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

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

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?

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...

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

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!