China’s Rebalancing Has Begun

Saturday, July 21st, 2012

Michael Pettis at China Financial Markets has some interesting comments via email regarding much needed China rebalancing and a timeframe for a possible Spain exit from euro.

Pettis On Spain Exit …

How will Spanish households react to a default on preferred shares and subordinated bonds, or even a very public discussion about the possibility of such a default?　 I don’t know, but I assume that it will speed up deposit withdrawals from the banking system even more.　 For that reason it continues to be a very good idea to keep an eye on Target 2 balances.　 These serve as a pretty good proxy, I think, for the behavior of depositors.

Things are evolving in Spain exactly as we would expect them to evolve according to the sovereign-debt-crisis handbook.　 Unless we get real fiscal union in Europe, or Germany leaves the euro, or Germany stimulates its economy into running a very large trade deficit, or the euro depreciates by 15-20% against the dollar in the next year – all very unlikely, I think – I really see no reason to doubt that Spain will leave the euro and restructure its debt within the next few years.

Mish Comments on Target 2

Target 2 stands for Trans-European Automated Real-time Gross Settlement System. It is a reflection of capital flight from the “Club-Med” countries in Southern Europe (Greece, Spain, and Italy) to banks in Northern Europe.

Please see Target2 and the ELA (Emergency Liquidity Assistance) program; Reader From Europe Asks “Can You Please Explain Target2?” for a more compete description.

There is much misinformation floating around on how Target 2 works, what Germany’s liabilities are, so please click on the above link if you are interested in target 2 balances.

The following chart from PIMCO article TARGET2: A Channel for Europe’s Capital Flight shows the capital flight through March. The problem has accelerated since then, because of fears in Spain and Italy.

Pettis On China Price Deflation…

China’s official GDP growth rate has fallen sharply – on Friday Beijing announced that GDP growth for the second quarter of 2012 was a lower-than-expected 7.6% year on year, the lowest level since 2009 and well below the 8.1% generated in the first quarter. This implies of course that quarterly growth is substantially below 7.6%.　 Industrial production was also much lower than expected, at 9.5% year on year.

In fact China’s real GDP growth may have been even lower than the official numbers.　 This is certainly what electricity consumption numbers, which have been flat, imply, and there have been rumors all year of businesses being advised by local governments to exaggerate their revenue growth numbers in order to provide a better picture of the economy. 　Some economists are arguing that flat electricity consumption is consistent with 7.6% GDP growth because of pressure on Chinese businesses to improve energy efficiency, but this is a little hard to believe.　 That “pressure” has been there almost as long as I have been in China (over ten years) and it would be startling if only now did it have an impact, especially with such a huge impact occurring so suddenly.

Adding to the slow economic growth, the country may be tipping into deflation.　 Last Monday the National Bureau of Statistics released the following inflation data:

In June, the consumer price index (CPI) went up by 2.2 percent year-on-year. The prices grew by 2.2 percent in cities areas and 2.0 percent in rural areas. The food prices went up by 3.8 percent, while the non-food prices increased by 1.4 percent. The prices of consumer goods went up by 2.3 percent and the prices of services grew by 1.9 percent. In the first half of this year, the overall consumer prices were up by 3.3 percent over the same period of previous year.

In June, the month-on-month change of consumer prices was down by 0.6 percent, prices in cities and rural went down by 0.6 and 0.5 percent respectively. The food prices dropped by 1.6 percent, the non-food prices kept at the same level (the amount of change was 0). The prices of consumer goods decreased by 0.9 percent, and the prices of services increased by 0.3 percent.

My very smart former PKU student Chen Long, who follows monetary conditions in China as closely as anyone else I know tells me:

The most interesting thing is that even if CPI remains stable month-on-month, it will turn negative year-on-year in January 2013.　 And if it continues to decline month-on-month at current rates, we could see negative year-on-year CPI as early as August/September.

Unlike some other analysts, in other words, I am not concerned about deflation persisting for long unless the PBoC cuts interest rates much more sharply than any of us expect.　 I know this may sound strange – most analysts believe that cutting interest rates will actually reignite CPI inflation – but remember that the relationship between inflation and interest rates in China is, as I have discussed many times before, not at all like the relationship between the two in the US.　 It works in the opposite way because of the very different structure of Chinese debt and consumption.

Pettis On China Rebalancing…

After many failed attempts, over the past six months we may be seeing for the first time the beginning of China’s urgently needed economic rebalancing, in which China reduces its overreliance on investment in favor of consumption.

Regular readers of my newsletter may be surprised to see me say this.　 For the past four or five years analysts have been earnestly assuring us that the rebalancing process had finally begun, and I had always insisted that it couldn’t have begun yet.

Why?　 Because as I understand it rebalancing is almost arithmetically impossible under conditions of high GDP growth rates and low real interest rates.　 Once the real numbers came in, it always turned out that in fact imbalances had gotten worse, not better.　 Typically many of those too-eager analysts have resorted to insisting that the consumption data are wrong, although even if they are right this does not confirm that rebalancing had taken place since errors in reporting consumption have always been there.

But this time seems different.　 Now for the first time I think maybe the long-awaited Chinese rebalancing may have finally started.

Of course the process will not be easy. With China’s consumption share of GDP at barely more than half the global average, and with the highest investment rate in the world, rebalancing will require determined effort.

How to rebalance

The key to raising the consumption share of growth, as I have discussed many times, is to get household income to rise from its unprecedentedly low share of GDP.　 This requires that among other things China increase wages, revalue the renminbi and, most importantly, reduce the enormous financial repression tax that households implicitly pay to borrowers in the form of artificially low interest rates.

Forcing up the real interest rate is the most important step Beijing can take to redress the domestic imbalances and to reduce wasteful spending.

And this seems to be happening.　 [Yet] Beijing has reduced interest rates twice this year, and reluctant policymakers are under intense pressure to reduce them further.　 [However] The students in my central bank seminar at PKU tell me that there are new rumors about the way the cuts were implemented.　 “Usually it is the PBoC that submits a proposal of rates cut to the State Council,” one of them wrote me recently, “but this time (July 5th) it was the State Council who handed down to the PBoC the decision to cut rates, so that the PBoC was not fully aware of the rates cut before July 5th.”

If my student is right (and this class has an impressive track record), this suggests that monetary easing is being driven by political considerations, not economic ones, which of course isn’t at all a surprise.　 But even with the rate cuts, perhaps demanded by the State Council, with inflation falling much more quickly than interest rates the real return for household depositors has soared in recent months, as has the real cost of borrowing.　 China, in other words, is finally repairing one of its worst distortions.

China bulls, late to understand the unhealthy implications of the distortions that generated so much growth in the past, have finally recognized how urgent the rebalancing is, but they still fail to understand that this cannot happen at high growth rates.　 The problem is mainly one of arithmetic.　 China’s investment growth rate must fall for many years before the household income share of GDP is high enough for consumption to replace investment as the engine of rapid growth.

As China rebalances, in other words, we would expect sharply slowing growth and rapidly rising real interest rates, which is exactly what we are seeing.　 Rather than panicking and demanding that Beijing reverse the process, we should be relieved that Beijing is finally resolving its problems.

As an aside, we need to make two adjustments to the trade surplus in order to understand what is really going on within the balance of payments.　 First, one of the causes of last month’s weak imports has been a sharp decline in commodity purchases.　 I have many times argued that commodity stockpiling artificially lowers China’s trade surplus by converting what should be classified as a capital account outflow into a current account inflow.　 If China is now destocking, then China’s real trade surplus is actually lower than the posted numbers.

Second, we know that wealthy Chinese businessmen have been disinvesting and taking money out of the country at a rising pace since the beginning of 2010.　 One of the ways they can do so, without running afoul of capital restrictions, is by illegally under- or over-invoicing exports and imports.　 This should cause exports to seem lower than they actually are and imports to seem higher.　 The net effect is to reduce the real trade surplus.

Since these two processes, commodity de-stocking and flight capital, work in opposite ways to affect the trade account, it is hard to tell whether China’s real trade surplus is lower or higher than the reported surplus.　 But once de-stocking stops, we should remember that the trade numbers probably conceal capital outflows.

How does all this affect the world?　 In the short term rebalancing may increase the amount of global demand absorbed by China, but over the longer term it should reduce it.　 Rebalancing will inevitably result in falling prices for hard commodities, and so will hurt countries like Australia and Brazil that have gotten fat on Chinese overinvestment. 　Rising Chinese consumption demand over the long term and lower commodity prices, however, are positive for global growth overall, and especially for net commodity importers.　 Slower growth in China, it turns out, is not necessarily bad for the world.　 The key is the evolution of the trade surplus.

There is much more in his email that I wanted to use, but I stretched the bounds of fair use already.

Those wishing to see more can follow Michael Pettis on his blog China Financial Markets which I consider one of the very few “must read” sites.

The above report should appear on his blog shortly, with more details. Thanks Michael!

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Tags: Banking System, Capital Flight, China Gdp, China Price, Club Med, Debt Crisis, Deflation, Depositors, GDP Growth, Gross Settlement, Michael Pettis, Northern Europe, Preferred Shares, Rebalancing, Settlement System, Southern Europe, Sovereign Debt, Subordinated Bonds, Target 2, Trade Deficit
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The Future of Manufacturing Is in America, Not China

Saturday, July 21st, 2012

The Future of Manufacturing Is in America, Not China

By Vivek Wadhwa | Foreign Policy

A furor broke out last week after it was reported that the uniforms of U.S. Olympians would be manufactured in China. “They should take all the uniforms, put them in a big pile, and burn them,” said an apoplectic Sen. Harry Reid. The story tapped into the anger — and fear — that Americans feel about the loss of manufacturing to China. Seduced by government subsidies, cheap labor, lax regulations, and a rigged currency, U.S. industry has rushed to China in recent decades, with millions of American jobs lost. It is these fears, rather than the Olympic uniforms themselves, that triggered last week’s congressional uproar.

But Ralph Lauren berets aside, the larger trends show that the tide has turned, and it is China’s turn to worry. Many CEOs, including Dow Chemicals’ Andrew Liveris, have declared their intentions to bring manufacturing back to the United States. What is going to accelerate the trend isn’t, as people believe, the rising cost of Chinese labor or a rising yuan. The real threat to China comes from technology. Technical advances will soon lead to the same hollowing out of China’s manufacturing industry that they have to U.S industry over the past two decades.

Several technologies advancing and converging will cause this. First, robotics.

The robots of today aren’t the androids or Cylons that we are used to seeing in science fiction movies, but specialized electromechanical devices run by software and remote control. As computers become more powerful, so do the abilities of these devices. Robots are now capable of performing surgery, milking cows, doing military reconnaissance and combat, and flying fighter jets. Several companies, such Willow Garage, iRobot, and 9th Sense, sell robot-development kits for which university students and open-source communities are developing ever more sophisticated applications.

Read complete article

Tags: Androids, Anger And Fear, Apoplectic, Berets, Chinese Labor, Cylons, Dow Chemicals, Electromechanical Devices, Fighter Jets, First Robotics, Government Subsidies, Irobot, Military Reconnaissance, Olympic Uniforms, Open Source Communities, Robot Development, Science Fiction Movies, Sen Harry Reid, Sophisticated Applications, Uproar
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The Weaponization of Economic Theory

Saturday, July 21st, 2012

This is an excellent article by Michael Hudson. The very end is a powerful commentary on the neoliberal ideology, defined in Wiki as “based on the advocacy of economic liberalizations, free trade, and open markets. Neoliberalism supports privatization of state-owned enterprises, deregulation of markets, and promotion of the private sector‘s role in society. In the 1980s, much of neoliberal theory was incorporated into mainstream economics.”

This doctrine has been used to shift power, money and other resources to the members at the very top of our society, with great support from the non-top who have been successfully misled into thinking they are supporting an equitable system. It’s not, at the very foundations. If you read nothing else, read the final section in which Michael explains why neoliberalism is a weaponization of economic theory – a “doctrine of power and autocracy combined with deregulation and dismantling of democratic law” – aimed at replacing the government’s power to protect the people with an oligarchic power to oppress them. It is not about free markets and free trade, as the terms were traditionally used by economists. It is about central planning by financial centers, and it requires deregulation and a tax structure favoring banking and financial institutions, and their major customers, real estate interests and monopolies. We have that now.

Michael argues that “the result is a doctrine of financial war not only against labor but also against industry and government. Gaining the financial power to indebt economies at increasing speed, the banking and financial sector is siphoning resources away from the real economy. Its business plan is not based on employing labor to expand output, but simply to transfer as much of the existing flow of revenue as possible into its own hands, by capitalizing all such revenue into interest payments, on loans collateralized and pledged to creditors.” In his conclusion, Michael compares our state to the economic polarization characterizing ancient Rome before its ruin. ~ Ilene

The Weaponization of Economic Theory
Courtesy of Michael Hudson

Europe’s three needs: a debt write-down, a real central bank, and a more efficient tax system

Brussels Talk, Madariaga College, Governing Globalisation in a World Economy in Transition, June 27, 2012

What can Europe learn from the United States?

First, the United States – like Canada, England and China – have central banks that do what central banks outside of Europe were created to do: finance the budget deficit directly.

I have found that it is hard to explain to continental Europe just how different the English-speaking countries are in this respect. There is a prejudice here that central bank financing of a domestic spending deficit by government is inflationary. This is nonsense, as demonstrated by recent U.S. experience: the largest money creation in American history has gone hand in hand with debt deflation.

It is the commercial banks that have created the Bubble Economy’s inflation, from North America to Europe. They have recklessly lent mortgage credit and other credit far beyond the ability of domestic economies to pay. A real central bank can create credit on its electronic keyboards just as easily as commercial banks can do. But central banks do not create credit for speculative purposes. They do not make junk mortgages based on “liars’ loans” (the liars are the banks, not the borrowers), based on fictitious evaluations by crooked appraisers, and sold fraudulently to investment banks to package and sell to gullible Europeans, pension funds and other customers.

In short, there is no need for the present austerity. If Europe acted like the United States, it could bail out the banks.

But would this be a good thing? My second point is that there are good reasons not to fund a dysfunctional debt overhead, financial and tax system. It is preferable to change these systems.

In the United States, Paul Krugman has urged the Federal Reserve to simply lend banks an amount equal to their bad loans and negative equity (debts in excess of the market price of assets). He urges a “Keynesian” program of spending to re-inflate the economy back to bubble levels. This is the liberal answer: to throw money at the problem, without seeking structural reform.

The Bank for International Settlements (BIS) disagreed last week in its annual report. It said – and I believe that it is right – that monetary policy alone cannot solve an insolvency problem. And that is what Europe has now: not merely illiquidity for government bonds and corporate debt, but insolvency when it comes to the ability to pay.

In such circumstances, the BIS explains, it is necessary to write down the debt to the amount that can be paid – and to undertake structural reforms to prevent the Bubble Economy from recurring.

The Canadian postal workers union has an informal slogan: “A job that’s not worth doing is not worth doing well.” I might apply this to Europe by saying that a badly structured economy is not worth subsidizing or saving. It should be made well.

This entails, for starters, writing down the debt overhead. That is what created the German Economic Miracle of 1948: the Allied Monetary Reform that wiped out debts over and above minimum working balances, and wages debts owed by employers to employees. It was easy to write down debts that were owed to Nazis. It is much harder to do so when the debts are owed to powerful and entrenched institutions – especially to banks.

Take the case of a Greek debt writedown. This would hurt the Greek banks first and foremost, and also more innocent German insurance companies and banks.I have a modest suggestion as to how to handle this. First, let the Greek banks go under. They helped stymie the Greek government’s attempt to stop tax evasion and money laundering. They have been described as co-conspirators and corrupt. Of course their depositors should be made whole by a standardized, public bank insurance scheme. But bank bondholders and stockholders, and even non-insured depositors, are another matter.

As for the German institutions, if a Greek Clean Slate pushes them into insolvency, the German Government should do what the U.S. Federal Deposit Insurance Corp. (FDIC) is empowered to do: take them over, make all the depositors and policy holders whole, and operate these institutions as a public option – either temporarily or permanently.

The alternative is austerity and debt deflation that will leave European markets shrinking, living standards falling, and turn Europe into what U.S. Defense Secretary Rumsfeld has said so often: “Old Europe,” as if it is too late to be saved. Any discussion of the U.S. economy necessarily involves the global context. So it is necessary to discuss not only domestic U.S. developments, but also relations with Europe and the BRICS countries.

The most important dynamic is financial. A continued decline in real estate prices, coupled with local government debts, has led to debt deflation. As personal and corporate income are diverted to pay debt service, spending on new consumption and investment goods is cut back. Sales and employment opportunities are falling off, especially for new entrants into the labor force. Major categories of debt cannot be repaid in Europe and the United States, except by foreclosures transferring property to creditors. Short-term financial aims overshadow the long-term adjustments that ultimately will be needed: debt writedowns in the public and private sectors. The alternative to this “business as usual” scenario is for the U.S. and European economies to look increasingly like the Baltics – austerity aggravating economic shrinkage.

The U.S. Government as well as European governments have taken bad bank debts onto the public balance sheet. This is not a problem for the United States, whose Federal Reserve can simply create the credit to roll over its debt. But for Europe, public debts simply cannot be paid under current central bank constraints. Instead of changing the central bank rules, the European Union is willing to plunge the continent into depression and economic shrinkage.

U.S. Austerity and deeper Negative Equity

The U.S. economy is free of the monetary constraint that Europeans impose on themselves. The Federal Reserve does what central banks are supposed to do: monetize government deficit spending by buying public debt. However, the increase in new government debt creation has not been mainly to finance deficit spending to increase economic activity and employment, to invest in rebuilding the nation’s infrastructure or providing states and cities with the revenue sharing that in the past enabled them to balance their local budgets. Instead, the government has created debt in an attempt to re-inflate real estate markets back toward Bubble Economy levels. The idea was for the economy to “borrow its way out of debt.”

In practice, there was not much hope of success. The banks sent the $800 billion of Federal Reserve’s Quantitative Easing (QE2) in 2012 abroad, mainly to the BRICS economies in the form of interest rate and currency arbitrage. The banks’ idea was to earn their way out of their own negative equity, but not by lending to a real estate market whose prices continue to decline. This is forcing more properties into negative equity – and that leaves the banks themselves in a negative equity position. So there is little new lending for real estate, to consumers, or to business. Markets are being shrunk by debt deflation.

States and cities also face a shrinking tax base, and many are subject to constitutional requirements for balanced budgets. The path of least resistance has been to underfund their pension plans – which have fallen far behind, especially inasmuch as most plans assume an 8% annual rate of return. This rate – assuming a savings doubling time of just nine years – has become even more fictitious today than it was a decade ago. So some localities have taken risks and lost – with their loss being the counterpart to earnings by the largest banks on derivatives.

The bottom line here is that the U.S. economy is not in a position to “borrow its way out of debt.” The outlook thus is for a similar austerity to that of Europe.

Financial fraud has been effectively decriminalized in the United States. In a nutshell, people have lost trust in the banks – and the financial sector itself mistrusts its fellow institutions. So the non-bank money market funding has dried up for business, and individuals are afraid to invest in the stock market.

President Obama retains his progressive rhetoric, but actually is neoliberal. (His Senate mentor was Joe Lieberman who helped him go for the money and choose Rubinomics advisors.) Mitt Romney pretends to be a right-wing extremist, but seems reasonable on economic policy. However, he may feel under pressure to support right-wing Republican lobbyists in the Congressional leadership. Even if he does, there will not be much difference from the Obama administration. The U.S. situation thus is much like that of Britain under Labour party leadership in recent years: centrist or even left-wing rhetoric on social policies, but neoliberal financial policy favoring the banks.

BOTTOM LINE: Neither the U.S. nor European economies can “grow their way out of debt.” Their debt deflation will worsen, and their budget deficits will widen.

The U.S. Political Outlook

As in Europe, there is little alternative from the ostensible left – from the Democratic Party, the labor unions and allied interests. President Obama seems likely to win this November’s presidential elections, and he is a neoliberal – probably more so than the Republican candidate Mitt Romney.

The common backers of the Republican and Democratic Parties – mainly, Wall Street and real estate interests – realize that a Democratic President is in a better position than a Republican to neutralize Congressional or Senate opposition to scaling back and privatizing Social Security and Medicare. Democratic politicians are more likely to counter Republican proposals along these lines than proposals put forth by their party’s own president. The situation is much like Tony Blair out-Thatchering Britain’s Conservatives in trying to privatize British rail and tube infrastructure and promoting the Public-Private Partnership plan. This is essentially the Rubinomics position supported by the Democratic leadership.

Many voters simply will stay home, so Mr. Romney may have a chance to win, based on support in the South and the West – and even perhaps some Midwestern swing states. In either case, the 2013-16 administration looks like it will be a bipartisan neoliberal austerity.

From the U.S. vantage point, Europe is a dead zone. It looks to me like financial and fiscal self-destruction.

There would be some hope for progress if the financial crisis was used to clean up bureaucracy and shift the tax system off the cost of living and doing business to a land tax on economic rent. This would prevent a new real estate bubble from developing, by holding down the “free” site value that could be capitalized into bank loans. This would lower the cost of housing, and also free employment from taxation. And it could go hand in hand with reducing the size of the Greek bureaucracy, for instance.

But I don’t see this happening in Europe. So financial austerity is likely to aggravate the budget deficits rather than help them. European economies are likely to grow “surprisingly” less than forecasts suggest, and news media will report this as “unanticipated slowdown” “to everyone’s surprise” and so forth.

The likely political reaction in Europe is likely to be a nationalistic opposition to relinquishing government power. But this opposition is likely to come more from the right than from the left of the political spectrum. This is what is so striking about today’s political situation both in Europe and the United States: the failure of the left to provide an economic alternative, and of the right to reform the tax system and corruption.

BOTTOM LINE: The U.S. trade balance may improve as consumer budgets are squeezed, limiting imports, and as domestic shale gas cuts import demand. But capital inflows are unlikely to increase. And until interest rates begin to rise, capital outflows will continue (much as was the case in Japan after 1990). The U.S. is thus suffering a “Japan syndrome.”

Increasing global fracture into regional blocks

Instead of international “cooperation,” I see a regional rivalry among blocs polarizing between the U.S.-centered NATO bloc and the BRICS, expanding their influence. Europe looks pretty much left out, as its markets are not growing and it is not a prime investment area. The BRICS countries are likely to start erecting capital controls against easy-credit policies in the United States funding a takeover of their assets.

Financial flows and capital flight are putting upward currency pressure on the BRICS at the expense of the euro and the dollar. If the euro does not decline against the dollar, it is largely because both currencies are equally weak together and share similar problems. Both economies will shrink, leading to more insolvency for real estate and also for government budgets. This Euro-American shrinkage is likely to spur moves in China and other BRICS to rely more on growth of their internal market. China’s wage levels are likely to rise, prompting production to aim more to satisfy domestic consumer demand than foreign export demand.

The main problem for China is that one of the first expenditures of families with rising revenue is to buy autos. The government’s response is to invest more in public transportation, and is likely to impose an environmental tax. More dispersion of urban centers is likely in order to minimize transportation costs – and more infrastructure spending in general.

Capital controls are likely, and also a denomination of foreign trade and investment in BRICS currencies rather than the U.S. dollar or euro. This tendency will accelerate if U.S. and European military policy continues to expand into Asia and other regions. As matters look at present, U.S. military diplomacy will focus more on trying to recover influence in Latin America, including privatization of key infrastructure to buyers (on credit) who will engage in rent extraction, adding to the price level. The result of debt deflation is thus to raise the cost of living and doing business for much of the economy, squeezing labor and commerce alike.

These policies are likely to be characterized as “muddling through.” This means postponing what looks like the inevitable end game: a large write-down of government debt, a shift away from the dollar as global currency (quite possibly with a re-introduction of gold to settle balance-of-payments deficits). Diplomatically, these changes will constrain U.S. military spending, while pressuring Europe to re-orient its geographic focus if it is to resume economic growth and pull itself out of a feedback of debt deflation, unemployment and even emigration.

The neoliberal challenge

The term “neoliberalism” misrepresents and even inverts the classical liberal idea of free markets. It is a weaponization of economic theory, kidnapping the original liberal ethic that sought to defend against special privilege and unearned income. To classical economists, a free market meant one free of unearned income, defined as land rent, natural resource rent, monopoly rent and rent-extracting privilege. But to neoliberals a free market is one free from taxes or regulation of such rentier income, and indeed gives it tax favoritism over wages and profits.

Neoliberalism and neo-conservatism are complementary doctrines of power and autocracy combined with deregulation and dismantling of democratic law. The aim is to replace government power as used to protect the people with an oligarchic power to oppress the people.

Today, the neoliberal aim is to cripple government power, enabling a free-for-all for the financial sector. Protecting civil freedoms are also heavily signposted, but the high price of legal representation is a barrier for most. A doctrine primarily of the financial sector, the aim is to un-tax banks and financial institutions and their major customers: real estate and monopolies.

Neoliberalism is a doctrine of central planning, which is to be shifted from governments to the more highly centralized financial centers. This requires disabling public power to regulate and tax banking and finance. As a transition, ideological deregulators such as Alan Greenspan and Tim Geithner have been appointed to the key regulatory positions in the United States.

The result is a doctrine of financial war not only against labor but also against industry and government. Gaining the financial power to indebt economies at increasing speed, the banking and financial sector is siphoning resources away from the real economy. Its business plan is not based on employing labor to expand output, but simply to transfer as much of the existing flow of revenue as possible into its own hands, by capitalizing all such revenue into interest payments, on loans collateralized and pledged to creditors.

The effect is no more democratic than the Roman democracy, which arranged voting by “centuries” headed by the largest landowners – essentially an acre-per-vote, to make an analogy. In the U.S. case, votes are bought not by land as such, but by dollars – mainly from the financial sector. In the end, to be sure, most dollars come from rent extraction.

The result must be economic polarization, above all between creditors and debtors as in Rome. So the end stage of neoliberalism threatens a Dark Age of poverty/immiseration – most characteristically, one of debt peonage. And just as Rome’s creditor class and its predatory imperial expansion brought down the Roman Empire and reduced it to mere subsistence, so the combination of neoliberalism and neo-conservatism today seeks to globalize itself, spreading austerity even as it brings technological progress to sovereign debtors.

Tags: Autocracy, Business Plan, Creditors, Deregulation, Economic Theory, Economists, Equitable System, Estate Interests, Financial Institutions, Financial Sector, Free Markets, Interest Payments, Mainstream Economics, Michael Hudson, Monopolies, Neoliberal Ideology, Open Markets, Privatization, State Owned Enterprises, Tax Structure
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The Education of a Mortgage Bond Manager, Part II

Saturday, July 21st, 2012

by David Merkel, Aleph Blog

In much of my life, I have been thrust into situations for which I was not ready, and ended up rebuilding the wheel, or came up with an unorthodox approach that worked.  But a lot of the problem came down to the question of time horizon.  How long can you buy and hold, even if temporary market conditions make you squeamish?

I remember the first CMBS bond that I bought in 1998: it was the longest AAA tranche of a Nomura deal, which was out of favor at the time.  I did a lot of work analyzing the deal, and concluded that the bond was a lot safer than many competing bonds and offered more yield.  In early 1999, when I described this purchase to the investment committee of a charitable board the I was on, one said, “Only 7%, and you are locked in for 14 years?”  I said that stock valuations were high, and that 7% was a great return.  It was a great return, and far better than the stock market over the same time period, though I could not have known that at the time.

I became an advocate for CMBS in my firm as I realized that the hot product being offered would have the majority of its cash flows come at the 10-year maturity, but there would still be some level of withdrawals.  After some modeling, I realized that the best strategy was investing 80-85% of the money 10 years out, while leaving 15-20% of the money as pseudo-cash: 2 years out or shorter.  Of all of the mortgage bond categories, only CMBS offered assets with a ten-years or more duration, with minimal credit risk.

I used Charter/Conquest as my software.  It enabled me to set a consistent set of macroeconomic principles to evaluate a large number of properties in different economic areas.  The software would project the cash flows  of each property, given the assumptions that you fed it.

I spent time analyzing geography and property types.  I had a decent idea as to what areas of the country were doing badly, and with what property types.

I created what I called the black bucket.  Property types and geographic areas that I did not like were assigned to the black bucket, and if the  black bucket got big enough, we did not play in the deal.  It was a good method, and one CMBS expert at a bulge-bracket bank said to me that it was the most rigorous means of testing CMBS that he had run into.  Most buyers were far more trusting, and tended to buy quality issuers that were taking advantage of their reputation.

By having an independent standard of value where I worked, I did better than competitors.  I did not follow fads; I followed value to the greatest extent that I knew.

Brokers would be puzzled on why I turned down deals from good dealers, or why I bought deals from originators that were subpar.  My lesson was dig into the details, and ignore names.  Analyze the data, avoid the marketing.

Doing your own analysis is a lot of investing.  Ignore the puzzled expressions of your brokers, and buy what you have determined is valuable.  More in part 3.

Tags: Aleph Blog, Bond Manager, Credit Risk, Decent Idea, Economic Areas, hot product, Investment Committee, Macroeconomic Principles, Merkel, Minimal Credit, Mortgage Bond, Nomura, Question Of Time, Same Time Period, Stock Market, Stock Valuations, Time Horizon, Tranche, Unorthodox Approach, Withdrawals
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The Education of a Mortgage Bond Manager, Part I

Saturday, July 21st, 2012

by David Merkel, Aleph Blog

You might remember my “Education of a Corporate Bond Manager” 12-part series.  That was fun to write, and a labor of love, but before I was a corporate bond manager, I was a Mortgage Bond Manager.  There is one main similarity between the two series — I started out as a novice, with people willing to thrust a promising novice into the big time.  It was scary, fun, and allowed me to innovate, because in each case, I had to rebuild the wheel.  I did not have a mentor training me; I had to figure it out, and fast.  Also, in this era of my career, I had many other projects, because I was the investment risk manager for a rapidly growing life insurer.  (Should I do a series, “The Education of a Financial Risk Manager?”)

One thing my boss did that I imitated was keep notebooks of everything that I did; if this series grows, I will go down to the basement, find the notebooks, and mine them for ideas.  When you are thrust into a situation like this, it is like getting a sip from a firehose.  Anyway, I hope to do justice to my time as a mortgage bond manager; I have been a little more reluctant to write this, because things may have changed more since I was a manager.  With that, here we go!

Liquidity for a Moment

In any vanilla corporate bond deal, when it comes to market for its public offering, there is a period of information dissemination, followed by taking orders, followed by cutoff, followed by allocation, then the grey market, then the bonds are free to trade, then a flurry of trading, after which little trading occurs in the bonds.

Why is it this way?  Let me take each point:

1. period of information dissemination — depending on how hot the market is, and deal complexity, this can vary from a several weeks to seven minutes.
2. taking orders — you place your orders, and the syndicate desks scale back your orders on hot deals to reflect what you ordinarily buy and even then reduce it further when deals are massively oversubscribed.  When deals are barely subscribed, odd dynamics take place — you get your full order, and then you wonder, “Why am I the lucky one?”  After that, you panic.
3. cutoff — it is exceedingly difficult to get an order in after the cutoff.  You have to have a really good reason, and a sterling reputation, and even that is likely not enough.
4. allocation — I’ve gone through this mostly in point 2.
5. grey market — you have received your allocation but formal trading has not begun with the manager running the books.  Other brokers may approach you with offers to buy.  Usually good to avoid this, because if they want to buy, it is probably a good deal.
6. bonds are free to trade — the manager running the books announces his initial yield spreads for buying and selling the bonds.  If you really like the deal at those spreads and buy more, you can become a favorite of the syndicate, because it indicates real demand.  They might allocate more to you in the future.
7. flurry of trading — many brokers will post bids and offers, and buying and selling will be active that day, and there might be some trades the next day, but…
8. after which little trading occurs in the bonds — yeh, after that, few trades occur.  Why?

Corporate bonds are not like stocks; they tend to get salted away by institutions wanting income in order to pay off liabilities; they mature or default, but they are not often traded.

By this point, you are wondering, if the title is about mortgage bonds, why is he writing about corporate bonds?  The answer is: for contrast.

1. period of information dissemination — depending on how hot the market is, and deal complexity, this can vary from a several weeks to a few days.  Sometimes the rating agencies provide “pre-sale” reports.  Collateral inside ABS, MBS & CMBS vary considerably, so aside from very vanilla deals, there is time for analysis.
2. taking orders — you place your orders, and the syndicate desks scale back your orders on hot deals to reflect what you ordinarily buy and even then reduce it further when deals are massively oversubscribed.  When deals are barely subscribed, odd dynamics take place — you get your full order, and then you wonder, “Why am I the lucky one?”  After that, you panic.
3. cutoff — it is exceedingly difficult to get an order in after the cutoff.  You have to have a really good reason, and a sterling reputation, and even that is likely not enough.
4. allocation — I’ve gone through this mostly in point 2.
5. grey market — there is almost no grey market.  There is a lot of work that goes into issuing a mortgage bond, so there will not be competing dealers looking to trade.
6. bonds are free to trade — the manager running the books announces his initial yield spreads for buying and selling the bonds.  If you really like the deal at those spreads and buy more, you can become a favorite of the syndicate, because it indicates real demand.  They might allocate more to you in the future.
7. no flurry of trading — aside from the large AAA/Aaa tranches very little will trade.  Those buying mezzanine and subordinated bonds are buy-and-hold investors.  Same for the junk tranches, should they be sold.  These are thin slices of the deal, and few will do the research necessary to try to pry bonds out of their hands at a later date.
8. after which little trading occurs in the AAA bonds — yeh, after that, few trades occur.  Same reason as above as for why.  Institutions buy them to fund promises they have made.

Like corporate bonds, but more so, mortgage bonds do not trade much after their initial offering.  The deal is done, and there is liquidity for a moment, and little liquidity thereafter.

Again, if you’ve known me for a while, you know that I believe that liquidity can’t be created through securitization and derivatives.  Imagine yourself as an insurance company holding a bunch of commercial mortgage loans.  You could sell them into a trust and securitize them.  Well, guess what?  Only the AAA/Aaa tranches will trade rarely, and the rest will trade even more rarely.  The mortgages are illiquid because they are unique, with a lot of data.  You would have a hard time selling them individually.

Selling them as a group, you have a better chance.  But as you do so, investors ramp up their efforts, because the whole thing will be sold, and it justifies the analysts spending the time to do so.  But after it is sold, and months go by, few institutions have a concentrated interest to re-analyze deals on their own.

And so, with mortgage bond deals, even more than corporate bond deals, liquidity is but for a moment, and that affects everything that a mortgage bond manager does.  More in part 2.

More … /

Tags: Aleph, Big Time, Bond Manager, Corporate Bond, Desks, Financial Risk Manager, Firehose, Grey Market, Hot Deals, Information Dissemination, Investment Risk, Labor Of Love, Life Insurer, liquidity, Merkel, Mortgage Bond, Novice, Public Offering, Similarity, Sip
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U.S. Equity Market Radar (July 23, 2012)

Saturday, July 21st, 2012

U.S. Equity Market Radar (July 23, 2012)

The S&P 500 Index rose 0.43 percent this week as the second quarter earnings season kicked off in earnest this week. Energy, technology and materials outperformed as cyclical areas outperformed. Financials were the big underperformers this week, falling more than two percent on disappointing earnings reports.

Strengths

• The energy sector was the best performer this week, rising 2.56 percent and is now the best-performing sector over the past month. Oil & gas drilling and equipment were the best performers, led by Baker Hughes and Schlumberger on the back of strong earnings reports and low expectations.
• The technology sector was led higher by the computer storage and equipment industry group along with internet software and services. SanDisk, eBay and Google were all standout performers on strong earnings reports.
• The best individual stock performer this week was SanDisk, which rose 10.38 percent as the company reported earnings and an outlook that positively surprised street expectations.

Weaknesses

• The financial sector lagged as heavyweights Bank of America, JPMorgan Chase and Morgan Stanley all fell sharply. Earnings or guidance disappointments were the primary culprits, but after a relief rally on last week’s earnings, JPMorgan Chase gave it all back this week falling by more than 6 percent.
• The consumer staples sector was brought down by record high grain prices which negatively impact “protein” companies such as Tyson, which fell 6.56 percent, as well as packaged goods companies such as ConAgra Foods, which fell 4.55 percent.
• Chipotle Mexican Grill was the worst performer, falling 19.21 percent as second quarter sales were less than expected.

Opportunity

• It is all about earnings right now with another heavy week scheduled for next week. While the week ended on a sour note, the market has weathered the current environment pretty well considering expectations coming into the week.

Threat

• While policy-makers in Europe have made strides to stabilize the situation, many risks remain and the situation remains very fluid.
• China recently cut interest rates for the second time in a month, which likely indicates the conditions on the ground remain challenging.

Tags: Baker Hughes, Bank Of America, Computer Storage, Conagra, Conagra Foods, Consumer Staples, Earnings Reports, Earnings Season, Ebay, Gas Drilling, Google, Grain prices, Jpmorgan Chase, Low Expectations, Market Radar, Morgan Stanley, Packaged Goods Companies, Second Quarter Earnings, Second Quarter Sales, Street Expectations
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The Economy and Bond Market Radar (July 23, 2012)

Saturday, July 21st, 2012

The Economy and Bond Market Radar (July 23, 2012)

Treasury yields headed modestly lower again this week. Retail sales were much weaker than expected. Inflation and manufacturing data were more or less in line with expectations, while housing data was mixed. By Friday, European financial concerns had resurfaced as Spanish 10-year bond yields spiked above 7 percent and hit new highs. Spain indicated its recession will likely continue into next year. U.S. treasuries remain a safe haven for global investors, pushing yields lower this week.

Strengths

• Industrial production rose 0.4 percent, ahead of expectations and a bright spot in an otherwise lackluster week for economic data.
• Real estate lending in China jumped 20 percent year-over-year in the second quarter and already shows Chinese policy-makers are taking aggressive action to combat the ongoing global slowdown.
• Housing starts rose 6.9 percent in June and the National Association of Home Builders confidence index had its biggest increase since September 2002.

Weaknesses

• Retail sales fell 0.5 percent and have now fallen for three months in a row, which bodes very poorly for second-quarter GDP growth.
• The Conference Board’s Leading Index fell 0.3 percent in June, also indicating lackluster growth.
• Auto sales in the European Union fell 2.8 percent in June for the ninth consecutive monthly drop.

Opportunity

• With growth tepid, the Federal Reserve will not only remain accommodative, it may increase accommodation in the next few months.

Threat

• Europe remains a wildcard with the markets shifting focus on a weekly basis.

Tags: Aggressive Action, Auto Sales, Bond Market, Bond Yields, Chinese Policy, Confidence Index, Economic Data, Financial Concerns, GDP Growth, Global Investors, Global Slowdown, Housing Starts, Market Radar, National Association Of Home Builders, New Highs, Quarter Gdp, Safe Haven, Shifting Focus, Treasuries, Treasury Yields
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Gold Market Radar (July 23, 2012)

Saturday, July 21st, 2012

Gold Market Radar (July 23, 2012)

For the week, spot gold closed at $1,584.50 down $5.18 per ounce, or 0.33 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 1.49 percent. The U.S. Trade-Weighted Dollar Index edged 0.13 percent higher for the week.

Strengths

• A trading desk in Toronto pointed out that swap dealers, a category of relatively large traders and big banks, are actually net longs in the gold market. Even though the dollar continues to rally, every time gold seems to dip in price, the market sees renewed support from what may be Chinese buying. With the swap dealers being net long gold, we are seeing a very significant change of ownership in the gold market. While the hot-money crowd has lost interest in gold for the time being, the value-based crowd is apparently accumulating gold at these levels.
• Mag Silver (MAG) reported positive drill results from its 100 percent-owned Cinco de Mayo Ag-Au-Zn-Pb project in Mexico. A long 61m interval of massive sulfide mineralization grading 89 grams per ton Silver, 0.78 grams per ton gold, 0.13 percent Copper, 7.3 percent Zinc and 2.05 percent Lead is a new zone and was documented as one of four separate intersections and suggests MAG may have intersected the “guts” of the Carbonate Replacement Deposit (CRD) system. The gold and copper grades are the highest documented to date at Cinco de Mayo and may also suggest feeder-type, hotter mineralization. Michael Grey, Macquarie gold mining analyst, believes Cinco de Mayo now has the critical mass to be the flagship asset of a separate company and a value driver for MAG shareholders as a potential near-term spin-out company.
• In addition, Fresnillo Plc reported attributable total silver production declined 6.5 percent in the first half of 2012 from 21.46 million ounces during the first half of 2011 to 20.07 million ounces. The declines in quarterly and six-month silver production were attributed to the “expected natural decline in the silver grades at the Fresnillo mine.” This could be a catalyst to push Fresnillo to consolidate this joint venture interest in the higher grade Juanicipio joint venture project with Mag Silver.

Weaknesses

• Anglo American Platinum, the world’s top platinum producer, warned that the first-half earnings will drop by as much as 78 percent, hit by lower sales and prices. South Africa’s platinum sector is battling the impact of weak demand, soaring costs, and a government safety drive that has cut production as operations are suspended for safety violations.
• Mongolia’s biggest political party has formed a coalition with fringe parties which want to limit foreign mining investment in order to gain a parliamentary majority. In the past, they have also demanded a renegotiation of a 2009 agreement which gave Canada’s Ivanhoe Mines, now controlled by mining giant Rio Tinto, 66 percent ownership of the $13 billion in a project. Analysts anticipate substantial pressure for policies to be more populist and resource-nationalist, which in return likely will result in an elevated level of volatility.
• The latest analysis of gold exploration by the well-respected Halifax-based minerals-focused research organization, Metals Economics Group, suggests that despite a huge focus by global miners and explorers on precious metals exploration over the past few years, the rate of new gold resource discovery is substantially lagging behind resource depletion. The group’s latest study, “Strategies for Gold Reserves Replacement: The Costs of Finding and Acquiring Gold,” reports that gold discoveries of at least 2 million ounces over the past 14 years could only replace around 56 percent of the estimated amount of gold mined over the same period, and this is only if these same discoveries prove to be economically minable.

Opportunities

• China is preparing to introduce an interbank gold-trading system, a move that may enable domestic banks to treat the precious metal as a more liquid asset and increase holdings. China has been the largest gold producer since 2007. An interbank gold-trading system would be part of a set of broader reforms that Beijing aims to introduce to make the financial sector more market-driven. Traders note that China is already very important in terms of gold production and consumption and if a new interbank market really does flourish, it could put the Chinese market in the mainstream and become world-class.
• As Julian Phillips of the Gold and Silver Forecaster recently noted on Mineweb, monetary authorities and the banks are ill-prepared to take five more years of what has happened in the last five years. The entire subject of gold being mobilized in the developed world’s monetary system is now firmly center stage as commentary on re-defining gold from a Tier II asset to a Tier I asset has been called for by the Federal Reserve in the U.S. at the same time it is being proposed to the Basel III Committee on monetary reform. If it is so redefined, this will mean that 100 percent of its value can be attributed to a bank’s balance sheet as required assets, up from the current 50 percent. We would consider the Basel Committee’s proposed effective date of January 1 as the most significant step in the re-monetization of gold since it was written out of the global monetary system back in 1971. Redefining gold as a Tier I asset would advance gold’s desirability enormously next year. We expect to see concerted efforts from the banking system to harness this private gold.
• Experiments using gold in the monetary system in Turkey are being watched with fascination by all monetary authorities. As we have discussed in earlier Investor Alerts, Turkey’s commercial banks are targeting customers to open gold deposit accounts. One of our analysts recently returned from a trip to Turkey, where he spoke with representatives of a company that actually had converted 20 percent of its euros into gold so it would have instant liquidity should there be a problem with the euro. In both China and India, major banks offer gold accumulation accounts.

Threats

• David Rosenberg of Gluskin Sheff pointed out that with retail sales down three months in row, a 1-in-50 event, the risk of recession is rising dramatically. David further noted that the next crunch for the consumer, home equity lines of credit, could morph from being a source of liquidity for homeowners into a giant headache that is about to get worse, as almost 60 percent of all home equity lines will start requiring payments of both principal and interest between 2014-2017.
• According to the Energy Intensive User Group, the proposed tariff increase by South Africa’s power utility leaves no space for business to evolve and would make some business completely uncompetitive. The Energy Intensive User Group of Southern Africa has said that the latest media reports surrounding proposed tariff increases by the South African electric public utility Eskom of at least 14.6 percent over each of the next five years would put further jobs at risk in the country. The government’s push to see more downstream beneficiation of minerals becomes even more difficult to achieve in the event of the proposed electricity price hikes. Eskom’s proposed hike could climb to 19 percent if carbon taxes or capital for more power plants was added.
• In 2011, the South African gold fields produced only around 6 million troy ounces of the yellow metal, placing them fourth behind China, Australia, and the U.S. in producer rankings. This is a far cry from the peak reached in 1971, when, according to the South African Chamber of Mines numbers, they produced 79 percent of the gold mined globally. For the mines to remain open, they must mechanize, which will require more energy. While the government may oppose cutting more jobs, you just can’t send workers two-plus miles underground and rely on people and muscle power to achieve the productivity needed to cost-effectively mine the gold.

Tags: Change Of Ownership, Dollar Index, Gold Market, Gold Miners, Gold Mining, gold stocks, Hot Money, Market Radar, Massive Sulfide, Michael Grey, Mining Analyst, Money Crowd, Natural Decline, New Zone, Nyse Arca, Separate Company, Silver Production, Spot Gold, Sulfide Mineralization, Time Gold
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Energy and Natural Resources Market Radar (July 23, 2012)

Saturday, July 21st, 2012

Energy and Natural Resources Market Radar (July 23, 2012)

Strengths

• The yield on 10-year U.S. Government Treasury Notes dropped 2 percent from last Friday, closing the day at 1.4576 percent, below the June Consumer Price Index of 1.7 percent. Currently, the average dividend yield of stocks in the Global Resources Fund portfolio is 3.64 percent.
• Bloomberg reported that coal workers have gone on strike at a Glencore mine in Northern Colombia, and output is expected to be cut by half. The workers are demanding higher wages to compensate for the increases seen in production. The National Federation of Coal Producers has forecasted that Colombia, the largest supplier of coal in South America, will increase output by 16 percent this year.
• Copper futures reached their highest level this past Thursday at $3.534 per pound after about two-and-a-half weeks. This came after China’s Premier, Wen Jiabao, commented that China’s employment situation is “severe” and that China will make job creation the number one priority when undertaking plans of economic restructuring.
• OPEC will begin cutting shipments as oil sanctions continue to be imposed upon Iran. Exports are estimated to drop by 0.9 percent per day until August 4 (excluding Angola and Ecuador). Brent increased 4.3 percent through the week before dropping slightly on Friday.
• Clarkson reported that Chinese oil demand is up about 15 percent for this year, 10 percent more than expectations, demonstrating that China’s slowing GDP growth rate does not translate into a slowing energy demand.

Weaknesses

• Rio Tinto is beginning to cut an undisclosed number of jobs at its Clermont mine in Australia due to low thermal coal prices. Output at the Clermont mine was down 200,000 tons year-over-year from January to June.
• Spot iron ore prices dropped to 8-month lows this week, hovering at $125 per metric ton. The last time prices were this low was in November 2011, when iron ore was recovering from a year-low of $116.90 in October. Mining companies such as Anglo American and BHP continue to increase output despite weaker demand from China, which may contribute to a global surplus in 2013, according to Reuters.
• Worldsteel’s June crude steel output data shows that global crude steel output decreased 0.2 percent year-over-year for the first time since January. Western Europe’s output is down 5.3 percent year-over-year, however, second quarter production was up 0.9 percent year-over-year.

Opportunities

• Italy is aiming to attract $18 billion in investment from oil and gas exploration companies in an effort to decrease government expenditure and put an ease to its debt situation. Mario Monti, the Prime Minister of Italy, wants to soften the oil and natural gas exploration ban that was imposed after the Gulf of Mexico spill in 2010. Ninety percent of Italy’s oil and gas demand is currently being imported.
• Codelco is seeking rights to the Junin Deposit in Ecuador that has enough copper and molybdenum reserves to make it a strong competitor with top mining companies in Peru and Chile, two countries that are dominant in the global supply side of these metals. Reuters reported Santiago Yepez, President of Ecuador’s Mining Chamber, as saying that “Junin could be one of the most significant copper deposits in South America.”
• HSBC reported that demand for coking coal is expected to grow by 4 percent per year through 2016. Australia will look to gain from this as it is likely to remain the dominant producer of coking coal through 2030, with control of more than half of the market share.
• Barclays highlighted that the biggest four Chinese banks have increased lending in July, as new loans in the first half of July are double the amount given out in the same period last month. These loans account for about 35 percent to 50 percent of total new loans.
• Clarkson reported that China’s demand for Very Large Crude Carriers (VLCC) has risen 75 percent since 2008. China’s oil demand represents one-fifth of OECD per capita demand, and if that demand increases to Mexico levels (representing 50 percent of OECD per capita demand), China will need 225 new VLCC tankers.

Threats

• Zambia, Africa’s largest coal producer, has proposed a new regulatory act requiring foreign mining companies to place the revenue generated from export sales in local banks for 30 days. Deputy Finance Minister Miles Sampa said this will go into effect within the coming weeks.
• Reforms of increasing nationalism are evident in Bolivia’s recent possession of one of Glencore’s tin and zinc mines. The government wants to take more control over the mining industry. According to Bloomberg, Vice President Garcia Linera said in an interview that “We’re not going to hand our country to foreigners who destroyed Bolivia and left it stagnating for 20 years.”

Tags: Chinese Oil, Coal Prices, Coal Producers, Coal Workers, Consumer Price Index, Copper Futures, Dividend Yield, Economic Restructuring, Employment Situation, Gdp Growth Rate, Iron Ore Prices, Market Radar, Northern Colombia, Oil Sanctions, Premier Wen Jiabao, Resources Fund, Rio Tinto, Thermal Coal, Treasury Notes, Undisclosed Number
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Emerging Markets Radar (July 23, 2012)

Saturday, July 21st, 2012

Emerging Markets Radar (July 23, 2012)

Strengths

• China’s big four banks made about Rmb50 billion of new loans in the first half of July, double the amount in June, Shanghai Securities News reported. Additionally, China’s outstanding real estate loans were up 10 percent year-over-year in the first half of the year.
• China is boosting this year’s railway investment plan by 9 percent to Rmb 448.3 billion ($70.3 billion).
• Turkish white goods manufacturers continue to gain market share, with sales increasing by 5 percent year-over-year in June. Domestic sales were up 3 percent to 634 thousand units, while exports were up 15 percent to 1.43 million units.

Weaknesses

• On July 19 the Ministry of Land Resources and Ministry of Housing and Urban-Rural Development jointly held an urgent video conference with local governments on how to prevent a rebound of home prices, and asked them to increase land supply for ordinary residential units. Although it had prompted negative sentiment toward the property sector, the government didn’t issue new policies to slow housing transactions, which are vital to investment activities.
• China’s Premier Wen Jiabao warned that the economic rebound isn’t yet stable and hardship may continue for a period of time.

Opportunities

• Borrowing costs in the Czech Republic are to remain low after Moody’s reaffirmed the country’s A1 rating this week with a stable outlook, four notches above Italy and five above Spain.
• With the trade deficit on a downward path and inflationary pressures diminishing, BMI expects that the Reserve Bank of India has sufficient space to resume monetary easing.
• In its July 17 report, Citi Research says China’s economic rebalancing is positive to the economy and the market in the long term, but should introduce uncertainties in corporate earnings amid slower growth and reforms in the near term. It points out that slow investment and the de-capacity process will likely bring gains for telecommunications, staples, health care, utilities, transportation, discretionary and property.

Threats

• Although China is adding investments to help stabilize economic growth, the country still intends to reduce the weight of investment in the GDP. Sectors that are related to or relying on investments may see sales and earning growth being revised downwards going forward.
• Trade figures published by the Bank of Thailand in July indicate that exports are falling short of consensus expectations for a robust recovery in 2012.
• BMI revised its forecast for Mexico’s average inflation from 3.6 percent to 3.8, as a recent outbreak of bird flu has driven up egg and poultry prices in the country, while a growing concern over the drought in the U.S. has caused grain prices to spike.

Tags: Bank Of India, Corporate Earnings, Downward Path, Economic Rebound, Goods Manufacturers, Inflationary Pressures, Land Resources, Local Governments, Ministry Of Housing, Negative Sentiment, Premier Wen Jiabao, Property Sector, Real Estate Loans, Rebalancing, Reserve Bank Of India, Residential Units, Shanghai Securities News, Stable Outlook, Time Opportunities, White Goods
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