A few years ago, I was in China on a business trip.
At the airport, as I was leaving, the departure authorities asked if I was leaving with any RMB (Chinese currency). Knowing that I was under the allowable $10,000 amount, I told him I had 3,500RMB (approx $500USD). He gasped like I was some crook. He had several others rush over. They huddled and he then told me I had to get out of line and go exchange all my RMB to USD.
I asked why (since I was under the limit)? The only answer I got was that it was illegal to carry that much RMB out of the country. I was surprised! I explained that I was returning in a few weeks and would use the RMB I had on me, at that time (saving some exchange fees) and that I had done this before. They did not care - I was told I could not leave with the RMB and needed to exchange them for USD.
A few days later, it was widely reported in the press that China was adjusting the peg of the RMB to the USD and after the adjustment, those RMBs would be worth more USDs - China was just trying to keep the more valuable stuff, ie the RMB, local and not out floating on the world wide economy.
The real target of this activity was to reduce currency speculation, where the currency would leave the country weaker than the value of the currency when it returned to the country. This is a natural reaction when a country knows it is increasing the value of its currency.
While this just may seem to be an oddity of conducting business on the global stage, it is similar to conditions that are now also occurring.
In a previous post on this blog “Is the Chinese Economy Out of Control?”, it was mentioned that due to the size of stimulus provided during the GFC, in a very short time by the Chinese government, there will likely be some serious unintended consequences.
These unintended consequences could manifest themselves in terms of foreign policy or China becoming more assertive on the global stage.
There are many recent developments within China indicating it is now asserting itself on the global stage causing global businesses to sour on China. These are examples of the unintended consequences mentioned in the previous blog post.
When China was admitted to the World Trade Organization in 2001, it affirmed its emphasis on opening its economy to foreign business however these recent developments are indicating a tilt toward promoting dominant state owned companies, again, an example of unintended consequences.
The ongoing Google incident, where Google who has had troubles with China’s censorship rules, has recently experienced intense hacking attacks against its network, providing an opportunity for a local Chinese search engine to dominate an Internet market of 400 million uses.
Another example is the bullying associated with the drummed up “spying charges” against executives (based in China) of Rio Tinto, a resource and mining company with headquarters in Australia. The charges were later reduced to bribery after China obtained significantly lower iron ore prices for long term contracts.
Coca-Cola recently had a bid, for a local Chinese juice company, not accepted by government regulators on the grounds that if the acquisition went through, consumer prices would increase and smaller companies would be crowded out of the market (even though the company that was to be combined with Coke) would hold about 20% market-share … this led to calls that the Chinese were protectionists (of their local markets) and raising trade barriers.
Technology executives are highlighting that recently issued procurement rules in China are favoring “indigenous innovation” limiting access by foreign suppliers to tens of billions of dollars of contracts for computers, telecommunications gear, and office equipment.
Foreign makers of wind turbines and solar panels say they are being shut out of big renewable-energy projects in China or being forced to license production to local companies at prices set by the government.
It is also becoming clear that China feels it has less need for foreign funds. A few days ago, China’s Premier, Wen Jiabao, told the Americans to stuff it and strongly defended what amounts to China’s policy of currency manipulation.
In what amounted to an extension of its reach in the global economy, Wen warned various world leaders that removing stimulus too early would lead to second dip in the global recession.
Wen also defended China's currency manipulation. Defying the global consensus, Wen said, "I don't think the yuan is undervalued. We oppose countries pointing fingers at each other and even forcing a country to appreciate its currency."
In a floating-exchange rate world, no one forces a currency to appreciate. If people don't want to own it for yield or sound monetary and fiscal policies, it's hard to "force" a currency to rise. You can, however, forcibly depreciate your currency by selling it and buying others. And that's exactly what China's been doing for years.
To be fair, China's currency manipulation is a form of economic stimulus. By pegging, or linking, it's currency to the U.S. Dollar, China engages in a kind of perpetual devaluation. It preserves the price competitiveness of Chinese exporters. And more importantly for China's economy, a humming export engine keeps employment high, achieving the primary goal of political stability.
But there is no doubt that China's currency policy is costing jobs in the Western world.
In the meantime, deleveraging activities of the household and the private sectors in the Western world, along with Euro weakness, are increasing the demand for the dollar. While these trends can see-saw a bit, these currencies are moving relative to one another, however relative to gold and other tangible things, all of them will lose value. The U.S. Dollar is bad. But it is less bad than the Euro at the moment.
All of this currency movement is adding to the tension between an already tense U.S. & China relationship and essentially goading the U.S. Congress to take some action.
As the banker to the U.S. (meaning the largest buyer of U.S. debt), many suggest it is best to not irritate the banker as they may stop lending money to the U.S. If China were to stop buying U.S. debt, yields on the 10 year note would take off like a rocket causing runaway inflation, and that would be bad, very bad!
I favor a quote from Steve Forbes. Forbes says that pursuing additional financial education and the resulting increase in our financial literacy (including the interaction of the currency and debt markets) will open our eyes to alternative wealth creating strategies and this will be they key to resolving our financial crisis.
To gain the necessary financial education, it is best to obtain association with, access to, and membership in a wealth creation community. As a result, you will obtain examples of alternative wealth creating strategies such as debt reduction, asset protection, and wealth acceleration with investments in items such as precious metals, water rights, oil, natural gas, potash mines, food commodities, or gold mines … perhaps investments in energy assets that are inherently useful like oil rigs, hydropower, or methanol plants … things hard to build, difficult to replace, and costly to substitute … definitely not financial stocks, definitely not retail stocks, definitely not commercial property.
I trust this article provides a little more insight into the global economy, why we have mutually dependent economies, and serious unintended consequences that are brewing as a result of TARP and Economic Stimulus. As China becomes more assertive on the global stage, they feel they have little to learn from the rich nations of the West, since they widely believe the financial crisis was caused by a blow-up of the Western World’s financial system.
It is wise to monitor world affairs and consider alternative wealth creating strategies. I will provide updates in future articles and at my blog over the next few weeks.
Thursday, March 25, 2010
Wednesday, March 10, 2010
Is the Chinese Economy Out of Control?
Is China trying to take a shortcut to greatness? To understand what's taking place in China today, we need to rewind the clock about a decade.
At that time the Chinese government chose a policy of growth at any cost. It kept its currency, the renminbi, at artificially low levels against the dollar -- this helped already cheap Chinese-made goods become even cheaper than its competitors.
The global consumers were eager to buy them and China turned into a significant exporter to the US.
If free-market economic forces were at work, the renminbi would have appreciated and the US dollar would have declined. However, if China let its currency appreciate, its exports would have become more expensive and the demand for Chinese products would have declined; thus its economy wouldn't have grown at 10% a year.
But China isn't your long standing democracy and using the government-controlled banking system, China accumulated a couple trillion dollars of foreign reserves in US Dollars and Euros. This had unintended consequences in that it helped keep US interest rates at very low levels and lent a friendly hand in the financing of a huge consumption binge by the US consumer, which was China's largest customer.
The more China sold to the US, the more dollars it accumulated and thus the more US Treasuries it bought, driving down the interest rates in the US. The US consumer was in turn happy to leverage its future (through the "always" appreciating asset, its home) and delighted to consume cheap Chinese-made goods.
This match made in heaven between China and the US consumer worked great as long as housing prices kept rising and like an ATM, housing kept supplying dollars to its owners to spend. But all good things come to an end and great things come to an end with a bang.
Let’s now fast-forward a year. Today the global economy is stabilizing but the US consumers of Chinese-made goods are now deleveraging, unemployment is high, and US banks aren't lending.
Despite this, the Chinese export-based economy has reported a growth rate of 8.7% in 2009. The rest of the world looks at the Chinese growth miracle with envy as it seems that China has figured out economics of the next business cycle. But don't hurry to trade your democracy for an authoritarian system. The Chinese grass is not as green as it appears.
First, one should always be skeptical of economic numbers that are put out by any Government, yet alone the Chinese government. The high growth rate of last year in China occurred when its exports were down more than 25%, tonnage of goods shipped through its railroads was down by double digits, and its electricity consumption fell like a rock.
Second, China will do anything to grow its economy, as the alternatives will lead to political unrest. A lot of peasants moved to the cities in search of higher-paying jobs during the go-go times. Because China lacks the social safety-net of the developed world, unemployed people aren't just inconvenienced by the loss of their jobs, they starve (and this helps explains the high savings rate in China) and hungry people don't complain, they riot! Once you look at what's taking place in the Chinese economy through this lens, then the decisions of its leaders start making sense, or at least become understandable.
Unlike Western democracies, where central banks can pump a lot of money into the financial system but can't force banks to lend or consumers and corporations to spend, China can do both very fast. The Chinese government controls the banks. Thus it can make them lend and it can force state-owned enterprises (one-third of the economy) to borrow and to spend. Also, China can spend infrastructure project money very fast -- if a school is in the way of a road the government wants to build, it becomes a casualty for the greater good without a lot of delay due to environmental or society related concerns.
China has spent a tremendous amount of money on infrastructure over the last decade and there are definitely long-term benefits to having better highways, fast railroads, and more hospitals. But any government is horrible at allocating large amounts of capital. Political decisions (driven by the goal of full or near full employment) are often uneconomical and full of corruption and cronyism that result in projects that destroy value.
Infrastructure and real estate projects are where you get your biggest bang for the buck if your goal is to maintain employment, because they require a lot of unskilled labor. This is where in the past a lot of Chinese money was spent. This also explains why the Chinese keep building skyscrapers even though the adjacent ones are still vacant.
In addition, China has built the largest shopping mall in the world, the South China Mall, which is still 99% vacant years after construction. China also built a whole city, Ordos, in Inner Mongolia, on spec for one million residents who never appeared. China is a less shiny but more drastic version of Dubai.
We look at China and are mesmerized by its 1.3 billion people representing huge target markets. There is speculation that the Chinese consumer will pick up the demand slack for the US and European consumers who are deleveraging and buying fewer Chinese-made goods. This may happen but it will take decades. The US and European consumers are two-thirds of much larger economies. The Chinese consumer is only one-third of the Chinese economy.
We have to remember that economic bubbles are usually just a good thing taken too far. This was the case with railroads in the US in the late 19th century. The railroads were supposed to change the landscape of the US, and they did, but that didn't prevent a lot of them from going out of business first. The Internet was supposed to change how we communicate, and it did, but in the process it generated a tremendous bubble, followed by the loss of wealth for many.
The Chinese economy is no exception. Its long-term future may be bright but in the short run we've got a bubble on our hands. The temporary mirage of economic resiliency must be followed by huge pain and drastic consequences because every cycle has an up and a down. This is a law of nature and the laws of economics do not work differently.
I favor a quote from Steve Forbes. Forbes says that pursuing additional financial education and the resulting increase in our financial literacy (including the interaction of the currency and debt markets) will open our eyes to alternative wealth creating strategies and this will be they key to resolving our financial crisis.
As an example of alternative wealth creating strategies … consider investments in precious metals, water rights, oil, natural gas, potash mines, food commodities, or gold mines … perhaps investments in energy assets that are inherently useful like oil rigs, hydropower, or methanol plants … things hard to build, difficult to replace, and costly to substitute … definitely not financial stocks, definitely not retail stocks, definitely not commercial property.
I trust this article provides a little more insight into the global economy and the mutually dependent economies. Due to the size of the stimulus provided in a very short time, by the Chinese government, there will likely be some serious unintended consequences that will manifest themselves, also on the world stage. These consequences could express themselves in terms of foreign policy, such as dangerous undercurrents to Taiwan’s peaceful reunification, or in terms of China becoming more assertive on the global stage because they feel they have little to learn from the rich nations of the West, since they widely believe the financial crisis was caused by a blow-up of the Western World’s financial system.
It is wise to monitor world affairs and consider alternative wealth creating strategies. I will provide updates in future articles and at my blog over the next few weeks.
At that time the Chinese government chose a policy of growth at any cost. It kept its currency, the renminbi, at artificially low levels against the dollar -- this helped already cheap Chinese-made goods become even cheaper than its competitors.
The global consumers were eager to buy them and China turned into a significant exporter to the US.
If free-market economic forces were at work, the renminbi would have appreciated and the US dollar would have declined. However, if China let its currency appreciate, its exports would have become more expensive and the demand for Chinese products would have declined; thus its economy wouldn't have grown at 10% a year.
But China isn't your long standing democracy and using the government-controlled banking system, China accumulated a couple trillion dollars of foreign reserves in US Dollars and Euros. This had unintended consequences in that it helped keep US interest rates at very low levels and lent a friendly hand in the financing of a huge consumption binge by the US consumer, which was China's largest customer.
The more China sold to the US, the more dollars it accumulated and thus the more US Treasuries it bought, driving down the interest rates in the US. The US consumer was in turn happy to leverage its future (through the "always" appreciating asset, its home) and delighted to consume cheap Chinese-made goods.
This match made in heaven between China and the US consumer worked great as long as housing prices kept rising and like an ATM, housing kept supplying dollars to its owners to spend. But all good things come to an end and great things come to an end with a bang.
Let’s now fast-forward a year. Today the global economy is stabilizing but the US consumers of Chinese-made goods are now deleveraging, unemployment is high, and US banks aren't lending.
Despite this, the Chinese export-based economy has reported a growth rate of 8.7% in 2009. The rest of the world looks at the Chinese growth miracle with envy as it seems that China has figured out economics of the next business cycle. But don't hurry to trade your democracy for an authoritarian system. The Chinese grass is not as green as it appears.
First, one should always be skeptical of economic numbers that are put out by any Government, yet alone the Chinese government. The high growth rate of last year in China occurred when its exports were down more than 25%, tonnage of goods shipped through its railroads was down by double digits, and its electricity consumption fell like a rock.
Second, China will do anything to grow its economy, as the alternatives will lead to political unrest. A lot of peasants moved to the cities in search of higher-paying jobs during the go-go times. Because China lacks the social safety-net of the developed world, unemployed people aren't just inconvenienced by the loss of their jobs, they starve (and this helps explains the high savings rate in China) and hungry people don't complain, they riot! Once you look at what's taking place in the Chinese economy through this lens, then the decisions of its leaders start making sense, or at least become understandable.
Unlike Western democracies, where central banks can pump a lot of money into the financial system but can't force banks to lend or consumers and corporations to spend, China can do both very fast. The Chinese government controls the banks. Thus it can make them lend and it can force state-owned enterprises (one-third of the economy) to borrow and to spend. Also, China can spend infrastructure project money very fast -- if a school is in the way of a road the government wants to build, it becomes a casualty for the greater good without a lot of delay due to environmental or society related concerns.
China has spent a tremendous amount of money on infrastructure over the last decade and there are definitely long-term benefits to having better highways, fast railroads, and more hospitals. But any government is horrible at allocating large amounts of capital. Political decisions (driven by the goal of full or near full employment) are often uneconomical and full of corruption and cronyism that result in projects that destroy value.
Infrastructure and real estate projects are where you get your biggest bang for the buck if your goal is to maintain employment, because they require a lot of unskilled labor. This is where in the past a lot of Chinese money was spent. This also explains why the Chinese keep building skyscrapers even though the adjacent ones are still vacant.
In addition, China has built the largest shopping mall in the world, the South China Mall, which is still 99% vacant years after construction. China also built a whole city, Ordos, in Inner Mongolia, on spec for one million residents who never appeared. China is a less shiny but more drastic version of Dubai.
We look at China and are mesmerized by its 1.3 billion people representing huge target markets. There is speculation that the Chinese consumer will pick up the demand slack for the US and European consumers who are deleveraging and buying fewer Chinese-made goods. This may happen but it will take decades. The US and European consumers are two-thirds of much larger economies. The Chinese consumer is only one-third of the Chinese economy.
We have to remember that economic bubbles are usually just a good thing taken too far. This was the case with railroads in the US in the late 19th century. The railroads were supposed to change the landscape of the US, and they did, but that didn't prevent a lot of them from going out of business first. The Internet was supposed to change how we communicate, and it did, but in the process it generated a tremendous bubble, followed by the loss of wealth for many.
The Chinese economy is no exception. Its long-term future may be bright but in the short run we've got a bubble on our hands. The temporary mirage of economic resiliency must be followed by huge pain and drastic consequences because every cycle has an up and a down. This is a law of nature and the laws of economics do not work differently.
I favor a quote from Steve Forbes. Forbes says that pursuing additional financial education and the resulting increase in our financial literacy (including the interaction of the currency and debt markets) will open our eyes to alternative wealth creating strategies and this will be they key to resolving our financial crisis.
As an example of alternative wealth creating strategies … consider investments in precious metals, water rights, oil, natural gas, potash mines, food commodities, or gold mines … perhaps investments in energy assets that are inherently useful like oil rigs, hydropower, or methanol plants … things hard to build, difficult to replace, and costly to substitute … definitely not financial stocks, definitely not retail stocks, definitely not commercial property.
I trust this article provides a little more insight into the global economy and the mutually dependent economies. Due to the size of the stimulus provided in a very short time, by the Chinese government, there will likely be some serious unintended consequences that will manifest themselves, also on the world stage. These consequences could express themselves in terms of foreign policy, such as dangerous undercurrents to Taiwan’s peaceful reunification, or in terms of China becoming more assertive on the global stage because they feel they have little to learn from the rich nations of the West, since they widely believe the financial crisis was caused by a blow-up of the Western World’s financial system.
It is wise to monitor world affairs and consider alternative wealth creating strategies. I will provide updates in future articles and at my blog over the next few weeks.
Thursday, March 4, 2010
In 2010, Demand for Commodities is Creating Investment Opportunities
Emerging markets kicked into high gear a few years ago (see previous post on this blog titled “The World’s Center of Gravity is Continuing to Tip in Favor of Emerging Markets”) and this was fully evident in the middle of 2008 as many commodity prices reached all-time highs.
As global demand increased, the prices for commodities like oil, corn, sugar and cotton rose to dizzying heights.
The market cooled off in late 2008 and early 2009 as part of the deleveraging initiated in Phase 1 of the Global Financial Crisis but now commodities are beginning to move back up.
Many commodities have achieved a 50% retracement back up to 2008 highs and this upward movement signals to many a continuing uptrend.
After worldwide demand destruction in late 2008 it appears a solid uptrend is being formed.
This uptrend is a combination of fundamental factors with the most important driver coming from markets like China and India.
These emerging markets consume everything from oil to orange juice, and after the sudden fall of 2008, the craving for so-called luxury goods, from the people of these emerging markets, has just started.
Worldwide demand for these staple commodities (fuel for a car, coffee is a new delicacy, and corn-fed meats on the dinner plate) will continue to rise.
After you get past all the investment bank upgrade and market consensus reports, there are plenty of solid reasons that gold is set to rise in the next 12 months.
From a technical perspective, gold has not reached its inflation-adjusted all-time high. For that to happen, gold would need to be at $2,000 an ounce — a 75% increase from today’s price.
In 2010, this could easily happen. However, a more conservative, yet realistic goal would be $1,500 gold — which could very easily happen in the next 12 months.
Other than technical indicators and charts, there are plenty of fundamental reasons to assume the metal will go higher and two of the most significant reasons are listed below.
First and most importantly is that there is an implicit flaw with Western government funding models. Governments like ours here in the U.S., naturally choose short-term fixes for long-term problems (it probably has to do with the lack of term limits for politicians and frequent re-elections). Most likely these features of our government and political system will not magically change overnight, nor will it likely change by the end of 2010.
So the probabilities are high that fears of inflation will remain large and as a hedge, many will demand gold, hence increasing gold prices. And, as the short-term fixes expose more government-monetized debt, prices of the precious metal will also go higher.
The second reason that gold will shoot to $1,500 in the next 12 months is supply related. Many of the gold fields in South Africa are finding it more difficult and hence more expensive to mine the gold that is deep in the earth. With gold being harder to obtain, the price will be higher due to increased mining costs and inevitably, there will be less supply of gold brought to market due to these expensive mining methods and ongoing difficulty in the mining process.
As demand rises and supply is reduced, you can bet that prices for gold will have nowhere to go but higher than the current $1,100 an ounce.
I favor a quote from Steve Forbes. Forbes says that pursuing additional financial education and the resulting increase in our financial literacy will open our eyes to alternative wealth creating strategies and this will be they key to resolving our financial crisis.
As an example of alternative wealth creating strategies … consider investments in precious metals, water rights, oil, natural gas, potash mines, food commodities, or gold mines … perhaps investments in energy assets that are inherently useful like oil rigs, hydropower, or methanol plants … things hard to build, difficult to replace, and costly to substitute … definitely not financial stocks, definitely not retail stocks, definitely not commercial property.
I trust this article provides a little more insight into the world of the commodity markets and with the raging demand due to the rise in the living standards in many of the world’s emerging markets, there are numerous alternative wealth generating opportunities. This increased demand places commodities in a super-cycle that will likely last another decade. In the commodities world, there are no CEOs on the inside cooking the books nor do you have accounting firms puffing up the profits - you just have prices responding to pure supply and demand. This is why many refer to the commodities markets as the last bastion where there is pure capitalism. It is wise to have exposure to the commodities markets as the world’s economies respond to the emerging markets.
I will continue to introduce alternative wealth creating strategies to consider in future articles and updates at my blog over the next few weeks.
As global demand increased, the prices for commodities like oil, corn, sugar and cotton rose to dizzying heights.
The market cooled off in late 2008 and early 2009 as part of the deleveraging initiated in Phase 1 of the Global Financial Crisis but now commodities are beginning to move back up.
Many commodities have achieved a 50% retracement back up to 2008 highs and this upward movement signals to many a continuing uptrend.
After worldwide demand destruction in late 2008 it appears a solid uptrend is being formed.
This uptrend is a combination of fundamental factors with the most important driver coming from markets like China and India.
These emerging markets consume everything from oil to orange juice, and after the sudden fall of 2008, the craving for so-called luxury goods, from the people of these emerging markets, has just started.
Worldwide demand for these staple commodities (fuel for a car, coffee is a new delicacy, and corn-fed meats on the dinner plate) will continue to rise.
After you get past all the investment bank upgrade and market consensus reports, there are plenty of solid reasons that gold is set to rise in the next 12 months.
From a technical perspective, gold has not reached its inflation-adjusted all-time high. For that to happen, gold would need to be at $2,000 an ounce — a 75% increase from today’s price.
In 2010, this could easily happen. However, a more conservative, yet realistic goal would be $1,500 gold — which could very easily happen in the next 12 months.
Other than technical indicators and charts, there are plenty of fundamental reasons to assume the metal will go higher and two of the most significant reasons are listed below.
First and most importantly is that there is an implicit flaw with Western government funding models. Governments like ours here in the U.S., naturally choose short-term fixes for long-term problems (it probably has to do with the lack of term limits for politicians and frequent re-elections). Most likely these features of our government and political system will not magically change overnight, nor will it likely change by the end of 2010.
So the probabilities are high that fears of inflation will remain large and as a hedge, many will demand gold, hence increasing gold prices. And, as the short-term fixes expose more government-monetized debt, prices of the precious metal will also go higher.
The second reason that gold will shoot to $1,500 in the next 12 months is supply related. Many of the gold fields in South Africa are finding it more difficult and hence more expensive to mine the gold that is deep in the earth. With gold being harder to obtain, the price will be higher due to increased mining costs and inevitably, there will be less supply of gold brought to market due to these expensive mining methods and ongoing difficulty in the mining process.
As demand rises and supply is reduced, you can bet that prices for gold will have nowhere to go but higher than the current $1,100 an ounce.
I favor a quote from Steve Forbes. Forbes says that pursuing additional financial education and the resulting increase in our financial literacy will open our eyes to alternative wealth creating strategies and this will be they key to resolving our financial crisis.
As an example of alternative wealth creating strategies … consider investments in precious metals, water rights, oil, natural gas, potash mines, food commodities, or gold mines … perhaps investments in energy assets that are inherently useful like oil rigs, hydropower, or methanol plants … things hard to build, difficult to replace, and costly to substitute … definitely not financial stocks, definitely not retail stocks, definitely not commercial property.
I trust this article provides a little more insight into the world of the commodity markets and with the raging demand due to the rise in the living standards in many of the world’s emerging markets, there are numerous alternative wealth generating opportunities. This increased demand places commodities in a super-cycle that will likely last another decade. In the commodities world, there are no CEOs on the inside cooking the books nor do you have accounting firms puffing up the profits - you just have prices responding to pure supply and demand. This is why many refer to the commodities markets as the last bastion where there is pure capitalism. It is wise to have exposure to the commodities markets as the world’s economies respond to the emerging markets.
I will continue to introduce alternative wealth creating strategies to consider in future articles and updates at my blog over the next few weeks.
Subscribe to:
Posts (Atom)
