China Oyster

China Beidou (Compass) GPS-style system begins operational service...

2011-12-27T19:13:00.000+08:00

The China Daily has reported China's homegrown Beidou Navigation Satellite System began providing initial positioning, navigation and timing operational services to China and its surrounding areas from 27th December.

Beidou is being developed to rival the United States-developed Global Positioning System (GPS), the European Union's Galileo and Russia's Global Navigation Satellite System, and is aimed at allowing travelers, drivers and military officials to accurately know their locations.

The system will provide service with high precision and credibility for industries and sectors including mapping, fishery, transportation, meteorology and telecommunications.

To date, China has launched 10 satellites for the Beidou system, with the tenth being lifted into orbit earlier in December. Ran Chengqi, director of the management office of the China Satellite Navigation System, told a press conference 6 more satellites will be launched in 2012 to further improve the Beidou system and expand its service coverage across most parts of the Asia-Pacific region.

China began building the Beidou system in 2000 with a goal to break its dependence on the US GPS and so creating its own global positioning system by 2020.

The Beidou system is compatible and interoperable with the world's other major global navigation satellite systems, according to Ran. He also encouraged enterprises at home and abroad to join the research and development of application terminals compatible with Beidou, saying a beta version of the system's Interface Control Document (ICD) could be accessed online starting 27th December.

The onset of Beidou's operations expands China's reach beyond its borders and has profound implications in sectors like maritime trade and military development across the Asia Pacific space.

China Ningxia wines tops French Bordeaux in Beijing wine challenge...

2011-12-20T21:13:00.000+08:00

In a blind winetasting competition in Beijing on December 14, five wines from Bordeaux and five wines from Ningxia - all priced in the range 200 - 500 yuan (RMB) - were wrapped in black cloth, tagged with a number, and served to ten French and ten Chinese wine judges. When the results were announced: the top four wines were Chinese!

The Ningxia vs Bordeaux Challenge was organised by Jim Boyce with website TasteV, wine club Zun, and Grape Wall contributors.

The wines were opened, tested for quality, bagged and tagged, in the presence of several reporters, under the supervision of Philip Osenton, who works with distributor Globus and is former head sommelier at Ritz London and restaurant manager for the Savoy. He and others, including the media, witnessed computation of the scores.

“Sacrilège,” screamed the headline of the French business daily, La Tribune. But the top French dailies, Le Monde and Le Figaro, seemed to suppress the news, quite understandably. The people have enough to worry about.

OK, French wines have been beaten with some regularity ever since the Judgment of Paris on May 24, 1976, when, to the utter and never fully digested shock of the French wine establishment, a Napa Valley Cabernet Sauvignon and a Chardonnay beat their Bordeaux counterparts - and put California on the international wine map.

The judges were asked to rank the wines from first to tenth based on quality. First place was worth one point, second place worth two points, and so on. The wines with the lowest total scores were the winners. The judges had spent 40 minutes tasting and ranking the wines and another 30 minutes discussing them.

The top five:

1. Grace Vineyard Chairman’s Reserve 2009 34 points (RMB 488)

2. Silver Heights The Summit 2009 42 points (RMB 416)

3. Helan Qing Xue Jia Bei Lan Cabernet Dry Red 2009 44 points (was RMB220, now pending)

4. Grace Vineyard Deep Blue 2009 46 points (RMB 288)

5. Barons de Rothschild Collection Saga Medoc 2009 54 points (RMB 350)

The Chinese judges:

Ma Huiqin, professor at China University of Agriculture and wine marketing expert (head judge)
Frankie Zhao, owner of Pro-Wine Consultancy
Fiona Sun, senior editor at China edition of Revue du Vin
Jin Yang, wine teacher who spent five years studying in Bordeaux wine programs
John Gai, of wine distributor and bar operation Palatte

The French judges:

Nicolas Carre, sommelier and wine consultant (head judge)
Jerome Sabate, long involved as wine maker with Dragon Seal in Beijing
Nathalie Sibillet, oenologist, journalist and teacher
Thomas Briollet, seven years experience in China wine distribution
Edouard Kressman, wine maker with experience in Bordeaux, California and Argentina

Of course, wine competitions can be criticized. The French wines were handicapped by an import tax of 48% (another detail of why China has a huge trade surplus with the rest of the world). But then, Chinese wines got hit with consumption and value-added taxes that reduced the gap to 20%, according to Boyce. And the most expensive Bordeaux retailed for RMB 350 while the winning Ningxia retailed for RMB 488. Quite a price difference.

For now, the big takeaway is that Chinese wines have again - not for the first time, shown they can compete on a global level. The reality check: these wines represent a smidgeon of the China market and the industry as a whole still has a long way to go.

But who could have imagined a few years ago spending US$77 on a bottle of good Chinese wine to be shared over a romantic dinner? The French must have had similar thoughts about California wines in the aftermath of May 24, 1976.

More upheaval in the old world order...

China's 2011 holdings US Treasuries debt cut again in October

2011-12-18T11:54:00.000+08:00

China trimmed its holdings of US Treasury debt by US$ 14.2 billion in October, driving its holdings to the lowest level this year.

This move to cut the US debt holdings indicated an attempt by the People's Bank of China (PBOC) to increase its cash holdings of dollars in order to shore up the value of the yuan.

The yuan has been faced with increasing downward pressure as investors sold the currency seeking a safe haven in the US dollar amid a grim outlook for the global economy.

China held a total of US$ 1,134 billion of US Treasury debt as of October 2011. According to the US Treasury Department, China accounted for approximately 24% of total foreign holdings of US debt. Despite this latest cut, China remains the largest foreign holder of US treasuries.

Analysts advocate China should continue to accelerate the diversification of its US$ 3.2 trillion foreign-exchange reserves, amid growing global financial uncertainty. Currently, about one-third of China's foreign-exchange reserves is invested in US Treasury bonds.

The PBOC has been reported it's planning to create a fund worth US$ 300 billion to invest the country's foreign-exchange reserves in the US and European markets. The fund will reportedly seek to invest in real assets and company shares, rather than government securities.

Gao Xiqing, vice-chairman of China Investment Corp, the country's sovereign wealth fund, said recently that the fund is actively looking for investment opportunities in infrastructure projects in countries including Britain, the US, and Brazil.

Stockmarket volatility...biggest historic moves in the Dow Jones index

2011-12-08T21:26:00.001+08:00

The five largest one day percentage and points up moves in the history of the Dow Jones Industrial average all occurred during a bear market.

It does appear odd. Surely the biggest up moves should happen in bull markets, not bear markets. Right?

Do remember that the market continually tries to fool as many people as it can. In bear markets, everyone is looking to buy the bottom, whereas in bull markets, everyone is looking to sell the top.Bull and bear markets can't happen without this phenomenon coming into play.

That's tantalising...with the current Eurozone woes and United States' unresolved fiscal deficit issues, volatility is here to stay.

2011 China grain harvest rises for the eighth consecutive year

2011-12-04T15:14:00.001+08:00

The China National Bureau of Statistics office released in a statement on Friday the country achieved another bumper agricultural harvest this year, the eighth consecutive year of growth for grain output and a record for food production.

Agricultural experts said the bumper harvest will help ease the country's food price hikes, facilitating the government's efforts to combat the stubbornly high inflation rate (official October CPI was +5.5% ). However, China's robust demand means the increased grain production is unlikely to check the country's growing imports, particularly for corn.

Bumper yields this year saw food output rising to a record 571 million tons, registering a 4.5 percent increase year-on-year. The production volume has already reached the government's grain output target for 2020, the bureau said.

Major Crops    Tonnes (millions)    Annual increase
Rice              200                        + 2.6%
Wheat           118                        + 2.4%
Corn              192                        + 8.2%
Sub-total           510
Others       61
Total                  571                        + 4.5%

As China's urbanization process deepened, Chinese families consumed more meat in their daily diet, generating extra demand for corn as animal feed.

Meanwhile, industrial demand for starch and ethanol also increased, imposing upward pressure on corn imports. During the first nine months of this year, China imported 645,000 tons of corn according to data from grain.gov.cn, a website operated by the China National Grain and Oils Information Center.

In July, China ordered 533,000 tons of corn for delivery after August from the United States, according to the US Department of Agriculture, exceeding US estimates for Chinese's corn imports for the whole year.

2011 & 2012 calendar schedule of Euro maturing sovereign bonds

2011-11-29T22:55:00.001+08:00

The Rome-based Treasury sold 7.5 billion euros of new bonds today at record yields.

“These are hopelessly unsustainable yields and reflect the panic that is enveloping the euro zone,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said.

France has Euro 177bn, Italy 170bn and Spain 167bn bonds maturing which need to be refinanced through first quarter 2012. These do not include the additional new issues to finance the 2012 fiscal deficits likely to be incurred...

With too high a price to pay and so much maturing imminently... you are looking at an unstoppable freight train, with lights flashing and horns blaring about to hit the buffers. Do not let your investments get caught in the middle of the level crossing...this is the time to seriously consider precious metals like gold and silver.

Interactive Graphic on Worldwide Bank Debt - Who owes what to whom?

2011-11-19T11:17:00.001+08:00

Click on image above to enlarge view

Click and visit this interactive link below to find out who owes what to whom...let's annex some respite from the relentless daily drumbeats of a worldwide financial edifice on the verge of collapse...winter maybe on its way but it doesn't mean we cannot have some light-hearted fun...
Source BBC News: Debt Web - Who owes what to whom?

These insightful graphics from the British Broadcasting Corporation valiantly attempt to peel away the layers of national banking debt each of the major world economies is owed from another.

I want to believe Santa Claus has a distant cousin somewhere in Harbin...

Notes on the data:
The Bank for International Settlements data, represented by the proportional arrows, shows what banks in one country are owed by debtors - both government and private - in another country. It does not include non-bank debts. Only key eurozone debtors and their top creditors are shown. Although China is known to hold European debt, no comprehensive figures are available.

GDP figures are the latest complete 2010 figures from the IMF. The percentage of gross government debt to GDP is also the latest IMF calculation.

Overall foreign (or gross external) debt is taken from the latest 2011 World Bank/IMF figures and includes all debt owed overseas, including that owed by governments, monetary authorities, banks and companies.

Gross foreign debt per person is calculated using the latest medium variant population figures from the UN Population Division.

A brief history of worldwide house price trends 1970 - 2008

2011-11-16T21:32:00.001+08:00

Double click on image to enlarge view

The striking aspect is the two boom cycles experienced by the United Kingdom and Netherlands in both the late 1980's and post 2001. Japan collapsed after 1991 and never recovered.

The 2000s was characterised by an era of cheap credit fueled by the Greenspan-led United States Federal Reserve which rippled worldwide that drew in Ireland, Spain and Australia. It's surreal and one wonders, within this context, the extent to which Fannie Mae and Freddie Mac were responsible for the 2008 US subprime housing bust.

The stand-out is Germany whose real house prices remained startling flat throughout most of this period...only to fall from the mid-2000s...reflecting a culture of renters and / or financial probity.

Alas, the historic data on mainland China is near impossible to obtain. The country didn't really open up fully for private enterprise until 1992. I'm sure the size of the current property bubble there will render its growth performance vis-à-vis 1970, to be off the charts.

Is 6% yield on sovereign bonds the crisis point of no return?

2011-11-12T13:05:00.003+08:00

With Italian 10 year bonds having crossed a critical 6% yield threshold this week, it is worth seeing how other sovereign bonds behaved. Let us look at the 20 week run-up period before the crossover...

For Greece, the chart starts on September 4th, 2009, and it first crossed the 6% threshold in the week of January 15th, 2010.

For Ireland, the graph starts on May 7th, 2010 (right before the original bailout) and it breaks 6% for the first time during the week of September 10th, 2010 (around the time of EFSF announcement).

For Portugal, the graph starts on May 14th, 2010 (right before the original bailout) and it breached 6% for the first time during the week of September 17th, 2010 (around the time of EFSF announcement).

For Italy the graph starts on June 17th 2011 (before the “big” July bailout) and it just crossed the 6% threshold.

Greece broke 6% and never looked back. It had a few rallies, but never really got close to 6% again. Portugal and Ireland had similar experience until quite recently. Portugal continues to track the path first blazed by Greece. Maybe Greece is unique, but from a time series study, Portugal seems right on track to follow it. Ireland has materially turned the corner, though it hasn’t improved recently. I don’t think it is a co-incidence, that Ireland had let some financial institutions experience severe write-offs, and then it turned the corner.

It is too early to tell what path Italy will follow, but at least for the other countries, they traded similarly prior to the breach, and followed similar paths after the breach. Italy is too big, that I don’t think it can turn like Ireland did. If Italy moves much further, I think it will follow Portugal and Greece. It has more debt than Portugal, Ireland and Greece combined.

Governments do not have months to fix this, they have weeks, and they have been squandering them.

Otherwise, austerity measures will become a regular fixture of day to day living for the populace going forward.

One can anticipate protection by examining purchasing an ETF called Proshares UltraShort Euro (NYSE:EUO) which increases in value by 2% for every 1% decrease in the value of the Euro.

Click here for more info: Eurozone countries 10 year bond yield - the great unravelling

Eurozone countries 10 year bond yield history - the great unravelling

2011-11-10T22:22:00.001+08:00

The great unraveling of the Eurozone has taken an ominous turn...bond yields have shot up in Italy as investors perceive the sovereign risk to have deteriorated. Greece, Portugal and Ireland have already floundered on the credit rocks.

Yesterday, Italy's yields acrossed the 7% Rubicon. A 7% yield is widely deemed as unsustainable and has previously led to bailouts and talk of default in smaller euro zone economies such as Portugal, Ireland and Greece. The crisis will not end simply with Berlusconi's excruciatingly slow demise. If the thinking now is that Italy also needs a bail out, there's a problem. Italy has two trillion euros of debt. That’s greater than the total amount of debt owned by Greece, Ireland, Portugal and Spain combined.

When the Euro was launched in 1999 there was much fanfare over the convergence of interest rates as sovereign risk appeared to equalise with markets not differentiating between economic fundamentals in each Eurozone nation. All started to unravel in 2008.

And, just by looking at the chart, you can tell that there's no way this implosion can be put back the way it was. If the euro is going to weaken, then the best way to play it is to buy the ProShares UltraShort Euro ETF (NYSE:EUO). Every 1% decline in the euro will move the ETF up by 2%.

US Debt in Household Budget Terms

2011-09-29T12:21:00.001+08:00

By removing several zeros from the Government's figures and rephrasing the official terminology, one can place the debt situation in terms we all can understand - that of a family’s income and expenses.

A family taking in an annual income of $21,700 but spends $38,200 will soon be in dire straights.

The large outstanding balance of $142,710 on the credit card only exacerbates the situation.

Clearly, spending cuts need to be made, but eliminating only $385 from the family’s budget would be a drop in the bucket.

Either a substantially higher amount of income needs to be made, or the family will have to learn to live with less.

Clearly, this "family's" credit status is beyond alarming. The parents must accept the responsibility that has led up to their predicament and avoid shunting the repayments to the kids.

It's not all hopeless... in the household context, by all means start paying down the credit card debt and start managing the card company's expectations by committing to repaying an affordable amount each month. Alongside this, the long road to redemption must also start with initiating some nominal savings to weather the inevitable storms that will appear. Assets like precious metals eg silver should act as a store of value in the long term. Currently priced at around US$30 an ounce, they are worth accumulating.

China's WEF warning on its US Treasury sovereign debt holdings...orderly liquidation...

2011-09-17T09:07:00.001+08:00

China has explicitly warned the debt markets...

A key rate setter for China's central bank let slip, or was it a slip, that Beijing aims to run down its portfolio of United States debt as soon as safely practicable.

"The incremental parts of our of our foreign reserve holdings should be invested in physical assets," said Li Daokui at the World Economic Forum in the very rainy city of Dalian, formerly Port Arthur from Russian colonial days. Mr Li, one of three outside academics on China's Monetary Policy Committee, described the debt deals on Capitol Hill as "just trying to by time", saying it will not be enough to stop America's "debt dynamic" turning dangerous.

"We would like to buy stakes in Boeing, Intel, and Apple, and maybe we should invest in these types of companies in a proactive way."

"Once the US Treasury market stabilizes we can liquidate more of our holdings of Treasuries," he said.

It appears this is the first time a top adviser to China's central bank has uttered the word "liquidate". Until now the policy has been to diversify slowly by investing the fresh US$200bn, on average, accumulated each quarter into other currencies and assets, mainly AAA euro debt from Germany, France and the hard core.

It is not clear how much US debt is held by SAFE (State Administration of Foreign Exchange), the Chinese central bank's forex arm. The figure is thought to be over US$2.2 trillion. What's clear is a large vexed seller is agog to let go.

The relevant ETF (NYSE: TBT) to capture this directional move, as confidence in US Treasuries slowly erodes, is the ProShares UltraShort 20+ Year Treasury; it seeks daily investment results that correspond to twice (200%) the inverse (opposite) of the daily performance of the Barclays Capital 20+ Year U.S. Treasury Bond Index (the Index).

English collective nouns…a school of fish, parliament of owls, pride of lions, Congress of baboons…making the world go round.

2011-09-05T23:12:00.001+08:00

The English language has some delightfully anthropomorphous collective nouns for the various groups of animals.

We are all familiar with a herd of cows, a flock of chickens, a school of fish and a gaggle of geese.

However, less widely known is:
- a pride of lions,
- a murder of crows (as well as their cousins the rooks and ravens…recall the 1963 Alfred Hitchcock film "The Birds"?)
- an exaltation of larks and,
- presumably because they look so wise, a parliament of owls.

Now consider a group of baboons. They are the loudest, most dangerous, most obnoxious, most viciously aggressive and least intelligent of all primates. Ironically, what is the proper collective noun for a group of baboons? Believe it or not... a congress!

Dedicated to the politicians of the world…especially to those on both sides of the Atlantic responsible for the current global economic woes and specifically, to that collective crew in Washington DC who literally personify this noun.

Against this backdrop, with the scope for fiscal and monetary policy ammunition running desparately short and stimulus all but exhausted, politicos might be expected to grasp the nettle, overcome their squeamishness about confronting vested interests opposed to change and push through reforms to improve the supply side of the economy; policies such as making it easier to hire and fire, promoting greater competition and investing more in training.

How about the people deserving a keen "convocation of eagles" in these national legislatures...

US jobs recovery has stalled...is a Greater Depression beckoning as financial crisis continues unabated...a possible jobs solution...

2011-09-03T09:34:00.002+08:00

Ahead of the US Labour Day holiday weekend, the Labour Department's latest employment non-farm payrolls report for August, issued yesterday, makes for grim reading showing zero job growth with unemployment transfixed at 9.1% (14 million people).

President Obama has convened an "emergency" jobs speech before a joint session of Congress on 8 September.

Recent sagging consumer confidence and skittish businesses' reluctance to hire underscore the severity of the United States situation. The impact is also felt abroad right now by Asia exporters hurt by declining trade volumes. Consumer spending represents around 70% of US GDP (about US$ 14.7 trillion in 2010).

The tremendous stockmarket rallies triggered from March 2009 as company profits recovered have not translated into additional new jobs in the US.

What the chart above (made by Calculated Risk) shows is the trajectory of job losses and gains over time, after employment peaked, during this recession(red line), compared to previous recessions.

So as you can see, the depth of the decline was much worse than any other recession. Furthermore, the pace of the recovery is much weaker than in previous ones. Over a year it was looking as though the recovery might be kind of V-shaped (a really big, wide V), but now it's clear that the comeback won't look anything like the decline. Now the comeback is basically flatlining. It's turning into a tilted "L".

Ironically, the only time in history that portrayed a much worse and protracted decline than the current one came about during the 1930s and 1940's Great Depression.

With current sovereign debt crises unresolved, both in the US and Europe, there is a danger of panic solutions being deployed by governments that may portend unintended consequences (eg. implementing QE3, Eurobonds) and exacerbate the uncertainty over further new job creation.

There is one possible solution which can foster job creation back in the US. Consider the current S&P500 companies' balance sheets hold cash of US$500+ billion. Unfortunately, a significant chunk of this cash is held in their overseas subsidiaries bank accounts which cannot be repatriated back to US shores, otherwise they would be immediately subject to US business tax of 35% (the 2nd highest in the world after Japan's 39.5%). Scrap this inane tax rule. Let these companies bring their hard-earned money back tax-free.

Let's do a rule of thumb calculation. Say, 40% of this cash, valued at US$200 billion, is held abroad. Repatriate this to the US and assuming dividend and share buy-back policies remain unchanged, it's all re-invested in high value IT and biotech industries, within key R&D, software / hardware manufacturing processes, where the US still retains a solid competitive advantage. That should generate 2 million critical US$100,000 jobs...and these intrinsically satisfying roles stimulate increased consumer spending (including derived demand for Asia exports), pep up family units and generate local taxes paid...

Surely it makes commercial sense to also consider relocating some of these overseas positions back to the United States than end up with incessant verbal spats over high-technology transfer agreements, patent thefts and infringements with some local partners in those testy countries...like China.

Real Madrid bankers, Bankia, pledge Cristiano Ronaldo as collateral for more ECB funds...Moody's rate loan AAA

2011-08-10T20:49:00.013+08:00

Bankia, banker to the world famous Spanish soccer Real Madrid, is really up against the wall amidst the current Eurozone debt crisis.

...very creatively, they have pledged as collateral in return for more funds from the European Central Bank (ECB), the club's loan on the Cristiano Ronaldo transfer.

The 2009 deal made Ronaldo's transfer from Manchester United to Real the most expensive footballer in history. He is one of their "galaticos" - star players. The loan has been rated AAA by Moody's.

Ronaldo now achieves the distinction of having a credit rating higher than the United States government, which was downgraded from AAA to AA+ last Friday.

Should both Bankia and Real Madrid go bust, the ECB would own Ronaldo.

Let's also hope for Bankia's sake, Cristiano doesn't suffer any serious playing injuries...like breaking his toe anytime soon...a subsequent "negative outlook with risk of downgrade" attached to the loan's credit rating would not be in the world's soccer...and economic interest.

Spanish bank fields Ronaldo as collateral - Daily Telegraph

Standard & Poors Cuts USA credit rating from AAA to AA+...Federal Reserve on the defensive...next steps?

2011-08-06T09:01:00.025+08:00

It was the biggest open secret in Washington DC the failure to satisfactorily tackle the USA debt ceiling debate was going to trigger an urgent ratings review which had been signaled by S&P earlier this year.

It's now happened. S&P announced the downgrade on Friday night around 8.30pm EST, Saturday morning 8.30am Asia. It was a monumental moment in the history of America.

The Federal Reserve had bet the farm QE2 last August and it has lost. The worst move here would be to double-down on QE3, because if it failed to rouse global markets in a sustained fashion, then the Fed's remaining credibility and "magic" would vanish in a puff of smoke.

Would you pull out your super bazooka American Express card now to patch over the last 3 years juggling act using the Mastercard to pay off the Visa debt balance?

The perception has now changed. Interest rates around the world are going to edge up over the next 6 months as the reference price of "risk-free" rates long revered in US Treasury bills are redefined. Should central banks decide not to move interest rates up in order to manage their fragile economies, then expect a degree of foreign exchange rate volatilty.

The impact for the next 6 months will be:

The wealth effect will start to diminish as asset values become more "costly" to own and service. Will corporates and consumers continue to "pay more" and chase assets?
Stock markets will have to rapidly adjust for and reflect the extra interest expenses within companies as debt (re)financing becomes more expensive. These are headwinds for those large leveraged companies and small businesses reliant on their bankers.
Bonds prices trend downwards as investors rethink pricing in the context of a rising interest rate environment

What are the range of options and next steps available to ordinary consumers:

Pare down stock market portfolios to eliminate as much market risk as possible, so long as financial markets remain vulnerable, and politicians lack real impetus to resolve sovereign debt concerns. Stay with boring stable companies eg utilities that generate dependable cashflows.
Retain a strong cash component in portfolios to take advantage of potential fire-sale opportunities. Financial markets can over-react emotioally to the downside eg Oct. 2008 & Mar. 2009 as fundamentals get tossed out of the window in panicked dashes to the exits.
Property investors (the above-water, positive-equity universe) should consider locking in their capital gains and take a breather.
Assess the alternative of owning precious metals...gold and silver. Historically these have provided a store of value and risk/uncertainty hedge in volatile financial climates.

The US dollar's reserve status held since 1945 is waning. Over the last four weeks, the world has watched aghast as the internet era threw open the incessant bickering within the highest echelons of American government. The mantle of trust and faith in the creditworthiness of the USA, gingerly built up throughout the 20th century, is eroding. Asia is well positioned, but not guaranteed, to assume the economic vitality that has served America so well in the past.

QE3 will not be a panacea...more like Ben Bernanke riding to the rescue on a lame horse. Stay nimble and let the game come to you.

S&P 500 back to March 2009 lows...in gold terms...

2011-08-05T07:19:00.028+08:00

On March 6th 2009, the United States Standard & Poors 500 (S&P 500) index made an intraday low of 666. Gold on that day was $965. Thus, the S&P 500 bought .69 ounces of gold.

Today, at the intraday high of gold and the low of the S&P 500, the index bought .73 ounces.

Therefore, in gold terms and/or in REAL terms as opposed to NOMINAL money terms, today’s action in the S&P 500 has propelled us basically back to the March ’09 low.

What this means is gold closing at US$1,648 today is not expensive / overvalued.

Given the choice to invest in a broad index fund or purchase gold bullion (government mint coins, private mint rounds, bars etc), albeit these do not pay interest and dividends, you can sleep peacefully without contending with all the financial markets' volatility and USA and Eurozone sovereign debt crisises.

Going forward, gold is in a bull market, it is a store of value, it's real money. The financial markets still are still rivetted with risk. I encourage you to research this and consider buying the physical stuff or a financial ETF (NYSE: GLD).

Are you middle class? One possible definition...

2011-08-01T21:51:00.009+08:00

Are you middle class? Surprisingly, most people who think they are middle class, are not middle class.

It's refreshing to observe how enhanced global trade flows have enabled significant numbers of people in Asia to rapidly close the gap with their American and European peers.

A recent opinion on "Being middle class" at ChrisMartenson.com (a respected American economics and finance blogger) is being able to afford a dozen of the following items what most would expect a middle class family of 4 or 5 can afford:

1. Income (from job and/or investments) to financially support yourself and your family of 4 or 5 without resorting to government assistance when it comes to housing benefits, welfare assistance, etc.

2. Reasonable health insurance/health care for your family (assuming no major debilitating conditions).

3. Reasonable dental insurance/dental care for your family (cleanings, the occasional crown, braces for a kid or two, etc. with affordable deductibles).

4. Paid off all educational loans within 10 years of graduating college / university.

5. Savings for retirement, around 10% to 15% or more of income put into a pension plan or other investments to cover retirement at age 65, medical expenses, possible nursing home care, etc.

6. Savings for both short- and intermediate-term goals (such as one replacement computer/notebook, television, or home appliance a year; a gently-used replacement vehicle every 7 years for each spouse).

7. Savings for long-term goals (having a 20% down payment towards the purchase of a house near where you currently live within 10 years of entering the job market, having higher education / university expenses at least half-covered within 18 years of each child's birth).

8. Kids' stuff: school clothes, tricycles/bicycles, inline skates or other sports equipment, uniforms or musical instruments, allowances, help with a used car when they reach driving age, etc.

9. A family vacation for a week, at least once every year or two; a family vacation for a week at least 2,000 miles away, at least once every 5 years.

10. Taking the family out to a decent restaurant (not Pizzahut) at least once per week.

11. Some new clothes and shoes each year - no need to shop for second-hand clothes.

12. Debt-free except mortgage - i.e. credit cards completely paid off every month (or at most three months).

For Asia, I would add being able to employ a live-in maid to run a domestic household while one or both spouses are at work.

If you:
- are on government assistance,
- have delayed health care or dental care because of costs,
- cannot save 10% to 15% of your income towards retirement costs,
- are not able to save the equivalent of a 20% down payment towards a house (yes I understand you may not want to own, but you know the directional goal I'm driving towards),
- cannot afford to take vacations,
- are not able to pay off your credit card every month, etc.

then you're really not what traditionally would be defined as middle class. You're struggling or you're working class or lower middle class. Even if you might have an iPhone or some of the latest fashions, you're really deluding yourself.

This goes double if both spouses work and such a lifestyle still can't be afforded. Over 50 years ago, most middle class women in the United States and western Europe didn't even work outside the home.

Obviously, we are looking at financial behavioural traits here instead of focussing on absolute income thresholds, since cost of living indices vary across different countries.

However, when it comes down to the crunch, strong leading middle class indicators include the capacity to save for a down payment on a home, deploy an emergency fund, build up children's college funds, etc.

So feel to mention some other items that would be expected of a typical middle class family, that many who think they are middle class, actually can't afford.

The US$15 trillion debt ceiling...a graphic picture of what this debt pile looks like...

2011-07-23T08:43:00.029+08:00

With a 2nd August deadline looming and unless Congress approves an increase in the debt ceiling, the United States government finds itself running out of cash to pay social security recipients and on the brink of defaulting on interest payments to Treasury bondholders. So just how big is the size of the US$15 trillion "credit card" hole which the government finds itself in? (ie US$15,000 billion, US$15,000,000 million)

Well, let's say it's all piled up in one place using US$100 notes...and take a few reference points like comparing it to the Statue of Liberty, an American football or soccer pitch...

Nope, there's not much hope of this being paid off in a hurry within this generation.

It looks like our kids and maybe, grandchildren, will have to shoulder this burden of excess in the years to come...

How to plan for and protect yourself against the implications:
Just how bad is the US$ financial crisis?

What US$ 1 trillion in US$100 notes look like?

The 1st China-US Governors Forum paves the way for closer bilateral trade and economic ties in Sino-Chinese relations...

2011-07-17T20:43:00.008+08:00

The first ever China-US Governors Forum opened at Salt Lake City on 14th July. Its purpose is to provide a new platform in promoting cooperation between the two sides in areas of trade, investment, energy, environment and people to people exchanges.

With the full backing of both Presidents Hu and Obama, it is jointly organized by the Chinese People's Association for Friendship with Foreign Countries (CPAFFC) and the National Governors Association (NGA) of the United States. This venture was instigated by President Hu in his January visit to the United States to enhance cooperation at the local level between the two countries.

The Chinese delegation led by the Zhejiang provincial Communist party secretary Zhao Hongzhu plus leaders from a number of Chinese provincial leaders including from Anhui, Qinghai, Yunnan and Zhejiang and over 30 US governors attended the forum. CPAFFC and NGA signed a Memorandum of Understanding, pledging to make the forum a long-term fixture.

In 2010, China exports to the United States totalled US$364 billion. This compared with US exports to China of US$91 billion. Last year, exports from 24 states to China exceeded US$ 1 billion. Over the past decade, 47 US states' exports to China have grown over 100 percent.

The conference attracted a few hundred researchers and entrepreneurs from local universities, businesses and other institutions in China and the US, as they explore opportunities for new joint projects to promote trade and business, education, cultural exchanges and tourism.

According to the China Daily, this was not just a talk-fest...20 deals were inked including:
- Starbucks and Aini Group in Yunnan (one of the province's most established coffee operators and agricultural companies) signed an agreement to create a coffee business partnership between their two companies, to purchase and export high-quality arabica Yunnan coffee beans, as well as operate dry mills in Yunnan province.
- The Wuhu Economic and Technological Development Zone in East China's Anhui province reached a deal with NuvoSun on a project for thin film solar cells.
- The first China-Midwest (Shanghai -St. Louis) cargo air route operated by China Eastern poised to be a key trade hub will take flight in September creating 12–15,000jobs in St Louis, Missouri. This is subject to one final piece of legislation to be passed by Missouri state senators in September.

This is one dimension that has the highest potential to both promote improving economic relations and bolster closer social ties between the two countries. It dovetails with the signature state visits and summits held by both countries recently in 2009 and 2011…..where the almost obligatory mega-deals are penned eg Boeing planes, Caterpillar mining and construction equipment.

Casting aside any political rivalries and military tensions between the world's top two nations by GDP, it’s one small step for bilateral trade and a giant stride for Sino-US commerce.

China's new Shanghai to Beijing high-speed rail link opens on 30 June...plane wins on time but does not beat cost, comfort and convenience

2011-07-02T12:08:00.030+08:00

Thursday, 30 June 2011, the eve of the 90th anniversary of the 1 July founding of the Chinese Communist Party, was a historic day marking the inauguration of the newly built Shanghai to Beijing high speed rail link (HSR - 国高速铁路).

Work began in April 2008 and it was completed ahead of schedule at a total cost of RMB221 billion (US$28bn). The HSR is expected to have a top speed of 300km per hour along the 1,318km route, punctuated by 22 stations with 23 trains running daily in both directions.

Linking the mainland's economic and political hubs, both cities are both currently plagued by gridlocked city centres due to the recent rapid economic growth in China and the relentless increase of middle class car ownership.

A point to point, time and cost test comparing the new hi-speed rail service with an airliner was carried out by two intrepid South China Morning Post reporters on the day. So, how long would it take to reach the downtown Beijing bureau from their central Shanghai office? Will hi-speed rail drastically cut into the time savings from flying. The results highlighted above are pleasantly surprising.

Unless one is seriously time constrained, it makes sense with some forward planning, to just hop on the express, sit back, kick off your heels, and bask in comfort watching the landscape roll by.

If this exercise is anything to go by, HSR for the 1,318km journey is a serious challenger to flying. If the original plan to run the trains at 350km per hour had forged ahead, this would have killed off the airlines slashing the rail journey to around four hours. However, reasons such as affordable pricing, increasing energy efficiency and potential safety factors put that to rest.

There will be long term benefits which the HSR will bring to the 2nd and 3rd tier cities along the route which includes 22 stations (eg real estate and infrastructure development).

China has the world's longest HSR network with about 8,358 km (5,193 miles) of routes in service as of January 2011 including 2,197 km (1,365 miles) of rail lines with top speeds of 350 km per hour (220 mph). Since the introduction of high-speed rail on April 18, 2007, daily ridership has grown from 237,000 in 2007 and 349,000 in 2008 to 492,000 in 2009 and 796,000 in 2010. This vision was only realised via extensive cooperation and through technology transfer agreements with foreign train makers Siemens, Bombardier and Kawasaki Heavy Industries.

Going forward, Chinese train-makers and rail builders have signed agreements to build HSRs in Turkey, Venezuela and Argentina; bidding on HSR projects in Saudi Arabia, Russia, the United States and Brazil. They are competing directly with the established European and Japanese manufacturers, and sometimes partnering with them.

Back on the train...all that remains is to iron out the glitches from the poor mobile phone reception encountered on this first day. Then the business community could really catch on...

World Bank appoints a new treasurer Madelyn Antoncic...ex-Chief Risk Officer of Lehman Bros...

2011-06-30T21:35:00.013+08:00

The newly appointed Vice President and Treasurer of the World Bank was the Chief Risk Officer at Lehman Brothers when they went bankrupt in 2008.

Antoncic had been with them since 1999...so how much did she know about the underlying asset quality of the bank's assets before they imploded...she can't say she didn't know what was going on...can she?

World Bank Group President Robert B. Zoellick said...“Known for her forthrightness, I am delighted Madelyn is taking up this important role. She brings to the Bank an extensive background in the financial industry and a demonstrated record of leadership, innovation, and integrity.”

Antoncic holds a Ph.D. in Economics and Finance from New York University. As treasurer she will be responsible for maintaining the World Bank's high standing in financial markets and for managing an extensive client advisory, transaction, and asset management business.

It's a zany world out there across the big pond...

A new Eurozone stress test... Denmark shuts its borders to immigration...

2011-05-15T22:21:00.005+08:00

On 11 May, Denmark shocked the European Union (EU) by announcing it will install permanent stations along its frontiers to curb crime and illegal immigration. Control booths will be erected at crossings to Germany and Sweden and in harbors and airports.

This contravenes the spirit of the 1985 "Schengen Agreement" — a free-travel system that has removed compulsory passport controls between many internal borders in Europe. The Schengen Area currently consists of 25 states, all but 3 of which are members of the European Union; the non-EU members being Iceland, Norway and Switzerland.

The system has been under pressure recently with the EU Commission considering reintroducing national border controls in the face of a flood of North African immigrants. The agreement in Denmark was made to meet demands from the government's nationalistic ally, the Danish People's Party, and is expected to be approved by Parliament.

With the Arab Spring in which conflagrations blew up in Algeria, Libya and Egypt, Mediterranean border nations like Greece, Italy, Spain and Malta have also complained that the 27-nation EU has dumped its immigration issues and the costs of dealing with illegal immigrants on their backs.

Coupled with recent economic fissures appearing inside the EU and aversion by some states to come to the rescue of fellow members, the bailouts of Greece, Ireland and Portugal have already dealt a crushing blow to the euro. Spain's fate looks sealed too. With the Denmark butterfly now flapping its wings, this could be a harbinger of a wider European fragility.

Nationalism looks to be increasingly asserting itself on both the ecoonomic and social fronts...the liberal fabric of Europe is be about to be sorely tested...

China cracks down on Unilever...for daring to raise prices.

2011-05-10T20:10:00.006+08:00

On May 6, the Chinese Government declared it will fine Unilever RMB 2 million (US$ 308,000) for announcing in the media its intention to raise prices on a range of its consumer products. Apparently this had led to hoarding.

The National Development and Reform Commission, China’s top economic planning agency, said in a statement sales on some products surged 100 times above "normal" levels. The government has stamped its authority to control inflation as a top priority and the central bank stated on May 3 “stabilizing prices and managing inflation expectations are critical.”

The NDRC reminded China’s Price Law disallows operators from fabricating and distributing information about price increases, raising prices collectively and pushing up prices excessively. Consumer prices in China jumped 5.4% in March, the biggest increase in 32 months, exceeding the government’s 4% full-year target every month this year.

It's interesting how Unilever could respond to this in the long term as it also confronts the rising trend of commodity price. Shackled by pricing constraints, it may have to put the China business model under the microscope. To stay competitive and serve this growing market, does it need to evaluate and source from another low-cost manufacturing location within SE Asia or India? Capped and/or diminishing profit margins are not the basis of sound sustainable businesses.

Standard & Poors Cuts USA Sovereign Credit Rating to "Negative" from "Stable"

2011-04-21T23:09:00.012+08:00

The US ratings agencies, long discredited for kow-towing to the major Wall Street investment houses, as they led a race to the bottom in terms of assigning ratings to sophisticated and complex instruments they themselves were not able to fully understand, finally peered over the fiscal precipice on Monday with Standard & Poors opening the first salvo to admonish the US sovereign credit rating. It cut its long-term outlook on the US to "negative" from "stable." The revision sparked fears that Uncle Sam could soon surrender his coveted "AAA" rating, the cornerstone of "reserve currency" status.

I've always seen these firms as lagging indicators to the machinations in the real economy. Look at what happened in the Eurozone with Greece, Ireland and Portugal. They were late...as usual...in recognising the gargantuan sovereign fiscal risks. Maybe they don't see it as part of their remit anymore to stand up to and ruffle governments' feathers before fiscal road accidents happen. It used to be said the role of the Federal Reserve was to take away the punch bowl just as the party got swinging...with the independent ratings agencies jousting alongside in tandem. However, the pressure within these agencies to search for new sources of income compromised their high ethical standards in the quarterly earnings pressure-cooker that is Wall Street.

For most of 2011, long-term bond yields have been in a trading range between 4.375% and 4.65%. Despite the upward trajectory of QE2 money printing, an endless stream of Treasury bonds issuance and foreign buyers starting to make noises about US fiscal irresponsibilty (Brazil, Russia and China) and the Government's ability to repay, yields have remained stubbornly low.

But interest rates will have to go higher soon...the Treasury has to offer attractive yields to appeal to these overseas buyers to buy ever higher volumes. In February, PIMCO, led by bond king Bill Gross, a conservative bond stalwart, announced its exit from the US treasury market completely. That's akin to Burger King declaring they no longer will use beef in their burgers.

The opportunity to short the treasury bond market is not far off, with yields near the lowest points and pricing near the top of their trading ranges. QE2 ends on 30th June and will open up uncertainty as the market addicts develope cold turkey. Where else can one find the grease to ramp up the markets? A lucrative ETF, ProShares UltraShort 20+ Year Treasury (symbol NYSE: TBT) is a good proxy to brace for a decline in treasury prices, gaining 2% for each 1% fall in price.

2011 Japan Earthquake, Nuclear Accident and Economic Implications

2011-03-20T10:03:00.018+08:00

The sixth largest earthquake ever recorded at 9.0 on 11 March in northern Japan and the ensuing tsunami plus nuclear accident at the Fukushima Daicchi is a potential game-changer to the current fragile global economic stability.

With facts still foggy a week after the event, it is not inconceivable fear starts to take over. After all, in the nuclear industry "perceptions" are everything (aka Three Mile Island 1979, Chernobyl 1986). Already some multinational companies have chartered private jets to evacuate their overseas staff from Japan.

This radiation threat can zigzag but I see the economic picture taking shape in the following direction:

1. The world watches rivetted by this destruction in an advanced economy. One reactor may be so catastrophically damaged it contaminates the whole site so rendering the permanent complete shutdown of the entire electricity generating complex. Immediate energy shortages cascade to a grinding slowdown for industries served in the local area. It will take weeks to play out.

2. Japan is a major world player. The smooth cash flows in the global economic system to this financial centre will be disrupted as Japan rethinks the rebuilding programmes for this region which will probably take several years. Initial estimates are this area generates 3% of the national output. Just-in-time manufacturing and logistics patterns can screech to a halt if there are no alternative networks available and the implications can be heavy for domestic exporters and multinational companies. For the financial players, global money movements can be disrupted as their interest rate sensitive strategies and carry trades in the country start to morph into something completely unexpected in an uprooted Japanese landscape. Already we saw drastic and unexpected G7 intervention in the yen this week.

3. Should Japanese exports plunge and imports rise for the reconstruction efforts, Japanese money flows will tend to stay onshore within Japan. They may find they cannot participate in the US Treasury auctions of which they are the world's second biggest holder. US Treasury yields will therefore start to notch up and this can have ominous implications for bondholders and governments in their debt-servicing interest payments.

4. With money ebbing away from the US Treasury auctions, already magnified by fiscal crises in Western Europe PIGS countries, questions will be raised whether another round of quantitative easing be required after the end of June. The current rising oil price due to north African tensions (another potential game-changer in Middle-East oil dynamics) does not help. Is the groundwork being "justifiably" prepared for QE3 based on this Japan crisis?

5. There could be spill-over effects into the enormous derivatives arena. This is a fast-changing financial landscape for the international big boys and any changes in the economic assumptions that underpin these assets can quickly turn them toxic.

6. Everything changes. Faster than you can believe.

The baseline is starting to shift this week. We cannot foretell whether the resulting market turbulence (Nikkei down 16.5% in two days, worst performance since 1987 crash) was just a temporary hiccup or the harbinger of bigger moves to come over the the next two months, as the economic consequences of the guargantuan task ahead for the world's leading creditor nation are digested. Japan recovered relatively quickly from the 1995 Kobe 6.9 earthquake.

After the stunning market rebounds over the last two years, it may be time to hit the sidelines by paring down the non-core holdings and move to cash.

Dagong Global Critique of Federal Reserve QE2 Quantitative Easing Measures

2010-11-13T10:00:00.009+08:00

A China credit rating agency, Dagong Global, the equivalent of Moody's and Standard & Poors, came out with a blistering critique of the latest US$600bn quantitative easing manoeuvre by the U.S. Federal Reserve announced on 3rd November.

"Though it is likely for the current loose monetary policy to postpone the occurrence of difficulties, yet in the long run, it will be proven to be a practice resembling drinking poison to quench thirst."

Timed for the Seoul G20 meeting, the drumbeat of anti-American economic policy management is building. Germany weighed in this week with their finance minister pronouncing the U.S. Federal Reserve "clueless".

Based in Beijing and founded in 1994, this is the same agency which in July announced credit downgrades to several western nations stripping them of their AAA status (Germany AA+, USA AA, Britain AA-, France AA-).

Watch for further announcements from Dagong...it is demonstrating to be a robust counterweight to the systemic biases embedded within the western ratings agencies who totally failed to anticipate the risks that unfolded leading up to the 2008 financial crisis.

Time will tell whether it proves to be a good leading indicator of the Chinese government's thought processes on western monetary policy management.

US Foreclosure-gate: Subprime 2 housing crisis coming?

2010-10-16T08:47:00.015+08:00

The news broke this week on foreclosure-gate. It has been evident for a while the U.S. banks are drowning in foreclosures and this current crisis is just going to make things a lot worse. Back in 2005, there were approximately 100,000 home repossessions in the United States. In 2009, there were approximately 1 million home repossessions in the U.S. and RealtyTrac is now projecting that there will be an all-time record of 1.2 million home repossessions in the United States this year.

Vast numbers of foreclosures across the United States could be invalid because the securitization process has muddied the chain of ownership. In fact, an increasing number of judges have ruled that the "owners" of the mortgage have no right to foreclose on a property because they lack clear title. This has giving rise to a "Show me the Doc" (document for tile deed) movement to help householders restrain the banks' actions.

8 Investment Implications:
House Buyers

Foreclosure bargains currently on the market may not be the bargains they appear if legal title is not clear.
How will this affect the middle-upper of the property market with recent social trends to "trading-up"?

Americans that have recently purchased foreclosed homes may now be facing some serious problems themselves enduring the uncertainty of where legal title actually resides. Managing household budgets will be thrown awry.

House Sellers

Millions of Americans may now "own" homes that they do not have clear title for. When it comes times to sell those homes, many Americans may find themselves unable to do so, thereby restricting labour mobility.

Householders with Foreclosure Notices Served

For a typical under-water US householder, there may be an incentive to just stay in one's property until a bank or "someone" turns up with the full and proper paperwork to evict. The "Show-me-the-doc" movement is now gaining traction as survival instincts are triggered with social mores thrown out.
By not paying the mortgage, a householder may gain a "temporary reprieve" to transfer mortgage spending elsewhere.

Banks

It will make it much more difficult for the banks to sell the massive backlog of foreclosed properties they have accumulated.
Under current FASB accounting regulations, such loans (assets) should be marked to zero if there is no eligible legal title or in the absence of market validity. Massive write-offs could be looming. It distracts management attention from running the core business.
How will this affect the ability for banks to sell mortgage-backed-securities (MBS) into the market?
Will banks continue to hoard money and not lend as they consider all conservative means at their disposal to shore up their capital base?
Should another raising of capital arise to boost their Tier 1 and 2 reserve ratios, this will cause dilution to existing shareholders.

Ratings Agencies

Do they have any credibility left? What checks did they do to validate any of the paperwork before they issued their ratings on the mortgage-backed securities (MBS)?
Warren Buffett has sold down a large proportion of his holdings in Moodys over the last 18 months.

Government

Another test of the big banks are too big to fail may not be far off depending on the size of write-offs and how market confidence is affected.
Is there political appetite for another bailout?
The Federal Reserve is holding US$ trillions of MBS on its balance sheet when it bailed out these banks. One day, it has to divest itself of these. Who will want to buy them and at what yields?
FDIC reserves may not be enough to absorb a wave of smaller bank failures that result from foreclosure inertia. This may necessitate more federal spending to boost their reserves and so further increase the growing fiscal deficit.

Lawyers

Attorneys general in 50 states will be working together on a joint investigation into this foreclosure crisis. It is going to become much harder to get a mortgage. It is going to become much harder to buy a home. It is going to become much harder to sell a home.
For a bank, this must be a nightmare. Loans on the books are backed by inadequate documentation. Employing low paid back-end staff to sign off mortgage approvals and which were subsequently "re-packaged" without thoroughly questioning any of the paperwork or ensuring completeness of due legal process. At best it's carelessness, at worst negligence. Defective documentation has created millions of blighted titles that could plague the nation for the next decade. Lawyers smell blood!

Economic

This probably explains why the recent consumer spending indicators have not been worse in the downturn. Is it possible what some foreclosed householders don't pay in mortgages has been "transferred" to other items eg Walmart, iPads etc
Over time, if this is not quickly resolved, the U.S. housing industry is likely to suffer a significant downturn due to all of this uncertainty. Consumers consume. Housing expenditures and their flow-through to related support industries (eg furniture and furnishings) transmit to the general economy.
To assess if consumers hold back, Thanks-giving and christmas spending over the next two months will be key indicators to watch.

In a litigious society like the U.S., lawyers will have a field day. 2008 subprime could now morph into subprime 2 making tobacco litigation seem like a picnic.

A healthy property market is pivotal for any economy. It promotes labour mobility, greases social development and drives a steadfast flow of consumer spending.

Shorting the US banking sector (symbol:XLF, Financial Select Sector SPDR) seems a reasonable bet until clarity is achieved with this tangle of legal spaghetti. Imagine the financial equivalent of BP having many many small wells gushing oil out into the Gulf all at once and getting confused as to which ones to plug immediately. We know what happened to BP's share price in the first two months of that saga.

An explanation of how bubbles happen...

2010-10-02T17:45:00.004+08:00

This is the most simple and straightforward explanation I've come across on how and why asset bubbles occur. It comes from Thomas Woods, the author of Meltdown which digs into the real causes of the 2008 collapse. He had this to say at a recent speech at Indiana University:

… Asset bubbles, like the housing bubble we’ve just lived through, do not occur spontaneously. If people bought lots of houses on the free market, interest rates would rise as the banks’ loanable funds were depleted. That would put an end to speculation in real estate.

But thanks to the Federal Reserve System, which is no part of the free market, large infusions of money created out of thin air kept interest rates low, and thus perpetuated the bubble. During an asset bubble, demand for the asset in question rises, as does its price. Where would people get the money to keep buying an increasingly costly asset if the government’s officially approved money machine weren’t there to flood the economy with cash?

It was this interference with interest rates, pushing them well below where the free market would have set them, that set in motion the classic boom-bust cycle we’ve just witnessed. F.A. Hayek won the Nobel Prize for showing how central banks like the Federal Reserve, by interfering with interest rates and not allowing them to tell entrepreneurs the truth about economic conditions, divert the economy into unsustainable configurations that inevitably come undone in a crash. (Hayek belongs to a tradition of free-market thought called the Austrian School of economics.)

Adding fuel to the fire was the so-called Greenspan put, the unofficial policy of the Greenspan Fed that promised assistance to private firms in the event of risky investments gone bad. What kind of incentives do you suppose that created?...

Concise, logical and accurate. That's in the USA and they've just learnt a harsh lesson. Let's hope more consumers in China and Hong Kong start paying attention and dispense with the "but this time it's different here" attitude. Nations do not succeed by strenuously defying economic gravity.

A History of 50 Investment Bubbles

2010-09-26T09:03:00.018+08:00

With the price of gold and silver scaling new heights recently, how does this performance compare against historical bubbles that formed and burst? Tulipmania in Holland during the 1600's and the South Sea bubble of 1720 spring to mind... the graphic below (Sharelynx.com) shows 50 historic bubbles from days gone by.

In this context, the chart shows that this current bull market in the precious metals is barely off the ground compared to other bubbles.

Double click on the image to enlarge...

BP disaster is not in the spill...it's with their PR...and long term Russian manouevres

2010-06-20T10:34:00.031+08:00

It's a horrible accident but you don't really have to clean up the entire Gulf of Mexico as the mass media would lead you to believe. The Gulf of Mexico is massive, covering 615,000 square miles and containing 660 quadrillion (660 thousand million millions) gallons of water. Looking at the amount of oil the Macondo well drilled by the Deepwater Horizon rig has been leaking, most estimates are in the 12,000-20,000 barrels per day range, so let's take the high end and also assume that this continues until mid-August, meaning four months since the accident.

Assume that the cap captures no oil (the latest reports are that it may be capturing much of the oil but let's be conservative). 20,000 barrels/day x 120 days x 42 gallons/barrel = 100.8 million gallons of oil released. 100.8 million divided by 660 quadrillion is one gallon of oil for every 6.6 billion gallons of water in the Gulf. That's the equivalent of roughly one-millionth of an ounce of oil in a typical bathtub full of water.

Huge oil spills have happened before and they were not the end of the world. The 1979 incident with PeMex's Ixtoc oil well was far worse than the Deepwater Horizon well. 140 million gallons of oil poured out of the Mexican well. After four months, an oil slick had covered about half of Texas's 370-mile gulf shoreline devastating tourism...and they recovered.

This in itself was nothing compared to Kuwait. During the first day off the 1990 Gulf War, 10 times as much oil spilled into the Persian Gulf which is one-sixth the size of the Gulf of Mexico. What were the long-term consequences? Whitney Tilson, a value-oriented New York hedge fund manager cites a 1993 UNESCO study that reported "little" long-term damage was done to the environment. "Half the oil evaporated, a million barrels were recovered and 2 million to 3 million barrels washed ashore mainly in Saudi Arabia," he said...and they recovered.

So, does that make BP a bargain investment today? Not yet. Four factors are unfolding which could serve as a drag to BP's fortunes. Last week, the major ratings agencies, Standard & Poors, Fitch and Moody's downgraded BP's credit ratings to just above "junk" status as financial liabilities escalate. The US$20bn escrow account set aside for compensation is just a starting point. Soon after a meeting at the White House, it eliminated its dividend for the next three quarters. As a result, some mutual funds may have to sell off their BP holdings due to internal rules on having to maintain only dividend-paying companies within their portfolios.

One company's crisis, however, is someone else's opportunity. Russian President Dmitry Medvedev added further pressure on BP stopping short of saying the disaster would prompt a review of Russia's partnership with BP. He warned that the oil giant might face "annihilation" as a result of the fall-out of the oil disaster. In an interview with the Wall Street Journal, he described the spill as a "wake-up call" and said that "hopefully [BP] can afford the losses". In Russia, BP holds a 50% stake in TNK-BP - a joint venture with AAR (Alfa Access-Renova) which is owned by a group of Russian billionaires. BP is the third largest oil producer in Russia accounting for roughly a quarter of BP's global production. According to analysts at Moscow investment bank Troika Dialog, BP's stake in TNK-BP is worth about US$16-18bn. Relations between BP and the Russian authorities have been strained for many years going back to Putin's leadership over taxes and operating control. The weakened company must be wary operating in partnership with business oligarchs who have forged connections to the highest echelons of central government circles where a nationalistic fervour has recently gained momentum and with energy supply high on its agenda.

While this dark cloud looms overhead, BP has stumbled from one PR disaster to another. The CEO, Tony Hayward stated at the end of May he "wanted his life back" having already spent some time in the Gulf in charge of daily operations while many local fishermen and hotel owners have had their earnings potential obliterated this summer as the crisis mounted. Last week their Swedish chairman stated after the White House meeting BP would look after the "small people", an unfortunate slip in translation. It smacked again of an aloof corporate culture. Meantime, he has withdrawn his hapless CEO from the firing line after his weak testimony to Congress for neither being able to articulate anything new over the company's decision-making process in the events leading up to the accident nor any reassurances on the management of the spill. Mr Hayward was subsequently savaged by the US press. After jetting back to the UK, yesterday he was back in the news for taking his 52 foot yacht out to take part in a boating competition attracting yet more biting criticism from the English press. BP accounts for one in six pounds of the FTSE 100 total dividend payout leaving many organisations and individuals out of pocket...and this 53 year old geologist seems to have got his life back...but at what reputational cost to the brand?

The oil community is becoming more concerned with longer term erosion under the seabed within the immediate vicinity of the well spill due to the failure to seal the well head. Why? This is a relatively huge reservoir with an abundance of methane. The oil and gas that are flowing out of the rock are bringing small amounts of that rock (in the form of sand) out with them. Rocks that contain lots of oil are not that strong and are easily worn away by the flow of fluid through them. This leads to cracks in the zone and could be a precursor to more leakages within the area and a worse case scenario could be a gargantuan "volcano-like" eruption as the seafloor collapses due to the unremitting pressure build-up and increasing flow rates. Will this almost certainly lead to the bankruptcy of the company as containment fails at all levels?

Look to see if the relief well being drilled and expected to be completed in August can solve the problem. This will be the first positive fillip to BP's revival.

China's devaluation dilemma: where next with the yuan, dollar and the euro?

2010-05-22T23:08:00.014+08:00

The yuan is currently pegged to the US dollar in order to keep Chinese goods comparatively cheap in the key North American markets. As long as the US dollar is weak, the Chinese yuan is weak and therefore competitive in European markets. While complaints abound from the US about this "unfair" trade advantage, is it possible China has been blind-sided by the recent euro woes?

The US$-euro exchange rate is also a pillar to global trade. As the euro falls, countries are also under pressure to weaken their currencies. Specifically, China is under pressure to weaken its currency because Europe is the largest consumer of Chinese goods. In order to remain competitive, Chinese companies must reduce their profit margins or hope to make up reduced profits by increases in volume.

To weaken one's currency, one has to sell it and buy another currency. If you're China, would you rather sell the yuan to buy the euro, yen, or U.S. dollar? In this trio, the US dollar is king because it's the least worst scenario being the global reserve currency.

The Chinese government is now confronted with a policy dilemma because it has painted itself into a corner. Which exchange rate should it "manage" for the long term benefit of its export industries? It can either target the US$-yuan or the euro-yuan. It cannot aim for both as it has no influence over the US$-euro rate. As this chapter unfolds, distant images of how another major economic power blew up in the late 1980s with failed exchange rate targetting, from which it has never recovered, loom ever larger: Japan. This lack of control worries Chinese policymakers. This could be one reason why Chinese entrepreneurs have recently voiced their increasing concerns over their own government's US$-yuan policy. There are now bigger and wider issues at stake because entrepreneurs are not willing to invest in a climate of uncertainty.

Every country desires a weaker currency so it can export more goods. However, the only way to weaken one's currency is to sometimes make bad investments. Such economics make sense to a central banker: more exported goods mean more jobs, social cohesion and a higher GDP. So why would you fundamentally weaken your entire nation for one good year of exports? Imagine breaking all the windows in your city so that you will experience a building boom.

If market forces to allow the exchange rate to find their comfort levels are not the answer for China's zest for "control", then an alternative outlet needs to be created to protect the general Chinese investor community from the future vagaries of their export sectors. A safety valve that can stand the test of time. Precious metals are one such avenue.

The LIBOR-OIS spread is signalling a credit crisis could be brewing again...

2010-05-21T12:35:00.015+08:00

One measure of the fear in the credit marketplace is the interest rate that banks charge each other compared to the safe overnight rate.

This is measured by the LIBOR-OIS spread. LIBOR is the London Interbank Offered Rate that banks charge each other for unsecured funds as quoted in London. The OIS is the Overnight Indexed Swap, the interest derived from the central bank’s overnight rate. In the U.S., the OIS is based on the fed funds rate.

The difference between these two rates offers a useful indicator of the risk perceived in the markets and the potential lack of trust banks have with each other. The credit crisis showed that big banks can collapse within a matter of days. No bank wants to be put in a position to recover loans to its peers / counter-parties over protracted periods of time and uncertainty because they have suddenly encountered "difficulties" and may not be able to repay.

The Bloomberg chart above shows how the spread was generally a low 10 basis points (0.1%) until the Credit Crisis. After October 2009, the rate returned to those low levels and has stayed low until this May. Was this recent period the “eye of the storm”?

As you can see, the LIBOR-OIS spread has doubled in just the last two weeks, a clear warning that the new turmoil around the Greek sovereign debt crisis is raising risk levels. Given the inter-connectedness amongst the international financial institutions, those with loans especially in the PIIGS nations may face higher borrowing rates as repayment risks increase. German, French and Spanish bankers with overseas loans in these regions therefore could be subject to more sleepless nights.

US Bonds: a safe haven to diversify away from the PIGS (but for 2010 only) ...

What is currency debasement and why gold will be the next world currency?

2010-05-18T21:56:00.010+08:00

If the 2008 financial crisis was characterised by private debt being bailed out by public debt (ie borne by the long suffering taxpayer), then who will come to the rescue of sovereign debt? Which government(s) is going to foot the tab on another's profligacy? It seems another floor has just been built on the house of cards.

With this new set of economic machinations, the chart above points to next year’s sovereign debt estimates for the G7 and other key global economies. The U.S. debt in 2011 would be about equal to GDP (US$15 trillion) while the debt loads carried by Japan, Italy and Greece would exceed GDP.

There is a concern among investors that not all is right with the financial world and they don't fully understand it. They think central bankers might be debasing their currencies and so there is an interest developing in gold. If their personal wealth can be affected by the future inflation spawned by the trillions of dollars and euros created to finance economic rescue plans, then the potential implications for gold are profound.

What is currency debasement and how does one measure it? This may once have been the domain of a few old Germans, Latin Americans and Asians to think about. The recent ferocity in which it has struck Mittel Europa has un-nerved many who are slowly coming round to the view the Euro is heading inexorably towards Argentine peso status. It won't be just clattering pots and pans in the streets...the trade union molly-coddled Greeks can attest to something more vigourous.

Here’s one way to look at currency destruction. 10 years ago this week, US$1,000 bought nearly four ounces of gold and today US$1,000 won’t even get you a single ounce (today's spot price is US$1,215). Gold is money, so when you look at the gold-US dollar exchange rate, the dollar’s value has fallen by a startling 70%+ just in the past decade...and that's the global reserve currency!

To hold gold is not about getting rich, but a means to diversify assets and protect wealth.

Acropolis now...the web of PIIGS debt exposed in technicolour

2010-05-08T10:24:00.029+08:00

The following pentagram is from the New York Times. Crafted from the BIS (Bank of International Settlements) data, it shows the total debt load of the PIIGS (Portugal, Ireland, Italy, Greece and Spain) nations as at 31st December, 2009 spotlighting how much is owed:
1. between the PIIGS nations themselves and
2. from the PIIGS to the major trading European partners, France, Germany and the UK
Arrow widths are proportional to debt amounts.

The joint EU/IMF rescue package this week of euro 111 billion or US$145 billion (bn) to bail-out Greece has triggered a burning fuse which will have global ramifications. It will leave the much maligned 1990s Asia currency contagion in the dust. There is simply too much interlinked debt in the European financial system at alarming proportions of national GDPs, one wonders how they will ever be rolled-over, never mind paid off.

After Greece, like dominoes, the other PIIGs are about to topple.

It's a sobering thought. EU leadership has been virtually non-existent. The world got a glimpse of this when the Eyjafjallajökull volcano erupted in April and paralysed European airspace for days costing the airlines billions. The Greece situation has merely amplified this.

The value of fiat paper money is waning. We are still some distance from the devastation wrought by hyperinflation in 1920s Germany, 1990s Argentina and 2000s Zimbabwe. It will take magical healing powers for the European financial system to untangle itself and escape the dark forces of dislocation building up within this pentagram.

The watershed moment has finally arrived to fully recognise gold and silver are real alternatives to holding paper money as a store of value.

Today the UK is at a crossroads. A general election with a vital decision to make and action urgently required...

2010-05-06T21:23:00.007+08:00

In the tightest United Kingdom general election since 1974, the three main political parties are slugging it out to carve out a mandate to govern this island nation of circa 62 million, the 6th biggest economy in the world.

Speaking on Wednesday at Bradford University, the last day of campaigning, the Prime Minister, Gordon Brown said: "I know there are people who say, or hope, the election is already over. But I tell you that tomorrow is the time for the thousands of people to speak for themselves.

"Tomorrow doesn't belong to the press, to the commentators, to the insiders, to the vested interests or even to the political parties. Tomorrow your voice shall be heard and your vote will determine the direction of this country."

The right to vote in an open and transparent manner is commonly taken for granted in the western hemisphere. In Asia today, with perhaps India, Indonesia and the Philippines excepted, this is still very much a work-in-progress. We should genuflect on the millions of people who aspired and struggled to achieve this vision and did not live to realise their dreams.

During this momentary interlude in the daily heartbeat of a nation, the attention on the economy will rightfully and respectfully take a back seat while the heeled populace makes a beeline to the ballet box and cast a life influencing decision. Today nobody, including the Prime Minister, need be “primus inter pares” (first amongst equals). Amen to that…

Australia's new 40% mining super profits tax...the "Greater China tariff "

2010-05-05T21:16:00.003+08:00

On Tuesday, the Australian government levied a 40% Resource Super Profits Tax on its mining industry to take effect from July 2012. The company tax rate would be cut from 30 percent to 29 percent in July 2013 and to 28 percent a year later.

In one stroke, the cost of doing business shot up overnight. The Australian mining sector accounted for $94 billion in exports during 2009, 38% of the total.

Multinationals like Rio Tinto and BHP Billiton were left scrambling in their wake as Australia is a vital cog in their global mining operations. Resource mining is a capital intensive industry and long term planning is essential, sometimes with payback taking many years.

Perversely, is this otherwise a Great China Tariff, a tax to soak the Chinese? The resource sector comprises 9% of Australia's economy. Australia exports 80% of its resources. Who is the biggest buyer of those resources? China. The Chinese bought US$42.4 billion of resources from Australia in 2009.

China is scouring the world for oil, natural gas, copper, coal, and iron ore supplies. It has a desperate need for the raw materials ... and lots of money to toss around in order to get it. Plus…China doesn't just buy products from Australia, it buys mining companies too (US$$20 billion worth in the last 18 months or so).

The proposed Australian super-profit tax reinforces the lesson China learned in 2005 and 2006: the resources aren't yours unless they are in your house. Instead of sending more money on taxes to foreign governments, China will spend that money in its domestic mining and energy infrastructure. Right now, China has no choice but to "pay up" for Australian resources. It has to have them to continue building. But stories like this are huge drivers for China's domestic exploration programs...

China can't replace Australian supplies of iron ore, tin, and oil with domestic deposits tomorrow... but the country does have some excellent prospects.

In with Mars and out with the moon - Obama's new frontier

2010-04-17T11:34:00.018+08:00

On Thursday, 15th April, President Obama announced at Cape Canaveral the scrapping of the moon programme which he had inherited from George Bush. Understandly this drew consternation from the Apollo astronauts who flew the 1960s and 1970s moon missions as a sign of American demise.

Instead Obama delivered a US$6 billion boost in NASA's budget, then offset the cancellation of a mission that would once again send men to the moon by announcing a new program to land astronauts on Mars... and drop in on an asteroid as well.

Over the course of my days on this remarkable planet of ours, I have had the opportunity to get to know all manner of personality types. One of the most troubled have been the serial spenders... deluded individuals that simply can't help but buy all that their hearts desire, no matter how much pain results from their debt-financed spending. That describes today's political class.

Unless and until you start hearing the president making speeches about not going to Mars, followed by wishing legions of negative-equity houseowners who bought over their heads and government employees the best of luck as they start to toss away their their credit cards and enter the private sector, the only conclusion to be drawn is that a space ship isn't the only thing headed for outer space, but government debt as well.

This spending is unsustainable...

Click below for Obama's personality trait as analysed by a world personality expert:
Dr Sam Vaknin, narcissism, Obama and the fate of the world economy

There is no US consumer recovery...implications for China

2010-03-20T18:45:00.003+08:00

Last week's Flow of Funds report from the US Federal Reserve showed that US total credit expansion, or the relative lack of it, continued to disappear down the plughole despite the government's mighty efforts to put the country back on the path to prosperity (see chart below).

The current recovery, based in very large part to manufacturers starting to ramp up their inventories, simply cannot be sustained while credit is disappearing at this debilitating rate.

The recently released Q4 Flow of Funds data allowed economists to get a full view of the 2009 data. It was ugly. Most shockingly, the household sector shrank its borrowing for the seventh quarter in a row.

Combined with continued rapid balance sheet shrinkage in both the corporate and financial sectors, total domestic debt contracted for the fourth quarter in a row. The government's creation of credit, or stimulus, as big as it has been is barely propping up the whole economy overall.

Now, we might be getting used to such news, but it is always worth remembering that, prior to the global meltdown, even one quarter of total domestic debt shrinkage was enough to stir the government into rapid response mode with quick relief measures.

The omens are not good for China's exporters. 15 months after the height of the financial crisis, the trend is now clear. US consumers who make up 70% of US GDP are just not in the mood to spend. No wonder the Chinese premier is reluctant to let the value of the yuan appreciate significantly. This will put pressure on the exporters to raise their prices to the buyers and could be the final straw that leads to bankruptcy and spills more unemployed factory workers onto the city streets.

With demand conditions probably permanently stuck in a rut, who dares to prick any of the current China bubbles ranging from property to stockmarkets?

China's global shopping spree for oil

2010-03-06T18:22:00.006+08:00

China is hunting for resources from Canada to Nigeria to support expansion in the world’s fastest growing major economy. It's global pursuit of oil and gas has grown to a crescendo. China's state oil giants are stepping up their pursuit of overseas assets as domestic oil output stagnates and supply of natural gas fails to keep pace with the growth in demand. Yet their aggressive moves are getting precious little media attention.

Since 1993, right about the time that China started importing oil, the big three petroleum companies have started a major push in foreign countries through equity-type investment and contractual management. The first salvo was on September 6, 1994 when CNOOC (China National Offshore Oil Corporation) acquired 33% of Arco’s share at the Malacca oil field in Indonesia. After the Chinese oil companies became publicly traded in 2000 and 2001 their acquisition of foreign oil and gas assets has become more vigorous. By September 2009, China’s oversea oil and gas investments were spread among 28 countries and 73 projects.

China’s latest purchase came last month in February when PetroChina (part of CNPC)paid US$1.7 billion to buy a 60% stake in a Canadian oil sands operation from Athabasca Oil Sands Corp. The production from the oil sands investment is expected to be as high as 500,000 barrels per day under full development. The Canadian acquisition is among the latest in China’s shopping spree for global oil and gas assets. Those purchases are further increasing the size of China’s biggest oil companies - CNPC (China National Petroleum Corporation), Sinopec and CNOOC which are now among the largest oil companies in the world. Last November, Petroleum Intelligence Weekly published its list of the world’s 50 biggest petroleum companies. China’s three biggest energy companies were ranked, respectively, as number 5, 25, and 48.

China has seized the opportunity of the global economic crisis and the decline in oil prices to solidify its energy security. It sees access to foreign oil as a crucial element of its economic future. Last year, the country imported 50% of its oil for the first time.

Furthermore, in 2009, production by Chinese companies operating overseas oil and gas fields exceeded 800 million barrels (2.2 million barrels per day, about 57% of total imports). Meanwhile, China has become the biggest buyer in the global oil and gas M&A (mergers & acquistions) market. Chinese companies announced 11 acquisitions with a total value of $16 billion. The biggest deal was Sinopec’s purchase of Swiss-based Addax Petroleum for US$7.5 billion in June 2009, by far the biggest acquisition in China’s oil and gas trading history.

Other important highlights of recent Chinese overseas oil and gas purchases include:
- 2006-09: CNOOC and Sinopec’s acquisition of three blocks in Angola for US$1.8 billion
- Apr.2009: Xinjiang Guanghui Group US$44 million acquisition of 49% stake of Kazakhstan TBM Co. to jointly develop the eastern Kazakh oil and gas blocks in the Zaysanskaya region;
- May 2009: China Development Bank’s $10 billion contract with Brazilian state oil company Petrobas for “petroleum and loan exchange” which allows China to get 150,000 barrels per day for 10 years;
- May 2009: PetroChina’s US$ 1 billion acquisition of 45.5% percent of Singapore Petroleum Co., Ltd;
- Sept./Oct. 2009: China Investment Co.’s US$939 million for a 11% stake of global depositary receipts of Kazakhstan's national oil company and US$300 million for a 45%stake of the Russian Nobel Oil Group;

Through these deals, China has steadfastly increased its potential oil supply by about 1.5 million barrels per day.

To facilitate oil and gas imports, China is building pipelines. Under construction or already under partial operation are the China-Russia crude oil pipeline, China-Myanmar oil and gas pipelines, and Central Asia gas pipelines. It is clear that the building of the necessary infrastructure, coupled with China’s aggressive global acquisition spree is part of a deliberate effort to increase the country’s energy security.

What's all the fuss about with the Toyota car recall?

2010-02-28T12:26:00.007+08:00

The Japanese Toyota president was compelled to fly over to Washington from Tokyo and make a grovelling public apology under intense media scrutiny inside the US Congress. Politicians know they can get a lot of free press by stoking the popular perception that Toyota somehow knew the gas pedals were "dangerous," but installed them anyway, violating U.S. laws and regulations. U.S. automakers are doing everything to encourage this hysteria. This was just plain old fashioned bullying...

However, let's look at the facts so far. The probability these accidents resulted from the use of an ill-designed component of accelerator pedals getting stuck and causing fatal crashes, I had to consider the numbers: 34 people died in accidents blamed on the pedals. That's a pretty small number, but maybe enough to raise some concerns... until you realize that's the total number of fatalities since 2000.

Toyota has recalled more than 8.5 million vehicles in the U.S. Assume the owners drive those vehicles an average of 10,000 miles a year (that's less than 30 miles round-trip a day...conservative in the vast spaces of the US - and a factor of 10 makes the maths simpler). This means Toyotas are logging more than 85 billion miles a year in the U.S. or 850 billion miles during the last 10 years.

By dividing 34 deaths into 850 billion miles and the odds of a Toyota owner having one of these accidents is one in 25 billion for each mile driven...or your cahnces of being are a fatality are one in 2.5 million. That's a random event. If Toyota were using faulty equipment, we would have seen thousands more accidents and deaths...and you can bet in a litigious society like the United States, claims would have been filed by savvy lawyers and piled high in the law courts by now, on par probably with cigarette-induced diseases.

You're more likely to get killed by lightning: 60 people died from lightning in the United States just in 2009. The odds of a hole-in-one in golf are only 5,000 to 1.

Statistics aside, the allegedly defective accelerator part is made in Canada by Indiana-based CTS Corp. Many makes and models use this same part. For example, the Pontiac Vibe uses it. Ford sells a van in China with the component. Why aren't we hearing about those cars? None of the drivers with American cars that use identical parts ever experienced a stuck accelerator? US Transportation Secretary Ray LaHood told people to stop driving Toyotas... and then retracted it saying it was "obviously a misstatement."

I'm confident those parts are safe. It makes sense for those driving recalled Toyotas to get the pedal replaced and ignoring the recall voids the warranty.

Look for Toyota to be one of the consistent performers of the decade too...

Linking 1 trillion dollars to the founding of modern Rome...

2010-02-20T12:43:00.028+08:00

When I was at school, it wasn't long before I was drawn to the fascinating subject of history. With great teachers who were quick to engage young minds, I was quick to absorb all the best and worst achievements of mankind... nothing quenches the thirst for knowledge more than anchoring a few memorable dates, the names of kings and queens from ancient Egypt to modern Britain, titanic battles fought on land, sea and air plus the rich tapestry of discoveries and inventions stemming from the plain wheel to the rocket engine.

I was trying to figure out what a trillion dollars (one milllion million or thousand billion) mean to people nowdays. It can be hard to get one's head around this (unless you live in Zimbabwe where they have issued a trillion banknote in 2009). There were two ways I approached this:

1. If one were to print and spend 1 million a day, how long would it take to go through a 1 trillion...
- The maths would be 1,000,000,000,000 (that's a whopping twelve zeroes) divided by 1,000,000 = 1 million days. That would be 2,740 years.
- Another way to look at this is, you would have had to go back to 730 BC (before Christ) and keep spending a million dollars a day non-stop up to today. That goes back to the era of the founding of Rome by Romulus and Remus in 753 BC! Staggering!
[The insignia of the Roman Standard was SPQR: Senatus Populusque Romanus - "The Senate and the People of Rome", or should that be Spending Plentifully Quickly Redux, because it was spending over-reach that led to the demise of the empire in the end.]

2. What does US$ trillion physically look like?
Below are graphics from the Centre for Research on Globalisation (California) / pagetutor.com on what US$ 1 trillion looks like.

Let's start with a humble US$100 note, the largest denomination in general circulation:

A packet of one hundred $100 bills is less than 1/2" thick and contains $10,000. Fits in your pocket easily and is more than enough for week or two of shamefully decadent fun:

This next little pile is $1 million dollars (100 packets of $10,000). You could stuff that into a carrier bag and walk around with it:

While a measly $1 million looked a little unimpressive, $100 million is a little more respectable. It fits neatly on a standard pallet:

And $1 BILLION dollars... now we're really getting somewhere...

Now, figure this out...US$ 1 TRILLION...a million million or one thousand billion and notice it's double stacked.

This has convinced me the US government with its US$100+ trillion debt mountain (I guess you can picture this now) of liabilities (eg. from current and projected annual fiscal deficits, Medicare & Medicaid healthcare programmes for an increasingly aging population and massive military commitments overseas) is already bankrupt and will never be able to settle in full with its creditors China, Japan, Middle-east oil nations. Given the hard choice between a reality that is hard to accept and a delusion that is impossible to trust, I will pick the reality. The US dollar will descend from current reserve currency status to "Monopoly" money and not be worth the paper it's printed on. The last refuge for stores of value will be in physical commodities like precious metals, crude oil and farmland.

How to plan for and protect yourself against the implications:
How the Greenspan Guidotti Rule foretells a currency crisis?

Valentine's Day distilled...funnies on love

2010-02-14T17:57:00.005+08:00

It's Valentine' Day today...and New Year's Day too in the Chinese calendar. That puts some Oriental folks in a bit of a quandary...what gives?...attending to the New Year well-wishing rituals centering around their close families and joyfully dispensing & receiving red laisee packets...or being attentive to their lovers' needs. It was Mao who stated "Women hold up half the sky..." in recognition of their pivotal importance in society, albeit spelling out the blindingly obvious, but an anachronism that blights modern China today.

Since the dawn of the human race, understanding your partner or new-found-love has been the ultimate voyage to self-discovery. Moving right along, we will enter the risky theme of the differences between Mars and Venus. Political correctness and economic reality will therefore be temporarily suspended...

ROMANCE MATHEMATICS
Smart man + smart woman = romance
Smart man + dumb woman = affair
Dumb man + smart woman = marriage
Dumb man + dumb woman = pregnancy

OFFICE ARITHMETIC
Smart boss + smart employee = profit
Smart boss + dumb employee = production
Dumb boss + smart employee = promotion
Dumb boss + dumb employee = overtime

SHOPPING MATHS
A man will pay $2 for a $1 item he needs.
A woman will pay $1 for a $2 item that she doesn't need.

GENERAL EQUATIONS & STATISTICS
A woman worries about the future until she gets a husband.
A man never worries about the future until he gets a wife.
A successful man is one who makes more money than his wife can spend.
A successful woman is one who can find such a man.

HAPPINESS
To be happy with a man, you must understand him a lot and love him a little.
To be happy with a woman, you must love her a lot and not try to understand her at all.

LONGEVITY
Married men live longer than single men do, but married men are a lot more willing to die.

PROPENSITY TO CHANGE
A woman marries a man expecting he will change, but he doesn't.
A man marries a woman expecting that she won't change, and she does.

DISCUSSION TECHNIQUE
A woman has the last word in any argument.
Anything a man says after that is the beginning of a new argument.

Love makes the world go round, sends women dizzy and puts men in a spin. That's what I call manna from the orbital heavens!

Black clouds gather over Europe...a Greek tragedy playing out...

2010-02-12T22:09:00.028+08:00

Greece is in trouble. At first gradually, and then with alarming speed, the country has lost credibility with investors because it borrowed too much money and now it can't afford to service its debt. Greece's problems don't directly influence most Chinese and American businesses, but they remind us of the greater issue that's still out there...

The whole world is carrying too much debt. Years and years of artificially low interest rates, lax lending standards, and a belief that assets can't fall have clogged our arteries with bad investments and unserviceable debts. We had a heart attack in 2008. It hurt, but it didn't kill us. We should have learned from it. Instead, we ordered the world's biggest plate of pancakes and bacon. We took on another huge slab of debt and we supported all the malinvestments. Greece's problems are like chest pains after you've just left the hospital. They make your family nervous... Given the massive debt levels, investors are demanding a very high rate of return at 7% because the risk of default is high, compared with 4.5% a few months ago.. If Greece is not able to raise capital, it won t be able to meet its obligations.

If Germany bails out Greece, it just makes the problems in Europe worse. Greece stops trying to fix itself, and now every other broke European country knows they can have a bailout, too. They also stop austerity measures. And meanwhile, the debt burden is still there. It hasn't gone away. They've just pushed the default farther into the future.

Greece, in other words, is the fiscal Petri dish that reveals in gory detail what could happen if soveriegn governments fail to maintain the confidence of investors. It is not merely that those interest rates are already inflicting an awful toll on borrowers in Athens and beyond. It is that they are sending the national government towards a full-blown debt spiral, in which the cost of its annual interest bill becomes so unmanageable that it can hardly afford to supply its citizens with basic services.

But on the bigger matter of what this euro collapse country by country means: in the usual sequence, if Greece were still using its own drachma, the world would write down the currency, devaluing it in exchange terms. The holders of Greek bonds would take a big capital loss and the system would eventually regain a better trade balance as Greece wouldn’t be able to afford to import as much at the same time that exports would increase thanks to cheaper labor. But with the European Union in place, the exchange rate can't move, so Greek interest rates have jumped.

Greece is not a major economic power. It only represents 2% of Europe s GDP. The market is paying close attention to this situation because Greece is a microcosm of Europe. Many other nations are in a similar situation (Portugal, Ireland, Italy, Spain, Bulgaria, Latvia, Lithuania and even the United Kingdom). Enormous debts have resulted from liberal social programs (national healthcare, pensions, welfare) and many governments have been spending beyond their means for decades. A year ago, they were not in a financial position to spend billions of dollars on bailouts and stimulus programs but they did. Now, they are dangerously close to the breaking down completely.

The situation in Greece might be resolved in the next two weeks, but the next problem is just around the corner. Last week, Portugal tried to raise $1 billion in a one-year auction and they had to cancel it due to low demand. When a country can t even auction short-term maturities, it is in dire straits. Spain s unemployment rate is 19.5% and their debt has been downgraded. Spain is a much bigger problem as the country represents 13% of Europe s GDP. All countries are struggling with their own deficits and they can t jeopardize their own well being to help other nations. The dominos are lined up and wobbling, and almost anything – even a concerted push by speculators – could set them in motion. It seems to me that the euro is turning out to be much more complex to manage than the US dollar and could be very vulnerable for years to come.

To play offense, you can short the Euro ETF "ProShares UltraShort Euro" (EUO:NYSE). Block-tackling through defence, consider going switching to US Treasury bonds as a safe haven this year.

US Bonds: a safe haven to diversify away from the PIGS (but for 2010 only) ...

US Bonds: a safe haven to diversify away from the PIGS (but for 2010 only) ...

2010-02-11T22:12:00.017+08:00

A revealing analysis by Bloomberg has found US bonds haven’t declined in consecutive years since the 1950’s. Given 2009's 11% decline and the continuing low inflation environment bonds just might have history on their side:

“Last year’s return, based on the note’s price change and interest payments, was negative 11 percent. This was the worst performance ever recorded by the St. Louis Fed, whose data goes back to 1928. The previous mark was set in 1999, when the 10-year security posted a negative 8.3 percent return. In the following year, the note returned 17 percent. Similarly, the total return swung from negative 8 percent in 1994 to 23 percent in 1995.”

The financial hurricane unleashed into the equity markets during 2008 followed by the bounce in 2009, which now increasingly looks this was merely the eye of the storm passing, has opened in 2010 with a slow brewing crisis in Greece, the birthplace of western civilisation. This is going to be much bigger than the Dubai debacle in December. It also threatens to draw in Portugal, Ireland and Spain whose economies are in equally if not worse shape. This grouping is colloquially known as the PIGS. The European Union's constitution does not allow for bailouts of member states. Individual states must keep their deficits below 3.5% of GDP or administer their own harsh fiscal medicine. If they do not have the political will, the Euro will be in big trouble. Greece is now in this predicament. The markets sensing blood will pick off the weak states first before moving inwards towards the core like France, Germany and UK. Contagion will spread quickly...just like the 1998 Asia financial crisis.

Strange as it may seem, the US Treasury bond market inspite of the fiscal calamity wrought by the extreme rescue measures of the Obama administration in 2009, may yet prove a temporary safe harbour as the winds ratch up a few more knots in 2010.

A government cover-up bigger than tobacco and asbestos? Your mobile phone...

2010-02-07T17:44:00.026+08:00

"The machine has got to be accepted, but it is probably better to accept it rather as one accepts a drug—that is, grudgingly and suspiciously,...like a drug, the machine is useful, dangerous and habit-forming. The oftener one surrenders to it the tighter its grip becomes." George Orwell.

Though the scientific debate is heated and far from resolved, there are multiple reports, mostly out of Europe's premier research institutions, of cell-phone and PDA use being linked to "brain aging," brain damage, early-onset Alzheimer's, senility, DNA damage, and even sperm die-offs (many men, after all, keep their cell phones in their pants pockets or attached at the hip).

In contrast, any research that connects cell phones to increased cancer rates is not widely reported in the U.S., which reminds one of the non-disclosure tactics once used in tobacco, asbestos, and Agent Orange research. Even if there’s no real danger here, the above recent article (click on the image) by GQ shines light on things you probably didn’t know about cell phones.

Recent Findings:
- Interphone researchers reported in 2008 that after a decade of cell-phone use, the chance of getting a brain tumor—specifically on the side of the head where you use the phone—goes up as much as 40 percent for adults. (Study sponsored by the International Agency for Research on Cancer, in Lyon, France. Scientists from thirteen countries took part in the study, the United States conspicuously not among them.)
- In the summer of 2006, a super-Wi-Fi system known as WiMAX was tested in rural Sweden. Bombarded with signals, the residents of the village of Götene—who had no knowledge that the transmitter had come online—were overcome by headaches, difficulty breathing, and blurred vision, according to a Swedish news report. Two residents reported to the hospital with heart arrhythmias, similar to those that, more than thirty years ago, a US neuro-scientist Allen Frey, induced similar frequency micowaves in frog hearts. This happened only hours after the system was turned on, and as soon as it was powered down, the symptoms disappeared.
- In a study by researchers associated with the venerable Karolinska Institute in Stockholm, which hands out the Nobel Prize for medicine, the massive expansion of mobile phones in Sweden during 1997 was found to have coincided with a marked but subtle decline in the overall health of the population. Might it be, the Karolinska researchers asked, that Swedes fell victim to the march of the first big microwave mobile phone systems? The number of Swedish workers on sick leave, after declining for years, began to rise abruptly in late 1997, according to the study, doubling during the next five years.

Where is all this going for big business? There are massive vested telecoms and digital infrastructure interests at stake in all developed and developing countries. Military-industrial complexes are built upon such platforms. Government communication strategies are also starting to deploy digital platforms. With the relentless march of mobile telephony and wi-fi networks, instances of urban living with huge mobile antennae perched on the tops of buildings, a walk down the street to your local super-market, entering public buses and descending down to mass transit trains will inevitably subject you to this constant "low-level" barrage of microwaves. Is modern society starting to be dumbed-down overall? Education authorities increasingly report instances of short attention spans for today's youngsters perhaps due to the prevalence of personal video games. Perhaps we should look no further than across our living rooms to that humble mobile phone and the Wi-Fi modem which is silently emitting non-stop microwave signals.

Back to the neuro-scientist, Allen Frey, "It just so happens that the frequencies and modulations of our cell phones seem to be the frequencies that humans are particularly sensitive to. If we had looked into it a little more, if we had done the real science, we could have allocated spectrums that the body can't feel. The public should know if they are taking a risk with cell phones. What we're doing is a grand world experiment without informed consent."

I'm reminded of the closing scenes from The Terminator (1984)movie.
Sarah Connor asks the gas attendant: "What did he just say?"
Gas Station Attendant: "He said there's a storm coming in."
Sarah Connor: [sighs] "I know."

The curse of Time magazine's Person of the Year Award

2010-01-26T21:51:00.005+08:00

Ben Bernanke cannot catch a break at the moment. Just when employment and retail sales were better than expected and the dollar bounced off its lows, he was saddled with Time magazine’s Person of the Year award for 2009. The diligent student of the 1929 Great Depression and Japan's lost decades, he turned on the US printing presses and flooded the economy with dollars to stave off a panic in late 2008 as first class institutions toppled like dominoes around him (witness Fannie Mae, Freddie Mac, Lehman Brothers, Merril Lynch, Citigroup, AIG and General Motors) earning worldwide accolades. Making it to a magazine cover doesn’t seem fair. In case you’ve forgotten, let’s take a look at the last three recipients of Time’s Person of the Year award.

2008:
Barack Obama. How’s he doing? According to one of the most recent polls of U.S. voters:
President Obama’s 45% approval rating has plummeted below where George Bush’s was in 2001.
69% of Americans say they are worried about the increasing role of government in the U.S. economy.
55% of Americans feel the country is on the wrong track.
...and he lost the ultra-safe Democratic seat of Massachusetts held for 50 years, the previous incumbent being Ted Kennedy, one of the US aristocrats. This means his ambitious legislative agenda (healthcare, cap and trade...) is at risk without an absolute party majority in Congress.

2007:
Vladimir Putin won the award two years ago. How’s he doing? Russia has been unable to turn its massive oil reserves into political clout. Putin’s attempt to restore Russian influence over the former Soviet republics has dismally failed. Russia’s relationship with the EU hit new lows as a result of the natural gas wars. Russia’s TV censors cut scenes from an episode of “South Park” that ridiculed Putin.

2006:
Who won the award in 2006? It was "YOU"… remember? Meaning everybody. So, how are you doing?

Over the last weekend, President Obama was ringing up senators before Bernanke's term expires on 31st January, to ensure he achieves the 60 votes required for re-nomination as Fed Chairman for a second term. Before Massachusetts, Bernanke was deemed bullet-proof but a backlash is rippling through the country that he has been too cosy with bailing out the big banks at taxpayers' expense without listening to the needs of small businesses. This is unsettling the senators who are up for re-election this November and could torpedo his renomination...plus riling the financial markets which detest policy uncertainty.

Bernanke will win the re-nomination for a four year term but probably with the highest ever "No" votes cast for re-appointing a Fed Chairman in the Senate this week. The next four years' economic conditions in the US, and indeed around the globe, will truly define the mettle of this man and his place in history. In one corner wieldeth the visible hand of the Fed; in the other standeth Adam Smith's "invisible hand" with the tide of history in its favour. Let the battle begin...

Is it all sweet with sugar prices in 2010?

2010-01-23T10:59:00.016+08:00

A sugar crisis is developing in global markets. This deepened on Thursday after Indonesia, one of the world’s leading importers, failed to buy a single pound of the sweetener in its latest tender. The setback sent the price of white sugar in London to a record high of $760 a tonne. Sugar prices have surged 150 per cent since January 2009.

While sugar is no longer a key food commodity in developed countries, it remains a crucial source of calories in emerging countries, making its price a political issue. Shortages are already emerging in some Asian countries, according to local reports. Among the main importers, only Egypt appears to have covered its needs. “If they (Indonesia) don’t buy soon, the next stop is an empty shelf,” said Peter de Klerk at London-based sugar merchant Czarnikow.

This shortage has prompted the European Union to consider how to legally export more sugar under World Trade Organisation rules. “We are in an exceptional situation in the world market,” said an official in Brussels. Europe’s sugar exports are capped at about 1.37m tonnes after an agreement in 2004 when Brazil, Australia and Thailand – all big exporters – filed a legal complaint. European beet farmers have sufficient surpluses to export an additional 600,000-800,000 tonnes this year.

According to the Financial Times, the sugar crisis has been caused by a large supply deficit due to disappointing crops in Brazil and India, the world’s top producers, due to bad weather. Meanwhile, sugar demand has continued to grow. In India, the world’s largest consumer, a dry monsoon due to the El Niño weather phenomenon has damaged the cane crop. Sugar production has dropped to around 15m tonnes in 2009-10, down more than 40 per cent from a normal year. Meanwhile, El Niño brought rains to the dry season in Brazil, which accounts for 60 per cent of world exports. The wet weather has cut the number of days that farmers can cut cane and also reduced the amount of sucrose that refiners can extract, resulting in lower production.

Other producers, including Mexico, China, Russia and several central American countries have also harvested a lower than expected crop. There is a sugar Exchange Traded Note (SGG) to capitalise on this trend.

Inside the real Iran? A business viewpoint

2010-01-17T12:12:00.011+08:00

The first casualty of war is the truth. "It's a good idea to get to know people before you start bombing them" remarked Rick Steves, a US businessman who brought a film crew under a UN mandate into the heart of Iran and set the cameras rolling at street level. It has just been aired by the Public Broadcasting Service in the US, a non-profit organisation.

The video below highlights him delivering an open lecture to a US audience back home. During filming, he openly admitted he was stunned by his shortcomings as an American looking in. Although there was a government minder attached to the crew, there were no onerous restrictions on what they were prohibited from filming (only government buildings, banks, clubs and nuclear sites were forbidden).

Why is the country not open for business? Iran has been under a US trade embargo since 1979, following the Iranian revolution. The sabre-rattling has polarized into a battle between the Great Satan and the Axis of Evil. Iran has a population of 66 million people - twice of Iraq's. Over 50% of the population is under 30. Iran is not three separate peoples - Sunni, Shiite, and Kurds. It's one people and they are Persians, not Arabs.

His observations? The consequences of misreading a culture are expensive. The country is a theocracy. It’s a cash society with no international banking. Unlike the Arab world, the country is “dry” – there really is no alcohol, not even in the top international hotels (although he probably could have got some if he had dug The Lonely Planet). He has spent about a fortnight capturing images and conversations of modern day urban and rural Iran, answering questions ranging from the motivations and fears that confront everyday people he openly came across, why junctions have no traffic lights, the presence of women-only carriages in the underground system and why family houses can have two knockers. He attended a mosque, criss-crossed the bazaars and happened upon parts of the old Silk Road in the country.

This is not like the Discovery or National Geographic channels putting on a dash of soundbite bombast plus technicolour gloss to one side of a story. While Steves acknowledges the answers are complex, it is just one team’s raw unfiltered insight to the fundamentalist Muslim faith which the outside world, to date, has not had much access to. It strives to bridge the perceptions gap greatly needed to get to the cultural roots of how this proud country lives alongside its massive oil reserves, projects its power and has so far not been allowed to realise its economic potential.

US Employment Trends - Growth & Recovery?

2010-01-13T22:17:00.022+08:00

The following two graphics neatly sum up the stalled growth engine that is the US locomotive economy in recent years.

First up: US Job Growth by Decade

Take any post-war decade and the US boomed. It was virtually unchallenged in terms of non-farm employment growth, GDP and household net worth. Suddenly, it ambled aimlessly (the red line) after 2000. What caused it? Improved technology that reduced the dependency on labour, outsourcing to Asia, stringent new (green)regulatory hurdles that were not conducive to business investment?

Second up: The Length of Recovery
The latest job losses in this recession are much deeper (the red line again) and this revival is on course to be much longer, comparable at best to the post 2001 recovery. That is, unless there are new extraordinary measures by Obama to bend the curve steeply back up over a shorter timespan.

The US consumer is becoming a rarer species...exporting nations will need to rethink that lucrative market which has served them so well in the last decade...they will have to seek deeper from within their domestic markets.

How the Greenspan Guidotti Rule foretells a currency crisis?

2010-01-08T22:53:00.015+08:00

Currency speculators have it figured out when a currency will default. This is the equivalent of a government going bankrupt. The US will be going bankrupt in 2010 and this little known rule is the leading indicator that will predict an external currency crisis. The rationale is that countries should have enough reserves to resist a massive withdrawal of short term foreign capital.

In a 1999 academic paper, Alan Greenspan and Pablo Guidotti, the Argentine finance minister surmised "To avoid a default, countries should maintain hard currency reserves equal to at least 100% of their short-term foreign debt maturities." PIMCO, the world's largest money management firm, explains the rule this way: "The minimum benchmark of reserves equal to at least 100% of short-term external debt is known as the Greenspan-Guidotti rule. Greenspan-Guidotti is perhaps the single concept of reserve adequacy that has the most adherents and empirical support." That is to say, if you can't pay off your foreign debts over the next 12 months, you're a diabolical credit risk. The traditional rule of thumb was to maintain reserves equal to three months of imports. In failing to meet this threshold, speculators will have you in their sights, target your bonds and currency, making it virtually impossible to refinance your debts. A default becomes a self-fulfilling prophecy.

This is How The Maths Works
2010 US financing needs:
- US$2,000 billion short term debt that rolls over - this is the equivalent of your bank reviewing, extending and guranteeing your overdraft limit - you are gambling they will not withdrawing support for you all at once
- 2010 budget deficit of US$1,500 billion
- Total of US$3.5tn (US$3,500 billion) that has to be met by selling Treasury bills at auctions to willing domestic and overseas buyers

Is this covered adequately by reserves?:
- The US has 8,133.5 metric tonnes of gold or 261 million troy ounces which at the 31st December gold price of US$1,096 is worth US$287bn.
- The US strategic petroleum reserve currently holds 726 million barrels as at 29th December which at a current oil price of US$79/barrel is valued at US$57bn.
- The IMF warrants the US has US$136bn of currency reserves
- This puts the US reserves at close to US$500bn

Thus the reserves do not cover anything near the US$3.5tn that needs to be financed in 2010. The fact the US$ is a "reserve currency" currently enjoying the status of the preferred currency for internationl trade may encounter stiff headwinds as overseas confidence in it is challenged.

Watch for signs of trouble in Latvia and Ukraine first. These have failed the Greenspan Guidotti test. Contagion is by its nature unpredictable. A series of events in Thailand in June 1997 triggered the Asian currency crisis.

Mindful of the speed bumps ahead...you can short the US$ ie. cast your vote of no-confidence in the US currency and protect against the decline in the pegged Hong Kong dollar by buying the ETF called UDN (PowerShares DB US Dollar Index Bearish Fund) as part of a defensive strategy.

Why you should know about Bautou in China and its monopoly on rare earths metals...

2010-01-03T00:07:00.011+08:00

Bautou is located in Inner Mongolia. It was unknown to the outside world for millenia and not on the Silk Road, set up during the Han Dynasty (206BC - 220AD). It was described as "a little husk of a town in a great hollow shell of mud ramparts" when one of the first visitors came across this place in 1925.

Today, this once barren outpost has been transformed into the powerhouse of China's dominance of the market in some of the globe's most sought-after minerals. The Baotou Rare Earth Research Institute is home to some 400 scientists whose work has put China at the pinnacle of research into a group of 17 metals which sound as if they were dreamt up as poisons for superheroes. Discovered by a Swedish scientist in 1787 and despite their name, they are relatively abundant in the Earth's crust but the high cost of extraction means only areas with rich deposits, in particular China, are worth exploiting. The arrival of new technology means that global production has risen from less than 5,000 tonnes in 1955 to the current level of about 120,000 tonnes a year. Since 2000, demand for rare earth elements (REEs) has ballooned from 40,000 tonnes to a predicted 200,000 tonnes by 2014. Their unique properties of luminescence, magnetism and conductivity make them indispensable to industries reliant on REEs estimated to be worth US$5 trillion.

*Cerium (Ce) - catalytic converters for diesel engines
*Praseodymium (Pr) – an alloying agent for aircraft engines
*Neodymium (Nd) – key component of high-efficiency magnets and hard disc drives
*Lanthanum (La) – a major ingredient for hybrid car batteries
*Samarium (Sm) – lasers and nuclear reactor safety
*Promethium (Pm) – portable X-rays and a nuclear battery
*Gadolinium (Gd) – shielding for nuclear reactors, compact discs
*Dysprosium (Dy) – improves the efficiency of hybrid vehicle motors
*Terbium (Tb) – a component in low-energy light bulbs
*Erbium (Er) – fibre optics
*Europium (Eu) – used in flat screen displays and lasers
*Holmium (Ho) – nuclear control rods, ultra-powerful magnets
*Thulium (Tm) – lasers, portable X-rays
*Ytterbium (Yb) – monitoring equipment for earthquakes
*Lutetium (Lu) – oil refining
Two more elements, Scandium and Yttrium, are considered rare earths as they tend to occur in the same ore deposits and have similar chemical properties.

The development of Baotou into the global capital of REES is due to two factors: its proximity to the Baiyunebo mine, a vast open pit that is the world's largest rare earth mine, and Beijing's deliberate policy of at least two decades to turn this "Mother Lode" into a stepping stone towards status as an economic superpower. China, which by accident of geography holds about 50 per of the world's rare earth deposits and currently produces 97 per of global supplies, has made no secret of the nature or scale of its ambitions, summarised by former premier Deng Xiaoping when he said: "The Middle East has oil. China has rare earths." In 1999, President Jiang Zemin went further on a visit to Baotou when he summed up Beijing's strategy as being "to improve the development and applications of rare earth, and change the resource advantage into economic superiority".

Above all, REEs are an integral part of the technologies that politicians are relying on to try to avert the worst effects of global warming. From the generators of wind turbines to catalytic converters, and the batteries on hybrid cars to alloys that dramatically reduce leakage from overhead power cables, rare earths are at the heart of the green revolution.

During the past seven years China has reduced by 40 per cent the amount of REEs available for export. The result is that the rare earth industry in China is rapidly moving from a role as a provider of rare earth extracts for export, worth a few hundred million dollars a year to Chinese GDP, to a producer of finished REE components worth billions. In response to Chinese reductions in exports, global manufacturers are forced to move factories making rare-earth rich components to China to ensure continued production.

REEs are relatively cheap at about US$32 per kg. But others are far less abundant. Terbium, which is soft enough to cut with a knife, is an irreplaceable component of low-energy light bulbs. It sells for up to US$300 per kg and China needs its entire production to meet domestic demand. Dysprosium, whose Greek name translates as "hard to get at", allows lightweight magnets to function at high temperatures and costs about US$125 per kg. China is responsible for 99 per cent of the global output of both. In October 2009, an internal report by China's Ministry of Industry and Information Technology disclosed proposals to ban the export of five rare earths and restrict supplies of the remaining metals. China's control over rare earth supplies has sparked unease over their availability. Senior players in the rare earths industry are anxious to avoid suggestions that Beijing is using its commanding position to hold the world to ransom.

This is likely to prove extremely disruptive for the rest of the world. A sudden cut in supply is going to have painful knock-on effects for many high-technology industries in developed countries. The obvious response is to seek other suppliers. And rare earth mines are being developed in South Africa, Australia,Canada and Greenland. Questions remain as to whether mines outside China, such as the Mountain Pass site in California, which closed in 2002 and is being reopened, can be operated at economically sustainable levels. Nearly all operators outside China closed soon after 2000 when cheap Chinese REEs flooded the market, using highly polluting but cheap mining methods.

Jack Lifton, an independent consultant and a world expert on REEs, said: "A real crunch is coming. In America, Britain and elsewhere we have not yet woken up to the fact that there is an urgent need to secure the supply of rare earths from sources outside China. China has gone from exporting 75 per cent of the raw ore it produces to shipping just 25 per cent, and it does not consider itself to be under any obligation to ensure supplies of rare earths to anyone but itself. There has been an effort in the West to set up new mines but these are five to 10 years away from significant production."

For those who wish to climb the wall of worry that lies ahead, the race is still very much in its infancy. While both Western countries and China are already dashing to secure new sources of rare earths, last September, Australian regulators signalled they have got ahead of the curve by imposing restrictions and preventing a Chinese company (China Non-Ferrous Metal Mining Group) from taking a US$400m controlling stake in the Lynas Corporation, owner of one of the country's richest rare earth mines.

The above article includes excerpts from The Independent newspaper (UK)

From the excesses of 2009 to a moderation in 2010?

2010-01-01T12:49:00.010+08:00

A happy New Year to you and may your health be secure and hopes realised in 2010!

2009 will be a year to forget. Governments were still reeling from the 2008 financial firestorm that threatened to engulf the established economic order that had successfully underpinned the lifeblood of world commerce since 1945. They stared into the abyss, decided they did not like what they saw and coordinated on a worldwide scale to inject trillions of dollars to primarily re-liquify the functioning of the banking system. That was the story for the first three months of the year...

It worked...or so it would appear. Very quickly, financial and stock markets regained their footing and emerged like a phoenix from the ashes of despair. In April, a change in accounting standards by the US Financial Accounting Standards Board (FASB) gave the big banks a free pass not to "mark-to-market" the value of their assets, effectively amounting to another covert bailout by not needing to fully disclose the paper losses of their shredded investments (eg residential and commercial estate mortgages). The much publicised "stress-tests" which virtually every bank passed in May were but a charade behind the more critical FASB decision. By the end of June, stimulus money triggered new asset bubbles from US Treasuries to China residential property as the world banking system quickly set about liquifying the entrails of a battered private sector. Today, the US banking system still prefers to hoard much of the stimulus money and not lend out nearly as much to the private sector as the US government would like. 140 US banks have failed in 2009. In contrast, China's banks have been lending with gay abandon, albeit mandated by central government dictates.

The major industrialised world economies have been bingeing on a sugar-high. Towards the last three months of 2009, there has been an emerging, though so far relatively sedate, groundswell of opinion that all is still not well. Troubles are brewing with the PIGS (Portugal, Ireland, Greece and Spain). Latvia and Ukraine have not followed through with the IMF medicine and remain a tinderbox in Eastern Europe. Dubai's crisis briefly threatened...and then disappeared. At some point, governments will have to withdraw the stimulus and interest rates have to go up because there is simply too much money sloshing around the world financial system and the fear is some external (unforeseen?) factor can trigger off a new inflation that will spark out of control (recall 1920s Germany, 1980s Argentina and 2000s Zimbabwe).

We enter 2010 on a more hopeful note but caution still reigns. The US being the engine of the world economy is now characterised by unprecedented government debt levels which will span generations to pay off :

The financial markets may have shrugged off this awesome multi-trillion US$ cashflow deficit generated in just one year but the voices of wise old heads linger. The following clip is a montage, by popular vote, of Yahoo Finance Tech-Ticker's favourite pundit in 2009 and he does not mince words.

How does this translate at the street level? In China, even with authoritarian measures to spur and maintain "social harmony", mass riots by the populace can go largely unreported in the mainstream media. In downtown US cities, there are new stirrings as increasing numbers find themselves homeless through housing foreclosures and now seek social assistance. The following is a media nugget on how one of Obama's new welfare stimulus programmes affected Detroit, spiritual home of Motown and today's GM (General Motors).

The message for 2010 must be for governments to slow down, rein in their profligacy and educate their people on self-reliance and taking personal responsibility. Easier said than done... Paul Volcker, a Fed Chairman from 1979-1987 did it before Alan Greenspan replaced him. The guy had the courage to raise the Fed funds rate from 11% in 1979 to 20% in 1981 (its at 0 - 0.25% today under Bernanke). This policy brought on the highest unemployment since the Great Depression but he tamed the economy and its string of historic malinvestments. As the current head of the President's Economic Recovery Advisory Board, his is the lone voice of wisdom that must carry the message thru to Obama's ear in 2010.

China has overtaken Japan to become the 2nd biggest economy in the world

2009-12-29T20:40:00.004+08:00

China is poised to become officially the 2nd biggest economy in the world in 2009. On Christmas Day, the Beijing Statistical Office raised its 2008 GDP from 9 to 9.6% valuing the economy at US$4.6tn (US$4,600 billion) compared to Japan's US$4.9tn. In 2009, the forecast is for 8% GDP growth. To date, growth year-on-year for the 1st, 2nd and 3rd quarters were 6.1%, 7.5% and 8.9%. Averaging the first nine months at 7.7%, it will almost certainly overtake a stagnating Japan economy which the World Bank forecasts to shrink by 6% in 2009 and has held this 2nd spot for decades. India now ranks 4th.

“The big underlying factor propelling China’s growth is the continued migration of people from the agricultural sector to the more modern economy — industry and services,” said David Cohen , an economist at Action Economic in Singapore. “There’s no stopping China.”

China has had a natural advantage over Japan for years in terms of abundant natural resources, particularly energy and metals and a competitive labour pool. Japan has been captive to the price increases of world oil and natural gas prices.

China will still take decades to catch the United States' US$14tn economy although it can close that gap quickly if the US grows at 2-3% a year and it maintains current breakneck 8%+ rates.

The Chinese may not need to build a strong military to pass the US as the world's leading power. While maintaining powerful armies was important in the 20th century, national influence in the 21st century is liked to be fomented on currency value, export strength and access to natural resources. It is searching in all continents and developing alliances to secure natural resources, particularly oil and uranium.

Headwinds are never far away. Interventionist government investment, low interest rates and asset bubbles, according to some economists, can still crash the economy in the same manner as happened to Japan in the late 1980s from which they never recovered. Robust reserves can be eroded by bad debts from state owned banks. The country's demography points to a one-child policy leading to an inevitable aging population and pressure on the public finances that will constrain its growth prospects.

In 2010 China will play a pivotal role to shore up the waning US and European economies as it engages with its continuing , albeit diminishing purchases of their Government debt (Treasury bills, gilts etc). It is now locked in a relentless battle to prevent a meltdown in the value of its international reserves, denominated over 70% in US$; a battle that can be won only by diversifying stealthily to other asset classes. If it does not maintain the buying of US Treasuries, this signal to the financial markets will trigger a domino effect leading to the collapse of the US$ and plunge the country and the world at large into yet another economic crisis. Obama and Hu are playing a high stakes game of who blinks first.

In the future, China is considered likely to overtake the US in GDP... but three decades ago, so was Japan.

Christmas...from religion to commercialisation

2009-12-25T21:10:00.014+08:00

Christmas conveys different meanings to different people nowdays. That's not just the obvious religious connotations associated with it but the vast swathes of commercialisation that has swept all before it...Japan and China embrace it despite being steeped in Buddhism, Taoism and Shinto.

It was never like this. Christmas really started off as a Roman orgy...behind the backdrop of celebrating the winter solstice. Even when Charles Dickens wrote "A Christmas Carol" in 1843, the semblance of Christmas being a religious holiday was not even in the mainstream conciousness. It was an American Thomas Nast who introduced a rotund bearded Santa Claus to the world in the 1860s... and it wasn't until the 1920s that Coca Cola spread the global message of a decked out red coated "Father Christmas".

http://online.wsj.com/article/SB119820996084944523.html

1995 - Holidays are Coming

Tonight, I will probably fall asleep very late over a glass of red wine counting my blessings after watching Frank Capra's "A Wonderful Life" (1946)...a truly inspirational film.

A merry Christmas to you all!

First among equals - China, the US and the surveillance society

2009-10-28T10:45:00.014+08:00

It is a great source of wonderment how some of the stark government controlled economic models can rival their established advanced market counterparts in terms of economic vibrancy...and function under onerous surveillance. Or should this conventional line be turned the other way around?

Each year since 1997, the US-based Electronic Privacy Information Center and the UK-based Privacy International have undertaken what has now become the most comprehensive survey of global privacy ever published. The latest 2007 global rankings extend the survey to 47 countries (from an original 37) and, for the first time, provide an opportunity to assess trends. The intention behind this project is two-fold. First, to recognize countries in which privacy protection and respect for privacy is nurtured. This is done in the hope that others can learn from their example. Second, to identify countries in which governments and privacy regulators have failed to create a healthy privacy environment. The aim is not to humiliate the worst ranking nations, but to demonstrate that it is possible to maintain a healthy respect for privacy within a secure and fully functional democracy.

The key findings are:

- The 2007 rankings indicate an overall worsening of privacy protection across the world, reflecting an increase in surveillance and a declining performance on privacy safeguards.
- Concern over immigration and border control dominated the world agenda in 2007. Countries have moved swiftly to implement database, identity and fingerprinting systems, often without regard to the privacy implications for their own citizens.
- The 2007 rankings show an increasing trend amongst governments to archive data on the geographic, communications and financial records of all their citizens and residents. This trend leads to the conclusion that all citizens, regardless of legal status, are under suspicion.
- The lowest ranking countries in the survey continue to be Malaysia, Russia and China. The highest-ranking countries in 2007 are Greece, Romania and Canada. The worst ranking EU country is the United Kingdom, which again fell into the "black" category along with Russia and Singapore. In terms of statutory protections and privacy enforcement, the US is the worst ranking country in the democratic world (the US Patriot Act - Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism - was signed into law on 26 October, 2001). Argentina scored higher than 18 of the 27 EU countries. Australia ranks higher than Slovakia but lower than South Africa and New Zealand.
- The privacy trends have been fueled by the emergence of a profitable surveillance industry (eg 安防科技(中国)有限公司- China Security & Surveillance Technology [CSR] NYSE listed Shenzhen based company)dominated by global IT companies and the creation of numerous international treaties that frequently operate outside judicial or democratic processes.

The potential for engagement of these developments is currently limited to a marginal response. The problem for civil society – or indeed anyone wishing to challenge surveillance - is not simply the sheer magnitude of the threat, but also its complexity and diversity.

As this article is not meant to stir a rip-roaring debate on the moral direction of human rights and privacy concerns, it is nevertheless intriguing how the human spirit can still consistently prevail and triumph within these government strictures across all cultures. Economic Man or as it really cuts to the core of the theories of 18th century thinkers such as Adam Smith and David Ricardo. In "The Wealth of Nations" Smith wrote: " It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest." In modern day terms, so the phrase "there is no such thing as a free lunch" was coined.

Watched or not watched, that is probably not the question.

Gold goes mainstream at Harrods

2009-10-16T12:21:00.006+08:00

Today the upmarket London department store Harrods will sell gold bullion and coins over the counter for the first time in its history. It will be sold at the Harrods Bank branch on the lower ground floor of the Knightsbridge store. The owner, Mohamed Fayed, has teamed up with Produits Artistiques Métaux Précieux (PAMP), the Swiss refiner, to sell gold in the store. Mehdi Bakhordar, managing director of PAMP, said: "Harrods stock our full range and are now the only location in London where investors can purchase a 12.5kg gold bar 'off the shelf'."

This is a significant event. It is signalling the precious metal has gone into the retail mainstream and will be the talk of cocktail parties. In the UK, the allure of gold does not glitter as much as the attraction of real estate. Now a recognised brand name as entered the market and reached out to a new audience.

Wealthy investors are looking for an alternative asset class to diversify away from low interest rates and falling property and stock market portfolios over the last twelve months. In January 1980, the gold price hit a record US$800. When adjusted for inflation in US terms, it should be worth over US$2,300 today. If one takes all the gold that was ever mined since the history of mankind, it will just about fill two Olympic-sized swimming pools today. Yesterday, the gold price breached US$ 1,070 an ounce, another new record.

Asia investors will wonder what all the fuss is about. Today, government leaders in Beijing are using the media to encourage citizens to invest at least 5% of their savings into precious metals. Maybe, this issue will grace a magazine cover soon. More important, this is a another sign of a market top.

Dr Sam Vaknin, narcissism, Obama and the fate of the world economy

2009-10-15T16:53:00.030+08:00

Who is Sam Vaknin? He hails from Israel and is a world authority on the study of narcissism. He has dedicated twelve years to the study of personality disorders in general and the Narcissistic Personality Disorder (NPD) in particular. He has authored nine books on this topic including the Barnes & Noble best-seller "Malignant Self-Love: Narcissism Revisited" and has numerous awards under his belt. Although a prominent psychologist, he is adamant he is not a certified mental health professional.

He has studied Adolph Hitler, Mao Zedong, Joseph Stalin, Kim Jong-il, David Koresh and Charles Manson. He has added Barack Obama to this list.

" I must confess I was impressed by Sen Barack Obama from the first time I saw him. At first I was excited to see a black candidate. He looked youthful, spoke well, appeared to be confident – a wholesome presidential package. I was put off soon not just because of his shallowness but also because there was an air of haughtiness in his demeanor that was unsettling. His posture and his body language were louder than his empty words. Obama’s speeches are unlike any political speech we have heard in American history. Never a politician in this land had such quasi “religious” impact on so many people. The fact that Obama is a total incognito with zero accomplishment makes this inexplicable infatuation alarming. Obama is not an ordinary man. He is not a genius. In fact he is quite ignorant on most important subjects. Barack Obama is a narcissist...
...All these men had a tremendous influence over their fanciers. They created a personality cult around themselves and with their blazing speeches elevated their admirers, filled their hearts with enthusiasm and instilled in their minds a new zest for life. They gave them hope. They promised them the moon, but alas, invariably they brought them to their doom. Charmed by the charisma of the pathological narcissist, people cheerfully do his bidding and delight to be at his service. He creates a cult of personality – focused on one thing alone and that is power..."

On Obama's autobiography...
" Obama’s election as the first black president of the Harvard Law Review led to a contract and advance to write a book about race relations. The University of Chicago Law School provided him a lot longer than expected and at the end it evolved into, guess what? His own autobiography! Instead of writing a scholarly paper focusing on race relations, for which he had been paid, Obama could not resist writing about his most sublime self. He entitled the book Dreams from My Father. Not surprisingly, Adolph Hitler also wrote his own autobiography when he was still nobody. So did Stalin. For a pathological narcissist no subject is as important as his own self. Why would he waste his precious time and genius writing about insignificant things when he can write about such an august being as himself? Narcissists are often callous and even ruthless as the norm, they lack conscience. This is evident from Obama’s lack of interest in his own brother who lives on only one dollar per month. A man who lives in luxury, who takes a private jet to vacation in Hawaii, and who has raised nearly half a billion dollars for his campaign (something unprecedented in history) has no interest in the plight of his own brother. Why? Because, his brother cannot be used to increase his power. A narcissist cares for no one but himself. […] What can be more dangerous than having a man bereft of conscience, a serial liar, holding an office of great power?

Many politicians are narcissists. They pose the usual threats to others. […] They are simply self serving and selfish and are prone to passing ill-advised laws.
Obama evidences symptoms of pathological narcissism, which is different from the run-of-the-mill narcissism of a Richard Nixon or a Bill Clinton for example. History shows plenty of evidence that pathological narcissists can be dangerous. "

Is Dr Vaknin being alarmist? Let us look at a sample of recent events that lend to or detract from his prognosis. Obama flew to Copenhagen on Airforce One to pitch for Chicago as a serious 2016 Olympic venue contender (and subsequently failed); summonsed General McChrystal, the top US commander in charge of Afghanistan away from a London meeting to an update on the tarmac before leaving Copenhagen; was awarded the 2009 Nobel Peace Prize (from 205 nominees) a week later on 9 October which he accepted humbly.

A fragile world economy which is tentatively stepping back from the abyss must learn to build trust in the policies from the "man of the moment" who must surely be a strong contender for Time's Person of the Year. Continue to watch Obamanomics with signature healthcare reforms legislation currently being debated in Congress; cap & trade plus new VAT (value added tax) proposals are now on the table as revenue raising measures. These are potentially added costs for the US consumer...and Asia export trade risks. Meanwhile world financial markets continue to cheerlead "green- shoots" countenancing no U-turns.

http://samvak.tripod.com/cv.html
http://samvak.tripod.com/obama.html

Official...this is what leaning over the US financial abyss looks like. Take a peek...

2009-10-09T02:01:00.039+08:00

The word "trillion" used to be the preserve of an elite group of physicists working on the Large Hadron Collider (atom smasher) project at CERN in Swizerland. Even the hallowed bods at NASA did not need to cope with this number. Its mission frontier, Mars, was a mere 55 - 401 million km from Earth depending on where these planets were in their orbit around the sun. It's 2008 budget was earmarked for only US$17.3 billion. A billion we can visually relate to - one thousand million; the sum a Columbian Medellin drug lord can be worth if he is lucky enough to evade the US DEA (Drug Enforcement Agency).

The world was formally introduced (some would say saturation-bombed) to the "trillion" in October 2008. That was after Fannie Mae, Freddie Mac, Lehman Brothers and AIG collapsed in quick succession and new soundbites were quickly required for the US news networks after editorial staff found it too "lengthy" to utter the "thousands of billions" when tallying up the total losses and bailouts.

First, to understand the severity of this financial debacle, one can take a peek at the graphic below. It gives a perspective of the financial problems confronting the US today, measured in comprehensible billions. In proportion, the bigger the square the bigger the number.

A little known report from the goverment's Office of the Comptroller of Currency (OCC) is published each quarter on the total value of derivatives. This little needle in the digital haystack highlights:
- a US$ 203 trillion notional (face-value) derivatives' position in the US banking system. 97% of this is held by five US banks (JP Morgan Chase, Goldman Sachs, Bank of America, Citibank and Wells Fargo). HSBC North Americas is ranked number 6.
- Net Current Credit Exposure(NCCE) is US$555bn; this is the net amount owed to banks if all contracts were immediately liquidated today.
- Potential future exposure (PFE) is US$ 670bn; an estimate of what the current credit exposure (CCE) could be over time, based upon a supervisory formula in the agencies’ risk-based capital rules.
- Total Credit Exposure (TCE) of US$1.2tn (1,225 bn); the sum of NCCE and PFE.
Wasn't it in March that HSBC alerted worldwide markets to its £12.5bn (US$20bn) rights issue? Can the HSBC boardroom sleep soundly with US$3 trillion derivatives' on its books? Using a TCE/Notional-Value risk ratio of 0.62% calculated from the above figures, HSBC's exposure is approximately US$19.5bn, assumimg conditions do not worsen. Just blaming it on unpopular sub-prime mortgages is not the whole story.

http://www.occ.treas.gov/ftp/release/2009-114a.pdf

The OCC report does not get coverage in the major US news networks. GE owns CNBC and NBC. Time-Warner owns CNN. Disney owns ABC. Westinghouse owns CBS. News Corporation owns Fox Networks. It's in everyone's interests to both manage the news and the share price.

US media ownership list dated 2003 and still relevant:
http://la.indymedia.org/news/2003/04/47530.php

What follows below is an interview with Janet Tavakoli, one of the foremost experts on structured finance with over twenty years Wall Street experience. She has written a book "Dear Mr. Buffett: What An Investor Learns 1,269 Miles From Wall Street". She states the derivatives mess is not over and the meltdown risk is now even higher than in 2007. That was not a typo.

Imagine what NASA would do with a trillion dollars? We really could be on another planet. For HSBC stock earthlings...how they exit North America will be just as critical as beaming their Scotty CEO up to Hong Kong.

Gold price sets new record...but not in euro, rupee, yen yet

2009-10-08T01:04:00.012+08:00

The gold price touched a new record high over US$1,045 today on the American commodity metals exchange (COMEX).

This was sparked off by news from the UK based Independent newspaper the Gulf Arab oil exporting nations were secretly planning with Russia, China, Japan and France to set crude oil pricing in a basket of currencies instead of the US$. This basket would include the euro, yen, yuan and gold. If the story is verified, this is a signal the US$ a worldwide reserve currency is on the brink of a permanent decline. China has already hinted in recent months to diversify away from buying US Treasuries.

This headline-grabbing gold rally must be viewed with caution. If one believes in purchasing- power-parity theory eg. the price of gold per ounce should be the same in all countries (after adjusting for exchange rates) otherwise, arbitrage will happen ie. a person buys the gold in the cheaper country and sells this at a higher price elsewhere. On this basis, the price of gold should have reached a record high too in the local currencies of other countries.

However, the charts below indicate this did not happen. Something is amiss. While gold is up in US$ and close to its highs in rupees (India is an active gold purchaser due to jewellry demand), prices are still about 10% down from their highs in both euro and yen currencies. This indicates the strength comes from a relatively weaker US$ instead of a spike in real demand. Further, it also suggests speculation in the COMEX futures markets (which trades in US$) is at very high levels and this excess can be pricked at anytime (witness crude oil's spectacular fall in summer of 2008 from record US$147 / barrel).

Gold's breakout will only prove sustainable and convincing if all these countries trigger new pricing highs in their respective currencies. That time is not far off...but it is not this week.

This US bank failure just triggered another huge shockwave to the fragile banking system

2009-10-04T09:55:00.021+08:00

The torpedoed US banking system remains in intensive care with life-support from the Federal Reserve keeping it just out of danger, but recovery still remains elusive and a long way off.

For a while now, the government through the Federal Deposit Insurance Corporation (FDIC) has maintained a list of "problem" institutions to assess the extent of the risks in the banking system. The FDIC is the banking regulator that insures customer deposits, helps find buyers for failing banks and liquidates collapsed banks. It insures 8,195 institutions with assets of US$13 trillion and collects insurance premiums from every licensed bank to protect customers' deposits up to US$250k in the event a bank fails. It gets no funding from the government. Banks pay premiums to the FDIC determined by the number of customer deposit accounts they service.

On June 30, 416 banks with assets of US$299bn (compared with 90 at end of March 2008 with assets of US$26bn) were on the problem list. These have failed the FDIC's criteria for asset quality, liquidity and earnings. Up to the week ended 2 October, 95 banks have failed in 2009.

Last week, an alarm bell went off. Georgia Bank, Atlanta's second largest bank with assets of US$2bn collapsed. It was not on the list.

This has sent another huge tremor to the banking system and three key questions emerge from this episode:
- there must be a serious flaw with the FDIC methodology...why and how were Georgia Bank's assets so radioactive their value evaporated rapidly escaping FDIC scrutiny
- with mark-to-market accounting suspended since April, no transparency exists with determining the fair value of bank assets and is this the proof regulators have now lost their grip with understanding any bank balance sheets
- just how stressful were the government's fanfare "stress tests" for the big banks completed in May given the complexity of their assets

With a another strong typhoon brewing off the coast, just because one can feel the first effects of the wind and cannot see it, so this is no reason to disregard the intensity of the typhoon when it makes that landfall.

Today, the FDIC is technically bankrupt as it's DIF [Deposit Insurance Fund] balance has fallen from US$52.8bn in March 2008 to negative. It has proposed to borrow forward three years' deposit insurance from its member banks to raise US$45bn. Another massive potential hit to the banks' earnings! Alternatively, there is a credit line from the Treasury for US$100bn approved by Congress in May which it can tap as a last resort. This will leave the poor taxpayer on the hook again with another bailout.

The rise of the China military machine and the intra-Asia trade opportunity

2009-10-01T23:01:00.053+08:00

Today marks the 60th birthday of the People's Republic of China. The 60 year cycle which has been documented since the time of the Shang Dynasty (17th - 11th century BC) is constructed from two cycles: the 10 heavenly stems (the five elements fire, earth, metal, water and wood) and the twelve earthly branches, or the 12-year cycle of animals referred to as the Chinese zodiac. Achieving 60 is to reach the age of wisdom having experienced every cycle.

In 1949, Chairman Mao stood at the Gates of Heavenly Peace and delivered a rousing speech to usher in a new era. Rag-a-tag columns of the PLA (People's Liberation Army) marched past with an assortment of bedraggled uniforms and tunics, pride undented, after crushing the Nationalists in a civil war who were forced to retreat to the island of Formosa (modern Taiwan). Only four years earlier, they were brothers-in-arms in the struggle to repel the mighty Japanese army.

Today, a Mao suited President Hu Jintao declared: "A socialist China that faces the future and the world is standing tall and firm in the East." It was an extravagant showcase that started with a miltary inspection and ended in the evening with more fireworks displays than the opening ceremony of the 2008 Olympics itself. The last such parades were in 1999 and 1984.

The modern PLA is 2.3 million strong. The National People's Congress set a 2009 military budget of Y480.7bn (US$70bn), an annual increase of 14.9%. The figure in 1978 was Y16.8bn (US$2bn). Beijing adds its military expenditure accounted for 1.4% of GDP which is lower than the US' 4.6%, Britain's 3% and India's 2.5%

The Chinese take their weapons "stuff" as seriously as Russia and North Korea. In contrast, Independence Day in Washington tends to be entertaining with marching bands and servicemen; the French roll out a few tanks and cavalry plus their Foreign Legion on Bastille Day; the British don't bother holding anything because it's been over a thousand years since they were last invaded, so they deploy the Household Cavalry parade for the Queen's birthday instead; such is the confidence these countries have in their standing on the world stage. Germany and Japan are too embarrassed to put on such shows.

The PLA showed off its DF-31A mobile nuclear intercontinental missile with a range of 11,000km capable of striking any big NATO city. Mid-air refuelling tankers and fighter jets conducted a fly-by. China has recently began projecting its power with a blue-water fleet which patrolled the Red Sea last year to defend vital sea lanes against pirates. Plans are afoot to build the first aircraft carrier.

The 21st century for Asian nations pivots around better defining porous land borders, containing separatism, securing raw resources and mutually defending critical supply routes like the Gulf of Aden, Straits of Hormuz and Straits of Malacca from piracy and terrorism. Neighbourly spats are becoming increasingly common in the South China Sea. China has already tangled and flexed its muscles with Vietnam, Malaysia and the Philippines over disputed areas with potential oil and gas deposits. It has embroiled itself with US and Japanese vessels in defining its sea borders. Another flashpoint is Tawang, the most militarised Buddhist enclave in the world that is on the Tibet-India border which remains a sensitive issue with India. “The India-China frontier has become more ‘hot’ than the India-Pakistan border,” said Brahma Chellaney, a professor of strategic studies at the Center for Policy Research, a research organization in New Delhi. He has advised the Indian government’s National Security Council.

India-China border

With the export trade to the US and Europe severely curtailed, the opportunity is there to seize the intra-Asia trade especially with rising middle-class populations in China and India, to absorb some of the excess capacity. India-China trade in 2008 totalled US$52bn. A 2008 pre-credit crisis report from the indepedent UK-based Drewry maritime consultants put the the intra-Asia trade as worth 28.3 million teu (20 foot containers equivalent units) in 2007 and forecast to reach 50.7 million teu by 2013. In 2010, UPS will open its dedicated intra-Asia air hub at Shenzhen International airport. Sabre-rattling and historic suspicions aside...the markets of China, Hong Kong, Japan, Korea and Taiwan currently account for more than half of UPS’s total intra-Asia volume. Just how delicate will China's "peaceful rise" be?

Unusual economic indicators to think about...and watch

2009-09-29T14:50:00.014+08:00

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/

New US$ carry trade is about to replace the yen bet. Where will this credit fountain gush to?

2009-09-26T12:10:00.027+08:00

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?

Is Twitter worth US$ 1 billion? Check out China's proven business model.

2009-09-25T10:53:00.023+08:00

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.

A "leading" indicator for the US consumer: The tipping point between intensive care and money heaven

2009-09-24T15:56:00.019+08:00

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.

Touchdown! Why the "r" landing beats the hard and soft versions

2009-09-23T14:29:00.073+08:00

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...