Chinese billionaires

Forbes China rich list shows that there are already 10 billionaires. Shen Wenrong, who imported the ThyssenKrupp steelworks from Dortmund, is 18th on the list.

James Kynge on China in 2014

If you've read James Kynge's very worrying book "China shakes the world" (2006), you may be interested in an article he published before then, in November 2004. It's in "The Alchemist", which is the quarterly journal of the London Bullion Market Association. Some salient points (though I can't say whether Kynge would say exactly the same things now):

1. The housing market has soared in China, creating massive wealth.
2. "The economy does not look terribly overheated or overbuilt."
3. "Consumer spending - especially on services - is quite a bit higher than official statistics show." (Perhaps this will answer Richard Duncan's recommendation to stimulate demand in developing economies.)
4. Property prices are so high (in 2004) that the rate of appreciation must slow down, which in turn will reduce the demand for steel, aluminium and cement; "a GDP slowdown is in prospect."
5. In 2003, China was responsible for nearly all the increased demand for copper, nickel and steel, but its appetite will endure: "When, and if, China overtakes the US as the world's largest economy, its people on a per capita basis will only be one sixth as wealthy as Americans. They will still be hungry, still cost competitive."
6. The middle class will grow more quickly than GDP; high-tech industrial wage rates will increase; low-tech factories are being forced inland, away from the trading seaboard.
7. China will move from manufacturing (at that time 60% of GDP, versus 30% in the US) towards services and a knowledge economy.
8. China will not collapse, but environmental problems will slow its industrial growth. Land is already intensively used, the north is short of water; air pollution is increasing the burden of health care to the point where the cost may exceed the value of extra factory output.
9. Demographics will also slow China - the over-60s are expected to rise from 11% of the population in 2004 to 28% by 2040. "China may grow old before it grows rich."
10. "China already has too much stuff" - the oversupply of manufactured goods has wiped out profit margins and the banking system is full of debt.

Going back to point 5 for a moment, Kynge doesn't see an end to the trading imbalance. China may decelerate, but it's still going to suck wealth out of the West for a long time.

Marc Faber: consumer spending to decrease

Seeking Alpha's Sunday review of fund manager stock suggestions reveals that Marc Faber expects consumer discretionary spending to decrease:

"He calls for a 10% correction by year-end, with emerging markets down 20%."

That may reduce the monthly trade deficit for a while, but won't turn it into a surplus. China's ultra-low wage costs, combined with what seems to be very loose enforcement of intellectual property rights, are still set to hollow out Western industrial production of all kinds, as James Kynge's book makes abundantly and frighteningly clear.

It's all very well finding ways for individual investors to benefit, but if you haven't got spare money to invest, you can't back the winner in this unequal contest. Without some degree of prosperity, what real peace will our countries have? I'd like to see a credible national economic plan from our politicians.

Pay your bills, or lose your assets

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.

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.

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.

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.

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.

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...

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.

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.

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.

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.

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.

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%.

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.

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!