength sapped, she must worry about the scruples of her competitors. If "might makes right", patents and copyright may not be the pension she was hoping for. I did discuss this a while ago (May 23), and think it's an issue to follow.
The value of the renminbi is not the answer to everything. If the Chinese yuan rises against the dollar, then Chinese imports will cost more, and America might well cut back; but US industrial exports could be slow to grow because of eroded manufacturing capacity. And a weaker dollar would mean foreigners could bid more for US products (including foodstuffs), so creating price inflation in the US while production lags behind demand.
And there is also the question of just how much the dollar would have to drop to make US products globally competitive anyway. What you could see is Chinese light industrial manufacturers suffer a contraction, losing business to countries that have even lower wage costs, such as Vietnam. When the dust has settled, America's balance of trade crisis could simply have widened from US-China to US-Far East.
So it's not so much the renminbi that has to rise, but the dollar to fall.
Also interesting to see intellectual property rights come to the fore. As America sees her economic strength sapped, she must worry about the scruples of her competitors. If "might makes right", patents and copyright may not be the pension she was hoping for. I did discuss this a while ago (May 23), and think it's an issue to follow.
When gold may not be safe
Marc Faber has commented recently that there are bubbles everywhere, including commodities. Although gold has intrinsic worth, its price is still going to be affected by the laws of supply and demand. It has risen very quickly over the past couple of years, but if you believe those experts who tell us that our inflation has been fuelled by credit, then if and when a "credit crunch" comes, the scramble to disinvest in order to pay creditors and get ready cash may well mean a temporary drop in the gold price, too.
I think gold bugs are looking to the longer future, when governments desperate to get out of a slump may choose to print currency and so devalue it against precious metals, which they can't multiply at will. Meanwhile, if you follow Dr Faber, you may consider waiting with your cash at the station instead of boarding any of the asset trains, as he puts it.
I think gold bugs are looking to the longer future, when governments desperate to get out of a slump may choose to print currency and so devalue it against precious metals, which they can't multiply at will. Meanwhile, if you follow Dr Faber, you may consider waiting with your cash at the station instead of boarding any of the asset trains, as he puts it.
Friday, June 08, 2007
Michael Panzner: government guarantees increase risky behaviour
Michael Panzner returns to one of the four central risks of which he warns, here in Seeking Alpha: the government mortgages the future with potential claims on the taxpayer's money.
Peter Schiff: China will dump the dollar
Peter Schiff predicts China must de-link from the dollar in today's Market Oracle. Because their economy is robust (based on actually making things), they will cope with the disruption and thrive; the USA will face the reckoning for its folly.
Thursday, June 07, 2007
No easy way out for the US economy
Martin Hutchinson at Prudent Bear gave his view on Monday - the way out of the crisis will either be long and difficult, or short and painful:
...the choice is between a short sharp depression, albeit presumably less severe than 1929-33 (unless the forces of protectionism take a hand as well) or a lengthy period of stagflation like the 1970s, probably with a deeper dip than 1973-75. The third possible pattern, a prolonged period of stagflation like Japan in the 1990s, now seems rather unlikely.
...the choice is between a short sharp depression, albeit presumably less severe than 1929-33 (unless the forces of protectionism take a hand as well) or a lengthy period of stagflation like the 1970s, probably with a deeper dip than 1973-75. The third possible pattern, a prolonged period of stagflation like Japan in the 1990s, now seems rather unlikely.
Marc Faber: cash may be king
Please read this thoughtful essay by the modest Marc Faber yesterday. He looks at the zooming valuations of the Zimbabwe stockmarket and explains that it's because local investors' money has nowhere else to go if it doesn't want to lose value. He says the rest of us have a similar problem.
Currently, Faber is cautiously bearish about most types of asset:
...it will become increasingly important for investors not only to decide which asset-class train they want to board, but also, and even more importantly, whether they want to board ANY of the asset trains.
...a peculiar feature of the bull market in asset prices since 2002 has been that all asset prices around the world have appreciated in concert, as a result of highly expansionary monetary policies, which has led to excessive credit growth and a credit bubble of historic proportions. Therefore, if my theory of slower credit growth in the future holds, it is conceivable that, for a while at least, all asset markets (with the exception of bonds and cash) could come under pressure, albeit with different intensities.
In fact, asset markets would come under pressure, even if credit growth continued at the present rate and didn't accelerate. In this instance, investors would be better off not boarding any investment train at all and, instead, staying at the station loaded up with cash. (However, they would still have to decide what kind of cash to hold.) U.S. dollars might not be the very best choice.
Currently, Faber is cautiously bearish about most types of asset:
...it will become increasingly important for investors not only to decide which asset-class train they want to board, but also, and even more importantly, whether they want to board ANY of the asset trains.
...a peculiar feature of the bull market in asset prices since 2002 has been that all asset prices around the world have appreciated in concert, as a result of highly expansionary monetary policies, which has led to excessive credit growth and a credit bubble of historic proportions. Therefore, if my theory of slower credit growth in the future holds, it is conceivable that, for a while at least, all asset markets (with the exception of bonds and cash) could come under pressure, albeit with different intensities.
In fact, asset markets would come under pressure, even if credit growth continued at the present rate and didn't accelerate. In this instance, investors would be better off not boarding any investment train at all and, instead, staying at the station loaded up with cash. (However, they would still have to decide what kind of cash to hold.) U.S. dollars might not be the very best choice.
Wednesday, June 06, 2007
The Ditching of the Dollar begins...
See David Galland's article in the Daily Reckoning Australia here.
Boom or bust? Cash, shares, property, government promises, or commodities?
The latest posting from The Daily Reckoning Australia includes this exchange:
We got this note the other day, "You say in part, "In markets today, to get along, you have to go long. And if you don't, well you're out of luck." Are you no longer worried about a melt down in the short term? How long is long? One year or two? Your past words of imminent doom had me very worried with its effect on my investment actions, (or inaction ) are you now changing your timeline? I am a daily reader of your investment letter and look forward to your response."
We answer that a melt-down must be preceded by a melt-up. Or in economic terms, a deflationary bust characterised by over production and capacity surpluses must be preceded by an inflationary boom.
We are in the boom phase. And like it or not, related to real value or not, prices are going to rise as global money and credit creation booms. If you're in the markets, you've got to make a choice with your money. So we'll be choosing assets with tangible value that are in economic demand as well.
This is the quandary for a cautious investor. During the inflationary period, cash is not a store of value. In a fair world, if the money supply expands by 13%, then the interest rate on deposits should increase to, say, 16% (allowing for tax) - anything less, and your wealth is being sucked out by an irresponsible government. Which it is. Paradoxically, to be cautious about your wealth, you have to get away from exclusive reliance on cash.
This is because inflation is not transmitted evenly throughout the economy. For example, I estimate that in the last 6 or 7 years, the money supply as measured by M4 (bank private lending) has expanded by around 80% in the UK. Deposits have certainly not returned 80%, but house prices have doubled.
However, borrowing must be repaid sometime - with interest. If a crunch comes and everyone has to pay up, then there will be a desperate shortage of ready money. Even houses can fall in value - whatever you treat like an investment will behave like one. So in the long term, it looks as though the saver has had the last laugh. Cash will be king again.
But the paupers have votes. So democratically-elected governments have a very powerful incentive to print money to put into the voters' hands - even if this means stealing the value of other people's accumulated savings.
No-one knows the timetable for all this, except that it's human nature to delay facing unpleasant situations, so we expect more fudging for a while yet.
Speaking of fudging, how does the government calculate inflation? Do its own "inflation-linked" products really store your wealth safely? Should you buy Treasury Inflation-Protected Securities (TIPS) in the US, or National Savings And Investments Index-Linked Savings Certificates in the UK? If the government gets your taxes and your savings and your investments, it's pretty much got you altogether. Do you trust it that completely?
How about equities? What shares would you buy? If you went into business yourself, how would you try to run it in this very unpredictable situation? Would you borrow cash to expand, risking suddenly having to repay it just as your customers disappeared because of their own money problems? Other than making profits by exporting jobs to low-wage countries (and slowly impoverishing the West), what good business opportunities exist in our wildly gyrating economies?
The Australian bear quoted above is indicating commodities, since the demand for natural resources isn't going to disappear entirely. Intrinsic value is an important consideration for him. If inflation continues, then presumably the price of commodities inflates; if deflation strikes, there will still be some money paid for commodities. Car companies can go bust, but iron and steel will only vary in price.
In a nutshell, it looks as though there's no one type of asset to hold in all conditions. The question instead is, what mix should you have?
We got this note the other day, "You say in part, "In markets today, to get along, you have to go long. And if you don't, well you're out of luck." Are you no longer worried about a melt down in the short term? How long is long? One year or two? Your past words of imminent doom had me very worried with its effect on my investment actions, (or inaction ) are you now changing your timeline? I am a daily reader of your investment letter and look forward to your response."
We answer that a melt-down must be preceded by a melt-up. Or in economic terms, a deflationary bust characterised by over production and capacity surpluses must be preceded by an inflationary boom.
We are in the boom phase. And like it or not, related to real value or not, prices are going to rise as global money and credit creation booms. If you're in the markets, you've got to make a choice with your money. So we'll be choosing assets with tangible value that are in economic demand as well.
This is the quandary for a cautious investor. During the inflationary period, cash is not a store of value. In a fair world, if the money supply expands by 13%, then the interest rate on deposits should increase to, say, 16% (allowing for tax) - anything less, and your wealth is being sucked out by an irresponsible government. Which it is. Paradoxically, to be cautious about your wealth, you have to get away from exclusive reliance on cash.
This is because inflation is not transmitted evenly throughout the economy. For example, I estimate that in the last 6 or 7 years, the money supply as measured by M4 (bank private lending) has expanded by around 80% in the UK. Deposits have certainly not returned 80%, but house prices have doubled.
However, borrowing must be repaid sometime - with interest. If a crunch comes and everyone has to pay up, then there will be a desperate shortage of ready money. Even houses can fall in value - whatever you treat like an investment will behave like one. So in the long term, it looks as though the saver has had the last laugh. Cash will be king again.
But the paupers have votes. So democratically-elected governments have a very powerful incentive to print money to put into the voters' hands - even if this means stealing the value of other people's accumulated savings.
No-one knows the timetable for all this, except that it's human nature to delay facing unpleasant situations, so we expect more fudging for a while yet.
Speaking of fudging, how does the government calculate inflation? Do its own "inflation-linked" products really store your wealth safely? Should you buy Treasury Inflation-Protected Securities (TIPS) in the US, or National Savings And Investments Index-Linked Savings Certificates in the UK? If the government gets your taxes and your savings and your investments, it's pretty much got you altogether. Do you trust it that completely?
How about equities? What shares would you buy? If you went into business yourself, how would you try to run it in this very unpredictable situation? Would you borrow cash to expand, risking suddenly having to repay it just as your customers disappeared because of their own money problems? Other than making profits by exporting jobs to low-wage countries (and slowly impoverishing the West), what good business opportunities exist in our wildly gyrating economies?
The Australian bear quoted above is indicating commodities, since the demand for natural resources isn't going to disappear entirely. Intrinsic value is an important consideration for him. If inflation continues, then presumably the price of commodities inflates; if deflation strikes, there will still be some money paid for commodities. Car companies can go bust, but iron and steel will only vary in price.
In a nutshell, it looks as though there's no one type of asset to hold in all conditions. The question instead is, what mix should you have?
Saturday, June 02, 2007
The monstrous scale of the US and UK trade deficits
Have a look at the table in this article from Market Oracle. The figures speak for themselves!
British readers, please consider the fact that we are only two above the US, although our GDP is far smaller.
British readers, please consider the fact that we are only two above the US, although our GDP is far smaller.
Thursday, May 31, 2007
Globalisation and economic depression - some strategies
China has its problems. Monsters and Critics, quoting UPI, says that 3.5 million jobs could go if the yuan appreciates much more against the dollar. But if it doesn't, the trade imbalance continues and the economy and stockmarket carry on overheating. So China too is between a rock and a hard place.
In the long run and given free global trade, surely low-wage economies will take work from the higher-wage ones, until we reach equilibrium. It's the rate of change that makes it messy. For people like the Chinese, they have to work out how to take over our manufacturing capacity without bankrupting their biggest customers; for the West, how to lose all this work and wealth and remain democracies.
Richard Duncan thinks it can't be done without some original form of intervention - he suggests a steadily rising minimum wage, to give the worker in the developing economies enough money to take over the job of buying things, a job that we in the West thought was ours for life.
But the implication for us seems clear - we must become poorer. The winners among us will be those who are able to extract capital out of their possessions and preserve it. Marc Faber says that there are bubbles everywhere - property, shares, commodities - but I guess that in a deflationary world there must be something that will increase in value relative to most other things.
Cash seems obvious - the deflation of the Thirties was such that in the UK we had the Geddes Axe, actually cutting the wages of public servants to maintain a steady relationship between money and things (UPDATE: I got Geddes wrong - see HERE - sorry). So public servants who had accumulated savings would have done well - if they had saved. For many others, it was unemployment and poverty. To get an idea of the process and consequences, read "Twopence to cross the Mersey" by Helen Forrester, a real-life story about the economic descent of her middle-class family, which had (typically) lived on credit before the Crash.
Some fear that our governments will shudder at the thought of repeating that period and will try to buy their way out of the jam by printing money, in which case we could go from deflation to hyperinflation, and this is where the gold-bugs raise their voices.
On this analysis, I should think the strategy is clear. First, get out of/avoid debt. Then, live simply, and if possible convert unnecessary assets to cash - which you may partly invest in whatever you think will hold its value. And look for the steadiest job you can find?
In the long run and given free global trade, surely low-wage economies will take work from the higher-wage ones, until we reach equilibrium. It's the rate of change that makes it messy. For people like the Chinese, they have to work out how to take over our manufacturing capacity without bankrupting their biggest customers; for the West, how to lose all this work and wealth and remain democracies.
Richard Duncan thinks it can't be done without some original form of intervention - he suggests a steadily rising minimum wage, to give the worker in the developing economies enough money to take over the job of buying things, a job that we in the West thought was ours for life.
But the implication for us seems clear - we must become poorer. The winners among us will be those who are able to extract capital out of their possessions and preserve it. Marc Faber says that there are bubbles everywhere - property, shares, commodities - but I guess that in a deflationary world there must be something that will increase in value relative to most other things.
Cash seems obvious - the deflation of the Thirties was such that in the UK we had the Geddes Axe, actually cutting the wages of public servants to maintain a steady relationship between money and things (UPDATE: I got Geddes wrong - see HERE - sorry). So public servants who had accumulated savings would have done well - if they had saved. For many others, it was unemployment and poverty. To get an idea of the process and consequences, read "Twopence to cross the Mersey" by Helen Forrester, a real-life story about the economic descent of her middle-class family, which had (typically) lived on credit before the Crash.
Some fear that our governments will shudder at the thought of repeating that period and will try to buy their way out of the jam by printing money, in which case we could go from deflation to hyperinflation, and this is where the gold-bugs raise their voices.
On this analysis, I should think the strategy is clear. First, get out of/avoid debt. Then, live simply, and if possible convert unnecessary assets to cash - which you may partly invest in whatever you think will hold its value. And look for the steadiest job you can find?
Wednesday, May 30, 2007
China's stockmarket begins to cool
The Chinese market dropped 6.8% today; not much compared to its rise this year, but it's seen as the start of a necessary correction - Mark Mobius of Templeton regards a potential 30% loss as healthy! However, The Daily FX think it may also trigger a similar bearishness on the Dow, and if it does, this will impact on the carry trade. It has already caused a drop on gold futures today. Everyone seems a bit jumpy.
ABOUT THE BEARS
Here are some blogs, websites and e-newsletters that usually take a bear view:
Contrary Investor is from a group of institutional investment managers and analysts. Parts of this site are charged.
The Contrarian Investors' Journal appears well-informed and readying us for a crash.
The Daily Reckoning A free, bearish/contrarian newsletter published by Bill Bonner and Addison Wiggin. Hosts columns and comments from many bears. See also sister publication, The Daily Reckoning Australia, and the Daily Reckoning blog.
Richard Daughty aka The Mogambo Guru. Financial adviser and fervent monetarist. Chief Operating Officer (COO) of Smith Consultant Group. A regular contributor to The Daily Reckoning. Style very breezy/gonzo/slapstick, but the substance is serious and he quotes many sources in his tirades.
Marc Faber Swiss-born, Hong Kong-based investment manager. His firm manages $300 million. Parts of his site are charged. Look at his Resources section for guides to further reading.
Financial Sense is a site run by investment adviser Jim Puplava, featuring editorials by many others.
GoldenBar is by Ed Bugos, a stockbroker and investment adviser who retired after 12 years in the industry. His is one of many "gold-bug" sites, and offers comment on the markets and economics.
iTulip is a successful contrarian site with many links and a history of warning investors about market bubbles.
Michael Panzner Author of "Financial Armageddon" - see Book Reviews page. A five-star bear who warns of dangers to the financial system. Very active in promoting his message. Has 25 years' experience in investment, and has worked for a number of major banks.
Safe Haven is a site for the cautious investor. If you click on "about SafeHaven" you will see useful recommendations for further reading.
Puru Saxena Owns Hong Kong-based investment advice firm. 10 years in the industry. Publishes financial newsletter "Money Matters" (annual fee).
Peter Schiff Author of "Crash Proof" with John Downes - see Book Reviews page. President of brokerage firm Euro Pacific Capital.
Mark Skousen - libertarian, economist and (currently) bear.
David Tice David manages a couple of mutual funds and heads a team that publishes Prudent Bear, a respected website. This calls itself "the one-stop shop for the bear case".
Back to main page
Contrary Investor is from a group of institutional investment managers and analysts. Parts of this site are charged.
The Contrarian Investors' Journal appears well-informed and readying us for a crash.
The Daily Reckoning A free, bearish/contrarian newsletter published by Bill Bonner and Addison Wiggin. Hosts columns and comments from many bears. See also sister publication, The Daily Reckoning Australia, and the Daily Reckoning blog.
Richard Daughty aka The Mogambo Guru. Financial adviser and fervent monetarist. Chief Operating Officer (COO) of Smith Consultant Group. A regular contributor to The Daily Reckoning. Style very breezy/gonzo/slapstick, but the substance is serious and he quotes many sources in his tirades.
Marc Faber Swiss-born, Hong Kong-based investment manager. His firm manages $300 million. Parts of his site are charged. Look at his Resources section for guides to further reading.
Financial Sense is a site run by investment adviser Jim Puplava, featuring editorials by many others.
GoldenBar is by Ed Bugos, a stockbroker and investment adviser who retired after 12 years in the industry. His is one of many "gold-bug" sites, and offers comment on the markets and economics.
iTulip is a successful contrarian site with many links and a history of warning investors about market bubbles.
Michael Panzner Author of "Financial Armageddon" - see Book Reviews page. A five-star bear who warns of dangers to the financial system. Very active in promoting his message. Has 25 years' experience in investment, and has worked for a number of major banks.
Safe Haven is a site for the cautious investor. If you click on "about SafeHaven" you will see useful recommendations for further reading.
Puru Saxena Owns Hong Kong-based investment advice firm. 10 years in the industry. Publishes financial newsletter "Money Matters" (annual fee).
Peter Schiff Author of "Crash Proof" with John Downes - see Book Reviews page. President of brokerage firm Euro Pacific Capital.
Mark Skousen - libertarian, economist and (currently) bear.
David Tice David manages a couple of mutual funds and heads a team that publishes Prudent Bear, a respected website. This calls itself "the one-stop shop for the bear case".
Back to main page
Tuesday, May 29, 2007
INTRODUCTION
A growing number of experts say that US trade and budget deficits, together with an unprecedented increase in the US money supply, have destabilised the world financial system.
This site looks for ideas to protect your wealth. It's not personal financial advice (a highly regulated activity), but I feel it's important to spread the word and discuss the issues. If you agree, please let others know about "Bearwatch".
The Book Reviews page is a good starting point (sidebar). Each title links to a review and summary.
The main page shows recent news and articles. You can also now automatically get updates by email (sidebar). To search for specific words or phrases, you may prefer the "Search this blog" tool - it's more comprehensive than the labels list.
Follow the Bears (sidebar) provides links to selected sites so you can track up-to-date comment from these bears.
Back to main page
This site looks for ideas to protect your wealth. It's not personal financial advice (a highly regulated activity), but I feel it's important to spread the word and discuss the issues. If you agree, please let others know about "Bearwatch".
The Book Reviews page is a good starting point (sidebar). Each title links to a review and summary.
The main page shows recent news and articles. You can also now automatically get updates by email (sidebar). To search for specific words or phrases, you may prefer the "Search this blog" tool - it's more comprehensive than the labels list.
Follow the Bears (sidebar) provides links to selected sites so you can track up-to-date comment from these bears.
Back to main page
Further reading for the serious investor
For those who wish to develop into active investors, may I direct you to the resources section of Marc Faber's website? This part is free and recommends newspapers, books and weblinks.
Gold to resume its rise?
Adrian Ash and Richard Daughty are bullish on gold again. Adrian expects the downturn in the US housing market to turn investors bearish; Richard relates the recent price-dawdling of gold to Spain's decision to sell a lot of it on the market to restock their foreign currency reserves.
Monday, May 28, 2007
Interview: "The Dollar Crisis" by Richard Duncan
While I am finishing Richard Duncan's book, please see here for an interview in which the author explains his analysis and proposed solutions. This man is no Chicken Little - he's worked for the International Monetary Fund and the World Bank. The problems he describes are very real and very important.
As I understand it, America is like a gourmet and the Far East is his favourite cafe. With the party of friends he brings, he is by far its most important customer - but he pays for the meals in IOUs. He's been such good business that the cafe has borrowed from the bank to build an extension and hire extra staff.
But some start to worry that America won't be able to settle the now-enormous bill. What to do? If he pays up, he runs out of money and stops visiting the restaurant. America will go on a diet of bread and water and the cafe will go bust. On the other hand, if the restaurant accepts that his IOUs are worthless, it's bust anyway.
One solution is to look for new customers before the crisis hits, so the cafe can keep going. And another is to outlaw IOUs - if you haven't got the cash, you don't get the meal.
So Mr Duncan proposes:
(a) a global minimum wage, so poorer people around the world can have the money to buy the goods and services the Far East is geared up to provide.
(b) a global bank, to oversee financial balances between countries and prevent these credit problems recurring.
Meanwhile, America must face a much lower standard of living for a long time, until he's out of the hole he dug for himself. And maybe he'll be allowed a discount on his debt (i.e. inflation). The cafe is going to suffer a loss; the question is whether the business can find a way to survive it.
All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.
As I understand it, America is like a gourmet and the Far East is his favourite cafe. With the party of friends he brings, he is by far its most important customer - but he pays for the meals in IOUs. He's been such good business that the cafe has borrowed from the bank to build an extension and hire extra staff.
But some start to worry that America won't be able to settle the now-enormous bill. What to do? If he pays up, he runs out of money and stops visiting the restaurant. America will go on a diet of bread and water and the cafe will go bust. On the other hand, if the restaurant accepts that his IOUs are worthless, it's bust anyway.
One solution is to look for new customers before the crisis hits, so the cafe can keep going. And another is to outlaw IOUs - if you haven't got the cash, you don't get the meal.
So Mr Duncan proposes:
(a) a global minimum wage, so poorer people around the world can have the money to buy the goods and services the Far East is geared up to provide.
(b) a global bank, to oversee financial balances between countries and prevent these credit problems recurring.
Meanwhile, America must face a much lower standard of living for a long time, until he's out of the hole he dug for himself. And maybe he'll be allowed a discount on his debt (i.e. inflation). The cafe is going to suffer a loss; the question is whether the business can find a way to survive it.
All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.
America's inflation causes China's inflation
A thoughtful article by Thomas Brewton yesterday here explains that US inflation is also causing inflation in China. While America sheds jobs and lives on credit, the Chinese economy is becoming overheated. When the pop comes, the result may well be bankruptcies and unemployment in both countries, as well as in others. Richard Duncan's book "The Dollar Crisis" explains the mechanisms in detail.
If the yuan is allowed to appreciate against the dollar gradually, Chinese business will start to suffer, but starting now may mean less pain overall. The USA will also undergo painful - and politically unpopular - adjustments. Can the crisis be managed without a crash?
All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.
If the yuan is allowed to appreciate against the dollar gradually, Chinese business will start to suffer, but starting now may mean less pain overall. The USA will also undergo painful - and politically unpopular - adjustments. Can the crisis be managed without a crash?
All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.
Interview: "The Dollar Crisis" by Richard Duncan
While I am finishing Richard Duncan's book, please see here for an interview in which the author explains his analysis and proposed solutions. This man is no Chicken Little - he's worked for the International Monetary Fund and the World Bank. The problems he describes are very real and very important.
As I understand it, America is like a gourmet and the Far East is his favourite cafe. With the party of friends he brings, he is by far its most important customer - but he pays for the meals in IOUs. He's been such good business that the cafe has borrowed from the bank to build an extension and hire extra staff.
But some start to worry that America won't be able to settle the now-enormous bill. What to do? If he pays up, he runs out of money and stops visiting the restaurant. America will go on a diet of bread and water and the cafe will go bust. On the other hand, if the restaurant accepts that his IOUs are worthless, it's bust anyway.
One solution is to look for new customers before the crisis hits, so the cafe can keep going. And another is to outlaw IOUs - if you haven't got the cash, you don't get the meal.
So Mr Duncan proposes:
(a) a global minimum wage, so poorer people around the world can have the money to buy the goods and services the Far East is geared up to provide.
(b) a global bank, to oversee financial balances between countries and prevent these credit problems recurring.
Meanwhile, America must face a much lower standard of living for a long time, until he's out of the hole he dug for himself. And maybe he'll be allowed a discount on his debt (i.e. inflation). The cafe is going to suffer a loss; the question is whether the business can find a way to survive it.
As I understand it, America is like a gourmet and the Far East is his favourite cafe. With the party of friends he brings, he is by far its most important customer - but he pays for the meals in IOUs. He's been such good business that the cafe has borrowed from the bank to build an extension and hire extra staff.
But some start to worry that America won't be able to settle the now-enormous bill. What to do? If he pays up, he runs out of money and stops visiting the restaurant. America will go on a diet of bread and water and the cafe will go bust. On the other hand, if the restaurant accepts that his IOUs are worthless, it's bust anyway.
One solution is to look for new customers before the crisis hits, so the cafe can keep going. And another is to outlaw IOUs - if you haven't got the cash, you don't get the meal.
So Mr Duncan proposes:
(a) a global minimum wage, so poorer people around the world can have the money to buy the goods and services the Far East is geared up to provide.
(b) a global bank, to oversee financial balances between countries and prevent these credit problems recurring.
Meanwhile, America must face a much lower standard of living for a long time, until he's out of the hole he dug for himself. And maybe he'll be allowed a discount on his debt (i.e. inflation). The cafe is going to suffer a loss; the question is whether the business can find a way to survive it.
America's inflation causes China's inflation
A thoughtful article by Thomas Brewton yesterday here explains that US inflation is also causing inflation in China. While America sheds jobs and lives on credit, the Chinese economy is becoming overheated. When the pop comes, the result may well be bankruptcies and unemployment in both countries, as well as in others. Richard Duncan's book "The Dollar Crisis" explains the mechanisms in detail.
If the yuan is allowed to appreciate against the dollar gradually, Chinese business will start to suffer, but starting now may mean less pain overall. The USA will also undergo painful - and politically unpopular - adjustments. Can the crisis be managed without a crash?
If the yuan is allowed to appreciate against the dollar gradually, Chinese business will start to suffer, but starting now may mean less pain overall. The USA will also undergo painful - and politically unpopular - adjustments. Can the crisis be managed without a crash?
Saturday, May 26, 2007
US Immigration Bill may also hit talented immigrants, extended families
New immigration rules may cause problems for highly skilled immigrants as this article in today's Washington Post explains. (Spotted via Free Internet Press - thanks.)
The proposed Bill seems to draw a line under the past, but is much tougher on future immigration. This raises the issue of fairness: for example, the amnesty would cover some 3 million resident "illegals" from India (see here) but make entry more difficult for "legitimate" Green Card holders' relations.
The Christian Science Monitor gives good coverage to the debate - see their article here and also the linked articles below it.
And if you wish to see the draft text of the Bill itself - all 326 pages of it - click here.
I guess that the difficulties of a bill like this arise from a conflict of objectives. If the US education system provided all the skilled workers America needs, the US could be simpler and firmer on immigration.
Instead, senior figures like Alan Greenspan voice support for easier immigration as a quick economic fix, ignoring the implications for the future. Why, that's almost like printing money now and leaving tomorrow's inflation for others to handle.
The proposed Bill seems to draw a line under the past, but is much tougher on future immigration. This raises the issue of fairness: for example, the amnesty would cover some 3 million resident "illegals" from India (see here) but make entry more difficult for "legitimate" Green Card holders' relations.
The Christian Science Monitor gives good coverage to the debate - see their article here and also the linked articles below it.
And if you wish to see the draft text of the Bill itself - all 326 pages of it - click here.
I guess that the difficulties of a bill like this arise from a conflict of objectives. If the US education system provided all the skilled workers America needs, the US could be simpler and firmer on immigration.
Instead, senior figures like Alan Greenspan voice support for easier immigration as a quick economic fix, ignoring the implications for the future. Why, that's almost like printing money now and leaving tomorrow's inflation for others to handle.
Friday, May 25, 2007
US immigration and the poor (continued)
Altough immigration can keep down the living standards of poorer workers, it's not possible to undo what has happened so far, as this source reports:
President Bush defended the bill as a comprehensive approach that will fix what most Americans believe is a broken immigration system through which millions of illegal immigrants have entered the United States.
"If anybody advocates trying to dig out 12 million people who have been in our society for a while, you know, it's sending a signal to the American people that's just not real," Mr Bush said.
President Bush defended the bill as a comprehensive approach that will fix what most Americans believe is a broken immigration system through which millions of illegal immigrants have entered the United States.
"If anybody advocates trying to dig out 12 million people who have been in our society for a while, you know, it's sending a signal to the American people that's just not real," Mr Bush said.
US poor getting poorer
Following my earlier comments on Alan Greenspan's enthusiasm for immigration, yesterday's Daily Reckoning gives Martin Hutchinson's view:
"The immigration bill brought forward and apparently likely to pass demonstrates an unattractive new political trend in the United States: the end of the classless society for which the U.S. has been famous [...] the rich really are getting richer in the US...the poor really are getting poorer [...]
The economic effect of large amounts of unskilled immigrant labour is very clear: it drives wage rates down to rock bottom levels [...] for the lower classes, it is hell...Instead of the well-paid factory jobs their fathers had, making physical products in which they could take pride, they are now reduced to competing with infinite numbers of illegal immigrants for personal service, retail and construction jobs that have not been mechanised or out-sourced.
Theoretically, they could get more education and turn themselves into brain surgeons or computer-aided designers; in practice, these possibilities merely make them mourn that they hadn't paid more attention in math class. Thus the social gulf grows ever wider."
All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.
"The immigration bill brought forward and apparently likely to pass demonstrates an unattractive new political trend in the United States: the end of the classless society for which the U.S. has been famous [...] the rich really are getting richer in the US...the poor really are getting poorer [...]
The economic effect of large amounts of unskilled immigrant labour is very clear: it drives wage rates down to rock bottom levels [...] for the lower classes, it is hell...Instead of the well-paid factory jobs their fathers had, making physical products in which they could take pride, they are now reduced to competing with infinite numbers of illegal immigrants for personal service, retail and construction jobs that have not been mechanised or out-sourced.
Theoretically, they could get more education and turn themselves into brain surgeons or computer-aided designers; in practice, these possibilities merely make them mourn that they hadn't paid more attention in math class. Thus the social gulf grows ever wider."
All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.
US poor getting poorer
Following my earlier comments on Alan Greenspan's enthusiasm for immigration, yesterday's Daily Reckoning gives Martin Hutchinson's view:
"The immigration bill brought forward and apparently likely to pass demonstrates an unattractive new political trend in the United States: the end of the classless society for which the U.S. has been famous [...] the rich really are getting richer in the US...the poor really are getting poorer [...]
The economic effect of large amounts of unskilled immigrant labour is very clear: it drives wage rates down to rock bottom levels [...] for the lower classes, it is hell...Instead of the well-paid factory jobs their fathers had, making physical products in which they could take pride, they are now reduced to competing with infinite numbers of illegal immigrants for personal service, retail and construction jobs that have not been mechanised or out-sourced.
Theoretically, they could get more education and turn themselves into brain surgeons or computer-aided designers; in practice, these possibilities merely make them mourn that they hadn't paid more attention in math class. Thus the social gulf grows ever wider."
"The immigration bill brought forward and apparently likely to pass demonstrates an unattractive new political trend in the United States: the end of the classless society for which the U.S. has been famous [...] the rich really are getting richer in the US...the poor really are getting poorer [...]
The economic effect of large amounts of unskilled immigrant labour is very clear: it drives wage rates down to rock bottom levels [...] for the lower classes, it is hell...Instead of the well-paid factory jobs their fathers had, making physical products in which they could take pride, they are now reduced to competing with infinite numbers of illegal immigrants for personal service, retail and construction jobs that have not been mechanised or out-sourced.
Theoretically, they could get more education and turn themselves into brain surgeons or computer-aided designers; in practice, these possibilities merely make them mourn that they hadn't paid more attention in math class. Thus the social gulf grows ever wider."
Thursday, May 24, 2007
Small progress in US-China talks
The Strategic Economic Dialogue talks have concluded, to be resumed in another 6 months. Judging from Business Week's report, not much was gained by the US; but then, China is negotiating from a position of considerable strength. She's only doing what we would do in her place. Interesting that there were extra talks afterwards.
But America's indebtedness is also a challenge for China and the rest of the world, in a different way. Richard Duncan's book makes it clear that making too much money in international trade is perhaps as big a problem as losing it. More about this soon.
But America's indebtedness is also a challenge for China and the rest of the world, in a different way. Richard Duncan's book makes it clear that making too much money in international trade is perhaps as big a problem as losing it. More about this soon.
Wednesday, May 23, 2007
What a bear!
I am reading Richard Duncan's book "The Dollar Crisis" and plan to review it in detail here soon.
Meanwhile, searching for information on him, I stumbled across a different, but similarly-named author, Richard C. Duncan, who propounds what he calls "Olduvai Theory". This is a real spine-tingler. It looks at the history of world energy consumption per capita and concludes that we passed the peak a generation ago. He says industrial society is a unique and unrepeatable period, has a life-span of some 100 years, and will decline fast, starting in 2008. I hope he's wrong, but it gives us a terrific motive to look after the world much more carefully.
But instead of concentrating on the fear, which is how journalists sell their papers, let's look at the themes this throws up: increasing world population and everyone's aspiration for a higher standard of living. So there are very powerful driving forces pushing up the demand for food, water, land, metals, and energy sources. This is why the Daily Reckoning says commodities are an asset class that will dominate investment for the next 15 years.
Meanwhile, searching for information on him, I stumbled across a different, but similarly-named author, Richard C. Duncan, who propounds what he calls "Olduvai Theory". This is a real spine-tingler. It looks at the history of world energy consumption per capita and concludes that we passed the peak a generation ago. He says industrial society is a unique and unrepeatable period, has a life-span of some 100 years, and will decline fast, starting in 2008. I hope he's wrong, but it gives us a terrific motive to look after the world much more carefully.
But instead of concentrating on the fear, which is how journalists sell their papers, let's look at the themes this throws up: increasing world population and everyone's aspiration for a higher standard of living. So there are very powerful driving forces pushing up the demand for food, water, land, metals, and energy sources. This is why the Daily Reckoning says commodities are an asset class that will dominate investment for the next 15 years.
More on Intellectual Property Rights in China
Have a look at this business guide from the US Department of Commerce, for companies wishing to protect their IPR in China. Each country runs by its own rules, together with such international undertakings as it is willing to give; and China's approach to this subject is by no means unique; but it gives one pause for thought. Here's a couple of tasters:
On average, 20 percent of all consumer products in the Chinese market are counterfeit. If a product sells, it is likely to be illegally duplicated...
There are several factors that undermine enforcement measures, including China’s reliance on administrative instead of criminal measures to combat IPR infringements...
Patents: China follows a first to file system for patents, which means patents are granted to those that file first even if the filers are not the original inventors...
Trademarks: China has a ‘first-to register’ system that requires no evidence of prior use or ownership, leaving registration of popular foreign marks open to third party...
Copyright: Unlike the patent and trademark protection, copyrighted works do not require registration for protection...
As I said in an earlier post, there may be more to argue about on the first two headings. Yes, there is some system of investigation and redress, but it doesn't necessarily have the rigour and powerful enforcement that Americans would expect in the USA.
On average, 20 percent of all consumer products in the Chinese market are counterfeit. If a product sells, it is likely to be illegally duplicated...
There are several factors that undermine enforcement measures, including China’s reliance on administrative instead of criminal measures to combat IPR infringements...
Patents: China follows a first to file system for patents, which means patents are granted to those that file first even if the filers are not the original inventors...
Trademarks: China has a ‘first-to register’ system that requires no evidence of prior use or ownership, leaving registration of popular foreign marks open to third party...
Copyright: Unlike the patent and trademark protection, copyrighted works do not require registration for protection...
As I said in an earlier post, there may be more to argue about on the first two headings. Yes, there is some system of investigation and redress, but it doesn't necessarily have the rigour and powerful enforcement that Americans would expect in the USA.
Wu Yi lays it on the line
Chinese Vice Premier Wu Yi said in her opening statement yesterday, "We should not easily blame the other side for our own domestic problems. [...] Confrontation does no good at all to problem-solving."
Tough, but true, and tough. The press weren't in on the whole two-day session, but this kind of sets the tone, don't you think?
Tough, but true, and tough. The press weren't in on the whole two-day session, but this kind of sets the tone, don't you think?
China and Intellectual Property Rights
One of the issues on the agenda at the Strategic Economic Dialogue between the US and China is action against copyright theft - see the CNN article from last week for a discussion of the problem.
But China is not only acquiring the custom and capital (even the factories) of the West: she is also very keen to catch up on know-how. The arguments at the moment may be about pirated music and videos, but I wonder whether industrial patents and designs may become a bone of contention in the future. I can't think it is safe for the West to watch its physical production processes migrate abroad, consoling itself with the thought of licensing the use of its inventions.
But China is not only acquiring the custom and capital (even the factories) of the West: she is also very keen to catch up on know-how. The arguments at the moment may be about pirated music and videos, but I wonder whether industrial patents and designs may become a bone of contention in the future. I can't think it is safe for the West to watch its physical production processes migrate abroad, consoling itself with the thought of licensing the use of its inventions.
More on Intellectual Property Rights in China
Have a look at this business guide from the US Department of Commerce, for companies wishing to protect their IPR in China. Each country runs by its own rules, together with such international undertakings as it is willing to give; and China's approach to this subject is by no means unique; but it gives one pause for thought. Here's a couple of tasters:
On average, 20 percent of all consumer products in the Chinese market are counterfeit. If a product sells, it is likely to be illegally duplicated...
There are several factors that undermine enforcement measures, including China’s reliance on administrative instead of criminal measures to combat IPR infringements...
Patents: China follows a first to file system for patents, which means patents are granted to those that file first even if the filers are not the original inventors...
Trademarks: China has a ‘first-to register’ system that requires no evidence of prior use or ownership, leaving registration of popular foreign marks open to third party...
Copyright: Unlike the patent and trademark protection, copyrighted works do not require registration for protection...
As I said in an earlier post, there may be more to argue about on the first two headings. Yes, there is some system of investigation and redress, but it doesn't necessarily have the rigour and powerful enforcement that Americans would expect in the USA.
All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.
On average, 20 percent of all consumer products in the Chinese market are counterfeit. If a product sells, it is likely to be illegally duplicated...
There are several factors that undermine enforcement measures, including China’s reliance on administrative instead of criminal measures to combat IPR infringements...
Patents: China follows a first to file system for patents, which means patents are granted to those that file first even if the filers are not the original inventors...
Trademarks: China has a ‘first-to register’ system that requires no evidence of prior use or ownership, leaving registration of popular foreign marks open to third party...
Copyright: Unlike the patent and trademark protection, copyrighted works do not require registration for protection...
As I said in an earlier post, there may be more to argue about on the first two headings. Yes, there is some system of investigation and redress, but it doesn't necessarily have the rigour and powerful enforcement that Americans would expect in the USA.
All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.
China and Intellectual Property Rights
One of the issues on the agenda at the Strategic Economic Dialogue between the US and China is action against copyright theft - see the CNN article from last week for a discussion of the problem.
But China is not only acquiring the custom and capital (even the factories) of the West: she is also very keen to catch up on know-how. The arguments at the moment may be about pirated music and videos, but I wonder whether industrial patents and designs may become a bone of contention in the future. I can't think it is safe for the West to watch its physical production processes migrate abroad, consoling itself with the thought of licensing the use of its inventions.
All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.
But China is not only acquiring the custom and capital (even the factories) of the West: she is also very keen to catch up on know-how. The arguments at the moment may be about pirated music and videos, but I wonder whether industrial patents and designs may become a bone of contention in the future. I can't think it is safe for the West to watch its physical production processes migrate abroad, consoling itself with the thought of licensing the use of its inventions.
All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.
US-China "Strategic Economic Dialogue" resumes
We're waiting to hear much from the Western side on the talks, but see here for a Chinese-angled general background to the series. However, this one from China View is more frank about the differences between the two sides.
Pakistan's Daily Times gives useful detail on the economic issues: US manufacturers are calling for further appreciation of the Yuan against the dollar, but "an international think tank, Oxford Economics, estimated that even a 25 percent revaluation of the yuan against the US dollar would decrease the total deficit by only 20 billion dollars after two years."
For the American side, it must be like an uncomfortable meeting with your bank manager.
Pakistan's Daily Times gives useful detail on the economic issues: US manufacturers are calling for further appreciation of the Yuan against the dollar, but "an international think tank, Oxford Economics, estimated that even a 25 percent revaluation of the yuan against the US dollar would decrease the total deficit by only 20 billion dollars after two years."
For the American side, it must be like an uncomfortable meeting with your bank manager.
Tuesday, May 22, 2007
'Nam for investors
Hard on the heels of revelations about Marc Faber's investment in Vietnam, here's a story about how Vietnam (and the Philippines) is attracting interest. A South Korean shopping centre in Ho Chi Minh City - who would have expected that in 1975?
Nostalgia apart, let's look at the economic implication. The article notes this development as "yet another sign of the region’s increasingly affluent middle class showing a growing preference for made-in-Asia products". One can only hope that the East creates enough demand, fast enough, to take over when America's wallet finally fails.
Nostalgia apart, let's look at the economic implication. The article notes this development as "yet another sign of the region’s increasingly affluent middle class showing a growing preference for made-in-Asia products". One can only hope that the East creates enough demand, fast enough, to take over when America's wallet finally fails.
The plain truth about investment
Dan Denning in The Daily Reckoning Australia says today:
"Studies show being in the right asset class accounts for over 90% of your total return in any given investment.
--This happens to be why we are still bullish on Aussie resource stocks despite the China melt-up. Resource stocks are the right asset class to be in right now, and probably for the next 15 years. There will be dips and potholes. But if the asset class is right (and resource stocks made a 200-year low in 2000, so they are still very cheap in historic terms), then the investment maths is really simple."
That's it, unless you're a gunslinger investor and fancy your chances against people who stare at computer screens all day, all week. The world's governments can print all the money they like, but they can't print the resources that turn into things money buys. This is where most bears are bulls.
"Studies show being in the right asset class accounts for over 90% of your total return in any given investment.
--This happens to be why we are still bullish on Aussie resource stocks despite the China melt-up. Resource stocks are the right asset class to be in right now, and probably for the next 15 years. There will be dips and potholes. But if the asset class is right (and resource stocks made a 200-year low in 2000, so they are still very cheap in historic terms), then the investment maths is really simple."
That's it, unless you're a gunslinger investor and fancy your chances against people who stare at computer screens all day, all week. The world's governments can print all the money they like, but they can't print the resources that turn into things money buys. This is where most bears are bulls.
Dollar to rise against the Euro; gold against BOTH
Goldseek.com today gives an extract from Steve Saville's 6 May article in "Speculative Investor", explaining why he thinks the US$ will rise against the Euro - he thinks the latter should depreciate relatively by 20%.
Again, read more closely - Saville says he expects both currencies to drop against gold, it's just that the Euro has further to fall.
Again, read more closely - Saville says he expects both currencies to drop against gold, it's just that the Euro has further to fall.
More on Marc Faber's investments
Bloomberg quotes Marc Faber as saying that US stocks are more reasonably priced than other markets after the recent fall in the dollar's value. When you read on, you find he means they're less outrageously priced, but still overvalued.
So where does he think your money should be?
"Faber recommended investing in "depressed assets,'' citing the Middle East market and the Detroit property market. He also said farmland in Argentina and Brazil is a good value and property in New Zealand and Australia may be a sound investment because of their proximity to China. [...] he has large positions in real estate and equities in Vietnam."
So where does he think your money should be?
"Faber recommended investing in "depressed assets,'' citing the Middle East market and the Detroit property market. He also said farmland in Argentina and Brazil is a good value and property in New Zealand and Australia may be a sound investment because of their proximity to China. [...] he has large positions in real estate and equities in Vietnam."
The plain truth about investment
Dan Denning in The Daily Reckoning Australia says today:
"Studies show being in the right asset class accounts for over 90% of your total return in any given investment.
--This happens to be why we are still bullish on Aussie resource stocks despite the China melt-up. Resource stocks are the right asset class to be in right now, and probably for the next 15 years. There will be dips and potholes. But if the asset class is right (and resource stocks made a 200-year low in 2000, so they are still very cheap in historic terms), then the investment maths is really simple."
That's it, unless you're a gunslinger investor and fancy your chances against people who stare at computer screens all day, all week. The world's governments can print all the money they like, but they can't print the resources that turn into things money buys. This is where most bears are bulls.
All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.
"Studies show being in the right asset class accounts for over 90% of your total return in any given investment.
--This happens to be why we are still bullish on Aussie resource stocks despite the China melt-up. Resource stocks are the right asset class to be in right now, and probably for the next 15 years. There will be dips and potholes. But if the asset class is right (and resource stocks made a 200-year low in 2000, so they are still very cheap in historic terms), then the investment maths is really simple."
That's it, unless you're a gunslinger investor and fancy your chances against people who stare at computer screens all day, all week. The world's governments can print all the money they like, but they can't print the resources that turn into things money buys. This is where most bears are bulls.
All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.
Dollar to rise against the Euro; gold against BOTH
Goldseek.com today gives an extract from Steve Saville's 6 May article in "Speculative Investor", explaining why he thinks the US$ will rise against the Euro - he thinks the latter should depreciate relatively by 20%.
Again, read more closely - Saville says he expects both currencies to drop against gold, it's just that the Euro has further to fall.
All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.
Again, read more closely - Saville says he expects both currencies to drop against gold, it's just that the Euro has further to fall.
All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.
Conspiracy to support the dollar
This exchange of letters in the Market Oracle has very significant implications. It's a discussion of the huge international "carry trade", which means borrowing in one country at low rates of interest, to invest in another country.
In this case, it is loans from Japan to invest in US Treasury bonds. The columnist, Professor Antal E. Fekete, says that Japan will keep its interest rate low, because otherwise the yen would rise, hitting Japanese exports. On the other side, the US Treasury will maintain or even increase interest rates on its bonds, to prevent the dollar from collapsing, despite America's economic weakness. China has no wish to destabilise the dollar, and as the Professor points out, some of China's enormous gains from the US come from its holding of Treasury bonds. So there are powerful vested interests sustaining the status quo.
This is a cool-headed contrary view to that of the most pessimistic bears, who feel in almost a moral sense that the present state of affairs ought to end in tears. It is the very awfulness of the potential consequences of a sudden, radical change of balance in the world economy that motivates the main players to keep the polite fiction of normality going.
So the Professor is a "bond bull": yes, the dollar may gradually decline; no, it will not suddenly dive. That's his position.
In this case, it is loans from Japan to invest in US Treasury bonds. The columnist, Professor Antal E. Fekete, says that Japan will keep its interest rate low, because otherwise the yen would rise, hitting Japanese exports. On the other side, the US Treasury will maintain or even increase interest rates on its bonds, to prevent the dollar from collapsing, despite America's economic weakness. China has no wish to destabilise the dollar, and as the Professor points out, some of China's enormous gains from the US come from its holding of Treasury bonds. So there are powerful vested interests sustaining the status quo.
This is a cool-headed contrary view to that of the most pessimistic bears, who feel in almost a moral sense that the present state of affairs ought to end in tears. It is the very awfulness of the potential consequences of a sudden, radical change of balance in the world economy that motivates the main players to keep the polite fiction of normality going.
So the Professor is a "bond bull": yes, the dollar may gradually decline; no, it will not suddenly dive. That's his position.
China's bubble - or long-term boom?
Bill Bonner's take on China's stake in US finance house Blackstone is bearish. He cites the OECD, saying low interest rates, thanks to China and Japan, have encouraged buy-outs like this.
Bonner has a jaundiced view of the fees and wheeler-dealing of market-makers, and believes that a flood of Chinese investors' money is raising share prices generally.
Today's Australasian Investment Review, quoted in ACN Newswire, dissents from the bubble view, giving these reasons:
• Firstly, much of the rebound in Chinese shares since 2005 reflects a recovery from a four-year bear market, during which individual Chinese investors lost confidence in shares and allocated most of their assets to bank deposits.
• Secondly, profit growth for listed Chinese companies over the last year has been a very strong 78%.
• Thirdly, while the price earnings ratio for Chinese A shares of around 40 times is high by our standards it is only just above its 10 year average of 36 times and is well below its previous high of 60 times.The PE on Chinese shares is also way below the peak levels reached during previous share market bubbles, eg, the Japanese Nikkei index peaked on a PE of 70 times in 1989 and the tech heavy Nasdaq reached a PE of 160 in 2000.
• Finally, Chinese investors still have a very low proportion of their financial wealth invested in shares, around 25% compared to over 50% in Australia and 40% in the rest of Asia. Bank deposits on 3% or so interest account for 65% of financial wealth.So the long term potential for a higher allocation to shares is high.
The author of this piece admits things need to cool down and the recent raising of interest rates should help. But, he says, China's financial and economic fundamentals are sound.
The arguments are cogent and reassure us about the longer term; but I imagine it's possible that if naive investors in China suffer a setback, they may over-react and become bearish for some time to come. If so, and bearing in mind Chinese light industry's vulnerability to exchange rates, a bold investor might buy medium/large-cap Chinese stocks. Not immediately, perhaps - I seem to recall that historically, a major stock slide takes around 30 months to hit bottom.
Bonner has a jaundiced view of the fees and wheeler-dealing of market-makers, and believes that a flood of Chinese investors' money is raising share prices generally.
Today's Australasian Investment Review, quoted in ACN Newswire, dissents from the bubble view, giving these reasons:
• Firstly, much of the rebound in Chinese shares since 2005 reflects a recovery from a four-year bear market, during which individual Chinese investors lost confidence in shares and allocated most of their assets to bank deposits.
• Secondly, profit growth for listed Chinese companies over the last year has been a very strong 78%.
• Thirdly, while the price earnings ratio for Chinese A shares of around 40 times is high by our standards it is only just above its 10 year average of 36 times and is well below its previous high of 60 times.The PE on Chinese shares is also way below the peak levels reached during previous share market bubbles, eg, the Japanese Nikkei index peaked on a PE of 70 times in 1989 and the tech heavy Nasdaq reached a PE of 160 in 2000.
• Finally, Chinese investors still have a very low proportion of their financial wealth invested in shares, around 25% compared to over 50% in Australia and 40% in the rest of Asia. Bank deposits on 3% or so interest account for 65% of financial wealth.So the long term potential for a higher allocation to shares is high.
The author of this piece admits things need to cool down and the recent raising of interest rates should help. But, he says, China's financial and economic fundamentals are sound.
The arguments are cogent and reassure us about the longer term; but I imagine it's possible that if naive investors in China suffer a setback, they may over-react and become bearish for some time to come. If so, and bearing in mind Chinese light industry's vulnerability to exchange rates, a bold investor might buy medium/large-cap Chinese stocks. Not immediately, perhaps - I seem to recall that historically, a major stock slide takes around 30 months to hit bottom.
Monday, May 21, 2007
More food for British bears - M4 up
Reuters reports M4 in the UK for the last quarter rose above 13% annualised. Where are all the blogs and websites that should be lamenting our improvidence? Why are Americans so much better at flaying their government for its financial mismanagement?
Panzner reviews Bookstaber on derivatives
Michael Panzner's view on the dangers of derivatives is confirmed in a new book by Richard Bookstaber, a senior insider in that world. "A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation " is available from Amazon here, where you will also find a review and further information about the author.
Panzner's Financial Armageddon site reviews it (under 18 May) here, quoting and commenting on a previous Wall Street Journal piece. He calls the whole system "Ponzi finance" and Bookstaber himself is calling for a reduction in the complexity of these financial instruments. See also my review of Panzner's Financial Armageddon, which considers these and other risks to America's economy.
Panzner's Financial Armageddon site reviews it (under 18 May) here, quoting and commenting on a previous Wall Street Journal piece. He calls the whole system "Ponzi finance" and Bookstaber himself is calling for a reduction in the complexity of these financial instruments. See also my review of Panzner's Financial Armageddon, which considers these and other risks to America's economy.
China puts Blackstone in its shopping basket
And the day before the next round of US-China trade talks starts, the IHT reports on the purchase of a $3 billion minority stake in private equity firm Blackstone Group. Nice timing.
Peter Schiff interview with MarketWatch
I'm not quite sure how to rate bears - stars don't give the right flavour. Honeypots? Claws? Anyhow, if Michael Panzner merits five of them, Peter Schiff is only a three or four, since he recommends a tailored suit/e of high-yielding, conservative, non-US value stocks as well as gold and mining shares.
For an introduction to his excellent book, "Crash Proof", see this. Click here for audio of Mr Schiff's interview last month on MarketWatch.com, and here for MW's covering note.
For an introduction to his excellent book, "Crash Proof", see this. Click here for audio of Mr Schiff's interview last month on MarketWatch.com, and here for MW's covering note.
China goes shopping for the world's resources
China is taking in $20 billion a month of foreign capital, according to this 9 March article from the International Herald Tribune. It has set up an agency to decide how to invest its (now) $1.2 trillion in foreign currency reserves.
There are many implications, some contradictory. Diversification could mean less demand for US Treasury bonds, and if China lends less to America, interest rates could rise in the USA. On the other hand, increasing its holding of other currencies will make it less disruptive for China to let the dollar drop against the yuan.
A stronger yuan will affect some Chinese businesses that trade with America, as previously noted. In a thread discussing America's trade deficit on China Daily, "tradervic" from Chicago says: "Mexico thought it had the cheapest labor market, welcoming all the American companies they could get. Then China showed up with their workforce, and those same American companies left Mexico, leaving the Mexicans running into America looking for jobs. It will be interesting to see what happens when the American companies start pulling out of more factories out China for Vietnam, Bangledesh, and other countries. It is like I told my cousins-in-law in China what happened to my cousins-in-law in Mexico and my immediate family in Detroit: Do not get too used to the jobs - they will not last forever."
I have previously suggested that China may be willing to accept these consequences, to some extent, as part of a strategic economic plan. Just as the Chinese in light industry should not take their jobs for granted, the US cannot rely forever on its bargaining power as one of China's biggest customers.
A Bloomberg article today explains how China is trying to manage the currency appreciation so as to limit the damage in employment terms. It also has a stockmarket bubble on its hands. Did China ever expect that wealth and success could be such a problem?
Now it can also start buying the world's assets. The IHT article quotes Jing Ulrich of J.P. Morgan: "They're not going to be looking for financial assets, but energy assets and natural resources, minerals — things China desperately needs." So bears who look to buy commodities as a hedge against US inflation, may be doubly motivated when they see a big player enter the same market.
All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.
There are many implications, some contradictory. Diversification could mean less demand for US Treasury bonds, and if China lends less to America, interest rates could rise in the USA. On the other hand, increasing its holding of other currencies will make it less disruptive for China to let the dollar drop against the yuan.
A stronger yuan will affect some Chinese businesses that trade with America, as previously noted. In a thread discussing America's trade deficit on China Daily, "tradervic" from Chicago says: "Mexico thought it had the cheapest labor market, welcoming all the American companies they could get. Then China showed up with their workforce, and those same American companies left Mexico, leaving the Mexicans running into America looking for jobs. It will be interesting to see what happens when the American companies start pulling out of more factories out China for Vietnam, Bangledesh, and other countries. It is like I told my cousins-in-law in China what happened to my cousins-in-law in Mexico and my immediate family in Detroit: Do not get too used to the jobs - they will not last forever."
I have previously suggested that China may be willing to accept these consequences, to some extent, as part of a strategic economic plan. Just as the Chinese in light industry should not take their jobs for granted, the US cannot rely forever on its bargaining power as one of China's biggest customers.
A Bloomberg article today explains how China is trying to manage the currency appreciation so as to limit the damage in employment terms. It also has a stockmarket bubble on its hands. Did China ever expect that wealth and success could be such a problem?
Now it can also start buying the world's assets. The IHT article quotes Jing Ulrich of J.P. Morgan: "They're not going to be looking for financial assets, but energy assets and natural resources, minerals — things China desperately needs." So bears who look to buy commodities as a hedge against US inflation, may be doubly motivated when they see a big player enter the same market.
All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.
China goes shopping for the world's resources
China is taking in $20 billion a month of foreign capital, according to this 9 March article from the International Herald Tribune. It has set up an agency to decide how to invest its (now) $1.2 trillion in foreign currency reserves.
There are many implications, some contradictory. Diversification could mean less demand for US Treasury bonds, and if China lends less to America, interest rates could rise in the USA. On the other hand, increasing its holding of other currencies will make it less disruptive for China to let the dollar drop against the yuan.
A stronger yuan will affect some Chinese businesses that trade with America, as previously noted. In a thread discussing America's trade deficit on China Daily, "tradervic" from Chicago says: "Mexico thought it had the cheapest labor market, welcoming all the American companies they could get. Then China showed up with their workforce, and those same American companies left Mexico, leaving the Mexicans running into America looking for jobs. It will be interesting to see what happens when the American companies start pulling out of more factories out China for Vietnam, Bangledesh, and other countries. It is like I told my cousins-in-law in China what happened to my cousins-in-law in Mexico and my immediate family in Detroit: Do not get too used to the jobs - they will not last forever."
I have previously suggested that China may be willing to accept these consequences, to some extent, as part of a strategic economic plan. Just as the Chinese in light industry should not take their jobs for granted, the US cannot rely forever on its bargaining power as one of China's biggest customers.
A Bloomberg article today explains how China is trying to manage the currency appreciation so as to limit the damage in employment terms. It also has a stockmarket bubble on its hands. Did China ever expect that wealth and success could be such a problem?
Now it can also start buying the world's assets. The IHT article quotes Jing Ulrich of J.P. Morgan: "They're not going to be looking for financial assets, but energy assets and natural resources, minerals — things China desperately needs." So bears who look to buy commodities as a hedge against US inflation, may be doubly motivated when they see a big player enter the same market.
There are many implications, some contradictory. Diversification could mean less demand for US Treasury bonds, and if China lends less to America, interest rates could rise in the USA. On the other hand, increasing its holding of other currencies will make it less disruptive for China to let the dollar drop against the yuan.
A stronger yuan will affect some Chinese businesses that trade with America, as previously noted. In a thread discussing America's trade deficit on China Daily, "tradervic" from Chicago says: "Mexico thought it had the cheapest labor market, welcoming all the American companies they could get. Then China showed up with their workforce, and those same American companies left Mexico, leaving the Mexicans running into America looking for jobs. It will be interesting to see what happens when the American companies start pulling out of more factories out China for Vietnam, Bangledesh, and other countries. It is like I told my cousins-in-law in China what happened to my cousins-in-law in Mexico and my immediate family in Detroit: Do not get too used to the jobs - they will not last forever."
I have previously suggested that China may be willing to accept these consequences, to some extent, as part of a strategic economic plan. Just as the Chinese in light industry should not take their jobs for granted, the US cannot rely forever on its bargaining power as one of China's biggest customers.
A Bloomberg article today explains how China is trying to manage the currency appreciation so as to limit the damage in employment terms. It also has a stockmarket bubble on its hands. Did China ever expect that wealth and success could be such a problem?
Now it can also start buying the world's assets. The IHT article quotes Jing Ulrich of J.P. Morgan: "They're not going to be looking for financial assets, but energy assets and natural resources, minerals — things China desperately needs." So bears who look to buy commodities as a hedge against US inflation, may be doubly motivated when they see a big player enter the same market.
Sunday, May 20, 2007
Protectionism dressed up as concern for worker's rights, the environment
The Detroit Free Press reports on new terms of trade set by America which require that Panama and Peru "...maintain and enforce five basic international labor standards: freedom of association for workers, the right to collective bargaining, and eliminating forced labor, child labor and discrimination in employment." They must also "adhere to environmental protection standards in their manufacturing."
Next in line for this treatment is Korea - but will such terms apply to China? Don't expect too much, Motown: remember Vice Premier Wu Yi's warning two days ago - "Attempts to politicize trade issues should be resisted." Wait till China's car industry really gets going.
Meanwhile, let's see what transpires in next week's resumption of the Strategic Economic Dialogue talks between the US and China, for which Wu Yi's Wall Street Journal essay on May 18 is an advance keynote-setter. Since she'll also be representing the Chinese side there, I don't expect much to be decided in America's favour.
Next in line for this treatment is Korea - but will such terms apply to China? Don't expect too much, Motown: remember Vice Premier Wu Yi's warning two days ago - "Attempts to politicize trade issues should be resisted." Wait till China's car industry really gets going.
Meanwhile, let's see what transpires in next week's resumption of the Strategic Economic Dialogue talks between the US and China, for which Wu Yi's Wall Street Journal essay on May 18 is an advance keynote-setter. Since she'll also be representing the Chinese side there, I don't expect much to be decided in America's favour.
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