There is much speculation as to what the long term effect of China's continuing city building programs will have on the overall Chinese economy.
There is not doubt tremendous glut of occupancy for many of it's newly built cities' skyscrapers. This leads many to believe that the Chinese are in the middle of their own real estate bubble. That might be the case in the short run. However, I believe there's another angle that's largely been ignored by many analyst who keep tabs on the region.
First off, I am not advocating, endorsing or commending any of the methods the Chinese government have taken. I would never advocate any policy other than a completely hands off approach to all things economic. However, it would be very ignorant to assume that the Beijing would take a hands off approach to any major market adjustment that it did not consider in the ruling parties best interest. With that in mind, what I present here is just my own theory of China's long-term strategy.
http://www.sbs.com.au/dateline/story/watch/id/601729/n/China-s-Empty-Cities
In the video at the 9:41 mark, the presenter points out an one of Beijing's goals as far as its expectations of urbanization.
"China's goal is to move an estimate 400 million people out of the country side and into the cities in the next ten years."
Why then is China using government policy to make the cities long before the demand for living in these cities even materializes? After all, China has made many market reforms over the last 20+ years, why not let the demand for housing creep up on its own have that signal developers to start building? Or, even if Beijing had wanted to use the State's resources to fund and develop the land, that would still leave the nagging question of why they would be in such a rush.
The following is complete speculation:
China is preparing for a very rapid appreciation of its currency. The goal of having such excess capacity in it's real estate market is to avoid a prisoner's dilemma in real estate purchases brought about by a middle class that will multiple exponentially in a very short period of time.
Now, an obvious question is: Where would this new found wealth be coming from? The answer, at least the one I would wager a small some of money on, is that its high savings rate would result in such a tremendous spending power gain that the aforementioned movement away from the country side would indeed take place, there would also be many Chinese in the more over-populated cities such as Shanghai and Beijing that would find themselves more comfortable in the unoccupied "ghost cities."
See China's reported savings rate: http://www.tradingeconomics.com/china/gross-savings-percent-of-gdp-wb-data.html
I guess we'll just have to wait and see.
Monday, November 11, 2013
Wednesday, November 6, 2013
Will This be a continuing Trend?
From the Economic Times of India:
SHANGHAI: China's yuan was steady against the dollar on Wednesday as an abundance of dollar supply offset a slightly weaker central bank midpoint, traders said.
Spot yuan traded at 6.0955 per dollar near midday, up 0.02 percent from Tuesday's close of 6.0968, after the PBOC fixed its midpoint at 6.1475, slightly weaker than Tuesday's close of 6.1447.
The People's Bank of China (PBOC) has set a slew of weaker midpoints recently, guiding the Chinese currency away from the string of all-time highs touched in mid-October. The dollar/yuan exchange rate is permitted to rise or fall by as much as 1 percent from the midpoint each day.
Read the whole article here: http://economictimes.indiatimes.com/markets/forex/chinas-yuan-steady-vs-dollar-stability-seen-in-near-term/articleshow/25302930.cms
Like I mentioned in a prior post, as the U.S. dollar continues to devalue due to inflationary policies by the Federal Reserve, foreign countries that hold dollar reserves in order to purchase oil and other global commodities will being to advocate for an alternative.
As some point out, it might actually end up being the Chinese Yuan:
http://www.businessweek.com/globalbiz/content/may2009/gb20090522_665312.htm
Chinese food for thought.
SHANGHAI: China's yuan was steady against the dollar on Wednesday as an abundance of dollar supply offset a slightly weaker central bank midpoint, traders said.
Spot yuan traded at 6.0955 per dollar near midday, up 0.02 percent from Tuesday's close of 6.0968, after the PBOC fixed its midpoint at 6.1475, slightly weaker than Tuesday's close of 6.1447.
The People's Bank of China (PBOC) has set a slew of weaker midpoints recently, guiding the Chinese currency away from the string of all-time highs touched in mid-October. The dollar/yuan exchange rate is permitted to rise or fall by as much as 1 percent from the midpoint each day.
Read the whole article here: http://economictimes.indiatimes.com/markets/forex/chinas-yuan-steady-vs-dollar-stability-seen-in-near-term/articleshow/25302930.cms
Like I mentioned in a prior post, as the U.S. dollar continues to devalue due to inflationary policies by the Federal Reserve, foreign countries that hold dollar reserves in order to purchase oil and other global commodities will being to advocate for an alternative.
As some point out, it might actually end up being the Chinese Yuan:
http://www.businessweek.com/globalbiz/content/may2009/gb20090522_665312.htm
Chinese food for thought.
If I was a Porfolio Manager...
What would be my portfolio strategy going forward?
What am I long?
What am I short?
(Well, for those questions in particular I'll be starting another blog pretty soon.)
I'd start by being open and honest with my view the U.S. and the world economy in general.
The U.S. economy is still struggling and will continue to do so unless dramatic changes are made both fiscally and monetarily. Fiscally, we suffer from high taxes and regulations that make it very difficult to grow and expand small and medium sized business. On the regulatory side,particularly on the financial side, there is a substantial amount of unnecessary and burdensome regulations that do nothing to protect investors yet make it more difficult to measure a client’s expectations of risk. For example, it is very puzzling for any financial institution recommend U.S. treasuries as a “low risk” (in regards to how most regulatory agencies define “low risk”) investment when there is over $17 trillion in debt with multiple insolvent government programs on the horizon. Concomitantly, we have a Treasury Department which relies so heavily on Central Bank purchases of bonds to keep interest rates low enough to maintain affordable interest payments on the national debt; which is eerily similar to the conditions that lead to the housing bubble which also relied on low interest rates to maintain demand for mortgage borrowing. This perpetuates an economy more and more reliant on government spending in order to give the illusion of economic growth. When in reality it’s simply creating more none value added positions in government whom will resist any necessary downsizing when anyone, either a politician or the bond market, starts to demand it.
On the monetary side, the Federal Reserve’s aforementioned near-zero interest rate policy and quantitative easing continues to greatly distort asset prices including stocks, bonds and housing prices. While the removal of these policies is still hotly debated, it remains to be seen that the economy and the markets currently rely too heavily on cheap money to remove the Fed’s support. Additionally, low returns on CDs and other traditional bank products have forced many into the equity markets whom otherwise normally shy away from such volatile assets. This of course includes large State pension funds such as the already underfunded CalPERS (the California public sector pension fund). In the case of CalPERS, over 52% of its assets are in equities. Knowing this, there exists a clear incentive for the Federal Reserve and the FOMC to use whatever powers they may possess to maintain an ever rising stock market. Otherwise, there would eventually be a significant defaulting of obligations to pension and other institutional funds that will leave many with a severe haircut in income which will be felt economically around the U.S. Further, the Treasury Department simply cannot risk a return to normalized interest rate on its debt without delivering a severe shock to Washington’s ability to spend. The most unfortunate part of these policies is that the measure of success for them is now subject to an unemployment rate that only seems to decline based not upon how many people actually get gainful employment, but instead how many of them leave the work force.
What will the Federal Reserve do next? The incoming Fed Chairman (or in the most likely scenario, Chairwoman) will likely continue the Fed’s easy money policies. The New York Times recently ran an article wherein they cited Fed officials and other mainstream economists’ vexation for the perceived “lack of inflation” as grounds for further continuation of stimulus. This apparent lack of inflation is predicated on the Consumer Price Index’s reflection on consumer prices. However, the CPI is subject to hedonics, substitutions and adjustments and does not take into consideration factors of inflation where credit markets are heavily subsidized by government programs. For example, the student loan market and its effect on tuition prices. It also does not take into account the rise in equities prices which will certainly effect retirees in need of cash flow from dividends. Demographically, these retirees will make up the majority of investors going forward which will likely push higher yielding securities prices higher.
What does this mean for the markets? In the short run U.S. Treasury yields may be contained by developments in Europe, India and other places where the economic future also remain somewhat cloudy. The sovereign debt crisis in Europe has not been handle completely as austerity policies have yet to be austere enough. The unfortunate reality will soon be made clear that further cuts in government expenditures will be necessary to sure up the balance sheets of not only the periphery Euro-zone countries, but core countries such as Spain and Italy as well. The effects of this uncertainty gives U.S. debt prices a significant discount in regards to other sovereign debt products (at least for the time being). These low treasury rates will continue to offer a low alternative risk free rate further pushing capital into both the equity and the commodities markets.
What about the rest of the world? It’s difficult to predict the world’s continued tolerance for the U.S. dollar’s reserve status. Inflation policies in the U.S. are not met well in B.R.I.C. countries where there have been calls for removal of the dollar as the reserve currency.
What alternative is there? If the Federal Reserve was to immediately end its open market operations and start to raise interest rates there would no doubt be a lot of pain and suffering for many all across the U.S. The highly leveraged would feel pain as interest rates raised, bond holders would feel the pinch as bond prices fell. The Dow and S&P would decline around 50 to 60%. Housing prices would most certainly fall as they are no longer supported by low rates as well as the Fed’s MBS purchases. Millions of federal and state workers would be laid off and pension funds, now adversely effected by lower stock and bond prices, would be bankrupting before our eyes. Do you know of any politician and/or Fed Chairman willing to put themselves in the position to be the most hated figures in the public eye? Me neither.
Knowing all of the above, what investments would I suggest? I’d stick with well position companies with global exposure that have very low interest rate or U.S. / E.U. specific economic risk. Microsoft, Exxon Mobil, and other well established international companies will continue to perform well. There will be excellent opportunities in Asia especially Singapore, Hong Kong (which I’m quite fond of) and Shanghai. I’m also rather bullish on commodities such as oil and gas. What’s most likely to happen, at least in my opinion, for the next few years is for the new consensus to be “moderate” inflation of around 3% to 4.5% to be an acceptable norm. The theory behind this is that it will allow for consumer de-leveraging as well as higher profits for companies (utilizing First In, First Out accounting principles) thus making it a win-win scenario. In the meantime, the DOW will likely climb higher reflecting ever higher equity prices. Predicting U.S. Bonds prices will be a perhaps be a more challenging endeavor, as higher inflation should cause Treasury rates to raise. However, if the Euro Zone is still dealing in crisis mode, there may well still be a discount on U.S. debt enough to put real interest rates into negative territory. At the end of the day, this will be a policy that will be hard even harder to remove as it only pushes the responsible decision making further down the road.
What am I long?
What am I short?
(Well, for those questions in particular I'll be starting another blog pretty soon.)
I'd start by being open and honest with my view the U.S. and the world economy in general.
The U.S. economy is still struggling and will continue to do so unless dramatic changes are made both fiscally and monetarily. Fiscally, we suffer from high taxes and regulations that make it very difficult to grow and expand small and medium sized business. On the regulatory side,particularly on the financial side, there is a substantial amount of unnecessary and burdensome regulations that do nothing to protect investors yet make it more difficult to measure a client’s expectations of risk. For example, it is very puzzling for any financial institution recommend U.S. treasuries as a “low risk” (in regards to how most regulatory agencies define “low risk”) investment when there is over $17 trillion in debt with multiple insolvent government programs on the horizon. Concomitantly, we have a Treasury Department which relies so heavily on Central Bank purchases of bonds to keep interest rates low enough to maintain affordable interest payments on the national debt; which is eerily similar to the conditions that lead to the housing bubble which also relied on low interest rates to maintain demand for mortgage borrowing. This perpetuates an economy more and more reliant on government spending in order to give the illusion of economic growth. When in reality it’s simply creating more none value added positions in government whom will resist any necessary downsizing when anyone, either a politician or the bond market, starts to demand it.
On the monetary side, the Federal Reserve’s aforementioned near-zero interest rate policy and quantitative easing continues to greatly distort asset prices including stocks, bonds and housing prices. While the removal of these policies is still hotly debated, it remains to be seen that the economy and the markets currently rely too heavily on cheap money to remove the Fed’s support. Additionally, low returns on CDs and other traditional bank products have forced many into the equity markets whom otherwise normally shy away from such volatile assets. This of course includes large State pension funds such as the already underfunded CalPERS (the California public sector pension fund). In the case of CalPERS, over 52% of its assets are in equities. Knowing this, there exists a clear incentive for the Federal Reserve and the FOMC to use whatever powers they may possess to maintain an ever rising stock market. Otherwise, there would eventually be a significant defaulting of obligations to pension and other institutional funds that will leave many with a severe haircut in income which will be felt economically around the U.S. Further, the Treasury Department simply cannot risk a return to normalized interest rate on its debt without delivering a severe shock to Washington’s ability to spend. The most unfortunate part of these policies is that the measure of success for them is now subject to an unemployment rate that only seems to decline based not upon how many people actually get gainful employment, but instead how many of them leave the work force.
What will the Federal Reserve do next? The incoming Fed Chairman (or in the most likely scenario, Chairwoman) will likely continue the Fed’s easy money policies. The New York Times recently ran an article wherein they cited Fed officials and other mainstream economists’ vexation for the perceived “lack of inflation” as grounds for further continuation of stimulus. This apparent lack of inflation is predicated on the Consumer Price Index’s reflection on consumer prices. However, the CPI is subject to hedonics, substitutions and adjustments and does not take into consideration factors of inflation where credit markets are heavily subsidized by government programs. For example, the student loan market and its effect on tuition prices. It also does not take into account the rise in equities prices which will certainly effect retirees in need of cash flow from dividends. Demographically, these retirees will make up the majority of investors going forward which will likely push higher yielding securities prices higher.
What does this mean for the markets? In the short run U.S. Treasury yields may be contained by developments in Europe, India and other places where the economic future also remain somewhat cloudy. The sovereign debt crisis in Europe has not been handle completely as austerity policies have yet to be austere enough. The unfortunate reality will soon be made clear that further cuts in government expenditures will be necessary to sure up the balance sheets of not only the periphery Euro-zone countries, but core countries such as Spain and Italy as well. The effects of this uncertainty gives U.S. debt prices a significant discount in regards to other sovereign debt products (at least for the time being). These low treasury rates will continue to offer a low alternative risk free rate further pushing capital into both the equity and the commodities markets.
What about the rest of the world? It’s difficult to predict the world’s continued tolerance for the U.S. dollar’s reserve status. Inflation policies in the U.S. are not met well in B.R.I.C. countries where there have been calls for removal of the dollar as the reserve currency.
What alternative is there? If the Federal Reserve was to immediately end its open market operations and start to raise interest rates there would no doubt be a lot of pain and suffering for many all across the U.S. The highly leveraged would feel pain as interest rates raised, bond holders would feel the pinch as bond prices fell. The Dow and S&P would decline around 50 to 60%. Housing prices would most certainly fall as they are no longer supported by low rates as well as the Fed’s MBS purchases. Millions of federal and state workers would be laid off and pension funds, now adversely effected by lower stock and bond prices, would be bankrupting before our eyes. Do you know of any politician and/or Fed Chairman willing to put themselves in the position to be the most hated figures in the public eye? Me neither.
Knowing all of the above, what investments would I suggest? I’d stick with well position companies with global exposure that have very low interest rate or U.S. / E.U. specific economic risk. Microsoft, Exxon Mobil, and other well established international companies will continue to perform well. There will be excellent opportunities in Asia especially Singapore, Hong Kong (which I’m quite fond of) and Shanghai. I’m also rather bullish on commodities such as oil and gas. What’s most likely to happen, at least in my opinion, for the next few years is for the new consensus to be “moderate” inflation of around 3% to 4.5% to be an acceptable norm. The theory behind this is that it will allow for consumer de-leveraging as well as higher profits for companies (utilizing First In, First Out accounting principles) thus making it a win-win scenario. In the meantime, the DOW will likely climb higher reflecting ever higher equity prices. Predicting U.S. Bonds prices will be a perhaps be a more challenging endeavor, as higher inflation should cause Treasury rates to raise. However, if the Euro Zone is still dealing in crisis mode, there may well still be a discount on U.S. debt enough to put real interest rates into negative territory. At the end of the day, this will be a policy that will be hard even harder to remove as it only pushes the responsible decision making further down the road.
Sunday, November 3, 2013
What are the Gold bugs thinking?
Every once in a while someone brings up some good questions to the myriad of gold speculators whom seem to be preparing for some end of the world scenario. The most obvious question seems to be: If the world economy really goes bust, what good is gold going to do? After all, you can't eat it and if you're preparing for such a bad scenario, would it not be more prudent to buy something that has value in a barter such as food, water, gasoline or ammo?
I think what a lot of people are looking at when discussing these potential situations is the axiom that it's going to be a world wide phenomenon. If American inflation get's to the point where foreign debt holders choose sell their debt into the open market, you are going to have see a much different scenario than a global collapse, you'll see a global purchasing power shift. The dollar's status as the reserve currency means it has utility beyond just a debt obligation to the Federal Reserve. A loss of the reserve status would mean you now cannot use the dollar to buy oil or other global commodities. So those dollars would make their way back here to the U.S. since that's the only place they can be used.
Gold might be completely useless for a while here in the U.S. as it's utility might only be used by a small amount of people whom can interact globally, as the majority might need something that can be used locally for barter. But after everyone comes to the realization that the world (mainly China, India, S.E. Asia) in actuality do not need the U.S. consumer (which at its origins is a completely laughable perspective), the value of those respective countries currencies increases as the excess goods that they were once making bound for the U.S. and Europe now are kept domestically causing the prices for those goods to fall. The law of one price sets in and then you might see gold take off. (Since the price of gold to their currency remains the same)
That's the gold bug's point. Now his purchasing power will increase both nominally and in even real term in the long run, since everyone else now concerned about the short run, he might have a good opportunity to purchase assets locally at a huge discount for his gold.
"The best time to buy is when there is blood in the streets."
I think what a lot of people are looking at when discussing these potential situations is the axiom that it's going to be a world wide phenomenon. If American inflation get's to the point where foreign debt holders choose sell their debt into the open market, you are going to have see a much different scenario than a global collapse, you'll see a global purchasing power shift. The dollar's status as the reserve currency means it has utility beyond just a debt obligation to the Federal Reserve. A loss of the reserve status would mean you now cannot use the dollar to buy oil or other global commodities. So those dollars would make their way back here to the U.S. since that's the only place they can be used.
Gold might be completely useless for a while here in the U.S. as it's utility might only be used by a small amount of people whom can interact globally, as the majority might need something that can be used locally for barter. But after everyone comes to the realization that the world (mainly China, India, S.E. Asia) in actuality do not need the U.S. consumer (which at its origins is a completely laughable perspective), the value of those respective countries currencies increases as the excess goods that they were once making bound for the U.S. and Europe now are kept domestically causing the prices for those goods to fall. The law of one price sets in and then you might see gold take off. (Since the price of gold to their currency remains the same)
That's the gold bug's point. Now his purchasing power will increase both nominally and in even real term in the long run, since everyone else now concerned about the short run, he might have a good opportunity to purchase assets locally at a huge discount for his gold.
"The best time to buy is when there is blood in the streets."
Friday, September 6, 2013
Please don't raise the Minimum Wage
Most people can sympathize with someone working in a low paying, entry level service job. The hours seem longer since you're on your feet most of the time and typically, you have to interact with people for the majority of your hours. While some tend to think that such jobs should demand a higher wage, mainly by the government mandate of a higher minimum wage, that answer is it would likely make many of those jobs would disappear. Thus destroying the first jobs of many young and inexperienced workers.
However, the damage goes further than that:
A wage is a price an employer is willing to pay for labor. It's also the price a worker is willing to sell his labor. Instead of a mandated minimum, this amount needs to be set by the market to properly assess to the supply and demand of labor. If no one in an given area wants to perform a specific task for the wages offered, the employer will have to offer a higher wage. If the employer cannot find enough employees, that might be a sign that it might not be realistic for that type of business in that area. If there are many people willing to perform the job at the price offered, not only may the employer the potential pay, it's a sign that there is available labor for other completable jobs. As more employers move into the area, the bidding for labor will result in higher wages.
Of course, this all goes without saying that it's now how much you make, it's how much you can buy with what you earn. If anyone really wants to aid those whom work menial job that do not pay much, the best thing to advocate either a hard money policy that doesn't allow central banks to inflate the money supply which eventually makes it's way to certain assets (as shown in the above post), inflating them beyond the means which the market accurately prices them.
A case study of American Samoa:
http://www.businessinsider.com/the-story-of-how-an-ill-conceived-minimum-wage-hike-destroyed-the-samoan-economy-2010-1
Thursday, May 16, 2013
Why Progressive Taxes Are Foolish
Why Progressive Taxes Are Foolish and why they should be abolished.
Just to be fair I'm going to lump in all taxes on income here and not just the actual income tax. I'm including abolishing the OSI tax and Medicare tax. I think one of the things the middle class needs to realize is that they get hit the hardest with the progressive income class. The calls for a return to the Clinton year taxes to somehow aid the economy are pretty reckless. Let's do some comparing here:
This information comes from the census data.
The average New Car in 1996 costs: $18,777.
The average new Car in 2011 costs $30,500
62.4% increase
The average home price in 1996 costs: 168K
The average home price in 2011 costs: 245K
45.8% increase
Average tuition, room and board per year at a public university in 1996. $4,280
Average tuition, room and board per year at a public university in 2012, $8,240
92.5% increase
A gallon of gas in 1996: $1.23 per gallon.
A gallon of gas in 2012: $3.68 per gallon. (roughly)
199% increase
So let's get this straight, you make more money and you're taxed more, but what you're buying cost much much more. As it turns out, you're really not getting wealthier. But the government's taking more and more of your money.
Comparing high paying jobs today with the mid-nineties does not accurately take into consideration the higher cost of living today. All it does is keep the middle class that's trying to move up the latter to upper middle class down and the effect falls through to everyone else.
Just to be fair I'm going to lump in all taxes on income here and not just the actual income tax. I'm including abolishing the OSI tax and Medicare tax. I think one of the things the middle class needs to realize is that they get hit the hardest with the progressive income class. The calls for a return to the Clinton year taxes to somehow aid the economy are pretty reckless. Let's do some comparing here:
This information comes from the census data.
The average New Car in 1996 costs: $18,777.
The average new Car in 2011 costs $30,500
62.4% increase
The average home price in 1996 costs: 168K
The average home price in 2011 costs: 245K
45.8% increase
Average tuition, room and board per year at a public university in 1996. $4,280
Average tuition, room and board per year at a public university in 2012, $8,240
92.5% increase
A gallon of gas in 1996: $1.23 per gallon.
A gallon of gas in 2012: $3.68 per gallon. (roughly)
199% increase
So let's get this straight, you make more money and you're taxed more, but what you're buying cost much much more. As it turns out, you're really not getting wealthier. But the government's taking more and more of your money.
Comparing high paying jobs today with the mid-nineties does not accurately take into consideration the higher cost of living today. All it does is keep the middle class that's trying to move up the latter to upper middle class down and the effect falls through to everyone else.
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