Chanos: How China Could Fail the World Economy

Wednesday, February 22nd, 2012

1. Hedge fund manager Jim Chanos says slowing demand in China will continue and may have ripple effects around the global economy.

2. China skeptic Jim Chanos says the air has already started to come out of China’s housing bubble.

Source: CNNMoney, February 21, 2012.

Tags: China Air, China Economy, China Housing, Economy China, Global Economy, Hedge Fund Manager, Housing Bubble, Jim Chanos, Ripple Effects, Skeptic, World Economy
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Plantar Fasciitis? (Jeffrey Saut)

Tuesday, May 17th, 2011

Plantar Fasciitis?

by Jeffrey Saut, Chief Investment Strategist, Raymond James

“About ten years ago I had an acute case of plantar fasciitis in the left foot, a condition in which the fascia, or the covering right beneath the skin, had become highly inflamed. I asked Pete Egoscue, a renowned postural specialist but one without medical training, to take a look at my foot. Pete had, after all, healed a number of people I knew, including my wife. Because Pete was self-taught, I was a skeptic – as any good trader would be. Pete said that he did not need to look at my foot because my foot was not the problem – a response that suggested I was dealing with a quack. But I was patient and continued to listen. He proceeded to explain that the pain in my left foot was the consequence of a structural, postural deficiency in my hip alignment. My right hip was rotated in such a fashion as to make the left side of my body do all the work and bear all the weight, culminating in the inflammation of my left foot. ‘The pain you feel in your left foot is just the symptom,’ Pete said. ‘If you treat it symptomatically and ignore the structural issue, you will never solve the problem.’ I did not immediately grasp the full meaning of his words, but I followed his prescription and in a few days the pain was gone. Some time later I realized that those words were probably the wisest I have ever heard from any human being, and that they apply to more than just the human body.”

“The root cause of the unemployment woes is quite obvious. In the United States alone, in the last two decades, nearly six million jobs in manufacturing have been lost overseas. This equates to nearly four percentage points of the current 9.7% US unemployment rate. As importantly, the migration of these jobs contributed to the most unsustainable economic imbalance in the world today – China’s persistent bilateral trade surplus with the United States. During the last decade, China accumulated almost $1.4 trillion of US debt and at least $2.3 trillion in global assets. These figures could grow to $3.8 trillion and $7 trillion, respectively, over the next decade if the current renminbi/US dollar (RMB/USD) exchange rate continues to be artificially suppressed from appreciating. One entity owning this much debt of one debtor, let alone a foreign government, creates too much risk concentration, and has possibly repressed volatility for debtor and creditor alike. The risk may seem manageable now, but who knows what the nature and temperament of the Chinese and American leaders will be in ten years? Isn’t it possible that either side could weaponize financial imbalances to the detriment of domestic and global stability?”

… Paul Tudor Jones (10/26/10)

He said, “(Your problem is) the consequence of a structural, postural deficiency in your hip alignment.” Similarly, the world’s biggest “structural problem” is the misalignment of China’s Renminbi (aka, its currency); and as stated, “If you treat it symptomatically and ignore the structural issue, you will never solve the problem.” Fifteen years ago China devalued its currency by ~50% in a single day (1/1/1994) and has experienced a manufacturing/export boom ever since. Indeed, 15 years ago China didn’t even register as one of the top trading partners with any of the G20 countries. Today it is the biggest trading partner for six of them. Interestingly, in January 1981 the Renminbi was changing hands at $0.6551 basis the U.S. dollar (RMB/USD). In 1Q94, following the devaluation, the RMB/USD exchange rate stood at $0.1144. It resided in the range of $0.1144 to $0.1208 until the summer of 2005, when cajoled by the U.S. Congress, the Chinese reluctantly began to revalue the Renminbi upward. It currently trades at $0.153889, and while that is roughly a 35% appreciation over the past six years, it is still materially undervalued. In fact, on an absolute purchasing power basis many savvy seers believe the Renminbi is 60% undervalued.

In past missives I have opined that China is slowly revaluing its currency in an attempt to create more domestic demand, dampen its inflation rate, and placate U.S. leaders. To be sure, the Chinese realize in the long-run the manufacturing/export driven economic model will eventually morph to the lower cost of labor, which is quickly becoming the Vietnams of the world. Accordingly, they are following what Brazil did with its currency (the Real) a few years ago. To wit, Brazil raised interest rates and increased the value of its currency. Surprisingly, Brazil’s economy continued to perk along, inflation subsided, and domestic demand improved. I see no reason why that formula won’t work for China as well. Therefore, going “long” the Renminbi still seems like a good investment strategy. As former Treasury Secretary Lawrence Summers states, “When somebody writes the history of our time 50 or 100 years from now it will be about how the world adjusted to the movement of the theater of history towards China.”

Tags: Acute Case, Bilateral Trade, Brazil, Chief Investment Strategist, Fascia, Human Body, jeffrey saut, Last Decade, Left Foot, Medical Training, Percentage Points, Pete Egoscue, Plantar Fasciitis, Quack, Raymond James, Root Cause, Skeptic, Trade Surplus, Unemployment Rate, Woes, World Today
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Jeremy Grantham: Beware of terminal paralysis

Thursday, February 26th, 2009

As the stock market indices are flirting with key charting levels and we are waiting for Mr Market to show his hand, it is useful to get an update on the outlook from Jeremy Grantham.

Grantham, chairman of Boston-based GMO, was a great skeptic between 1999 and October last year when he started propagating “hesitant and careful buying”. His latest thinking has just been reported in an interview with CNN Money as quoted below.

“Meanwhile, GMO chairman Jeremy Grantham is more upbeat – though he does expect more pain to precede any recovery.

“Looking back at historic bear markets, Grantham draws comparisons to 1974 and 1982, when the S&P 500 lost roughly half its value. Since he estimates the current S&P 500 fair value at 900, Grantham puts his worst-case bottom at a hair-raising 450.

“‘That’s fairly scary, but on the one hand we look at the massive stimulus, and then on the other we try to work out the fact that the global economy is in worse shape than it was in ‘74 or ‘82,’ says Grantham. ‘I’d say there are three-to-one odds that we go to a material new low. We should count on [the S&P 500] hitting 600 for a little while, and we should hope like mad it doesn’t get deep into the 500s.’

“Patience rules. Another looming threat is that the market may enter an extended period of drops and rebounds that flatten long-term returns and strand buy-and-hold investors for decades.

“Japan’s stalled stock market is one recent example, but the U.S. has had its shares of quagmires, too. Grantham likes to point out that investors who bought at market crests in 1929 and 1965 had to wait 19 years each time just to break even.

“Still, Grantham says buy-and-hold still makes sense for long-term investors when stocks are trading below fair value. He especially favors U.S. blue chips, and his fund is on a strict, slow schedule to invest as valuations dip even lower.

“‘If you don’t have a schedule for investing, you will not do it,” he says. “When the market goes down, it reinforces the hoarding of cash. By the bottom, you suffer what we called in 1974 terminal paralysis – you cannot pull the trigger. Almost everyone who avoids the great pain is very slow to get back.’

Source: Eugenia Levenson, CNN Money, February 25, 2009 (hat tip: Investorazzi).

Tags: 19 Years, Bear Markets, Blue Chips, Cnn, Cnn Money, Crests, Global Economy, Gmo, Jeremy Grantham, Paralysis, Patience, Quagmires, Rebounds, Skeptic, Stimulus, Stock Market Indices, Term Investors, Valuations, Worst Case
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Jeremy Grantham: Riveting Interview with Steve Forbes

Thursday, January 29th, 2009

Whoa! Jeremy Grantham gives a riveting, in-depth, specific and eloquent must-see interview. It is a clear and enlightening discussion with one of the finest and quiet geniuses in the investment world.

Subsequent to publication of Jeremy Grantham’s quarterly newsletter a few days ago, Steve Forbes conducted this interview with the chairman of Boston-based GMO. The video clip and transcript are published below.

Click here or on the image to view the video.

Click here for the transcript of the interview.

Here are the topical headings from the interview:

• Steve: China’s Long Tale
• Grantham’s Big Call
• A Whole New Bubble
• Time To Buy
• Cheapest in 20 Years
• Japan A Blue Chip?
• Emerging Markets
• Buy Big US Stocks
• Stimulus!
• Our Leaders Failed
• Dysfunctional Markets
• China Bubble

Here are a few paragraphs:

Steve Forbes: Well thank you, Jeremy, for joining us today. First, since you have bragging rights in this situation, what made you a bear, [a] great skeptic? Between 1999 until about a couple of months ago, you were saying, “Stay out.”

Jeremy Grantham: Well, really very simple. Not rocket science. We take a long-term view, which makes life, in our opinion, much easier.

Steve Forbes: Well everyone says it, but you certainly practiced it.

Jeremy Grantham: We actually do it. Well, we tried the short-term stuff and it was so hard; we thought we’d better do the long-term. We just assume that at the end, in those days, of 10 years, profit margins will be normal and price-earnings ratios will be normal. And that will create a normal, fair price. And more recently, we’ve moved to seven years, because we’ve found in our research that financial series tend to mean revert a little bit faster than 10 years–actually about six-and-a-half years. So we rounded to seven.
And that’s how we do it. And it just happened from October ’98 to October of ’08, the 10-year forecast was right. Because for one second in its flight path, the U.S. market and other markets flashed through normal price. Normal price is about 950 on the S&P; it’s a little bit below that today.

And on my birthday, October the 6th, the U.S. market, 10 years and four trading days later, hit exactly our 10-year forecast of October ’98, which is worth talking about if only to enjoy spectacular luck. The P/E was a little bit lower than average and the profit margins were a little bit higher, so they beautifully offset. And given our methodology, that would mean that on October the 6th, the market should have been fairly priced on our current approach. And indeed it was–that was even more remarkable–950, plus or minus a couple of percent.

Steve Forbes: And what did you see during that 10-year period that made you feel–other than your own models–that this was something highly abnormal, that this couldn’t last?

Jeremy Grantham: Well, first of all, the magnitude of the overrun in 2000 was legendary. As historians, you know we’ve massaged the past until it begs for mercy. And we saw that it was 21 times earnings in 1929, 21 times earnings in 1965 and 35 times current earnings in 2000. And 35 is bigger than 21 by enough that you’d expect everyone would see it. Indeed, it looks like a Himalayan peak coming out of the plain.
And it begs the question, “Why didn’t everybody see it?” And I think the answer to that is, “Everybody did see it.” But agency risk or career risk is so profound, that even if you think the market is gloriously overpriced, you still have to get up and dance. Because if you sit down too quickly–

Steve Forbes: Famous words of Mr. Prince.

Click here for the transcript of the interview.

Source: Forbes, January 23, 2009.

Download the Forbes: Jeremy Grantham Briefing Book here.

Tags: Blue Chip, Boston, Bragging Rights, chairman, China, Dysfunctional, Emerging Markets, Few Days, Flight Path, Geniuses, Gmo, Half Years, Himalayan, Interview Source, Investment World, Japan, Jeremy Grantham, Paragraphs, Price Earnings Ratios, Prince, Profit Margins, Quarterly Newsletter, Rivetting, Rocket Science, S Market, Seven Years, Skeptic, Steve Forbes, Steven Forbes, Stimulus, Stocks, Topical Headings, United States, Video Clip
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