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.
Tuesday, 29 December 2009
Friday, 25 December 2009
Christmas...from religion to commercialisation
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!
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!
Wednesday, 28 October 2009
First among equals - China, the US and the surveillance society
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.
Watched or not watched, that is probably not the question.
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.
- 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.
Friday, 16 October 2009
Gold goes mainstream at Harrods
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.
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.
Thursday, 15 October 2009
Dr Sam Vaknin, narcissism, Obama and the fate of the world economy
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
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
Friday, 9 October 2009
Official...this is what leaning over the US financial abyss looks like. Take a peek...
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$19.5bn, assumimg conditions do not worsen. Just blaming it on unpopular sub-prime mortgages is not the whole story.
http://www.occ.treas.gov/ftp/release/2009-114a.pdf
The OCC report does not get coverage in the major US news networks. GE owns CNBC and NBC. Time-Warner owns CNN. Disney owns ABC. Westinghouse owns CBS. News Corporation owns Fox Networks. It's in everyone's interests to both manage the news and the share price.
US media ownership list dated 2003 and still relevant:
http://la.indymedia.org/news/2003/04/47530.php
What follows below is an interview with Janet Tavakoli, one of the foremost experts on structured finance with over twenty years Wall Street experience. She has written a book "Dear Mr. Buffett: What An Investor Learns 1,269 Miles From Wall Street". She states the derivatives mess is not over and the meltdown risk is now even higher than in 2007. That was not a typo.
Imagine what NASA would do with a trillion dollars? We really could be on another planet. For HSBC stock earthlings...how they exit North America will be just as critical as beaming their Scotty CEO up to Hong Kong.
The world was formally introduced (some would say saturation-bombed) to the "trillion" in October 2008. That was after Fannie Mae, Freddie Mac, Lehman Brothers and AIG collapsed in quick succession and new soundbites were quickly required for the US news networks after editorial staff found it too "lengthy" to utter the "thousands of billions" when tallying up the total losses and bailouts.
First, to understand the severity of this financial debacle, one can take a peek at the graphic below. It gives a perspective of the financial problems confronting the US today, measured in comprehensible billions. In proportion, the bigger the square the bigger the number.
A little known report from the goverment's Office of the Comptroller of Currency (OCC) is published each quarter on the total value of derivatives. This little needle in the digital haystack highlights:
- a US$ 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.pdfThe 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.
Thursday, 8 October 2009
Gold price sets new record...but not in euro, rupee, yen yet
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$147 / barrel).
Gold's breakout will only prove sustainable and convincing if all these countries trigger new pricing highs in their respective currencies. That time is not far off...but it is not this week.
This was sparked off by news from the UK based Independent newspaper the Gulf Arab oil exporting nations were secretly planning with Russia, China, Japan and France to set crude oil pricing in a basket of currencies instead of the US$. 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.
Sunday, 4 October 2009
This US bank failure just triggered another huge shockwave to the fragile banking system
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.
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.
Thursday, 1 October 2009
The rise of the China military machine and the intra-Asia trade opportunity
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.
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?
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?
Tuesday, 29 September 2009
Unusual economic indicators to think about...and watch
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/
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/
Saturday, 26 September 2009
New US$ carry trade is about to replace the yen bet. Where will this credit fountain gush to?
For many years after the Japan economy shrivelled when their 1989 asset bubble burst, the government embarked on a low (near zero) interest rate policy to stimulate the domestic economy. In order to protect its export juggernaut (eg Toyota, Fuji, Mitsubishi, Sony) the Bank of Japan had to keep the yen exchange rate low to ensure export prices remained competitive abroad.
A new phenomenon started to take off - the yen carry trade. From the 1990s, savvy investors realised they could borrow at near zero interest rates from Japanese banks and invest in new business opportunities that could easily return double digits. With financial services innovation and the use of leverage, they could double, triple and even ten-fold up their original invested capital. It was like being given a crowbar to lift many times a normal weight.The Japanese housewife was a typical example borrowing Yen 600k (equivalent to about US$5k) at 0.25% from her bank and investing this immediately in a New Zealand dollar currency deposit account (within the same bank!) earning 4% per annum. With leverage, her bank was reasonably happy to grant this US$5k equivalent into an effective US$10-15 k margin account for her to control. Investing in the NZ$ meant 8% to 12% annual returns were therefore no problem. Now you know why LV and Tiffany stores worldwide were so favoured by the Japanese tourists abroad! Similarly, if you were a profitable non-Japanese heavyweight financial institution the leverage granted could have been unbelievable. This could be put to work in an ultra-safe US Treasury 30 year bond earning 6-7%. The major US investment banks could have notched up 30-35% a year safely without losing any sleep over the size of year-end bonuses. Some took this further to leverage up 20-30x on futures contracts. The yen carry trade was a virtually risk-free investment for many years.
Even though there have been swings in the yen exchange rate with other currencies over the last decade, it is probable these currency risks were manageable given the short timeframes for trading and short term investments (see graph with US$ rate).
Chart: Pacific Exchange Rate Service
Since mid-2007, the yen has started to strengthen...as the US$ started to relatively weaken against major world currencies over growing concerns in its American bubble economy. As a result, the yen carry trade has been unwinding rapidly (aim being to avoid getting killed by the crowbar which now works against you).
Move forward to today...the conditions are ripe in the US for a new carry trade. The interest rates are at a near zero 0.25% and the Federal reserve has stated they're likely to stay there for "an extended period of time". The US$ is weak due to massive trillion dollar government deficits and quantitative easing ie. printing money with no restrictions. So it is not likely to strengthen any time soon. Certain banks deemed "too big to fail" are awash with cash and this needs to find a new home. What will be the new assets being sought? If one can pinpoint these, their prices will likely explode to the moon as too much money chases so few goods.
- US treasury bonds are a source of lavatorial jokes now. Long dated bonds will lose value over time due to their humongous oversupply and future inflation could take hold quickly. Tim Geithner is unlikely to appear in front of Chinese students anytime soon to defend the value of the US$.
- Overseas govn't bonds. All European govn'ts are similarly plagued with massive debts as a proportion of their GDP so inflation risk is also abundant. Political risk in Middle-East oil nations remain high. Singapore and China sovereign bonds are not a big enough market yet.
- Competitive currency devaluations are likely in future as exporting nations strive to protect jobs. This will tend to dampen countries' relative interest rate advantages which are already at record lows, so borrowing in US$ to put in another currency deposit with a favourable interest rate deposit is not worthwhile
- That leaves distressed commercial real estate, commodities and precious metals. Paper assets will be out of vogue as tangibles come to represent what money has always been designed for ...a store of wealth. What would happen if a chunk of this idle US money was to stampede into gold and was met with competition from Indians famed for buying this stuff enmasse for their weddings and Chinese who want to buy everything stealthily?
A new phenomenon started to take off - the yen carry trade. From the 1990s, savvy investors realised they could borrow at near zero interest rates from Japanese banks and invest in new business opportunities that could easily return double digits. With financial services innovation and the use of leverage, they could double, triple and even ten-fold up their original invested capital. It was like being given a crowbar to lift many times a normal weight.The Japanese housewife was a typical example borrowing Yen 600k (equivalent to about US$5k) at 0.25% from her bank and investing this immediately in a New Zealand dollar currency deposit account (within the same bank!) earning 4% per annum. With leverage, her bank was reasonably happy to grant this US$5k equivalent into an effective US$10-15 k margin account for her to control. Investing in the NZ$ meant 8% to 12% annual returns were therefore no problem. Now you know why LV and Tiffany stores worldwide were so favoured by the Japanese tourists abroad! Similarly, if you were a profitable non-Japanese heavyweight financial institution the leverage granted could have been unbelievable. This could be put to work in an ultra-safe US Treasury 30 year bond earning 6-7%. The major US investment banks could have notched up 30-35% a year safely without losing any sleep over the size of year-end bonuses. Some took this further to leverage up 20-30x on futures contracts. The yen carry trade was a virtually risk-free investment for many years.
Even though there have been swings in the yen exchange rate with other currencies over the last decade, it is probable these currency risks were manageable given the short timeframes for trading and short term investments (see graph with US$ rate).Chart: Pacific Exchange Rate Service
Since mid-2007, the yen has started to strengthen...as the US$ started to relatively weaken against major world currencies over growing concerns in its American bubble economy. As a result, the yen carry trade has been unwinding rapidly (aim being to avoid getting killed by the crowbar which now works against you).
Move forward to today...the conditions are ripe in the US for a new carry trade. The interest rates are at a near zero 0.25% and the Federal reserve has stated they're likely to stay there for "an extended period of time". The US$ is weak due to massive trillion dollar government deficits and quantitative easing ie. printing money with no restrictions. So it is not likely to strengthen any time soon. Certain banks deemed "too big to fail" are awash with cash and this needs to find a new home. What will be the new assets being sought? If one can pinpoint these, their prices will likely explode to the moon as too much money chases so few goods.
- US treasury bonds are a source of lavatorial jokes now. Long dated bonds will lose value over time due to their humongous oversupply and future inflation could take hold quickly. Tim Geithner is unlikely to appear in front of Chinese students anytime soon to defend the value of the US$.
- Overseas govn't bonds. All European govn'ts are similarly plagued with massive debts as a proportion of their GDP so inflation risk is also abundant. Political risk in Middle-East oil nations remain high. Singapore and China sovereign bonds are not a big enough market yet.
- Competitive currency devaluations are likely in future as exporting nations strive to protect jobs. This will tend to dampen countries' relative interest rate advantages which are already at record lows, so borrowing in US$ to put in another currency deposit with a favourable interest rate deposit is not worthwhile
- That leaves distressed commercial real estate, commodities and precious metals. Paper assets will be out of vogue as tangibles come to represent what money has always been designed for ...a store of wealth. What would happen if a chunk of this idle US money was to stampede into gold and was met with competition from Indians famed for buying this stuff enmasse for their weddings and Chinese who want to buy everything stealthily?
Friday, 25 September 2009
Is Twitter worth US$ 1 billion? Check out China's proven business model.
Wall Street is abuzz over the US$100mn funding plan for a stake in the fast growth San Fransico based internet messaging company of 60 employees. This values it at US$1 bn. It is expected to have 25 mn users by the end of the year. However, it has peanuts in revenue and the co-founder Biz Stone has gone on record as saying they are still open to exploring advertising. Recently, Facebook valued at US$15 bn with 300 mn users has also been rolling out features similar to Twitter to enable users to share more of their content publicly, as it tries to manoeuvre into this space.
Is this is a sign of a market top? Money is being poured into an unproven business model because it cannot sit on the investment sidelines or be put to work on better opportunities elsewhere. Maybe it will pique the interest of Google and Yahoo. This has echoes of 1999. Remember Pets.com? Formed in 1998, Amazon.com backed them in a US$82mn IPO in February 2000. It had just spent US$2.6mn in a 30 second ad slot for the recent 39th SuperBowl final. Neither external advertising nor online advertising could sustain it. It went bust nine months later and signalled the beginning of the dot.com collapse.
Tencent Holdings in China is a better business model. Started in 1998, its "QQ" instant messaging system proved an immediate hit enabling it to rapidly forge a secure link amongst migrant families and friends between the countryside and the cities. This helped Tencent to eventually broaden out, innovate and add value to mobile users with QQ Games, QQ Music/Radio/Live and Paipai online shopping. Today it is China's leading internet portal with 990m registered users and is publicly listed in Hong Kong (HK# 0700) with a marketcap of US$29 bn , commanding a historic PE ratio of 72! 2009 first half revenues climbed 77% compared to 2008 first half.
So back to Twitter's valuation. One way to look at it is assess what the userfile is worth ie market value per user. Tencent is valued at US$29 (US$29bn / 990mn) given its solid market leadership position (if you believe Tencent's 72 PE ratio is grossly overvalued at today's stock price, it can still fall by 50% and the valuation pared down to around US$14-5). Similarly, Facebook is at US$50 while Twitter is at US$40 today based on 25 mn users. If it achieves 100mn users, the valuation improves to US$10.
Putting aside social democracy, the fast pace of technological innovation and focussing on just the numbers, Tencent has the edge here. It's still handsomely growing that top revenue line despite the economic downturn. Twitter looks a risky bet based on just the projected number of users.
Is this is a sign of a market top? Money is being poured into an unproven business model because it cannot sit on the investment sidelines or be put to work on better opportunities elsewhere. Maybe it will pique the interest of Google and Yahoo. This has echoes of 1999. Remember Pets.com? Formed in 1998, Amazon.com backed them in a US$82mn IPO in February 2000. It had just spent US$2.6mn in a 30 second ad slot for the recent 39th SuperBowl final. Neither external advertising nor online advertising could sustain it. It went bust nine months later and signalled the beginning of the dot.com collapse.
Tencent Holdings in China is a better business model. Started in 1998, its "QQ" instant messaging system proved an immediate hit enabling it to rapidly forge a secure link amongst migrant families and friends between the countryside and the cities. This helped Tencent to eventually broaden out, innovate and add value to mobile users with QQ Games, QQ Music/Radio/Live and Paipai online shopping. Today it is China's leading internet portal with 990m registered users and is publicly listed in Hong Kong (HK# 0700) with a marketcap of US$29 bn , commanding a historic PE ratio of 72! 2009 first half revenues climbed 77% compared to 2008 first half.
So back to Twitter's valuation. One way to look at it is assess what the userfile is worth ie market value per user. Tencent is valued at US$29 (US$29bn / 990mn) given its solid market leadership position (if you believe Tencent's 72 PE ratio is grossly overvalued at today's stock price, it can still fall by 50% and the valuation pared down to around US$14-5). Similarly, Facebook is at US$50 while Twitter is at US$40 today based on 25 mn users. If it achieves 100mn users, the valuation improves to US$10.
Putting aside social democracy, the fast pace of technological innovation and focussing on just the numbers, Tencent has the edge here. It's still handsomely growing that top revenue line despite the economic downturn. Twitter looks a risky bet based on just the projected number of users.
Thursday, 24 September 2009
A "leading" indicator for the US consumer: The tipping point between intensive care and money heaven
While scanning the investment horizon with the aftershocks from ground-zero (ie US of A) still reverberating for savvy investors, I came across something that really made my jaw drop, compelling me to do some quick calculations.
In 2001 and 2003, the old prez Bush made some big tax cuts in personal income tax. They expire towards the end of 2010 and will change back to the old rates. Big deal I thought, it's just catch-up time ... until I dug deeper. The taxpayer's pocket is going to get bashed on this one.
- The 10% bracket will increase to 15%
- The 25% bracket will increase to 28% (between $33,950 and $82,250 per year)
- The 28% bracket will increase to 31%
- The 33% bracket will increase to 36%
-The 35% bracket will increase to 39.6%
They seem smallish amounts until I figured you're looking at hikes of +9% to 50% (that's probably the local hairdresser in the bottom bracket!). But get this...Larry Summers, Obama's National Economic Adviser has gone on record in 2009 as saying these will not be renewed/extended. So that's the first calc. With all that govn't debt, they need the revenues.
In the last few years, Asia's emergence has revolved around the US consumer...not the mainland factoryworker or the rich monied wife who flies down from Shanghai to shop at Pacific Place while hubby pays HK$70,000+ per sqft for the Masterpiece in Tsimshatsui to get rid of his loose change. The last two (a small and visible minority) are just the multiplier effect at work aided by the factory worker (a visible but uninfluential economic majority). But over the water, "Joe the plumber" who was personified in the presidential election campaign as the common man on the street is a very visible and powerful cog of the economic majority who determines Asia's export fate, representing 70% of US GDP.
My second calc is to quantify the probable loss in Asia exports due to the loss in spending power as a result of these tax rises. My assumptions:
- US population 307m
- US unemployment in 2010 @ 10% (now at 9.7%, although John Williams of Shadowstats puts it in the mid-teens)
- No. taxpayers = 307m x 70% (30% are non-working under 18s and retirees) x 90% (less unemployed) = 193m
- Say the average taxpayer's annual salary is U$40k (ie HK$26k/mth) across the whole workforce and allow 15% for deductions (taxes & social security etc - very conservative %) and the tax rate goes up by +3% as above
Each taxpayer has to pay additional taxes of US$40k x 85% x 3% = US$1,020 per year. With 193m taxpayers = US$197bn increase in tax revenues / loss in consumer spending power.
Remember this is consumer goods (PCs, cameras and phones, stationery, clothes, home decorations etc) of incremental discretionary spending they will have to elimiminate. Most of this stuff is imported. They'll still have to maintain paying their rents/mortgages, eating and value shopping on day-to-day necessities while cutting back the imported nice to haves/luxuries. If not already, they're cutting back on services too (gym passes, Fifi's doggy manicure sessions).
This is where I use back of envelope maths for the third calc.....if 75% of the imported consumer stuff is from Asia (can only generalise here what truly good popular stuff South America, Europe and Africa ship across besides meat products, confectionery and precious stones), then Asia will lose US$148bn exports. Of this, say 50% is from China @ US$74bn (high volume and low margin consumer electronics and cheap household stuff you see in CitiSuper/FrancFranc/discount stores) with Korea, Taiwan and Japan making up the other 50% with their predominant lower volume but higher margin electronics gear and autos.
US$74bn China loss works out at a reduction in their trade surplus of US$6.2bn / month. If you look at the big picture below, US$6.2bn is a devastating hit in any month! My calc can still be 20% wrong and not affect the picture. The trend is already down drastically; it may bottom out and level off for a while in 2010...before it gets whacked again later. PRC Government steps in again with more stimulus?
This is a freight train which is out of sight but you can hear the rumbling in the distance. Oncethe lights start flashing, bells ringing and the gates come down at the crossing, it is too late to get across the profitable investing road. You're stuck in your positions! Whatever Obama's tax pledges, Joe the plumber is about to be well and truly drained (excuse the pun). You have plenty of time to position your portfolios to counter the 3% tax butterfly flapping its wings in Washington today before it causes an earthquake at the Chen's factory in Dongguan and Hutchison House (HK's status as a premier transhipment port is at stake here because of economic cycle and structural (Shenzhen port cheaper) shifts.
Keep a careful eye out on this US tax issue which the local HK media don't have on their radar today.
In 2001 and 2003, the old prez Bush made some big tax cuts in personal income tax. They expire towards the end of 2010 and will change back to the old rates. Big deal I thought, it's just catch-up time ... until I dug deeper. The taxpayer's pocket is going to get bashed on this one.
- The 10% bracket will increase to 15%
- The 25% bracket will increase to 28% (between $33,950 and $82,250 per year)
- The 28% bracket will increase to 31%
- The 33% bracket will increase to 36%
-The 35% bracket will increase to 39.6%
They seem smallish amounts until I figured you're looking at hikes of +9% to 50% (that's probably the local hairdresser in the bottom bracket!). But get this...Larry Summers, Obama's National Economic Adviser has gone on record in 2009 as saying these will not be renewed/extended. So that's the first calc. With all that govn't debt, they need the revenues.
In the last few years, Asia's emergence has revolved around the US consumer...not the mainland factoryworker or the rich monied wife who flies down from Shanghai to shop at Pacific Place while hubby pays HK$70,000+ per sqft for the Masterpiece in Tsimshatsui to get rid of his loose change. The last two (a small and visible minority) are just the multiplier effect at work aided by the factory worker (a visible but uninfluential economic majority). But over the water, "Joe the plumber" who was personified in the presidential election campaign as the common man on the street is a very visible and powerful cog of the economic majority who determines Asia's export fate, representing 70% of US GDP.
My second calc is to quantify the probable loss in Asia exports due to the loss in spending power as a result of these tax rises. My assumptions:
- US population 307m
- US unemployment in 2010 @ 10% (now at 9.7%, although John Williams of Shadowstats puts it in the mid-teens)
- No. taxpayers = 307m x 70% (30% are non-working under 18s and retirees) x 90% (less unemployed) = 193m
- Say the average taxpayer's annual salary is U$40k (ie HK$26k/mth) across the whole workforce and allow 15% for deductions (taxes & social security etc - very conservative %) and the tax rate goes up by +3% as above
Each taxpayer has to pay additional taxes of US$40k x 85% x 3% = US$1,020 per year. With 193m taxpayers = US$197bn increase in tax revenues / loss in consumer spending power.
Remember this is consumer goods (PCs, cameras and phones, stationery, clothes, home decorations etc) of incremental discretionary spending they will have to elimiminate. Most of this stuff is imported. They'll still have to maintain paying their rents/mortgages, eating and value shopping on day-to-day necessities while cutting back the imported nice to haves/luxuries. If not already, they're cutting back on services too (gym passes, Fifi's doggy manicure sessions).
This is where I use back of envelope maths for the third calc.....if 75% of the imported consumer stuff is from Asia (can only generalise here what truly good popular stuff South America, Europe and Africa ship across besides meat products, confectionery and precious stones), then Asia will lose US$148bn exports. Of this, say 50% is from China @ US$74bn (high volume and low margin consumer electronics and cheap household stuff you see in CitiSuper/FrancFranc/discount stores) with Korea, Taiwan and Japan making up the other 50% with their predominant lower volume but higher margin electronics gear and autos.
US$74bn China loss works out at a reduction in their trade surplus of US$6.2bn / month. If you look at the big picture below, US$6.2bn is a devastating hit in any month! My calc can still be 20% wrong and not affect the picture. The trend is already down drastically; it may bottom out and level off for a while in 2010...before it gets whacked again later. PRC Government steps in again with more stimulus?
This is a freight train which is out of sight but you can hear the rumbling in the distance. Oncethe lights start flashing, bells ringing and the gates come down at the crossing, it is too late to get across the profitable investing road. You're stuck in your positions! Whatever Obama's tax pledges, Joe the plumber is about to be well and truly drained (excuse the pun). You have plenty of time to position your portfolios to counter the 3% tax butterfly flapping its wings in Washington today before it causes an earthquake at the Chen's factory in Dongguan and Hutchison House (HK's status as a premier transhipment port is at stake here because of economic cycle and structural (Shenzhen port cheaper) shifts.
Keep a careful eye out on this US tax issue which the local HK media don't have on their radar today.
Wednesday, 23 September 2009
Touchdown! Why the "r" landing beats the hard and soft versions
Let's kick off by letting me tell you a little bit about myself and how this blog can help you make sense of the rapidly changing economic currents sweeping through the world today. It's going to provide insightful, thought provoking and actionable ideas for you.
Ever since I was a kid, our family TV always fascinated me as a window to the world. Interspersed with my schooling, the family's roots in Hong Kong and South China eventually led me back to this former British enclave during some of those long summer sojourns. Wasn't it here that naked capitalism faced off against rabid communism?
The seeds to better understand the full impact of economics was firmly planted here before returning home again to pursue my education. Trade catalyses nations and clarifies the human spirit. Economics was never the "dismal science" for me.
Long before I learnt about hard and soft landings in textbooks, I was buzzing with the "r" landing, an experience which never ceased to wow my friends back in the UK. While not part of the normal lexicon, it was something unique to Hong Kong. Every jet descending into Kai Tak airport (which closed in 1998) had to follow a straight line over low rise buildings in the centre of town and then bank steeply at most 90 degrees to the right before the rubber met the runway.
Have a peek below...best with earphones:
It was game on. After university and armed with my business degree, five years working in London with Quaker Oats and BP Amoco was sprinkled with opportunities to visit New York and Washington. I even accumulated more "r" landings and later decided to set down in Asia. In between, I gained my professional accountancy qualification. Valuable experience was gained working out here for Philip Morris, Marks & Spencer and a global weekly news magazine. Having travelled around this region, witnessed the phenomenal China growth first hand and worked in India for a while, I'm convinced we are at a monumental crossroads.
Pressing questions are confronting policymakers in their oak-panelled rooms today. Just how life-changing is the global financial crisis? What shape will the Pacific hemisphere take as it replaces the Atlantic century? Where will the next opportunities and threats come from? Can American hegemony survive without the US dollar as a world reserve currency? Will the Chinese and Indian consumer be able to chart a sustainable domestic growth path?
Around kitchen tables, animated discussions are commonplace on how to stretch the monthly income further, de-risk portfolios ravaged by the financial crisis and refine asset allocations to secure the roof over the heads.
We're going to embark on a journey together...the showdown (or "strategic partnership" according to the diplomats) between East and West has begun in earnest... I'll do a take on the issues of the day, peel away and demystify the numbers behind the headlines to provide you with actionable insights. I'm going to take the game to you...
Ever since I was a kid, our family TV always fascinated me as a window to the world. Interspersed with my schooling, the family's roots in Hong Kong and South China eventually led me back to this former British enclave during some of those long summer sojourns. Wasn't it here that naked capitalism faced off against rabid communism?
The seeds to better understand the full impact of economics was firmly planted here before returning home again to pursue my education. Trade catalyses nations and clarifies the human spirit. Economics was never the "dismal science" for me.
Long before I learnt about hard and soft landings in textbooks, I was buzzing with the "r" landing, an experience which never ceased to wow my friends back in the UK. While not part of the normal lexicon, it was something unique to Hong Kong. Every jet descending into Kai Tak airport (which closed in 1998) had to follow a straight line over low rise buildings in the centre of town and then bank steeply at most 90 degrees to the right before the rubber met the runway.
Have a peek below...best with earphones:
It was game on. After university and armed with my business degree, five years working in London with Quaker Oats and BP Amoco was sprinkled with opportunities to visit New York and Washington. I even accumulated more "r" landings and later decided to set down in Asia. In between, I gained my professional accountancy qualification. Valuable experience was gained working out here for Philip Morris, Marks & Spencer and a global weekly news magazine. Having travelled around this region, witnessed the phenomenal China growth first hand and worked in India for a while, I'm convinced we are at a monumental crossroads.
Pressing questions are confronting policymakers in their oak-panelled rooms today. Just how life-changing is the global financial crisis? What shape will the Pacific hemisphere take as it replaces the Atlantic century? Where will the next opportunities and threats come from? Can American hegemony survive without the US dollar as a world reserve currency? Will the Chinese and Indian consumer be able to chart a sustainable domestic growth path?
Around kitchen tables, animated discussions are commonplace on how to stretch the monthly income further, de-risk portfolios ravaged by the financial crisis and refine asset allocations to secure the roof over the heads.
We're going to embark on a journey together...the showdown (or "strategic partnership" according to the diplomats) between East and West has begun in earnest... I'll do a take on the issues of the day, peel away and demystify the numbers behind the headlines to provide you with actionable insights. I'm going to take the game to you...
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