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.
Sunday, June 17, 2007
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.
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