One can easily get confused by the government numbers flying around out there on the state of the economy...notable items include GDP, inflation, unemployment rates, manufacturing utilisation, trade surpluses/deficits and size of currency reserves.
With the exception of unemployment and inflation, many of us struggle to picture their meaning and relate them back to our daily lives in terms of how the real economy is doing.
Time Magazine has just come up with a quirky list to gauge how the high street is doing:
- immigration numbers
- babies born
- sales figures for men's underwear
- the reselling of cemetery plots
- the number of hikers
- coupon redemptions
- long distance relationships
- animal abandonment
- army ads get "tougher"
- hot waitress index
In Hong Kong, I'm adding:
- the number of people consulting fungshui masters and mediums (eg voodoo grandmas under a Wanchai footbridge to drive away bad luck and banish evil spirits)
While the first four can be measured with confidence, the remaining "anecdotal" indicators are quite thought-provoking. Time's link is below.
http://cheapskate.blogs.time.com/2009/09/25/ten-odd-economic-indicators-hot-waitresses-mens-underwear-blacked-out-football-games-and-more/
Tuesday 29 September 2009
Saturday 26 September 2009
New US$ carry trade is about to replace the yen bet. Where will this credit fountain gush to?
For many years after the Japan economy shrivelled when their 1989 asset bubble burst, the government embarked on a low (near zero) interest rate policy to stimulate the domestic economy. In order to protect its export juggernaut (eg Toyota, Fuji, Mitsubishi, Sony) the Bank of Japan had to keep the yen exchange rate low to ensure export prices remained competitive abroad.
A new phenomenon started to take off - the yen carry trade. From the 1990s, savvy investors realised they could borrow at near zero interest rates from Japanese banks and invest in new business opportunities that could easily return double digits. With financial services innovation and the use of leverage, they could double, triple and even ten-fold up their original invested capital. It was like being given a crowbar to lift many times a normal weight.The Japanese housewife was a typical example borrowing Yen 600k (equivalent to about US$5k) at 0.25% from her bank and investing this immediately in a New Zealand dollar currency deposit account (within the same bank!) earning 4% per annum. With leverage, her bank was reasonably happy to grant this US$5k equivalent into an effective US$10-15 k margin account for her to control. Investing in the NZ$ meant 8% to 12% annual returns were therefore no problem. Now you know why LV and Tiffany stores worldwide were so favoured by the Japanese tourists abroad! Similarly, if you were a profitable non-Japanese heavyweight financial institution the leverage granted could have been unbelievable. This could be put to work in an ultra-safe US Treasury 30 year bond earning 6-7%. The major US investment banks could have notched up 30-35% a year safely without losing any sleep over the size of year-end bonuses. Some took this further to leverage up 20-30x on futures contracts. The yen carry trade was a virtually risk-free investment for many years.
Even though there have been swings in the yen exchange rate with other currencies over the last decade, it is probable these currency risks were manageable given the short timeframes for trading and short term investments (see graph with US$ rate).
Chart: Pacific Exchange Rate Service
Since mid-2007, the yen has started to strengthen...as the US$ started to relatively weaken against major world currencies over growing concerns in its American bubble economy. As a result, the yen carry trade has been unwinding rapidly (aim being to avoid getting killed by the crowbar which now works against you).
Move forward to today...the conditions are ripe in the US for a new carry trade. The interest rates are at a near zero 0.25% and the Federal reserve has stated they're likely to stay there for "an extended period of time". The US$ is weak due to massive trillion dollar government deficits and quantitative easing ie. printing money with no restrictions. So it is not likely to strengthen any time soon. Certain banks deemed "too big to fail" are awash with cash and this needs to find a new home. What will be the new assets being sought? If one can pinpoint these, their prices will likely explode to the moon as too much money chases so few goods.
- US treasury bonds are a source of lavatorial jokes now. Long dated bonds will lose value over time due to their humongous oversupply and future inflation could take hold quickly. Tim Geithner is unlikely to appear in front of Chinese students anytime soon to defend the value of the US$.
- Overseas govn't bonds. All European govn'ts are similarly plagued with massive debts as a proportion of their GDP so inflation risk is also abundant. Political risk in Middle-East oil nations remain high. Singapore and China sovereign bonds are not a big enough market yet.
- Competitive currency devaluations are likely in future as exporting nations strive to protect jobs. This will tend to dampen countries' relative interest rate advantages which are already at record lows, so borrowing in US$ to put in another currency deposit with a favourable interest rate deposit is not worthwhile
- That leaves distressed commercial real estate, commodities and precious metals. Paper assets will be out of vogue as tangibles come to represent what money has always been designed for ...a store of wealth. What would happen if a chunk of this idle US money was to stampede into gold and was met with competition from Indians famed for buying this stuff enmasse for their weddings and Chinese who want to buy everything stealthily?
A new phenomenon started to take off - the yen carry trade. From the 1990s, savvy investors realised they could borrow at near zero interest rates from Japanese banks and invest in new business opportunities that could easily return double digits. With financial services innovation and the use of leverage, they could double, triple and even ten-fold up their original invested capital. It was like being given a crowbar to lift many times a normal weight.The Japanese housewife was a typical example borrowing Yen 600k (equivalent to about US$5k) at 0.25% from her bank and investing this immediately in a New Zealand dollar currency deposit account (within the same bank!) earning 4% per annum. With leverage, her bank was reasonably happy to grant this US$5k equivalent into an effective US$10-15 k margin account for her to control. Investing in the NZ$ meant 8% to 12% annual returns were therefore no problem. Now you know why LV and Tiffany stores worldwide were so favoured by the Japanese tourists abroad! Similarly, if you were a profitable non-Japanese heavyweight financial institution the leverage granted could have been unbelievable. This could be put to work in an ultra-safe US Treasury 30 year bond earning 6-7%. The major US investment banks could have notched up 30-35% a year safely without losing any sleep over the size of year-end bonuses. Some took this further to leverage up 20-30x on futures contracts. The yen carry trade was a virtually risk-free investment for many years.
Even though there have been swings in the yen exchange rate with other currencies over the last decade, it is probable these currency risks were manageable given the short timeframes for trading and short term investments (see graph with US$ rate).Chart: Pacific Exchange Rate Service
Since mid-2007, the yen has started to strengthen...as the US$ started to relatively weaken against major world currencies over growing concerns in its American bubble economy. As a result, the yen carry trade has been unwinding rapidly (aim being to avoid getting killed by the crowbar which now works against you).
Move forward to today...the conditions are ripe in the US for a new carry trade. The interest rates are at a near zero 0.25% and the Federal reserve has stated they're likely to stay there for "an extended period of time". The US$ is weak due to massive trillion dollar government deficits and quantitative easing ie. printing money with no restrictions. So it is not likely to strengthen any time soon. Certain banks deemed "too big to fail" are awash with cash and this needs to find a new home. What will be the new assets being sought? If one can pinpoint these, their prices will likely explode to the moon as too much money chases so few goods.
- US treasury bonds are a source of lavatorial jokes now. Long dated bonds will lose value over time due to their humongous oversupply and future inflation could take hold quickly. Tim Geithner is unlikely to appear in front of Chinese students anytime soon to defend the value of the US$.
- Overseas govn't bonds. All European govn'ts are similarly plagued with massive debts as a proportion of their GDP so inflation risk is also abundant. Political risk in Middle-East oil nations remain high. Singapore and China sovereign bonds are not a big enough market yet.
- Competitive currency devaluations are likely in future as exporting nations strive to protect jobs. This will tend to dampen countries' relative interest rate advantages which are already at record lows, so borrowing in US$ to put in another currency deposit with a favourable interest rate deposit is not worthwhile
- That leaves distressed commercial real estate, commodities and precious metals. Paper assets will be out of vogue as tangibles come to represent what money has always been designed for ...a store of wealth. What would happen if a chunk of this idle US money was to stampede into gold and was met with competition from Indians famed for buying this stuff enmasse for their weddings and Chinese who want to buy everything stealthily?
Friday 25 September 2009
Is Twitter worth US$ 1 billion? Check out China's proven business model.
Wall Street is abuzz over the US$100mn funding plan for a stake in the fast growth San Fransico based internet messaging company of 60 employees. This values it at US$1 bn. It is expected to have 25 mn users by the end of the year. However, it has peanuts in revenue and the co-founder Biz Stone has gone on record as saying they are still open to exploring advertising. Recently, Facebook valued at US$15 bn with 300 mn users has also been rolling out features similar to Twitter to enable users to share more of their content publicly, as it tries to manoeuvre into this space.
Is this is a sign of a market top? Money is being poured into an unproven business model because it cannot sit on the investment sidelines or be put to work on better opportunities elsewhere. Maybe it will pique the interest of Google and Yahoo. This has echoes of 1999. Remember Pets.com? Formed in 1998, Amazon.com backed them in a US$82mn IPO in February 2000. It had just spent US$2.6mn in a 30 second ad slot for the recent 39th SuperBowl final. Neither external advertising nor online advertising could sustain it. It went bust nine months later and signalled the beginning of the dot.com collapse.
Tencent Holdings in China is a better business model. Started in 1998, its "QQ" instant messaging system proved an immediate hit enabling it to rapidly forge a secure link amongst migrant families and friends between the countryside and the cities. This helped Tencent to eventually broaden out, innovate and add value to mobile users with QQ Games, QQ Music/Radio/Live and Paipai online shopping. Today it is China's leading internet portal with 990m registered users and is publicly listed in Hong Kong (HK# 0700) with a marketcap of US$29 bn , commanding a historic PE ratio of 72! 2009 first half revenues climbed 77% compared to 2008 first half.
So back to Twitter's valuation. One way to look at it is assess what the userfile is worth ie market value per user. Tencent is valued at US$29 (US$29bn / 990mn) given its solid market leadership position (if you believe Tencent's 72 PE ratio is grossly overvalued at today's stock price, it can still fall by 50% and the valuation pared down to around US$14-5). Similarly, Facebook is at US$50 while Twitter is at US$40 today based on 25 mn users. If it achieves 100mn users, the valuation improves to US$10.
Putting aside social democracy, the fast pace of technological innovation and focussing on just the numbers, Tencent has the edge here. It's still handsomely growing that top revenue line despite the economic downturn. Twitter looks a risky bet based on just the projected number of users.
Is this is a sign of a market top? Money is being poured into an unproven business model because it cannot sit on the investment sidelines or be put to work on better opportunities elsewhere. Maybe it will pique the interest of Google and Yahoo. This has echoes of 1999. Remember Pets.com? Formed in 1998, Amazon.com backed them in a US$82mn IPO in February 2000. It had just spent US$2.6mn in a 30 second ad slot for the recent 39th SuperBowl final. Neither external advertising nor online advertising could sustain it. It went bust nine months later and signalled the beginning of the dot.com collapse.
Tencent Holdings in China is a better business model. Started in 1998, its "QQ" instant messaging system proved an immediate hit enabling it to rapidly forge a secure link amongst migrant families and friends between the countryside and the cities. This helped Tencent to eventually broaden out, innovate and add value to mobile users with QQ Games, QQ Music/Radio/Live and Paipai online shopping. Today it is China's leading internet portal with 990m registered users and is publicly listed in Hong Kong (HK# 0700) with a marketcap of US$29 bn , commanding a historic PE ratio of 72! 2009 first half revenues climbed 77% compared to 2008 first half.
So back to Twitter's valuation. One way to look at it is assess what the userfile is worth ie market value per user. Tencent is valued at US$29 (US$29bn / 990mn) given its solid market leadership position (if you believe Tencent's 72 PE ratio is grossly overvalued at today's stock price, it can still fall by 50% and the valuation pared down to around US$14-5). Similarly, Facebook is at US$50 while Twitter is at US$40 today based on 25 mn users. If it achieves 100mn users, the valuation improves to US$10.
Putting aside social democracy, the fast pace of technological innovation and focussing on just the numbers, Tencent has the edge here. It's still handsomely growing that top revenue line despite the economic downturn. Twitter looks a risky bet based on just the projected number of users.
Thursday 24 September 2009
A "leading" indicator for the US consumer: The tipping point between intensive care and money heaven
While scanning the investment horizon with the aftershocks from ground-zero (ie US of A) still reverberating for savvy investors, I came across something that really made my jaw drop, compelling me to do some quick calculations.
In 2001 and 2003, the old prez Bush made some big tax cuts in personal income tax. They expire towards the end of 2010 and will change back to the old rates. Big deal I thought, it's just catch-up time ... until I dug deeper. The taxpayer's pocket is going to get bashed on this one.
- The 10% bracket will increase to 15%
- The 25% bracket will increase to 28% (between $33,950 and $82,250 per year)
- The 28% bracket will increase to 31%
- The 33% bracket will increase to 36%
-The 35% bracket will increase to 39.6%
They seem smallish amounts until I figured you're looking at hikes of +9% to 50% (that's probably the local hairdresser in the bottom bracket!). But get this...Larry Summers, Obama's National Economic Adviser has gone on record in 2009 as saying these will not be renewed/extended. So that's the first calc. With all that govn't debt, they need the revenues.
In the last few years, Asia's emergence has revolved around the US consumer...not the mainland factoryworker or the rich monied wife who flies down from Shanghai to shop at Pacific Place while hubby pays HK$70,000+ per sqft for the Masterpiece in Tsimshatsui to get rid of his loose change. The last two (a small and visible minority) are just the multiplier effect at work aided by the factory worker (a visible but uninfluential economic majority). But over the water, "Joe the plumber" who was personified in the presidential election campaign as the common man on the street is a very visible and powerful cog of the economic majority who determines Asia's export fate, representing 70% of US GDP.
My second calc is to quantify the probable loss in Asia exports due to the loss in spending power as a result of these tax rises. My assumptions:
- US population 307m
- US unemployment in 2010 @ 10% (now at 9.7%, although John Williams of Shadowstats puts it in the mid-teens)
- No. taxpayers = 307m x 70% (30% are non-working under 18s and retirees) x 90% (less unemployed) = 193m
- Say the average taxpayer's annual salary is U$40k (ie HK$26k/mth) across the whole workforce and allow 15% for deductions (taxes & social security etc - very conservative %) and the tax rate goes up by +3% as above
Each taxpayer has to pay additional taxes of US$40k x 85% x 3% = US$1,020 per year. With 193m taxpayers = US$197bn increase in tax revenues / loss in consumer spending power.
Remember this is consumer goods (PCs, cameras and phones, stationery, clothes, home decorations etc) of incremental discretionary spending they will have to elimiminate. Most of this stuff is imported. They'll still have to maintain paying their rents/mortgages, eating and value shopping on day-to-day necessities while cutting back the imported nice to haves/luxuries. If not already, they're cutting back on services too (gym passes, Fifi's doggy manicure sessions).
This is where I use back of envelope maths for the third calc.....if 75% of the imported consumer stuff is from Asia (can only generalise here what truly good popular stuff South America, Europe and Africa ship across besides meat products, confectionery and precious stones), then Asia will lose US$148bn exports. Of this, say 50% is from China @ US$74bn (high volume and low margin consumer electronics and cheap household stuff you see in CitiSuper/FrancFranc/discount stores) with Korea, Taiwan and Japan making up the other 50% with their predominant lower volume but higher margin electronics gear and autos.
US$74bn China loss works out at a reduction in their trade surplus of US$6.2bn / month. If you look at the big picture below, US$6.2bn is a devastating hit in any month! My calc can still be 20% wrong and not affect the picture. The trend is already down drastically; it may bottom out and level off for a while in 2010...before it gets whacked again later. PRC Government steps in again with more stimulus?
This is a freight train which is out of sight but you can hear the rumbling in the distance. Oncethe lights start flashing, bells ringing and the gates come down at the crossing, it is too late to get across the profitable investing road. You're stuck in your positions! Whatever Obama's tax pledges, Joe the plumber is about to be well and truly drained (excuse the pun). You have plenty of time to position your portfolios to counter the 3% tax butterfly flapping its wings in Washington today before it causes an earthquake at the Chen's factory in Dongguan and Hutchison House (HK's status as a premier transhipment port is at stake here because of economic cycle and structural (Shenzhen port cheaper) shifts.
Keep a careful eye out on this US tax issue which the local HK media don't have on their radar today.
In 2001 and 2003, the old prez Bush made some big tax cuts in personal income tax. They expire towards the end of 2010 and will change back to the old rates. Big deal I thought, it's just catch-up time ... until I dug deeper. The taxpayer's pocket is going to get bashed on this one.
- The 10% bracket will increase to 15%
- The 25% bracket will increase to 28% (between $33,950 and $82,250 per year)
- The 28% bracket will increase to 31%
- The 33% bracket will increase to 36%
-The 35% bracket will increase to 39.6%
They seem smallish amounts until I figured you're looking at hikes of +9% to 50% (that's probably the local hairdresser in the bottom bracket!). But get this...Larry Summers, Obama's National Economic Adviser has gone on record in 2009 as saying these will not be renewed/extended. So that's the first calc. With all that govn't debt, they need the revenues.
In the last few years, Asia's emergence has revolved around the US consumer...not the mainland factoryworker or the rich monied wife who flies down from Shanghai to shop at Pacific Place while hubby pays HK$70,000+ per sqft for the Masterpiece in Tsimshatsui to get rid of his loose change. The last two (a small and visible minority) are just the multiplier effect at work aided by the factory worker (a visible but uninfluential economic majority). But over the water, "Joe the plumber" who was personified in the presidential election campaign as the common man on the street is a very visible and powerful cog of the economic majority who determines Asia's export fate, representing 70% of US GDP.
My second calc is to quantify the probable loss in Asia exports due to the loss in spending power as a result of these tax rises. My assumptions:
- US population 307m
- US unemployment in 2010 @ 10% (now at 9.7%, although John Williams of Shadowstats puts it in the mid-teens)
- No. taxpayers = 307m x 70% (30% are non-working under 18s and retirees) x 90% (less unemployed) = 193m
- Say the average taxpayer's annual salary is U$40k (ie HK$26k/mth) across the whole workforce and allow 15% for deductions (taxes & social security etc - very conservative %) and the tax rate goes up by +3% as above
Each taxpayer has to pay additional taxes of US$40k x 85% x 3% = US$1,020 per year. With 193m taxpayers = US$197bn increase in tax revenues / loss in consumer spending power.
Remember this is consumer goods (PCs, cameras and phones, stationery, clothes, home decorations etc) of incremental discretionary spending they will have to elimiminate. Most of this stuff is imported. They'll still have to maintain paying their rents/mortgages, eating and value shopping on day-to-day necessities while cutting back the imported nice to haves/luxuries. If not already, they're cutting back on services too (gym passes, Fifi's doggy manicure sessions).
This is where I use back of envelope maths for the third calc.....if 75% of the imported consumer stuff is from Asia (can only generalise here what truly good popular stuff South America, Europe and Africa ship across besides meat products, confectionery and precious stones), then Asia will lose US$148bn exports. Of this, say 50% is from China @ US$74bn (high volume and low margin consumer electronics and cheap household stuff you see in CitiSuper/FrancFranc/discount stores) with Korea, Taiwan and Japan making up the other 50% with their predominant lower volume but higher margin electronics gear and autos.
US$74bn China loss works out at a reduction in their trade surplus of US$6.2bn / month. If you look at the big picture below, US$6.2bn is a devastating hit in any month! My calc can still be 20% wrong and not affect the picture. The trend is already down drastically; it may bottom out and level off for a while in 2010...before it gets whacked again later. PRC Government steps in again with more stimulus?
This is a freight train which is out of sight but you can hear the rumbling in the distance. Oncethe lights start flashing, bells ringing and the gates come down at the crossing, it is too late to get across the profitable investing road. You're stuck in your positions! Whatever Obama's tax pledges, Joe the plumber is about to be well and truly drained (excuse the pun). You have plenty of time to position your portfolios to counter the 3% tax butterfly flapping its wings in Washington today before it causes an earthquake at the Chen's factory in Dongguan and Hutchison House (HK's status as a premier transhipment port is at stake here because of economic cycle and structural (Shenzhen port cheaper) shifts.
Keep a careful eye out on this US tax issue which the local HK media don't have on their radar today.
Wednesday 23 September 2009
Touchdown! Why the "r" landing beats the hard and soft versions
Let's kick off by letting me tell you a little bit about myself and how this blog can help you make sense of the rapidly changing economic currents sweeping through the world today. It's going to provide insightful, thought provoking and actionable ideas for you.
Ever since I was a kid, our family TV always fascinated me as a window to the world. Interspersed with my schooling, the family's roots in Hong Kong and South China eventually led me back to this former British enclave during some of those long summer sojourns. Wasn't it here that naked capitalism faced off against rabid communism?
The seeds to better understand the full impact of economics was firmly planted here before returning home again to pursue my education. Trade catalyses nations and clarifies the human spirit. Economics was never the "dismal science" for me.
Long before I learnt about hard and soft landings in textbooks, I was buzzing with the "r" landing, an experience which never ceased to wow my friends back in the UK. While not part of the normal lexicon, it was something unique to Hong Kong. Every jet descending into Kai Tak airport (which closed in 1998) had to follow a straight line over low rise buildings in the centre of town and then bank steeply at most 90 degrees to the right before the rubber met the runway.
Have a peek below...best with earphones:
It was game on. After university and armed with my business degree, five years working in London with Quaker Oats and BP Amoco was sprinkled with opportunities to visit New York and Washington. I even accumulated more "r" landings and later decided to set down in Asia. In between, I gained my professional accountancy qualification. Valuable experience was gained working out here for Philip Morris, Marks & Spencer and a global weekly news magazine. Having travelled around this region, witnessed the phenomenal China growth first hand and worked in India for a while, I'm convinced we are at a monumental crossroads.
Pressing questions are confronting policymakers in their oak-panelled rooms today. Just how life-changing is the global financial crisis? What shape will the Pacific hemisphere take as it replaces the Atlantic century? Where will the next opportunities and threats come from? Can American hegemony survive without the US dollar as a world reserve currency? Will the Chinese and Indian consumer be able to chart a sustainable domestic growth path?
Around kitchen tables, animated discussions are commonplace on how to stretch the monthly income further, de-risk portfolios ravaged by the financial crisis and refine asset allocations to secure the roof over the heads.
We're going to embark on a journey together...the showdown (or "strategic partnership" according to the diplomats) between East and West has begun in earnest... I'll do a take on the issues of the day, peel away and demystify the numbers behind the headlines to provide you with actionable insights. I'm going to take the game to you...
Ever since I was a kid, our family TV always fascinated me as a window to the world. Interspersed with my schooling, the family's roots in Hong Kong and South China eventually led me back to this former British enclave during some of those long summer sojourns. Wasn't it here that naked capitalism faced off against rabid communism?
The seeds to better understand the full impact of economics was firmly planted here before returning home again to pursue my education. Trade catalyses nations and clarifies the human spirit. Economics was never the "dismal science" for me.
Long before I learnt about hard and soft landings in textbooks, I was buzzing with the "r" landing, an experience which never ceased to wow my friends back in the UK. While not part of the normal lexicon, it was something unique to Hong Kong. Every jet descending into Kai Tak airport (which closed in 1998) had to follow a straight line over low rise buildings in the centre of town and then bank steeply at most 90 degrees to the right before the rubber met the runway.
Have a peek below...best with earphones:
It was game on. After university and armed with my business degree, five years working in London with Quaker Oats and BP Amoco was sprinkled with opportunities to visit New York and Washington. I even accumulated more "r" landings and later decided to set down in Asia. In between, I gained my professional accountancy qualification. Valuable experience was gained working out here for Philip Morris, Marks & Spencer and a global weekly news magazine. Having travelled around this region, witnessed the phenomenal China growth first hand and worked in India for a while, I'm convinced we are at a monumental crossroads.
Pressing questions are confronting policymakers in their oak-panelled rooms today. Just how life-changing is the global financial crisis? What shape will the Pacific hemisphere take as it replaces the Atlantic century? Where will the next opportunities and threats come from? Can American hegemony survive without the US dollar as a world reserve currency? Will the Chinese and Indian consumer be able to chart a sustainable domestic growth path?
Around kitchen tables, animated discussions are commonplace on how to stretch the monthly income further, de-risk portfolios ravaged by the financial crisis and refine asset allocations to secure the roof over the heads.
We're going to embark on a journey together...the showdown (or "strategic partnership" according to the diplomats) between East and West has begun in earnest... I'll do a take on the issues of the day, peel away and demystify the numbers behind the headlines to provide you with actionable insights. I'm going to take the game to you...
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