Emerging Markets Cheat Sheet (October 3, 2011)

Sunday, October 2nd, 2011

Emerging Markets Cheat Sheet (October 3, 2011)

Strengths

• In China, industrial companies’ profit rose 28.2 percent in the first eight months from a year ago. Net income climbed to 3.2 trillion yuan ($500 billion), the National Bureau of Statistics of China said this week.
• Korea has sufficient foreign-exchange reserves to cope with a potential financial crisis even if European investors take their money out of the country, central bank Governor Kim Choong Soo said.
• Indonesia has foreign reserves of $120 billion, while foreign debt funding is about $30 billion, according to CLSA research. The reserves should provide Indonesia enough liquidity in the event that foreigners withdraw their money as a result of an escalation of the European sovereign debt crisis.
• China’s hog herds are “firmly bouncing back,” with the total number of pigs rising for six months and the number of breeding sows rising for four months, according to the Ministry of Agriculture in Beijing. The pork price increase was the largest contributor to rising inflation in China. Also this week, China Premier Wen Jiabao said China food prices are stabilizing.
• Korea’s industrial production rose 4.8 percent in August from a year ago after rising 4 percent the previous month, but it declined 1.9 percent sequentially month-over-month.
• Exports in India have been steadily growing and are on course to reach the government’s target of $300 billion for the current fiscal year, driven by increased government support to exporters to tap into new markets in Latin America and Africa.
• Turkey is three times more efficient in using energy than China, Russia, or South Africa, according to Credit Suisse. Also, Central European countries (the Czech Republic, Hungary and Poland) made the most incremental improvement over the last decade.

• Turkstat reported that the Turkish economy added 2.2 million new jobs in the first eight months of this year.

Weaknesses

• Korea’s consumer confidence index fell to a five-month low of 99 in August, down from July’s reading of 102.
• Investors are worried about China’s shadow-banking loans, due to intensified news that many small- and medium-sized enterprise (SME) debtors are bankrupt, and therefore bank shares are under pressure. A China International Capital Corporation Limited (CICC) bank analyst estimated private lending went up 38 percent to RMB 3.8 trillion in total loans outstanding in the first half this year, and he further estimates that non-public loan (NPL) increases from small enterprises would reach RMB150 billion, 0.46 percent of corporate loans, not as bad as many media reported.
• Economic growth in South Africa slowed significantly in the second quarter of 2011, to 1.3 percent from 4.5 percent in the first quarter. This can be largely attributed to the ongoing sovereign debt crisis in Europe and an overall negative global economic outlook. Currently, unemployment is just above 25 percent of the labor force.

Opportunities

• Merrill Lynch expects record 2010 construction permits in Turkey to translate into a significant increase in demand for kitchen appliances. Typically, construction permits lead house deliveries and white goods sales by 12 to 18 months.

• As railway investments decline, China’s next bright spot in fixed asset investment is water conservancy investment. The Chinese government is said to invest Rmb 4 trillion in the next five years in water and environment infrastructures. This chart shows the water conservancy investment has increased in recent years after being neglected for the last 10 years, after frequent droughts, floods and food shortages in recent years. In the twelfth five-year plan, water infrastructure investment is expected to be at a cumulative average growth rate (CAGR) of 23 percent, according to CLSA China strategist Andy Rothman.



• According to The Beijing Axis, the global balance of power is shifting into the hands of rapidly industrializing emerging growth giants, especially Brazil, Russia, India, China and South Africa. Today, these countries are fuelling the global recovery with their huge demand requirements, high growth multiples and vast deployment of capital. The report also highlighted that these emerging powers are becoming more present in securing a foothold in Africa’s vast and rich resources.
• Bloomberg reported that Bovespa, the operator of Latin America’s largest securities exchange, is planning to start a bond trading platform by the middle of next year. Marcelo Maziero, Bovespa’s head of product and customer development said, “We are developing a platform. We are accelerating the fixed-income side, so it gets to the same level as stocks.”

Threats

• In China, SMEs are very much underdogs when it comes to bank lending; therefore, they borrow from shadow banks, i.e., private loans and entrusted loans, to expand their growth. With the economy slowing down and loan price going up (see chart shown below), many of them are leveraged at a wrong time. Many SMEs are now financially stressed.

• The La Nina storm is threatening record South American crops. Rabobank International reported that La Nina runs the risk of bringing dry weather to parts of South America, threatening record crop production on the continent. Analysts have speculated that because weather forecasts indicate that La Nina conditions are expected to strengthen, this would likely have a negative impact on corn planted area and yields. Corn production is expected to rise 12 percent this year and soybean output may gain 1 percent.
• Colombia’s policymakers will probably leave borrowing costs unchanged for a second straight month and end a dollar-purchase program as slowing inflation allows them to gauge the impact of the European debt crisis on global growth, Bloomberg reported. Currency “intervention isn’t needed at these levels,” head analyst at Banco de Bogota SA Camilo Perez said, “What is the general driver in markets now is risk aversion and that means a weaker peso.” We continue to see emerging markets leaving their rates unchanged in response to global economic uncertainty.

Tags: Brazil, Central Bank Governor, Central European Countries, China Food, China Russia, Consumer Confidence Index, Credit Suisse, Current Fiscal Year, Debt Crisis, European Investors, Foreign Exchange Reserves, Incremental Improvement, India, Inflation In China, Infrastructure, Last Decade, Ministry Of Agriculture, National Bureau Of Statistics, National Bureau Of Statistics Of China, Outlook, Premier Wen Jiabao, S Industrial, Target, Turkish Economy
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Emerging Markets Cheat Sheet (May 16, 2011)

Saturday, May 14th, 2011

Emerging Markets Cheat Sheet (May 16, 2011)

Strengths

• In spite of political uncertainty in Peru, Credicorp reported solid first quarter results with net income rising 40 percent year-over-year, well ahead of consensus estimates. However, the bank cautioned that its future performance will be linked to economic stability in the country that, in a large measure, will depend on the outcome of the forthcoming election on June 5.
• Mexican-listed airport groups have reported satisfactory traffic data for April: ASUR led with a 4.8 percent increase, while GAP/OMA registered a 1 percent rise in the number of passengers.
• The 2009 combined middle and affluent (MA) class population of Emerging Europe was equal that of China. Russia has the second largest MA emerging market population, and Poland’s rivals that of India. At $17,856, Turkey has the second highest MA class GDP per capita in emerging markets.

• Taiwan’s April exports rose 24.6 percent, driven by information and communication products, minerals, and machineries.
• National Bureau of Statistics of China shows real estate investments reached RMB 1.3 trillion for the first four months of this year, up 34.3 percent from the same period last year. New project starts were up 24.4 percent year-over-year; sales were up 13.3 percent to RMB 1.4 trillion.
• Korean central bank freezes benchmark interest rate at 3 percent, after inflation in April declines to 4.2 percent from 4.7 percent in March, indicating a direction that inflation might start to peak. Also, Indonesia froze its benchmark rate at 6.75 percent in the week after its inflation was stabilizing at around 6.5 percent. If this is a trend, emerging Asia countries might be successful at curbing inflation.
• China International Capital Corp (CICC) says China’s Internet revenue will grow to RMB 1.5 trillion by 2013, which equates to a compound annual growth rate of 40 percent and 6.5 percent of total retail in the country. Sina, in its first quarter earning release, said its Weibo membership has grown to 140 million registered users, adding 40 million since February. CICC also believes the growth in Internet users will drive Internet infrastructure investment. It is estimated that China has 450 million active internet users, the largest in the world.
• In April, China has achieved its targeted money growth rate of 15 percent, i.e., M2 money supply is at 15.2 percent. If maintained, China might be able to manage a soft landing for its high flying GDP growth.
• China’s macroeconomic numbers also show robust consumer spending with retail sales growing 17.1 percent in April.
• Investment momentum remains high in China. Urban fixed-asset investment growth surprised the market on the upside by strengthening to 25.4 percent.
• China’s April exports grew 29.9 percent, which is a desirable growth given the RMB appreciation pressure and cost increases for Chinese manufacturers.
• Power generation in China was up 11.7 percent in April, but it still faces power shortage across the country.

Weaknesses

• Since 2004, public sector wages grew faster than wages in the private sector in Poland. Higher wages, combined with better social benefits and stable employment, lead many Poles to cast a wary eye toward privatization plans. Powerful unions were recently able to block initial public offering (IPO) plans.
• China’s consumer price index was 5.3 percent in April, slightly lower than 5.4 percent in March. Although the number is still above the government’s desired target of 5 percent for the year, a key component of the index, food, has declined 0.4 percent from March, indicating the government measures on price control have worked.
• Industrial production growth in China slowed to 13.4 percent year-over-year in April, compared to 14.8 percent in March, caused by government tightening of the housing market and inflation control.
• Auto sales in April fell 0.25 percent year-over-year in China, indicating a spillover effect from the government’s tightening on the housing market.
• China has just increased the reserve replacement ratio (RRR) another 50 basis points, reaching 21 percent for the large banks. Considering the fact that deposit growth year-to-date in China was 17 percent, the impact on the banks’ loan book is minimal.
• Chinese high speed rails are having a negative impact on airline traffic, particularly in the mid-to-short distance travel. According to the China Ministry of Railways, it takes four hours by high speed train from Wuhan to Guangzhou, while it takes three hours by airplane, including time spent traveling to the airport or train station and check-in.

Opportunities

• The number of listed airlines in Latin America increased this week with a successful IPO of Avianca from Colombia – the stock gained 18 percent on the first day of trading.
• There are indications that Mexico and Panama might be considering joining a combined equities platform (MILA) that will also include Chile, Colombia and Peru.
• Falabella, the Chilean retailer, has received a license to start banking services in Colombia.
• According to Metal Bulletin, Russian producers are looking for a $10 to 20 per ton increase in hot rolled coil export prices in June, which could signal some improvement in demand on the export markets. This could help maintain stable prices on the domestic market, while any signs of recovery in construction demand in Russia would be quite supportive for Russian steel companies.
• Deutsch Bank China Economist Ma Jun recently boosted his forecast of RMB deposits in Hong Kong to 2 trillion by the end of 2012, driven by rapidly rising trade settlement between China mainland and Hong Kong. RMB deposits soared to 407 billion in February 2011, six times the amount in the same period last year. Among the many opportunities arising from this growth is that Macau casino business will be the low hanging fruit for investors since it benefits directly from the RMB out-flows. The chart shows the correlation between RMB deposit in Hong Kong and Macau gaming revenue.

Threats

• A recent correction in commodities prices may be a headwind for resource dependent countries in Latin America, notably Brazil, Chile and Peru.
• A company press release by Magyar Telekom announced that the regulator in Hungary has obliged the operator to provide access to its passive network infrastructures, including ducts, poles, dark fiber, copper and optical local loops. It remains to be seen who will take advantage of this regulation to take share away from Magyar.
• April’s macro economic numbers show that the growth of the Chinese economy is slowing due to China’s monetary tightening. The market believes China will have one more interest rate hike in second quarter, and several RRR increases until inflation concerns subside. While the market is broadly predicting a soft landing in China, investors have yet to commit their money in the market, as shown by Hong Kong lower daily trading volume.

Tags: Asia Countries, Asur, Benchmark Interest Rate, Benchmark Rate, Brazil, Bureau Of Statistics, China International, China Russia, Cicc, Compound Annual Growth Rate, Credicorp, Emerging Asia, Emerging Europe, Forthcoming Election, Gdp Per Capita, India, Infrastructure, Internet Revenue, Market Population, National Bureau Of Statistics, National Bureau Of Statistics Of China, Political Uncertainty, Real Estate Investments
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India and China Continue to Drive Gold Demand

Sunday, November 21st, 2010

The World Gold Council’s (WGC) latest quarterly recap shows global gold demand is getting stronger despite rising gold prices. Gold rose 28 percent to record the highest average price for a quarter ever at $1,226.75 an ounce while gold demand jumped 12 percent on a year-over-year basis to 921.8 tons during the quarter.

Jewelry demand, which increased 8 percent on a year-over-year basis, accounted for 57 percent of overall demand, while investment demand rose 19 percent to account for 31 percent of total demand.

It appears consumers and investors, especially in India, China, Russia and Turkey, are growing accustomed to higher gold prices. At the end of the third quarter, gold demand in India had already exceeded that of 2009 and demand levels in China are ahead of last year’s pace.

The WGC says “these results demonstrate that consumers in these countries are becoming accustomed to high price ranges…and consumers are preferring to make gold jewelry purchases at current prices in order to avoid purchasing at higher prices in [the] future.”

Investment demand rose despite a 7 percent decline in investment in ETFs, which has been the biggest driver in investment demand of late.

Chinese investors seeking protection from rising interest rates directed a considerable portion of their savings into gold products, causing demand for gold bars to jump 44 percent. Net retail investment in China reached 45 tons, breaking the previous record of 40 tons set in the first quarter of 2010.

We’ve said this many times, as the economy recovers and per capita incomes in countries such as China and India rise, consumers and investors within those countries will likely see gold as a key investment vehicle because of the cultural connection carried over thousands of years.

Additionally, the official sector—central banks—were net buyers of gold with Russia, Sri Lanka, Thailand and Philippines increasing their holdings. This offset the International Monetary Fund’s continued selling of gold under the current Central Bank Gold Agreement.

Tags: Buyers Of Gold, Central Banks, China, China Russia, Chinese Investors, ETF, ETFs, Gold Bars, Gold Demand, Gold Jewelry, Gold Prices, Gold Products, Hellip, Incomes, India, India China, Investment Demand, Investment Vehicle, Jewelry Purchases, Price Ranges, Retail Investment, Rising Interest Rates, Rsquo, Russia, Wgc, World Gold Council
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Private and Public Sectors – Motivating and Regulating Markets (Mobius)

Saturday, August 21st, 2010

This article is a guest contribution by Mark Mobius, Vice-chairman, Franklin Templeton Investments.

Even though the government and the private sector have different roles in society, I believe both must depend on a capitalist philosophy in order to be successful. When capital is raised, be it from taxes or from the savings of individuals for investment, it must be put to productive use. Simply put, the capital must result in higher productivity, that is, there should be more goods and services produced for less capital. This translates to higher profitability. However, government organizations are often found to be less efficient in making that transformation because there are few incentives to do so. In comparison, the private sector is mostly driven by profit motives and incentives.

I believe having a motivating factor is fundamental for success and can garner remarkable results. In order to create motivation, government organizations could implement incentives for good performance. This could result in generating higher productivity among government workers, and in turn, they may be able to put capital, in the form of taxes, to better use. We have already seen some governments around the world privatize firms, implementing profit incentives within those organizations, often with stellar results.

I think it is a mistake to speak of free-market capitalism or government-led industry in isolation. The two can and do co-exist, as in countries like China, Russia and India, where the government occupies the “commanding heights” of various industries while applying free-market style incentives to the management levels of these organizations. Labeling a country as following only one of these economic models is often inaccurate at best and detrimental at worst.

Instead, I see the government’s role as an “umpire” in society, mediating between groups with different interests. In order for society to function effectively, opposing forces must be regulated to obey rules and act collectively for the common good. The recent financial crisis was an example of the consequences when governments do not play their umpire role effectively. I believe that the regulatory authorities, the courts and the government departments tasked to regulate the financial industry, for instance, did not adequately enforce rules and work cohesively. They allowed themselves to be influenced by a few key players. This problem was not exclusive to countries practicing free market capitalism—China too, had similar problems—but China’s centralized single-party government was able to move swiftly to correct regulatory errors and thus able to achieve quick results.

The key is to have a government that acts as a true umpire, treating each player fairly and applying the rules equally for all and independent of corrupting external influences. A free market model with an ineffective umpire, inadequate regulation and an uneven playing field is likely no better than a government-led model with no real capitalist system of incentives to maximize productivity.

Copyright (c) Franklin Templeton

Tags: China, China Russia, Commanding Heights, Economic Models, Franklin Templeton Investments, Free Market Capitalism, Government Organizations, Government Workers, Governments, India, Isolation, Management Levels, Mark Mobius, Motivation, Opposing Forces, Private Sector, Productivity, Profit Incentives, Profit Motives, Profitability, Public Sectors, Remarkable Results, Russia, Stellar Results, Umpire, Vice Chairman
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Gold Market Diary (July 5, 2010)

Sunday, July 4th, 2010

Gold Market Diary (July 5, 2010)

For the week, spot gold closed at $1,211.60 per ounce down $44.00 or 3.50 percent. Gold equities, as measured by the Philadelphia Gold & Silver Index fell 8.30 percent. The U.S. Trade-Weighted Dollar Index fell 0.99 percent.

Strengths

• Gold reserves for the International Monetary Fund (IMF) fell by 15.25 tons in May to 2,966.83 tons. This appears to indicate that they will continue to sell their remaining 137.5 tons on the open market as compared to via off market transactions with other central banks.
• Russia increased their gold holdings by 2.46 tons in May and has added gold every month since February. Recent purchases in the past years from China, Russia and India, combined with a decline in gold sales from European central banks demonstrates gold’s growing attractiveness among the group.
• The top gold ETF in the U.S. has now passed $50 billion as nervous investors have continued to put their trust in gold as double dip rumors are striking fear in investors.

Weaknesses

• The gold price recorded its heaviest one day decrease in five months on Thursday, deteriorating almost 4 percent to a five-week low. This sell off, one day after quarter end, seems more to reflect an unwinding of a short euro/long dollar and gold trade.
• Over the last couple of weeks, the euro has strengthened and the dollar has fallen, but gold had been holding up. It’s unlikely it was just a coincidence that the trade came off right after quarter end.
• India’s gold imports in June were 29.9 tons, which is nearly a 75 percent depreciation from a year ago due to gold’s ongoing price accelerations.

Opportunities

• A recent UBS poll of over 80 reserve managers concluded that gold was expected to be the strongest asset class for the rest of the year, and 22 percent of the managers foreshadowed that gold would be the most important reserve asset of the next 25 years.
• David Levenstein, founder of Lakeshore Trading, asserted “the price of gold is exhibiting classic bullish signs of higher highs and higher lows. And, it is very encouraging to see that the increase in price is not moving in a vertical line. This gentle gradient illustrates good solid buying as opposed to panic buying.” Levenstein says gold will reach $1,350 in the near future.
• The gold price could well double in nominal terms over the next three years says Rick Rule founder of Global Resource Investments. However, the circumstances surrounding such a move could include severe social unrest and massive volatility.

Threats

• Rick went on to note, gold obviously will not move in a straight line to higher prices. As an example, he noted if one looks back to the bull market from 1970 to 1980 when gold ran from $35 per ounce to a high of $850 per ounce. People don’t remember that gold moved from $35 to something like $210 or $215 by 1975 and then fell from that number to about $110.
• People who were right about the secular move in gold but leveraged themselves up, many of them got stomped out by a cyclical decline and actually went bankrupt despite having the right long term trade.
• On March 29, 1999, the Dow traded through 10,000. Today the Dow closed at 9,687. The War on Terrorism is approaching ten-years with little resolution in Afghanistan. Efforts to jumpstart the economy by issuing more debt to get out of debt have not delivered much confidence. Obviously, changes in taxes do matter when it comes to the behavior of consumers but government policies are directionally heading towards more regulation on capital returns combined with higher tax rates.

Tags: China, China Russia, Dollar Index, ETF, European Central Banks, Gold, Gold Equities, Gold Etf, Gold Holdings, Gold Imports, Gold Market, Gold Reserves, Gold Sales, Gold Trade, India, International Monetary Fund, International Monetary Fund Imf, Market Diary, Philadelphia Gold, Reserve Asset, Reserve Managers, Russia, Silver, Silver Index, Spot Gold, Striking Fear
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China-Russia on Treadmill to Growth – Crushing Chanos’ Bubble Bets

Thursday, April 15th, 2010

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President Barack Obama and Russian President Dmitry Medvedev signed the biggest nuclear arms pact in a generation last week. The so-called New START is hailed by Obama as a major step to show the world that the U.S. and Russia have mended their troubled relationship.

Meanwhile, Russia and China have also formed alliance to help each other increase their clout in global affairs, as visiting Chinese Vice President Xi Jinping who met with Medvedev in Moscow last month indicated. Xi is expected to succeed President Hu Jintao in 2012 as China’s top leader.

Old Foes = New Allies

Russia has watched China’s continued economic growth and advancing political clout with a mix of awe and unease. Nevertheless, economic and trade cooperation between the two countries has grown quite steadily  in recent years.

The final settlement of their 4,300-km shared border in July 2008, after more than 40 years of dispute, also helped spur the advancement of bilateral cooperation.

An Economic Paradigm Shift
Presidents Hu and Putin have moved quickly on an agreement to enhance mutual political trust and advance pragmatic cooperation, and signed agreements totaling $1.6 billion in the technology, energy and infrastructure sectors.

China is already Russia’s largest trading partner. The annual bilateral trade volume has increased from a few billion dollars back in the 1990s to $58 billion as of 2008.

Underneath the geopolitical and trade pacts, this newly elevated Sino-Russian alliance seems to also suggest the beginning of an economic paradigm shift for both countries.

“A Huge Fiscally Dysfunctional Iceberg”
China used to consider the euro as a top option to diversify its massive reserves from the dollar, but has grown quite wary of the euro zone debt situation.

Zhu Min, deputy governor of the People’s Bank of China, last month told a conference in Hong Kong that he viewed Greece as just the tip of a huge fiscally dysfunctional iceberg, one likely to swallow up growth opportunities in Europe for several years to come.

“Unsustainable” Sovereign Debt Levels
Elsewhere, among the established and generally considered “low risk” countries, national debt and deficit has reached an unsustainable level. The U.K, at 14.2%, and U.S. with 11.92%, now rank No. 8 and 14 respectively based on budget deficit percentage to GDP in 2010 by country.

As a comparison, the already bankrupt Iceland and Ireland–one of the “I’s” in PIIGS countries–rank behind the U.S. at No. 9 and 10, respectively.

Typically, a “sustainable debt” is one that grows slower than the GDP over time. This is part of the rational that the European Union requires its member countries to keep budget deficits below 3% of GDP as it is the general assumption of a long-term growth rate.

Crisis Transferred – Banks to Governments
In essence, the 2008 financial crisis has been transferred onto the government’s balance sheet from banks’ making the sovereign debt quite possibly the next major crisis across the Europe, the U.S. and U.K.

This has set off alarm bells among the developing countries, which typically have significantly lower levels of debt.  That alarm signal partly prompted Zhu Min stating:

“The U.K. is weak. America itself is weak, because in a two-to-four-year horizon, U.S. debt will climb to 110% [of GDP] and stay there for a while…Now they find nobody can save them.”

Counterbalance – Great Hope for Investors
Realizing the risks of the Western economy, it is logical for the neighboring China and Russia to be looking to each other for economic and trade alliance, in addition to expanding domestic consumer demand.

The World Bank last month raised its growth forecast for China this year to 9.5%, while Bank of America Merrill Lynch projected Russia, the world’s biggest energy supplier, is poised for a growth rate of 7% this year.

This new level of cooperation between the two Eastern powers would be good news for investors as they form a counterbalance to the West, which is facing serious fundamental problems that could lead to a total financial disintegration.

Treadmill to Growth Crushing Shorts
Lately, contrarian investor Jim Chanos is once again making headlines proclaiming “China’s treadmill to hell…will break this year and the bubble will pop.”

It is quite understandable how Mr. Chanos may have some sense of anxiety, since his fund–Kynikos–is shorting mainly Chinese developers and construction suppliers as disclosed in his latest interview. These sectors probably have not shown as much downside as he’d envisioned, primarily due to promising economic data coming out of China.

Buy On The Dip – Real Estate
All countries, including China, go through the normal up-and-down business cycle, which is nothing catastrophic as suggested by Mr. Chanos. As such, China’s economy and real estate sector could have a correction and cooling-off period ahead with Beijing attempting to rein in liquidity and inflation.

Nevertheless, with strong long-term growth prospect intact, buying on the dip via Chinese real estate related investment vehicles would fit nicely into a balanced long-term portfolio.

Yuan, Ruble, Gold & Metals
With the euro looking in dire straits even with the $61 billion EU-IMF Greece bailout pact, sterling in worse shape than the dollar, China will likely diversify more into gold, other developing market currencies, and promoting their own currency as alternatives.

From that perspective, yuan and ruble could vastly appreciate against the dollar over time just from the sheer growth and relative stability. Precious metals, gold in particular, and base metals could also benefit.

Commodities in general seem to have fully priced in a V-shaped recovery; nonetheless, it is still advisable for investors to allocate about 5% through physical holding, physical ETFs and/or longer-dated options, as part of a well-diversified portfolio.

Hot Now – Russia Bonds
Meanwhile, analysts estimated many dedicated emerging markets funds have set aside plentiful cash in order to snap up Russia’s first foreign-currency bonds since 1998. A record $18.8 billion had flowed into emerging debt funds in the first quarter for the new bond.

Russia’s government said last year it may borrow as much as $17.8 billion abroad in 2010 to help its budget deficit and establish a new benchmark for corporate borrowing.

Investors interested in Russia should bear in mind that the country’s revenue and GDP growth tends to be more sensitive to the volatile crude oil market, as discussed in my earlier article – “Sovereign Risk and the Price of Oil.”

Rethink and Be Prepared
In light of a plausible Western economic and dollar crisis, an event China and Russia, the de facto leaders of the developing world, seem to be actively preparing for, it is likely that China and Russia would weather just one such financial tsunami better than others.

That possibility warrants investors to rethink the conventional wisdom of associating established economies with lower risk and position portfolios accordingly.

Tags: Bank Of China, Barack Obama, Bilateral Cooperation, China, China Russia, Chinese Vice, Commodities, Debt Situation, Deputy Governor, Dmitry Medvedev, Economic Paradigm, Emerging Markets, ETF, ETFs, Gold, Hu Jintao, Infrastructure Sectors, Massive Reserves, Old Foes, Paradigm Shift, Political Clout, President Hu Jintao, Russia, Trade Cooperation, Trade Pacts, Trade Volume, Troubled Relationship
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Ridiculous Hype Over Secret Oil Meetings

Tuesday, October 6th, 2009

This post is a guest contribution by Michael “Mish” Shedlock, of Mish’s Global Economic Trend Analysis.

Once again everyone is hyperventilating over “secret” moves to trade oil in currencies other than the US dollar. Please consider The demise of the dollar by Robert Fisk.

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

The Americans, who are aware the meetings have taken place – although they have not discovered the details – are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs. Against the background to these currency meetings, Sun Bigan, China’s former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East. “Bilateral quarrels and clashes are unavoidable,” he told the Asia and Africa Review. “We cannot lower vigilance against hostility in the Middle East over energy interests and security.”

Supposedly Robert Fisk knows the plans but “Americans have not discovered the details”.

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Such “secret” talks surface about once a year and nothing ever happens. Yet, even if these talks led to actual actions, they are irrelevant for the simple reason it does not matter one iota what oil is priced in.

I discussed this concept in Oil Pricing Unit Red Herring on November 18, 2007. At the time everyone was going gaga because Venezuela and Iran would supposedly not take dollars for oil.

Ten Simple Facts

1) Oil is priced in dollars.
2) Oil trades in Dollars and Euros right now in spite of the pricing unit being dollars. OPEC has recently admitted this fact.
3) Clearly oil does not have to be priced in Euros to trade in Euros, or for that matter priced in Yen to trade in Yen. The same applies to any major currency.
4) Neither Venezuela or Iran hold any dollar reserves. To the extent that either is taking trades in dollars, there is clearly nothing forcing them to hold dollars. By extension there is nothing forcing any OPEC country to hold dollars if it doesn’t want to.
5) It takes less than a second for Forex trades to take place. 24 hours a day, 7 days a week, one can sell any currency they want and buy any other currency.
6) The above logic applies to any currency and any commodity.
7) Nothing is stopping anyone at any time anywhere from selling dollars for whatever currency they want to hold. Nor is anything stopping anyone anywhere at any time from selling any major currency for U.S. Dollars.
8) Because currency conversion is instantaneous no one has to hold U.S. dollars to buy oil, copper, gold, iron, lead, wheat, soybeans, or anything else.
9) Dollars are held (or not held) for reasons totally unrelated to pricing unit. Some of those reasons are political, some are based on sentiment, some on trade patterns and trade relationships, and some to suppress the value of local currencies to improve exports.
10) Currencies float and so do the price of oil and commodities. Pricing oil (or any other commodity) in Euros will not cause a price change in dollars. Look at gold which is simultaneously priced in everything as proof.

War Over Pricing Unit?

Fisk concludes with “Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars. Bankers remember, of course, what happened to the last Middle East oil producer to sell its oil in euros rather than dollars. A few months after Saddam Hussein trumpeted his decision, the Americans and British invaded Iraq.”

Iran has virtually no trade with the US, nor is there US foreign direct investment in Iran. Pray tell what does Iran need to hold dollar reserves for? Iran’s statements amount to political hot air and nothing more. It announced something the world already knew, they already held no dollar reserves. Who should care?

Note that it takes less than a second for Forex trades to take place, and 24 hours a day, 7 days a week, one can sell any currency they want and buy any other currency. Logically, it makes no difference if US dollars are converted into Euros one second before a purchase or one second after the a purchase.

Given that it is irrelevant what oil is priced in outside of something illiquid like Yap Island stones, the logical conclusion is the US did not go to war over oil being priced in Euros.

Currencies Are Fungible

Let’s put the horse in front of the cart where it belongs.

You can get a price of oil in any major currency you want today because all major currencies are fungible. However, pricing oil in a basket of currencies would do nothing but cause confusion. The idea is ridiculous.

Saudi Arabia, China, Japan, and any other country can hold whatever reserves they want in whatever currencies they want regardless of the pricing unit of oil. Reserves are based on trade relationships not pricing units!

Pricing oil in Euros (or even sillier – a basket of currencies) will not cause anything to happen. If pricing unit changes do happen, they will be a result of sentiment changes in regards to existing dollar hegemony and not the other way around.

Dollar Armageddon is not coming over a pricing unit, nor did the US invade Iraq for that reason. The story is nothing meaningless hype.

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

http://globaleconomicanalysis.blogspot.com/2009/10/ridiculous-hype-over-secret-oil.html

Tags: Avw, Bigan, Brazil, Central Bank Governors, China, China Japan, China Russia, Chinese Yuan, Commodities, Demise Of The Dollar, Economic Trend, Energy Interests, Euro Gold, Gold, Gulf Arabs, Japanese Yen, Loyal Allies, Michael Mish, Middle East History, Mish Shedlock, oil, Openx, Red Herring, Robert Fisk, Secret Moves, Secret Talks, Unified Currency
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Q&A with Mario Gabelli: The Strong Will Get Stronger

Tuesday, September 8th, 2009

An upshot of the financial crisis could be that investors go back to basics. In the case of equities, the means “plain old stock-picking” as Mario Gabelli of Gabelli Asset Management describes it. The paragraphs below are an excerpt of a recent interview Hedgeweek had with Gabelli.

GFM: Will the US be the first country to lead the way out of the crisis? How do you assess the administration’s actions up to now?

MG: Economic stimulus is co-ordinated, global and powerful. The US economy represents 24 per cent of nominal world GDP, and is about 60 per cent greater than the faster-growing China, Russia, India, and Brazil combined. However, we have our challenges. Within the US, the consumer is about 70 per cent of our economy and has been in a recession for the past year and a half. About nine per cent of Americans are now unemployed, and consumer spending remains hamstrung by rising unemployment, reduced wealth and the decline in stock market and housing prices, but also by the limited availability of credit.

An unintended consequence of the stimulation is likely to be inflation. We think the stimulus will work and that stocks are a good place to be. Both fiscal and monetary policy will work on a global basis, with speed bumps along the way. President Obama inherited a very difficult situation. Under the new administration we have had significant government intervention in the markets, which will be reduced as conditions in the economy improve.

GFM: What are you telling your clients? Have you changed anything in your investment strategy?

MG: The US economy should improve in 2010, helped by an uptick in auto spending and improvement in housing and the ongoing stimulus. There is upside operating leverage in corporate earnings, partly due to cost cutting. The secular themes are the US deleveraging and transferring its wealth to China. We expect more strategically-driven deal activity, as companies buy other companies to enhance growth. Our emphasis, as always, is on POSP – plain old stock-picking.

Click here for the full interview

Source: Hedgeweek, August 28, 2009.

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Tags: Brazil, BRIC, BRICs, China Russia, Consumer Spending, Corporate Earnings, Economic Stimulus, Emerging Markets, Fiscal And Monetary Policy, Gabelli Asset Management, Gfm, Global Basis, Government Intervention, India, Investment Strategy, Mario Gabelli, New Administration, Operating Leverage, Secular Themes, Speed Bumps, Stock Market, Unintended Consequence, Upshot, Uptick, World Gdp
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