Viewing Global Markets – What Happened in 2012?

Monday, June 4th, 2012

by Andrew Horowitz, The Disciplined Investor

Looking at the table below, it seems that the year has been one big waste of effort for most equity markets. Closing in on the lows in the EuroZone and just above the weekly lows in the U.S. markets.

But, Asia has been remarkably strong. In fact, China (up until very recently) has not wanted to budge from its high perch. Even with much of the bad news that is being thrown at it, Chinese stocks have been relatively resilient.

If you were thinking that they were just too cheap after the shellacking they took last year – consider the the continuing downtrend for Spanish and Indian shares.

Information on the table below looks at year-to-date trends for 2012 through June 1st.

The continuing prompts, promises and pledges from the Chinese government on additional stimulus measure has clearly been well engrained (brainwashing anyone?) into the investor’s psyche.  So, either the economy is going to get better without stimulus, or additional provisions will need to come in a rapid manner as markets have a short memory.

Which is it?

Copyright © The Disciplined Investor

Tags: Bad News, Brainwashing, Chinese Government, Chinese Stocks, Eurozone, Global Markets, Horowitz, India, Indian Shares, Investor, Lows, Nbsp, Pledges, Promises, Provisions, Psyche, Rapid Manner, Shellacking, Short Memory, Stimulus, Waste Of Effort
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China’s PMI, Hong Kong Retail Disappoint; Philippines, Russia, and Korea Lead in Improvement (June 4, 2012)

Monday, June 4th, 2012

Emerging Markets Radar (June 4, 2012)

Strengths

• The Philippine’s GDP increased 6.4 percent year-over-year in the first quarter this year, greater than estimated, and exceeded the previous quarter’s revised 4 percent. In Korea, industrial production rose 0.9 percent month-over-month in April, the biggest increase in three months, and it saw the Consumer Price Index (CPI) rise 2.5 percent in May, holding at a 21-month low.
• Thailand’s CPI for May rose 2.53 percent year-over-year, in line with expectations.
• Hunan Province in central China announced a provincial investment plan totaling RMB 4.2 trillion for 12th 5-years, or about Rmb 800 billion a year.
• China’s State Council has announced it will provide RMB 26.5 billion in subsidies to promote energy-efficient appliances, one of a series of stimulus measures that the market is expecting from the Chinese government.
• Turkey’s trade deficit was much better than expected in April, down to $6.6 billion from $9.1 a year ago.  Exports have been resilient in the first four months of 2012, rising by 10.9 percent over the same period a year ago. The eurozone is Turkey’s largest partner, and as a result of weaker demand in the region, exports to eurozone countries fell by 6.1 percent year-over-year in January through April. On the other hand, exports to North Africa rose by 63.3 percent (after falling by 23.9 percent in 2011), and exports to the Middle East increased by 35.5 percent.

Weaknesses

• China’s official PMI for May was 50.4 versus the estimate of 52; the reading was also the lowest in the year. The new order index dropped 470 basis points to 49.8 percent, which doesn’t bode well for productivity in the next few months if the downtrend is not stopped.  The HSBC final China flash PMI was 48.4 versus 49.3 in the previous month, a consecutive seventh month below 50. A PMI below 50 indicates industrial activities are contracting. HSBC China flash PMI tells more about export contraction at the moment.
• Hong Kong retail sales grew 11.4 percent in April versus estimate 16.4 percent, disappointing the market.
• Korean exports fell 0.4 percent year-over-year in May, exceeding estimates but still declining for a third month.
• The European Central Bank said that Hungary’s amended draft law still fails to address a number of previously highlighted concerns over central bank independence and executive powers of monetary council.

Opportunities

• The Russian manufacturing sector gained further growth momentum in May, with PMI remaining above 50.0 for the eight month running, rising to 53.2 in May.  Output and employment are higher, while inflationary pressures remain relatively weak.
• The Philippine’s GDP went up 6.4 percent in the first quarter, illustrating the fact that infrastructure investment and domestic demands are driving economic growth and corporate profits.

Threats

• With China PMI in May weakening and key sub-indices reflecting weak demand in the economy, this increases the probability of further policy relaxation and accelerated approval of infrastructure projects.
• Czech PMI fell to 47.6 from 49.7 in April, pointing to downside risk in coming quarters. HSBC survey data and anecdotal evidence suggested weak demand from both domestic and external markets, linked to the crisis in Western European economies.

Tags: Basis Points, Central China, Chinese Government, Consumer Price Index, Emerging Markets, Energy Efficient Appliances, Eurozone Countries, First Quarter, Four Months, GDP, Index Cpi, Investment Plan, Korea Industrial, North Africa, Pmi Hong Kong, Provincial Investment, Stimulus, Subsidies, Trade Deficit, Trillion
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Emerging Markets Radar (April 9, 2012)

Sunday, April 8th, 2012

Emerging Markets Radar (April 9, 2012)

Strengths

• The Hungarian PMI surged above expectations in March to 56.8, the strongest reading in the last thirteen months, reflecting the positive impact of the opening of the brand new Daimler AG plant. The Czech manufacturing PMI has also improved.
• Brazil’s consumer prices rose 0.21 percent in March from February, the government’s statistics agency said in a report distributed in Rio de Janeiro today. Economists surveyed by Bloomberg had expected inflation of 0.37 percent, according to the median forecast of 50 analysts.
• Chilean consumer prices rose 0.2 percent in March from the previous month, less than analysts’ forecast, bringing annual inflation back within the central bank’s target range for the first time in four months.
• China official March PMI was 53.1 versus the estimate of 50.8, rising 2.1 from February; new orders were up 4.1 points at 55.1 percent. Nevertheless, due to seasonality, March’s PMI is usually 3 points better than February’s, therefore, the market is cautious about the better-than-expected PMI for last month. PMI above 50 indicates industrial activities are expanding.
• China’s March non-manufacturing PMI was 58 versus 48.4 in February, indicating consumer consumption may be resilient.
• Philippines inflation eased to 2.6 percent on a year-over-year basis in March from 2.7 percent in February. A base-year comparison suggests inflation in the country will remain subdued in April. However, inflation trends should turn up from mid-year driven by a resumed rise in oil and commodity prices and strengthening domestic demand.
• March housing transactions increased 40 percent in Beijing, and similar increases were also seen in other tier 1 and tier 2 cities. Some analysts say buyers are encouraged by the fact that the Chinese government had historically failed in curbing housing prices, but others say March sales volume is always the equivalent of combined sales of January and February in the year and March of this year didn’t see better volume than prior years.
• Indonesia’s parliament did not pass the fuel raise bill which was to remove the fuel subsidy and raise fuel prices by 33 percent.

Weaknesses

• The Russian central bank chairman said the liquidity deficit faced by the financial industry is the “new norm” this year. One of the reasons is a continued capital outflow. Russians spent $12 billion on foreign property last year, compared with $5.5 billion a year in 2007 and 2008, according to the chairman.
• Colombian policy makers meeting last month were divided over the need to raise interest rates further to keep inflation in check. Analyst Brian Lesmes, at Grupo Bancolombia in Bogota, said that though inflation and credit demand have eased, further tightening may be needed to cool household demand.
• Thailand inflation edged up to 3.4 percent year-over-year in March from 3.3 percent in February, but base-year comparison suggests inflation in the country will remain subdued in April.
• Indonesia is to discuss an export tax on coal and base metals, which is negative for local materials companies but good for global coal and base metal producers.
• Taiwan may implement a capital gains tax on stock trading profits.

Opportunities

• Citigroup Inc. raised South African equities to overweight, the equivalent of a buy, on expected strong earnings growth and companies’ expansion into Africa’s fast-growing frontier markets, the bank said.
• In the last decade, Indonesia has restored stable economic growth and, therefore, has improved its wealth. With opportunities to build vast infrastructures and industrial complex, foreign direct investments (FDI) now are returning to the country. The increasing FDI has driven up demand for industrial estate and building materials, such as cements.

Threats

• Brazil’s tax agency said on Wednesday that intra-company commodities exports and imports by multinational traders must be settled using international prices. The country’s Federal tax authority said the measures are aimed at ending “price manipulation” of inter-company imports and exports that allow multi-national companies to evade local taxes.
• Peru is renegotiating with Mexico to cut natural gas shipments after allocating gas reserves to its domestic industry, a Peruvian government official said. Approximately half of the shipments will be cut, the president of state oil contracting agency Perupetro said this week.
• The Chinese economy is still in the process of a soft landing, but the policy response may fall behind the curve. In 2012, corporate revenue growth is predicted to be much slower than 2011, with gross margins also expected to be lower due to weaker demand and a rise in input costs.

Tags: Beijing, Brazil, China, China Official, Chinese Government, Commodities, Commodity, Commodity Prices, Consumer Consumption, Daimler Ag, Economists, Emerging Markets, Four Months, inflation, Philippines, Pmi, Radar, Rio De Janeiro, Russia, Sales Volume, Seasonality, Statistics Agency, Target Range, Thirteen Months, Tier 2
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Shifting Focus: Behind Country Valuations Today

Thursday, April 5th, 2012

by Russ Koesterich, iShares

As the European financial crisis raged last fall, investors were closely monitoring metrics like credit default swaps and yields on Italian bonds to determine where to place their country bets.

But 2012 has brought some stability to the eurozone and with it we’ve noticed a shift in the types of indicators that investors should be tracking when it comes to determining country valuations — metrics that show economic growth.

Yes, investors have always kept an eye on economic growth by tracking metrics like leading indicators, retail sales and industrial production. But what Nelli Oster, an investment strategist on my team, has noticed is that over the last six months, the sensitivity of country valuations to economic growth expectations has intensified.

Perhaps six months ago investors were too consumed by worries over European solvency to focus on economic growth. But today, that appears to have changed as those worries have lessened and as economic growth has become more varied and harder to find.

Nelli’s research shows that the country valuations have become more sensitive to how the near-term growth prospects for a country compare to past trends. Take China as an example. In early March, the Chinese government modestly lowered its annual growth target to 7.5% from 8%. While that is still a very healthy pace compared to the developed world, it left investors more worried about a slowdown in China — and the MSCI China index fell 6.9% in US dollars in March.

Nelli has also found that the valuations of developed market countries have become more sensitive to absolute growth levels, or how the near-term growth projection for a developed country compares to those for other developed markets. The growth projections Nelli analyzed were garnered from leading indicators.

She also noted that there’s more variation in growth rates. Countries such as the United States, Mexico and Japan are expected to grow faster relative to their past trends than six months ago, while prospects for countries such as Italy and Belgium have deteriorated. As growth is more difficult to find, investors seem willing to pay a larger premium to access it.

For investors, the intensified emphasis on growth means that in coming months, faster growing countries will likely be rewarded with higher returns, and the difference in returns between faster growing countries and slower growing ones will likely stay elevated.

Of countries expected to fare well relative to their past growth trends – also taking into account valuations, corporate sector profitability and riskiness – I hold overweight views of Norway and Russia. Of countries expected to slow down further, I hold underweight views of Italy and India (potential iShares solutions: AMEX: ENOR, NYSEARCA: ERUS).

Sources: Bloomberg, Worldscope

Disclosure: Author is long ERUS

International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Securities focusing on a single country may be subject to higher volatility.

Tags: China, Chinese Government, Credit Default Swaps, Developed Country, Economic Growth, ETF, ETFs, Eurozone, Growth Expectations, Growth Projection, Growth Projections, Growth Prospects, Growth Target, India, Investment Strategist, Ishares, Leading Indicators, Market Countries, Metrics, Mining, Msci China Index, Russia, Shifting Focus, Slowdown, Solvency, Valuations
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World Bank Warns of Economic Crisis in China; Only 3% Growth for Decade Says Michael Pettis

Friday, March 2nd, 2012

A World Bank report to be released next week warns of an economic crisis in China unless state-run firms are scaled back. The Wall Street Journal discusses the report in New Push for Reform in China

An exclusive preview of an economic report on China, prepared by the World Bank and government insiders considered to have the ear of the nation’s leaders, offers a surprising prescription: China could face an economic crisis unless it implements deep reforms, including scaling back its vast state-owned enterprises and making them operate more like commercial firms.

“China 2030,” a report set to be released Monday by the bank and a Chinese government think tank, addresses some of China’s most politically sensitive economic issues, according to a half-dozen individuals involved in preparing and reviewing it.

The report warns that China’s growth is in danger of decelerating rapidly and without much warning. That is what has occurred with other highflying developing countries, such as Brazil and Mexico, once they reached a certain income level, a phenomenon that economists call the “middle-income trap.” A sharp slowdown could deepen problems in the Chinese banking sector and elsewhere, the report warns, and could prompt a crisis, according to those involved with the project.

It recommends that state-owned firms be overseen by asset-management firms, say those involved in the report. It also urges China to overhaul local government finances and promote competition and entrepreneurship.

China’s Difficult Transition From an Unsustainable Growth Model

Peak oil, a housing bubble, bad debts and over-reliance on investments with no genuine economic feasibility guarantee China’s current boom is not sustainable. China bulls are in for a ride awakening when various bubbles pop.

As for recommendations, the report  proposes a sharp increase in the dividends that state companies pay their owner (the government) in order to boost revenue and pay for new social programs.

Does China need to increase competition, break apart, and privatize the state-owned monopolies?
Or should China simply increase the dividends?

I vote for the former as does Michael Pettis at China Financial Markets.

Via email, Pettis says:

The report is good as far as it goes, but it doesn’t go far enough. Of course increasing SOE dividends to the government for use in social programs will transfer wealth from the state sector to the household sector, but if the total profitability of the SOE sector is less than one-fifth to one-eighth of the direct and indirect subsidies transferred from the household sector, as I have argued many times, then even 100% dividends is not enough to slow the transfer significantly, and remember the transfers have to be reversed, not merely slowed. This proposal falls in the better-than-nothing category, but just.

What we really need are much more dramatic transfers, for example wholesale selling of assets, with the money used either to clean up bad loans or delivered directly to households. According to the article, however, “neither the World Bank nor the DRC proposed privatizing the state-owned firms, figuring that was politically unacceptable.”

This is the problem. The best solution for China, economically, seems to be off limits because it will be politically difficult. In that case the second best solution, a gradual build-up of government debt as growth slows for many years, is the most likely outcome.

And how much will growth slow? The World Bank report apparently doesn’t say, but the consensus has been slowly moving down towards 5-6% annual growth over the next few years.

That’s better than the crazy numbers of 8-9% most analysts were predicting even two years ago (and some still are), but it is still too high. GDP growth rates will slow a lot more than that. I still maintain that average growth in this decade will barely break 3%. It will take, however, at least another two or three years before a number this low falls within the consensus range.

And by the way when it does, metal prices should fall sharply. Copper prices have done reasonably well in the past few months as Chinese buyers have restocked, as we suggested might happen to our clients last fall. With the recent easing we may see more strength in copper over the next month or so, but I have little doubt that within two or three years copper prices are going to be a whole lot lower than they are today. Chinese investment demand simply cannot hold up much longer.

Sad State of Political Acceptability

The report makes feeble recommendations to ensure the proposals are “politically correct”. This is a bad practice for three reasons.

1. You only damage your own credibility
2. You presume perhaps incorrectly what is politically acceptable
3. You plant false hope that incorrect solutions will work, when it’s clear they will not

It would be far better list the alternatives and the limitations of those alternatives, then provide an honest assessment rather than assume something cannot be done. Unfortunately, telling people what they want and expect to hear is the sad state of political pandering everywhere.

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

Tags: Asset Management Firms, Bad Debts, Banking Sector, Chinese Banking, Chinese Government, Competition And Entrepreneurship, Difficult Transition, Dozen Individuals, Economic Crisis, Economic Feasibility, Economic Issues, Economic Report, Growth Model, Housing Bubble, Michael Pettis, Peak Oil, Slowdown, State Owned Enterprises, Unsustainable Growth, Wall Street Journal
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Hugh Hendry (Eclectica) Discusses Hyperdeflation, Europe, China, and Japan

Thursday, February 23rd, 2012

With the masses screaming their lungs of about hyperinflation, something that is highly unlikely at best, Hugh Hendry of Eclectica Talks About Hyperdeflation, why China might have a hard landing, and various off-the-beaten tracks Japan plays.

Here is clip from a Barron’s interview.

Barron’s: Where do you find yourself outside the existing belief system today?

Hendry: In 2009, I made a YouTube video of the empty skyscrapers in Wuhan, China. Goldman Sachs and others articulate a very reasonable and compelling argument of being invested in China. With the evidence of my own eyes, I concluded that China had a very robust system of creating gross-domestic-product growth, but forsaking the creation of wealth.

When America was having its China moment in the 19th century, it occurred against the backdrop of a gold standard, a hard-money regime, with a public sector that was minuscule versus the overall size of the economy. As an entrepreneur, if your project failed to generate a sustainable level of cash flow, you failed.

If you talk about a hard landing in China, you talk about GDP growth of 5%, not minus 5% or minus 15%. The Chinese government prints money. It can build superfast railways and overbuild airports, because the rest of the economy can subsidize it. China’s swollen public sector is directing asset allocation, rather than pursuing profit maximization. They see [their system] as a success. But it creates a bubble, which can prove quite damaging.

Barron’s: You’ve already had a hard landing—in the Chinese stock market.

Hendry: I should add something else that is contentious—U.S. quantitative easing [that eventually sent more money flowing to China], promoted because America had two sharp recessions and pursued orthodox policies, and had very little to show in the creation of jobs.

The policy was very successful. China now has inflation. Minimum wages have grown 20% annually for the past three years. This has encouraged the Chinese to tighten monetary policy. When you have bubbles and you tighten, bad things happen. China’s stock and property markets are weak, a side-effect of quantitative easing. We may now have the pricking of the Chinese bubble. A year or two down the line, it could have enormous repercussions for the global economy.

Barron’s: How does one play it?

Hendry: The world is very fearful of hyperinflation. Pension schemes have a preponderance of real assets, from forestry to gold to TIPS [Treasury inflation-protected securities], because they are very fearful. The road to hyperinflation is via hyperdeflation. That is why it’s proving so difficult for hedge funds to make money. How does the rational mind that anticipates hyperinflation own 10-year government Treasuries yielding less than 2%? It can’t. That’s why people are struggling. To lay the seeds of hyperinflation, you need really, really bad things to happen. I thought the U.S. housing market having a massive crash would be hyperdeflationary. But then my Chinese friends pumped $1 trillion of credit into their $5 trillion economy, and created a global recovery, which has just come to an end. I’m speculating that hyperdeflation happens before hyperinflation. What’s the worst that could happen? But the sum of all my fears would be China having a real hard landing of minus 5% or minus 10% GDP growth. If we had that—and Europe—the Fed would be printing $20 trillion, and I would have gold at $5,000. You can have a modest amount of gold, but you can’t have all your assets in real assets, in case we get that hyperdeflation event.

Barron’s: So how do you make money?

Hendry: Would you believe that the AIG strategy of selling too much credit protection in risky assets like mortgage-backed securities is alive and booming today in Japan? It doesn’t concern mortgages. It is credit-default swaps on individual Japanese corporations.

Barron’s: Do you seriously believe Japanese corporations are going to fail?

Hendry: Clearly, they can and do go bust. I’m buying the CDS on investment-grade Japanese corporations because of the overpricing anomaly. Japan had a bust 20 years ago, and yet today the banking stocks, relative to [Japanese bourse] Topix, are making fresh lows.

If I’m a Japanese bank and I lend money to a new business, I get 1% on 10-year paper. Then the bank gets a call from me, and I’m willing to pay 50 basis points for five-year protection on this same company. So suddenly, the yield has gone from 1% to 1½%. Compare that to five-year Japanese government bonds, yielding 30 basis points. The bank thinks: This is a great trade! Japanese steel companies are investment-grade and won’t go bankrupt. So, the bank gets this huge yen yield, and thinks it is not taking any risk. You’d better believe it will sell way too much of that good thing.

One of my partners told me about Japanese steel: Here is a country with no energy, no iron ore or coal, yet it’s the largest exporter of steel in the world, exports half its output. To put that in context, China manufactures 700 million tons of steel and exports perhaps 30 million. Japan produces 110 million tons and exports 40 million. As long as Asia is strong, they are fine. But if Asia hiccups or reverses, plant-utilization rates go from very high to very, very low very quickly.

Then we discovered that Warren Buffett owned shares of South Korea’s Posco [5490.S. Korea], and that Korea was the biggest importer of Japanese steel, but Posco and Hyundai [5380.S. Korea] are building huge, integrated steel plants. They have a surplus of steel capacity and—guess what?—they’re exporting to Japan, because the yen is so strong.

Initially, I wanted to buy a three-year, out-of-the-money put on Nippon Steel. My broker said, “I’ve been in a 20-year bear market; my boss will kill me.” Then I thought, being long credit protection is being long volatility. I redialed his credit counterpart. I said: “I’m thinking of purchasing up to a billion yen of five-year credit-default swaps in Nippon Steel.” The first thing he said was, “Would you consider 10 billion?” So one part of the bank is banned from selling volatility, and the other part is having a party. I bought reams of the stuff.

Barron’s: We’ve barely discussed Europe.

Hendry: We are partly playing it through Japan. If events kick off again in Europe, the correlation across all [global] asset classes will go to one. So the steel CDS is 130 basis points, while to insure against default by the French government, I’d be paying the same amount. Which is riskier? A very leveraged steel company that can’t tax you? Or a government that can? Our bearish bets are largely outside Europe. As for Greece, the end game will be the Greeks rejecting austerity. The euro is nothing but a gold standard lacking flexibility, and all the onus is on private citizens to take the pain. Eventually, a Greek politician will say, ‘Vote for me, and I’ll get us out of this system.’

I certainly agree with that last comment above.

I as I have said and repeated Eventually, Will Come a Time When ….

Eventually, there will come a time when a populist office-seeker will stand before the voters, hold up a copy of the EU treaty and (correctly) declare all the “bail out” debt foisted on their country to be null and void. That person will be elected.

The Barron’s interview is well worth a read in entirety.

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

Tags: Asset Allocation, Belief System, Chinese Government, Chinese Stock Market, Eclectica, GDP Growth, Gold Standard, Goldman Sachs, Hard Money, Hugh Hendry, Hyperinflation, Minimum Wages, Own Eyes, Profit Maximization, Recessions, Robust System, Skyscrapers, Sustainable Level, Wuhan China, Youtube Video
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Hugh Hendry’s Interview with Barron’s

Thursday, February 23rd, 2012

For those in the Hugh Hendry fan club we have an article from last week’s Barron’s where the hedge fund manager espouses his long held view that China will have a hard landing, along with the prospects of hyperinflation, and thoughts on Japan among other things.  As always it is more entertaining to see video of the acerbic Hendry than have to read it, but it is what it is.

Some snippets:

Where do you find yourself outside the existing belief system today?

In 2009, I made a YouTube video of the empty skyscrapers in Wuhan, China. Goldman Sachs and others articulate a very reasonable and compelling argument of being invested in China. With the evidence of my own eyes, I concluded that China had a very robust system of creating gross-domestic-product growth, but forsaking the creation of wealth.

When America was having its China moment in the 19th century, it occurred against the backdrop of a gold standard, a hard-money regime, with a public sector that was minuscule versus the overall size of the economy. As an entrepreneur, if your project failed to generate a sustainable level of cash flow, you failed.

China’s great opportunity is taking place within the U.S. fiat system, and so the consequences are perhaps less stark than in 19th-century America, which had stops and starts and many depressions, though with an overarching prosperity. China has not had that volatility.

If you talk about a hard landing in China, you talk about GDP growth of 5%, not minus 5% or minus 15%. The Chinese government prints money. It can build superfast railways and overbuild airports, because the rest of the economy can subsidize it. China’s swollen public sector is directing asset allocation, rather than pursuing profit maximization. They see [their system] as a success. But it creates a bubble, which can prove quite damaging.

You’ve already had a hard landing—in the Chinese stock market.

I should add something else that is contentious—U.S. quantitative easing [that eventually sent more money flowing to China], promoted because America had two sharp recessions and pursued orthodox policies, and had very little to show in the creation of jobs.

How does one play it?

The world is very fearful of hyperinflation. Pension schemes have a preponderance of real assets, from forestry to gold to TIPS [Treasury inflation-protected securities], because they are very fearful. The road to hyperinflation is via hyperdeflation. That is why it’s proving so difficult for hedge funds to make money. How does the rational mind that anticipates hyperinflation own 10-year government Treasuries yielding less than 2%? It can’t. That’s why people are struggling. To lay the seeds of hyperinflation, you need really, really bad things to happen. I thought the U.S. housing market having a massive crash would be hyperdeflationary. But then my Chinese friends pumped $1 trillion of credit into their $5 trillion economy, and created a global recovery, which has just come to an end. I’m speculating that hyperdeflation happens before hyperinflation. What’s the worst that could happen? But the sum of all my fears would be China having a real hard landing of minus 5% or minus 10% GDP growth. If we had that—and Europe—the Fed would be printing $20 trillion, and I would have gold at $5,000. You can have a modest amount of gold, but you can’t have all your assets in real assets, in case we get that hyperdeflation event.

The policy was very successful. China now has inflation. Minimum wages have grown 20% annually for the past three years. This has encouraged the Chinese to tighten monetary policy. When you have bubbles and you tighten, bad things happen. China’s stock and property markets are weak, a side-effect of quantitative easing. We may now have the pricking of the Chinese bubble. A year or two down the line, it could have enormous repercussions for the global economy.

What else do you own?

In the next 12 months, we’ll see further pathological swings in investor sentiment. Despite my reservations, I’m modestly long equity-market futures, some nonindustrial commodities, and some bullish fixed-income positions. We are very bullish agricultural commodities and agricultural equities, and hold a global basket of businesses—with interests ranging from fertilizer to farm equipment.

Disclosure Notice

Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog

Tags: 19th Century America, Acerbic, agricultural, Asset Allocation, Belief System, Chinese Government, Chinese Stock Market, Depressions, GDP Growth, Gold Standard, Goldman Sachs, Hard Money, Hedge Fund Manager, Hugh Hendry, Hyperinflation, Own Eyes, Profit Maximization, Robust System, Sustainable Level, Wuhan China, Youtube Video
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Have Winds Shifted to Provide Relief to Investors?

Sunday, January 8th, 2012

Have Winds Shifted to Provide Relief to Investors?

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors

Wind currents between the ocean and atmosphere affect climates around the world; likewise, government policy shifts and economic data have a similar ripple effect on markets.

During our Outlook 2012 webcast yesterday, our listeners heard a very passionate John Mauldin assess the debt situation in Europe, Japan and the U.S. and the need for immediate policy change. If you listened in, you may have wondered what economics and politics have to do with investments.

That’s a valid thought, as many investors hear predictions of which way the market will go or what stocks will outperform. As I often remind my readers, it’s not about political parties, it’s about the policies. And history says that government policy shifts can have a tremendous affect on the economy and the markets. While no one can predict the future, you can use probability in your favor.

For example, Chinese stocks have historically moved with money supply. In the webcast, Analyst Xian Liang showed the chart below plotting the year-over-year money supply in China against domestic B-shares (represented by the MSCI China Index) since the end of 2000.

The Chinese government is known for acting decisively in making policy changes to steer its economy in the right direction. In 2009, the growth in money supply was at an 11-year high of 30 percent after the government lowered the required reserve ratio (RRR) for major banks. Adjusting the reserve requirement is important inflation-fighting tool in China’s monetary policy. The lower the reserve requirement, the more money banks are able to lend out.

Throughout 2011, due to concerns about inflation, China had been raising the reserve requirement for banks and interest rates. This action reduced money supply to the low we see in the chart. This December, China shifted its stance as slow growth became a risk and inflation slowed. This action should increase money supply, and encourage markets, going forward.

China also recently announced an earlier-than-expected windfall profit tax cut for its oil companies. This special oil income levy raises the level at which a barrel of oil is taxed, going from $40 to $55. This $15 difference essentially translates to a substantial tax break for oil companies and extra money in their coffers.

Research firm Jefferies expected the tax adjustment, but thought that it would happen at the end of 2012. With this tax cut, it appears the government acknowledges the need for Chinese upstream oil companies to increase their cash flow so that they can increase domestic production, says Jefferies.

This tax cut was closely followed by analysts, and was seen as a “big positive” for China’s oil companies, specifically CNOOC, PetroChina and Sinopec, says Citigroup Global Markets. The market promptly responded positively, with each stock rising on the news.

Another economic measure that has a ripple effect on global markets is the Purchasing Managers’ Index (PMI), an indicator of manufacturing strength. We follow this index closely, as it is considered a leading indicator, meaning the markets react over the following three months after the PMI data is released.

As of December 31, the JP Morgan Global Manufacturing Purchasing Managers’ Index (PMI) crossed above the three-month moving average. Going back to the inception of the index in 1998, there have been 20 occurrences when the one-month number crosses above the three-month. When this has happened, it’s signaled higher prices for many commodities, especially oil, copper, and to less of a degree, materials and energy.

For copper, historically, 90 percent of the time, the price was positive over the next three months, with a median return of 10 percent over the following three months.

During the same three months, 85 percent of the time, West Texas Intermediate oil has also gone up. Its median three-month change has been an increase of 11 percent.

Materials and energy were also positively affected, with modest results: When the PMI crosses above the three-month average, 70 percent of the time, the S&P 500 Materials Index rose, with a median return of about 3 percent. The S&P 500 Energy Index had a median three-month return of about 5 percent, with an 80 percent chance of the three-month change being positive.

We believe the winds are shifting to bring needed relief to global investors. We’ve seen improving economic data from the U.S. lately, and this positive news from the world’s largest economy, along with an improving China—the world’s most populated country—offsets the negativity in Europe.

What’s the probability of the U.S. market heading higher in the year of a presidential election? Register today for our webcast next Tuesday to hear from Jeffrey Hirsch of the Stock Trader’s Almanac, the annual resource that countless money managers, traders and investors have come to rely on. We’ll discuss Jeffrey’s nearly 50 years of market research, along with the many other historical indicators such as the January Barometer and the Santa Claus Rally. Sign up now.

Tags: Chief Investment Officer, Chinese Government, Chinese Stocks, Climates, Debt Situation, Economic Data, Frank Holmes, Government Policy, John Mauldin, Monetary Policy, Money Banks, Money Supply, Msci China Index, Policy Shifts, Reserve Ratio, Ripple Effect, Rrr, U S Global Investors, Webcast Analyst, Wind Currents
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Jim Rogers: Why He’s Shorting Stocks and Favouring Commodities

Friday, December 30th, 2011

Jim Rogers discusses his outlook for the economy, stocks, and commodities.

Call Notes:

Jim Rogers: I’m not optimistic about 2012, and maybe even not 2013.”

JR: “I don’t see much reason to own stocks, when one can own commodities. If the world gets better, i’m going to make a lot of money in commodities because of the shortages, and if the world doesn’t get better, governments will print money. Whenever governments have printed money, the only way to protect one’s self is to own real assets.”

China: Hard or Soft Landing?

JR: “Some parts of the Chinese economy will have a very hard landing; the Chinese government has been trying to kill the real estate boom for 2 1/2 years. They’ve raised interest rates 6 times, raised reserve requirements a dozen times; they’re gonna pop the real estate bubble, but that’s not the whole China story. There’s gonna be parts of the Chinese economy that are gonna boom no matter what happens to real estate in Shanghai and Beijing.”

How about beaten down stocks like Potash and Mosaic?

JR: “I’m not familiar enough to give you a good comment; I just remember in the 70s, stocks went down and did nothing, and economies did nothing, and yet commodities themselves went through the roof. Some commodities stocks did well in the 70s; A recent Yale study showed that you would have made 300% more investing in commodities themselves rather than commodities stocks, unless you were a very good stock picker. So I’m sticking with the real commodities.”

Comment: Jim Rogers travels everywhere in the world with his family, and he eats his own cooking.

What about the other BRIC nations? What about Brazil and its dependency on China? Would you short Brazil?

JR: “I’m short India, I’m short Russia. Brazil is a huge natural resource based economy, and in commodity bull markets they do well. Fortunately, I’m not long, I don’t have any positions – Unfortunately, the new Brazilian government is starting to do some pretty foolish things which I think will not make them participate as much as they could.”

Jim Rogers is long gold, long silver, expects correction to continue down to the $1300/oz. level.

JR: “I’m a terrible market timer, I’m a terrible trader. It would not surprise me if gold went down to $1,300-$1,200. If it goes that low, I’m going to buy a lot more. I’m not selling any ofo my gold or silver, but I’m not a good market timer. I’m just saying that gold has been up 11 years in a row, it deserves a substantial correction. Substantial corrections are not unusual in bull markets. If it goes that low, I’ll buy a lot more.”

Source: CNBC, December 28, 2011.

Tags: agricultural, Agricultural commodities, Agriculture, American Technology, Chinese Economy, Chinese Government, Cnbc, December 28, Economy Stocks, European Stocks, Gonna Pop, Good Stock, Investing In Commodities, Jim Rogers, Outlook, Potash, Real Assets, Real Estate Boom, Real Estate Bubble, Real Estate In Shanghai, Shorting Stocks, Stock Picker, Stocks And Commodities, World Doesn, Yale Study
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Chinese Government Investment Arm Swoops in to Prop Up Banks

Wednesday, October 12th, 2011

Well at least they are transparent about it.  Chinese stocks of the banking kind, shot up overnight as an investment arm of the Chinese government, came into the market to buy buy buy.  At this point one has to wonder with the Fed intervening in bonds and herding savers into risk assets, various EU countries with short bans on financials, the Japanese central bank buying REITs and such, and now the Chinese outright buying stocks, where there is any price discovery happening on the globe.  All artifical, all the time – paper printing prosperity reigns.

More importantly, this appears to be more fallout of the massive Keynesian plan to flood the economy with stimulus during the global financial crisis.  We asked back then if China was simply following the Greenspan policy of kick the can down the road [Feb 16 2009: Is China Pulling an Alan Greenspan?] [May 27, 2009: How is China Spending their Stimulus... and How Many Loans Will go Bad?]- usually we are early on these things, asking the question two years ahead of the fallout.  And just like Greenspan’s (and now Bernanke’s) policy, eventually the can kicks back. [Jun 2, 2011: China Now Beginning to Feel Hangover from Lending Boom of 08/09 - Government May Assume Some Local Debt]  So all you can do as a central bank and government is simply pour more steroids on the problem.

• China is moving to support its state-run banks and financial markets, with a government investment arm purchasing shares in the four biggest lenders as worries mount over debt and slowing growth.
• Central Huijin Investment Ltd., an arm of the sovereign wealth fund China Investment Corp., announced it bought shares in the four big banks after the benchmark Shanghai Composite Index closed at its lowest level in more than two years on Monday.
• The news initially boosted Shanghai shares by 0.8 percent but the benchmark ceded most of those gains in the afternoon, closing only 0.2 percent higher at 2,348.52.
• Chinese share prices have languished despite the country’s still robust growth, weighed down by Europe’s debt crisis, Beijing’s credit tightening, and potentially high levels of bad loans at Chinese banks after a lending surge that helped China rebound from the global financial crisis.
• The government intervention in the stock market is also meant to counter growing concern over a debt crisis among China’s small- and medium-sized businesses at a time when bank liquidity is stretched by central bank requirements to hold record levels of reserves to help counter inflation.
• Central Huijin is the major shareholder in China’s big state-run banks. The company said in a brief announcement on its website Monday that it bought shares in the Industrial & Commercial Bank of China, Agricultural Bank of China, Bank of China and China Construction Bank and that it would continue its market-support operations. It gave no details about the amount of shares purchased.
• Given its continued concern over inflation, which has been hovering near three-year highs but is expected to moderate further in coming months, China is focusing on local bailouts and credit easing to help smaller companies but is unlikely to announce new stimulus spending anytime soon, analysts say.
• The banks’ Hong Kong-listed shares showed significant gains. ICBC climbed 6.7 percent, Agricultural Bank shot up 12.8 percent, Bank of China gained 7.7 percent and China Construction Bank added 5.8 percent. Gains on the Shanghai index were more modest.

Tags: Alan Greenspan, Bonds, Buying Stocks, China Investment, Chinese Government, Chinese Stocks, Eu Countries, Fallout, Financial Markets, Global Financial Crisis, Government Investment, Hangover, Investment Arm, Japanese Central Bank, Paper Printing, Price Discovery, Reits, Shanghai Composite Index, Steroids, Stimulus, Time Paper
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