US Dollar in 2010

Survey shows that the USD was named as both investors’ second favourite and second least favourite currency heading into 2010. Since hitting a 16-month low on a trade-weighted basis at end of November 2009, the USD has risen more than 5% given its strong correlation with risky assets such as equities are showing signs of breaking down.

Investors are split as to whether the resurgence reflects a squaring up of bets against the dollar ahead of the end of 2009 or whether it is the start of a longer-term upward trend in the US currency. The fragile finances of Britain, Japan, Russia, Spain, Ukraine and other nations increasing the chances of a scary market event that the assumption of the dollar’s straight line decline is no longer a given.

Low short-term interest rates in the US encouraged asset re-allocation with the US dollar being used as a funding currency for carry trades, thus undermining the currency’s strength. But this situation is balanced up with the view that the recovery in the US economy is gaining momentum and should it proved to be sustainable, this will help to ensure that capital flows become more balanced and thereby less dollar-negative.

Volatility of the dollar is increasing and there is broad consensus in the market that the dollar will rally once the Fed signals that it is ready to drop its pledge to keep US interest rates at ultra-low levels for an ‘extended period’. It is just the timing of such a move that is polarizing views on the currency.

Investors are now looking for signs for shifts in correlation which may signal the end of the US as a pure safe-haven play and becomes a value proposition instead. A full shift perhaps may still take months away, but the relationship between the dollar and stocks and commodities has weakened in November 2009. Two key indicators to watch – the sustainability of economic growth and build up in inflationary pressure, which would lead to higher interest rates, hence would undermine the dollar’s role as a borrowing currency of choice.

History, however tells us the US dollar shouldn’t start rising on a sustainable basis until 12 months after the Fed starts to lift rate. It will take time to drain the oversupply of dollars from the market and the currency will remain weak until the Fed’s rate rises above the competitors. After policy makers started boosting borrowing rates in July 2004, the dollar index tumbled 10% and didn’t get back to where it had been before the first increase and stay there for more than a month until November 2005. Intercontinental Exchange Inc’s dollar gauge fell 6% and took 7 months to recover after the Fed began lifting borrowing costs in July 1999. It dropped 16% following the Fed’s 1994 move without regaining lost ground until 1997.

Illiquidity & Pessimism

Last 24 hours, I have seen extreme volatility in FX markets, first seeing the USD shed valued across the board but on illiquid trading conditions. USD regained strength with confirmation that US consumer confidence improved markedly from the previous reading.

This illiquid holiday trading conditions are still affecting markets – a phenomenon that we will see for the remainder of this week and possibly early part of next year with many market makers and dealers are still away from their desks for holidays.

On the other hand, the short-term momentum indicators of pound sterling are showing that bearish sentiment continues to build over the UK’s rather abysmal fiscal condition and still deteriorating economy. I am seeing rising trading positions adding to the short GBP positions.

Treasury two-year note yields reached the highest levels since October. Least money overall is bidding on US debt but specifically less foreign central bank money is buying US debt. And this is on the short end of the yield curve!

I have been surprised to see the air thick with pessimism in recent weeks. Not so much the stock market, where the sentiment indexes show the bulls are dominating the bears by slightly more than 52%, but among the general public.

An NBC/Wall Street Journal poll last week found that 55% of all Americans feel the nation is heading the wrong decision. This is the highest level since January of this year – when the financial crisis was red hot and US President Obama was just entering the White House. Also, a recent CNBC ‘Wealth in America’ report found more negativity. Negative sentiments were expressed about the economy, home values and wage growth. Faith in institutions like the Fed Reserve, the US Treasury and the financial sector were very low.

President Obama’s approval rating has fallen below 50% for the first time. And now what? Well, we have moved from abundant optimism in 1999 to rampant pessimism in 2009. But there is one equal possibility that from this environment of low expectations, great things can happen.

Trust me, I was there back in 1999 when optimism reigned!

2010 Tech Outlook

I wrote a piece on this matter couple of months ago and I reaffirm my belief on this industry with a positive bias for 2010. Tech counters are up at least 50% since then with Japan leading the way.

Demands are improving, companies are skeptical so inventory to remain low a capex is held down. Valuation kept in the middle of the zone and these dynamics are unlikely to change in 2010.

Tech demand is been driven by PC. Data from the US shows that demand for PC could have an upside of 15%, and this comes from significantly revised up 2009 base. Penetration rate in China, India and Russia remains strong. Consumer PCs grew 30%yoy in the bad year shows the driver. Corporate, which commonly are replacing a quarter of PC, have slowed to one-sixth, is set to get back to 1 out of 4. Replacement market will be one of the principal drivers for handsets as well. Window 7 is less resource hungry and 70% of the consumer machines with Windows 7 has 64-bit, 4 GB is the least amount, essentially more bits can be used.

World is expecting launching of new products of e-paper, batteries, LEDs on TV and touch.

Inventories are at 10-year low. I don’t expect to see inventory rising up that much in the near term due to some supply constraints. While, I am seeing a rise in capex numbers, these are essentially to meet current demand. It is likely going to be an issue at some point, perhaps two quarters away from now. The supply curve cannot be shifted due to semi-equipment bottlenecks. Contacts of mine suggest that we are likely to see 25-30% upside for revenue growth and margins.

Backend pricing is firm with shorter lead time on equipment. It remains under-invested and that should keep pricing firm. It is not easy to change the supply curve with better mix for high-end wafers.

2010 – Risk Taking or Risk Aversion

2009 is coming to a close. It is all about a tug of war between risk aversion and risk taking, dictated by what happening with global currencies, stocks, bonds, commodities and for most part of the year, the battle is clearly won by an increasing global appetite for risk.

After the global financial system was on the brink of collapse in late 2008, it became apparent in early 2009 that disaster had been averted. It was a green light for global investors to start dipping their toes back in the water. In a sense, risk trade has been easy to understand as the US dollar has moved one way and practically everything else such as currencies, global stocks and global commodities have moved in the opposite direction.

When risk aversion is king, the US dollar wins and practically everything else loses. And conversely when risk appetite improves, that trade reverses. Now that the perception that the US recovery is on track, market focus is beginning to shift back to the traditional drivers of capital flow – interest rate differentials and economic growth differentials. That’s why we are seeing the US dollar recovers recently, even while stocks and commodities move higher. A clear decoupling of the correlations we have seen to this point will define the risk taking component of the risk trade for 2010.

The issue now is the economic recovery that we are seeing so far is sustainable or not? We have seen the positive GDP numbers that have technically ended most recessions. But now the forces pulling and pushing between risk aversion and risk taking are about the sustainability of the recovery. If the recovery proves sustainable, then the market focus should ultimately transition back toward relative growth and relative interest rate prospects between countries.

But this argument has a lot of detractors. There are some very serious problems that remain and risks that make sustainable growth a low probability, in my view. Key threats include: (1)the rising prospects of a sovereign debt crisis, which was Dubai that stroke fear in the financial markets and now Greece, Italy, Spain, Ireland and Portugal – all are coming under scrutiny for the same reasons and it can be contagious to investor confidence.(2 threat of asset bubbles with new bubbles in real estate are popping up in the areas that were relatively out-performers in the downturn such as China, India and Canada. (3 rising protectionism on global trade and capital flows. Considering protectionism was a key accomplice in fueling the Great Depression, this activity represents a major threat to global economic recovery. As the issue with China’s currency gains in intensity, I expect protectionist acts to rise in retaliation.

Why Are We Different?

I have been receiving great diverse views of what holds for 2010. Some are saying we are going to grow at 5-6% or at least 1-2% or dip back into recession. Why such disparity? I think part of the reason is a basic disagreement on the nature of the just-lapsed recession.


The optimistic argue that look that the past recoveries from recessions, they were always strong in the first year and suggesting a 5-6% is not all that aggressive. And I would tend to agree that if the past recession was a typical recession. But what we have just gone through a recession that was unlike any other we have experienced since the Great Depression. Typical recessions are inventory-adjustment recessions, caused by businesses getting too optimistic about sales and then having to adjust. We get temporarily higher levels of unemployment as inventories drop and they we get the rebound. It is not quite as simple as that this time around.

This recession was caused by not too much inventory but by too much credit and leverage in the system. And now we are in the process of de-leveraging. It is a process that is nowhere near complete. While the crisis stage is over, at least for now, there is still a lot of debt to be retired on the consumer side of the equation and a lot of debt to be written off on the financial system side. Total consumer debt is shrinking for the first time in 60 years and the decline shows no sign of abating. Credit card companies have reduced available credit by $1.6 trillion dollars while credit card delinquencies are hovering near all time highs.

Strain is also seen in the housing sector. Residential delinquencies are up and now stand at a stunning 9%. We are likely to see a significant increase in mortgage resets in 2010, which will see even more foreclosures. There is a lot of pain to come. This is not an environment that is typical of past recessions. There is certainly a lot of de-leveraging to be done, both as banks write-off bad debts on homes and as consumers walk away from mortgages badly underwater. The next coming debacle is on commercial real estate loans as total loan delinquencies at banks are rising precipitously every month.

While Obama is urging banks to lend, bank regulators are telling banks to raise capital and shore up their balance sheets. One way is to lend less and invest in US government bonds. Past post recession expansions have been built on growing credit and leverage and this will not be the case this time around. There will be little political will to continue with massive stimulus as the federal government is running massive deficits.

Oil & Gas Outlook

I expect order flow recovery in 2010. The sharp financial meltdown in 4Q 2008 has led to temporary and indiscriminate stalling of projects in 2009 was more of a reaction to an exogenous factor. As such it is likely that to see the new orders returning quickly back to the levels in 2007/08 as in the past year of cautious contract wards act like a compressed spring that is finally being released.

Companies that have raised equity in early and mid 2009 should benefit as the industry recovers in 2010. Asset acquisition news is likely to be one of the key pillars in 2010.

The International Energy Agency (IEA0 has revised upwards its global oil demand projection in mid November to 84.4mbd for 2009 (+1.7%yoy) and to 86.2mbd for 2010 (+1.6%yoy). The IHS Cambridge Energy Research Associates had earlier predicted that the global oil demand would start growing by 2010, rising to 89.1mbd in 2014.

More governments are encouraging more investment in downstream petrochemical facilities, especially in the Middle East. The award of sub-contracting works in the Middle East to pick up momentum by 1H2010 versus the more usual exporting of crude oil. This growing preference towards producing higher value derivatives and functional products have resulted in the award of construction projects like the Saudi Aramco Total Refinery and Petrochemical Company’s Jubail Refinery and Petrochemical Complex in Saudi Arabia.

I expect new orders for deepwater rigs to flow through more strongly from mid 2010. The conversion/new build of fixed/floating production platforms will lead the way in 2010. My industry compilation shows that 21% of the leading global rig owners’ offshore drilling rig fleet is currently warm/cold stacked, in line with global rig utilization rates. Most of these rigs are able to find new offshore exploration jobs as oil price stabilizes amidst strengthening oil demand.

Pressure on AHTS may also mitigate in 2010. As the rates have fallen about 35-40% from peak levels in 2008, further downside from the current US$1.55-1.60 per bhp is likely to be limited in 2010.

Key inflection points for my view will be (i) W-shaped economic recession, (ii) dip in oil prices back to less than US$50/bbl or sharp run in oil prices to beyond US$85/bbl, (iii) weaker-than-expected margins for new orders due to stiff competition which to be met with global players who are relatively more desperate for new jobs and (iv) failure to secure big offshore vessel/onshore plant construction contracts in face of slower than normal easing of tight credit.

Shipping Business Outlook

I expect freight rates to be on downward bias and volatile given the China’s strategic shipbuilding policy. This will ensure continual deliveries of dry bulk carriers to the market, on top of lower ship demolitions and lesser order cancellations.

The influence of China on the dry bulk shipping in 2009 was unexpectedly strong and will be one of the key influences into 2010 unless China or South Korea unexpectedly reduce subsidies or support to its established yards. China is aiming to be the largest global shipbuilding nation, which should have resulted in most of the 48% order placed with Chinese yards being delivered. The short 10-14 months construction timeframe for dry bulk carriers and more than 30% down-payments and progressive payments would not help either to slow down the trend.

The current short-term charter rates for Capsize and Panamax vessels are significantly above longer-term charter rates and this reflects the possibility of high speculative activities. The smaller-sized dry bulk carriers, namely Handymax and Handsize will face better supply/demand dynamics in 2010, anchored by a return of positive growth for grains and minor bulk. The order-book to fleet ratio for Handsize is 0.3x and Handyman of 1.8x are significantly lower than the 4.7x order to fleet ratio for Capsize vessels.

On the other hand, the monthly deliveries of new-build Capesize/Panamax vessels since June 2009 have been above the peak in the previous cyclical upturn for drybulk shipping industry, which could negatively affect the day charter rates.

The key turning point in this case will depend on China’s import of iron ore and that can be traced to production of steel, also the Chinese government’s stimulus policies, which have resulted in strong rebound in construction, infrastructure development, car production, new factories etc. Having said that, headwind for steel production could become stronger should Chinese authorities choose actions over words. The Ministry of Industry and Information Technology, the Ministry of Commerce and the CISA have warned about steel production oversupply in 2009.

The high iron ore surplus and huge 66m iron ore inventory at ports are also not helpful to China’s likely attempt to negotiate downward the annual iron ore prices for supplies in 2010. The premium of local iron ore prices over imported iron ore has been greatly reduced. China’s iron ore (Hebei, Tangshan) have dipped from an undeserving 8% premium over imported iron ore in late 2008 to the current 22% discount. This is even lower than the historical average 15% price discount to imported iron ore.

Chinese government is setting up the China Shipbuilding Industry Investment Fund by December 2009 as to give further support to its shipbuilding industry and this will increase the supply of dry bulk carriers globally. The demolition activities, which are on a a steady downtrend, are needed to resume to assist the rebalancing of demand/supply dynamic.

Playing a Devil Advocate

In 2009, we can safely say that three inter-related trends have dominated financial markets – US$ dollar secular weakness, rally in commodity prices and a pronounced out-performance of emerging markets, including Asia. Question is that will these three trends to continue into 2010, as there are signs that they are to be running out of steam. For us, this begs the question whether the trends of 2010 will prove different to those of 2009, given what was happening in the Middle East recently?

The news of a Dubai World would be suspending payments to creditors, which was promptly followed by the rumor that defaulted Saudi groups – the Saad group and the Aran group were really nerve wrecking news and make many to think hard how the Middle East could find itself in this tight spot?

Of course, one argues that this may be nothing more than a few bad apples that blatantly mismanaged the liabilities and blew up balance sheets.

But I am also intrigued by the recent announcements that some of the region’s sovereign wealth funds – Qatar and Kuwait – have lately been selling the large stakes that they acquired in Western financials at the beginning of last year’s financial crisis. Of course, this could be guided by the simple fact that banks are back above their purchase price and they are happy to turn the page or perhaps, the sales are an indication that the Middle East needs US$ right now and that we are confronting some kind of squeeze on the US$.

One thing that I am very sure is that the recent developments in Saudi and Dubai will most likely give pause to foreign banks looking to expand their lending operations in that region. This raises question of whether the Middle East will look to pump more oil in a bid to generate the revenue necessary to keep the wheels churning? Could this be the beginning of financial squeeze in the Middle East that lead to the kind of massive cheating on OPEC quotas that we witnessed in the 1980s?

With these confluences development, where would all this leave other emerging markets, most specifically Asian equities, which have soared in the past year? Historically, Asian equities tend to struggle when the US$ rallies as a strong US$ forces Asian central banks, who typically run pegs or managed floats, to print less aggressively. But at the same time, most Asian economies would likely welcome the extra liquidity that lower oil prices would provide, not to say anything about an environment of continued low interest rates.

If that is the saying of the day, it is likely lead to massive rotation within the markets away from commodity producers and property developers and towards manufacturers and exporters.

Five China Precepts

If you are long-term investor, you cannot afford not to look at China.

Consumerism is taking root. According to China’s National Bureau of Statistics, the country’s retail spending advanced 16.2% in October and should easily hit the 15% to 19% target for 2009, essentially that the increase in consumer spending in China will be larger than the retail spending growth in the US, Europe and Japan combined. Government stimulus programs, including rebates on ‘white goods’ and tax cuts for low-emission vehicles – helped China’s car sales increased 43.6% in October. Now, China is the world’s largest car market, having replaced the United States earlier this year. Sales of home appliances are also up sharply, rising more than 35%. According to Carbon Monitoring for Action, China’s power plant capable of handling Kansas City’s electricity needs every nine days and a city of the size of Philadelphia every 30 days.

China is ready to serve with its service sector is now growing twice as fast as its construction and infrastructure segments. More than 30% of China’s workers are employed in service-sector jobs. Beijing has shrewdly directed huge portions of its stimulus package into the country’s service sector as part of its broader strategy to reduce its dependence on exports and transform China into a stronger, standalone economy.

There is more to China than exports. Truth to be told, net exports account for only 20% of China’s GDP. According to BNP Paribas, China imports nearly 90 cents worth of goods for every $1 in exports – means that at most there is 10 cents worth of ‘flux’ in China’s economy.

China has an exit strategy with its global financial crisis stimulus initiatives and is utilizing private spending to address any interim shortfalls. Beijing has raised capital requirements for banks, raised lending standards and generally put the kibosh on easy money. On an overall basis, China is well ahead of the curve while the US is trapped in an economic minefield of its own making.

Spending pattern is undergoing a needed shift. In the old days, public spending and that of state-owned enterprises outweighed private investment. The two have flipped and it is a significant shift.

The $2.3 trillion of capital reserves give it almost unlimited flexibility. It almost needs no explanation.

As for the contention that China’s economic and stock market growth rates are unsustainable, I can certainly envision a near term pull back. They are probably right. That is normal for any financial market and here is the thing – When it comes to China, I am investing for the long haul. I know where I will be putting my money!

6 Trades for 2010

Accept my 6 trading recommendation for 2010:-

Oil Floats – the number of oil tankers floating in the Mediterranean and English Channel is up by 71% in the last two months. Each ship can hold nearly 1 million barrels, so a jump in price of just US$1 means an instant profit of a million dollars per ship. Goldman Sachs predicts a bull run in oil prices for the next 4 years and specifically, US$85 a barrel in the next 90 days. Between today and New Year’s is the perfect time to construct a doubler trade in oil.

Copper Trade – China is a manipulator of copper and it is being stockpiled by Beijing. China’s imports of copper are up 70% from last year. Officially, China says it holds roughly a quarter of a million tons of copper in its warehouses, valued at US$1.3 billion. To-date, copper is up 110% - it is a vital component in China’s attempt to establish a reliable electric grid across the Middle Kingdom. It pays to listen not what she does, but not what she says.

Gold Double – gold prices are the favourite plaything of manipulators. The shock is how little gold has moved, compared to say lead – another base metals.

Money Market Funds – they are in the hand of rogue traders. With US$3.5 trillion just lying around like a honey pot, someone had to figure a way to put it to a good work. When the US$62.5 billion Revenue Primary Fund failed last year, it was not because the money fund was sitting in safely in Treasuries, but in a ton of Lehman’s commercial junk paper to juice yields. Recently, Paul Volcker, financial adviser to President Obama, ignited a firestorm by suggesting that money market funds be bought under control.

Bank It – Stay away from banks. Even the best-run banks are now having trouble, but that of course, is not what the FDIC wants you to know. With 115 banks down, we have still got another 300 bankruptcies to go. That is why financial stocks have now become the most actively manipulated on Wall Street.

Small Cap Clean Tech – last year, it was solar and this year is clean tech. This is exactly what happened with SmartHeat, a totally boring heat exchange manufacturer that got romanced from $3 last December to %10 this August.

The current rally has all the features of manipulation. The media cheerleading, especially from Bloomberg, has been relentless. Trading desks have been quietly told to squeeze the shorts until they scream.

Why I Am Suspicious

Rising prices must be accompanied with rising volume – this is an old and time-honored stock market analysis concept and probably one of the most profound insights into market behaviour. Usually, a rally with declining volume is a sign of a weak market and usually a harbinger of a correction if not an outright trend change.

The whole rally of the March 2009 of the S&P 500 is characterized by low volume and since the late October the signs are more visible. It is declining markedly and the recent break out in prices to new highs for the year is on very thin ice.

The divergence between advance-decline line and momentum indicators is just another tell-tale signs to watch out for. Sentiment indicators got frothy.

The news of the financial woes in Dubai should remind investors that the major debt problem associated with the global real estate bubble have not been solved. So over the next two years, I expect that we will hear from many more defaulting borrowers in and outside the U.S.

I also expect a new wave of mortgage resets starting to hit the US banking system in the second half of 2010. It will be interesting to see how the governments around the globe react. The weaker ones may find themselves trapped, not being able to absorb a new surge of losses.

The worst case scenario will be not only banks going bust, we may well see banks plus some governments going bust.

For now, I would treat any potential stock market weakness as a buying opportunity since I don’t yet see an end to the medium term up trend that started in March. But we should never forget the long term risks, either.

After Dubai

Restructuring of Dubai’s obligations implies that the creditors will take a share of the pain for the most distressed assets. Following this, we learned one hard lesson that never assume of an implicit government support and going by that, things had to get worse before they got better.

The risk from Dubai is not likely to systematically important on a global level, it is significant on a UAE and GCC level. They are a reminder that vulnerabilities and imbalances that contributed to the credit crunch have not disappeared. It clearly tells us that default risk of Dubai World may be only one of the risks that market actors were under-pricing. In particular, world’s attention now is shifted to the Eurozone and its periphery, where weaker countries like Greece and the more indebted of the Central and Eastern European countries, are under pressure.

UAE banks, which are already challenged by losses on mortgages as well as exposure to quasi-private companies that are undergoing restructuring, can access a new facility if needed as the size of exposures became clear and hopes of support from Abu Dhabi rose.

The bubble in Dubai can end in a number of ways – it can end in an economic collapse and general default as Dubai has done now or as Argentina did back in 2001. It also can end in massive hyperinflation, as with Latin America repeatedly in the 1950s through the 1980s and in the Weimar Republic of the 1920s.

2 Property Market News Update

Signs are clearer. Bulls are retreating and bears are taking shape.
Our immediate neighbour – Singapore is experiencing the first squeeze in office rents. Singapore’s Straits Times reported that it is a great news for office tenants, but far leaner times for landlords as office rents have plummeted by more than half in the past 12 months. On average, they fell a whopping 53.4 per cent from their peak in the third quarter of last year to Sept 30 this year - the second-fastest rate of fall in the world. Only rents in Kiev, Ukraine, fell more quickly, by 64.6 per cent.

That meant the Republic fell from 9th spot to No.32 in the latest Top 50 most expensive markets list, according to a half-yearly global survey done by US-based consultancy CB Richard Ellis.
The occupancy cost here - rent plus local taxes and service charges - is now US$63.89 (S$88.25) per square foot (psf) a year, down 23 per cent from six months ago when it was in 15th place. That is down more than half from US$135.13 psf a year ago.

A little bit farther to north east – Hong Kong’s home market is taking a breather. Cheung Kong launched Le Prime in Tseung Kwan O for sale last Friday, with about 180 units being sold over the weekend. The selling price was largely in line with the secondary market price in the neighbourhood. Market response was weaker than that of its neighbouring Le Prestige, which was launched in July 2009 and sold out in three weeks.

In short, buyers seem to adopt a ‘wait-and-see’ approach amid uncertain global economic outlook. The home market in Thailand is also showing sign of losing momentum since October. Residential prices have ceased to rise since October, according to some of my contacts in Thailand.

Dubai in Trouble

Information about Dubai remains scarce and worst still that the government of Dubai will be on holiday until 6 December in celebration of Eid and the UAE’s National Day. The $22bn of Dubai World’s external liabilities is an amount large enough to present a significant short-term risk on global credit market. It certainly forces investing community to re-think about the strength underpinning this global recovery.

Question is that will this event be the catalyst to a new ‘sub-prime’ scale as I have been hearing repeatedly that banks in Dubai seems to be well-capitalized and do not seem large enough to badly hurt the system.

Dubai World is the emirate’s largest state-owned conglomerate and operates in diverse businesses ranging from real estate to maritime services. Nakheel is a real estate development company, owned by Dubai World and best known for its Palm project. Essentially, on Wednesday 25 November, the government of Dubai authorized the Dubai Financial Support Fund to spearhead the restructuring of Dubai World’s liabilities. The holders of Nakeel’s $3.5bn bond maturing in mid-December are facing the immediate threat of delayed payment and about two-thirds of these bonds are held by international investors. The Dubai World intends to ask all providers of financing to ‘stand still’ and extend maturities until at least May 30, 2010.

What is seriously need a re-thinking is the presumption that the government would bail out Dubai World and its companies and need to assess the viability of Middle East even if Abu Dhabi is willing to support Dubai’s economy.

We have already seen a general risk aversion move with countries with financing issues being penalized heavily. Central banks have announced they intend to buy US dollars for the first time this year and the intensity of such intention is likely to intensify. Already, the United Arab Emirates’ central bank eased credit for lenders and the MSCI Emerging Markets Index lost 3.9% in two days after news broke. The cost of protecting Dubai government notes from default more than doubled to 647 basis points in three days.

Dubai, the second biggest of seven states that make up the UAE and its state-owned companied borrowed $80 billion to fund an economy boom and this ‘butterflies’ in the stomach will continue for at least new couple of weeks, if not more, until some kind of confidence is coming back to the system.

Dubai’s trouble could trigger a wider problem. For sure, we already seeing investors traditional sought safe habour in government bonds from the stormy waters of corporate bonds, now prove to be the safer bet, after all. Dollar and Japanese Yen are the alternatives while European and especially Asian markets and commodities will take the brunt of the losses. It could be the momentary setback, but do not ignore this as Dubai World woes resonating across financial markets.

In short, this is a wake-up call and the financial crisis that we are seeing since late December 2008 is far from over.

Greece and US – what in common?

One could never understand what stands in common between these two countries. But Greece may soon like the US be faced with deciding which bad choice to make among a very small set of really bad, difficult choices.

Greece is disturbingly close to a debt compound spiral as much as we know jolly well about the US situation. Even a small increase in interest rates will have a big impact on these economies. And at some point, the bond market is not going to ‘go-along’ for the ride and there will be a limit to market tolerance.

The interest spread between 10-year Greek bonds and German bunds has jumped more than 170 basis points. Greek debt has decoupled from Italian bonds. Athens can no longer hide behind others in EMU’s soft South. Euro membership now has to work extremely hard to block every plausible way out of the crisis and this is what happens when a facile political elite signs up to a currency union for reasons of prestige or to snatch windfall gains without understanding the terms of its Faustian contract.

The newly-elected Hellenic Socialists (PASOK) of George Papandreou confesses that the budget deficit will be more than 12% of GDP this year – four times than original claim for the last lot. Communist-led shipyard workers have already clashed violently with police and some 200 anarchists were arrested in Athens and Mr Papandreau has mooted a pay freeze for state workers earning more than E2,000 a month to fight for fiscal prudence. Without drastic cuts, Greece’s public debt will rise from 99% of GDP in 2008 to 135% by 2011 – something that very dearly to Japan, indeed. In another word, Greece is testing the limit of sovereign debt as it grinds towards slump.

On top, Greece’s current account deficit hit 14.5% of GDP in 2008. In short, Greece is skating on thin ice.

On the other hand, its compatriot the United States is financing its more than trillion dollar a year borrowing with i.o.u’s on terms that seem too good to be true. That happy situation, aided by ultra low interest rates may not last much longer. Treasury officials now face a trifecta of headaches – a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead and interest rates that are sure to climb back to normal as soon as the Fed decides that the emergency has passed. Treasury officials are rushing to lock in today’s low rates by exchanging short term borrowings for long term bonds. The potential for rapidly escalating interest payouts is just one of the wrenching challenges facing the US after decades of living beyond its means.

Americans now have to climb out of two deep holes as debt-loaded consumers, whose personal wealth sank along with housing and stock prices and as taxpayers, whose government debt has almost double in the last two years alone, just as costs tied to benefits from retiring baby boomers are set to explode.

The government of these two countries are on teaser rates as clever debt management strategy will not be a better match for prudent fiscal policy!

Monetary Policy in Scrutiny

Policy-making is tricky when different asset classes are sending very different signals about the economy. However, these signals are essentially a by-product of policy. US bond markets are discounting a sluggish U-shaped recovery or even a double-dip recession while risky markets are signaling a strong V-shaped recovery ahead.

I doubt risky assets to invert their course as long as the Federal Reserve commits to maintaining exceptionally low levels of the federal funds rate for an extended period. So the policy dilemma is one of having to maintain ‘exceptionally low rates’ given the still very difficult real economic conditions against the danger of an increasing disconnect between risky asset valuations and the economy, which could eventually snap back and compromise economic and financial stability in the medium term.

In the case of US, I maintain that Fed fund hikes are a story for end of 2010 or 1Q2011 and in the case of UK, as the economy failed to pull out of recession in 3Q209, a rise in interest rates is unlikely to occur before 2Q2010. The Monetary Policy Committee did move to increase the program of quantitative easing, asking the Chancellor of the Exchequer, Alistair Darling, for an extra 25 billion pound to be pumped into the economy, bringing a total amount of 200 billion pound.

The ECB, meanwhile, stayed hold at 1% in November and the ECB president Jean-Claude Trichet expressed concern over the excess volatility and strength of the US dollar. However, further rate cuts seem unnecessary as signs of economic stabilization and a deceleration of deflation have emerged. Broad money supply growth continued to decelerate and credit to real economy is contracting.

On one hand, we had seen synchronized global policy easing, but on the other hand, tightening does not need to be. Australia embarked on its rate tightening phase earlier and it raised the rates twice, in October and November by 25 basis points each. Following the footsteps of the Reserve Bank of Australia, Norges Bank (Norway’s central bank) recently increased its key policy rate by 25 basis points to 1.5%.

And in Asia, it is very likely that the central banks will be the first among emerging markets to tighten policy as capital inflows and loose policies since late 2008 are raising liquidity and asset inflation. But as good inflation is under control amid a slow recovery in domestic demand, relatively weak credit growth and an output gap, this will delay interest rate hikes in mid to late 2010, especially in the export-dependent economies and constrain aggressive tightening until domestic and external demand improve further. Until then, the central banks will fight credit and asset bubbles via liquidity absorption and regulatory and prudential measures such as in real estate. Countries that are less export dependent and have attractive asset markets like India, South Korea and Indonesia will be the first ones to hike rates and allow currency appreciation.

Tough love with China

I am not sure if conventional wisdom of asking RMB to strengthen will be benefit the US economy still holds or not. The thought that simply see the peg as China’s principal weapon in an economic struggle for global ascendancy is both incomplete and naïve. The argument that if China were to allow its currency to rise, American manufactures would regain their lost edge and both manufacturing firms and the jobs formerly associated with them would return. However, it tells the wrong story, in my view.

My point is that the abandonment of the RMB would cause severe hardship in the US. The US economy is currently on life support provided by an endless flow of debt financing from China. These purchases are the means by which China maintains the relative value of its currency against the dollar.

When China drops the peg, the immediate benefits will flow the Chinese, not the Americans. Yes, prices for Chinese goods will rise in the US – but so will prices for domestic goods. As a corollary, the Chinese will see falling prices across the board. In addition, credit will expand in china while it contracts in the US. When the RMB appreciating, it no longer needs to sell its currency reserves by buying Treasuries, then prices and interest rates in the US will rise. Americans will lose access to the consumer credit that funds their current spending, but the things they buy will also get more expensive.

The People’s Bank of China stated that it will fine-tune the exchange rate formation mechanism in connection to capital flows and the movements of major currencies. This is the first official hint that China will take global exchange rates as a benchmark for the RMB exchange rate – is a very subtle but very important change in China’s exchange rate policy. The change in short-term currency movement may not be big but this is a significant shift away from the current set up.

When domestic demand counts for a larger weight in the Chinese economy, enhancing purchasing power would outweigh the objective of maintaining export competitiveness. The recent change in thinking that happened to the Japanese Yen could happen to the RMB as well. In short, we just saw a construction step towards that direction – albeit a small step for now.

Ready for Second Stimulus?

A number of short-term indicators have moved into over-bought territory and there are reasons to suspect that the softness especially in small cap stocks, we have been seeing will continue for a week or so. Within the context of a bull-market elsewhere, the most sensible response is to step away from it and more aggressive investors may actually wish to short them.

The development of a ‘double-top’ now in the S&P 500 is going to get bears excited and a head-and-shoulders topping formation may be forming to boot will also renew their courage unless new catalysts to be found to reverse the momentum.

Last week when I was holidaying, I learned that Goldman Sach is telling its clients that the Obama administration is going to announce another major stimulus package. That would mean that the combined monetary and fiscal infusion package that is already historic in proportions might actually be kicked up a notch.

Of course, the administration would have to persuade Congress to pass the legislation at a time when conservatives are already screaming about the extreme state of the nation’s deficit. But one should not ignore the possibility that the government has gone all-in with low interest rates and fiscal stimulus and is ready to go way overboard in its attempt to get the US economy rolling again. It is after all they are well politicians with the first, second and third motivations of these people are to get re-elected!

In that context, Goldman says that we should pay attention to two developments that suggest a greater likelihood of more stimulus ahead – first, we have comments from US Senate Majority Leader Harry Reid that the Senate was likely to consider a jobs bill in early 2010 and second, President Obama announced that the White House would convene a jobs summit in December.

Goldman analysts believe that Congress will enact $250 billion in additional fiscal measures to support growth over the next three years, including $75 billion more in 2010. However, recent developments – including the $45 billion bill to help homebuyers enacted last Friday – make this assumption look conservative. The analysts say that the timetable would be similar to what we have seen in each of the past two years – policy formulated internally in December, debated publicly in January and enacted in February. But they note that it would likely take longer to create and pass due to concerns about the effectiveness about prior efforts.

If this is real as speculated, I would think that the reaction to this second package would also be positive. This could be news that kicks-off the next leg higher or at least forestalls the recent consolidation phase that seems to have gotten under way.

Mexico – The New China?

According to corporate consultant AlixPartners, Mexico has leapfrogged China to be ranked as the cheapest country in the world for companies looking to manufacture products for the U.S. market. India is now No. 2, followed by China and then Brazil.

In fact, Mexico’s cost advantages and has become so cheap that even Chinese companies are moving there to capitalize on the trade advantages that come from geographic proximity. The influx of Chinese manufacturers began early in the decade, as China-based firms in the cellular telephone, television, textile and automobile sectors began to establish maquiladora operations in Mexico. By 2005, there were 20-25 Chinese manufacturers operating in such Mexican states Chihuahua, Tamaulipas and Baja.

China’s push into Mexico became more concentrated, with China-based automakers Zhongxing Automobile Co, First Automotive Works (in partnership with Mexican retail/media heavyweight Grupo Salinas, Geely Automobile Holdings and ChangAn Automobile Group Co. Ltd. (the Chinese partner of Ford Motor Co and Suzuki Motor Corp, all announced plans to place auto-making factories in Mexico.

Not all the plans would come to fruition. But Geely’s plan called for a three-phase project that would ultimately involve a $270 million investment and have a total annual capacity of 300,000 vehicles. ChangAn wants to churn out 50,000 vehicles a year. Both companies are taking these steps with the ultimate goal of selling cars to U.S. consumers.

Mexico’s allure as a production site that can serve the U.S. market isn’t limited to China-based suitors. U.S. companies are increasingly realizing that Mexico is a better option than China. Analysts are calling it “near-shoring” or “reverse globalization.” But the reality is this: With wages on the rise in China, ongoing worries about whipsaw energy and commodity prices, and a dollar-yuan relationship that’s destined to get much uglier before it has a chance of improving, manufacturers with an eye on the American market are increasingly realizing that Mexico trumps China in virtually every equation the producers run.

Indeed, there are four factors are at work here. Firstly, the U.S.-Mexico Connection: There’s no question that China’s role in the post-financial-crisis world economy will continue to grow in importance. But contrary to the conventional wisdom, U.S. firms still export three times as much to Mexico as they do to China. Mexico gets 75% of its foreign direct investment from the United States, and sends 85% of its exports back across U.S. borders. Secondly, the Lost Cost Advantage: A decade or more ago, in any discussion of manufactured product costs, Asia was hands-down the low-cost producer. That’s a given no more. Recent reports – including the analysis by AlixPartners – show that Asia’s production costs are 15% or 20% higher than they were just four years ago. A U.S. Bureau of Labor Statistics report from March reaches the same conclusion. Thirdly, the Creeping Currency Crisis: For the past few years, U.S. elected officials and corporate executives alike have groused that China keeps its currency artificially low to boost its exports, while also reducing U.S. imports. Last but not least, Trade Alliance Central: Everyone’s familiar with the North American Free Trade Agreement (NAFTA). But not everyone understands the impact that NAFTA has had. It isn’t just window-dressing: Mexico’s trade with the United States and Canada has tripled since NAFTA was enacted in 1994. What’s more, Mexico has 12 free-trade agreements that involve more than 40 countries – more than any other country and enough to cover more than 90% of the country’s foreign trade. Its goods can be exported – duty-free – to the United States, Canada, the European Union, most of Central and Latin America, and to Japan.

Commodities Rich Australia

At the forefront, the Australian economic boom will be the nation’s huge natural gas reserves particularly the Gorgon gas field, first discovered in 1981. Developers Chevron Australia, Shell Development Australia and Mobil Australia Resources in September got their first approval to begin work on the field, which has more than 40 trillion cubic feet of gas.

The Gorgon field, Australia’s largest natural resource, is responsible for the nation’s largest trade deal ever with the world’s fastest growing economy – China. The deal is that for PetroChina Co – Asia’s largest oil and gas company to buy 2.25 million tons per year of liquefied natural gas (LNG) from Gorgon over a period of 20 years.

According to Chevron Australia managing director, Roy Krzywosinski, this project is estimated to have economic life of at least 40 years from the time of start up. It is expected to create around 10,000 indirect and direct jobs during peak construction. While Australia waits for the first Gorgon LNG to ship in 2014, it expects LNG from the $12 billion Pluto project in early 2011, just six years after the field was discovered. Production increases of this magnitude would likely see the value of LNG exports increase towards a similar share of total exports as for coal or iron ore.

Australia’s population is growing more than 2% per year with two thirds of the growth coming from immigration in the past year. Workers are likely to be in short supply, lending to strong demand for skilled migrants and therefore fast population growth, which will have flow-on effects for housing markets. This bodes well for home prices, which gained 3.7% in the third quarter and are up 6.5% on the year.

Looking at interest rate increases in Australia could serve as a sign of things to come in other Western nations, most of which have kept their key lending rates at record lows. However, I note that Australia’s 5.7% unemployment rate looks tame next to the United States’ 10.2% and the United Kingdom’s 7.9%. Even commodity-rich Canada saw its rate swing back up again to 8.6% in October.

RMB to Swap?

China has made public announcements to overhaul the global monetary system. It questions the role of the US dollar as the reserve currency. Its officials have gone on record saying they want to move the global currency peg away from the dollar in favour of currency diversification as indicated by China’s push for OPEC to price oil in a basket of currencies, including the RMB, instead of US dollar.

There has been growing transactions using the RMB in China’s neigbouring countries in recent years. Today, the RMB is informally freely convertible in almost all countries bordering China. Since July, China has allowed Hong Kong and five mainland cities to settle cross-border trade in RMB.

The push for the regionalization of RMB appears to be gathering strength ahead of the scheduled launch of the China-Asean Free Trade Area (CAFTA) on January 1, 2010. There will be zero-tariff for 90% of the products traded between China and Asean countries and substantial opening in the service trade market.

At nearly US$2.3 trillion, China holds the largest official foreign exchange reserves of any country and surpassed Japan as the largest foreign holder of US debt. The effects of devaluation is no-trivial, especially as large increases to the US money supply and the impacts on purchasing power becomes a disconcerting issue for holders of large amounts of US-denominated assets such as US government bonds and treasury bills.

And since December 2008, the PBOC has signed six different official bilateral currency swap agreements worth RMB 650 billion in total. Currency swap agreements are two-way loans between central banks. This allows for bilateral trade to occur between two countries without a requirement to covert anything into US dollars as firms importing goods from China can then pay for them with RMB borrowed from domestic banks. Other countries working towards directly exchanging their own currencies in trade transactions with China rather than using the US dollar as an intermediary include Russia, Brazil, and Thailand.

China is making a great stride that scenario of the global currency of choice for resolving international trade settlements more plausible than it was even a year ago.

Capital Control in Fashion Again?

This year, we have seen strong currency appreciation in emerging markets both because of external conditions, including high liquidity, a weak US dollar and strong risk appetite as well as domestic factors such as relatively strong fundamentals and wider interest rates differentials. As portfolio investments to emerging markets also rising, policymakers are in dilemma how to avoid losing international competitiveness while also containing asset inflation and the emergence of asset bubbles.

So far, reaction was pretty limited to either verbal intervention or reserve accumulation. Others have kept or chosen more aggressive administrative measures, including capital controls mostly targeting portfolio investments rather than FDI.

The imposition of capital controls on capital inflows as well as currency intervention tends to be ineffective in reversing the appreciating trend of the local currencies, especially if the latter are primarily driven by external factors. However, capital controls may be helpful in easing volatility and the pace of the trend itself. The risk is that capital controls are seen as punitive measures against capital markets, raise uncertainty about future policy actions, hurt the credibility of the central banks and increase the cost of external funding for local businesses.

Ultimately, the decision will be guided on how fast capital is flowing in, sterilization costs and monetary policy flexibility. Those countries where currencies and equity markets that experienced surge over the course of the year are the most likely to impose some sort of limitations on capital inflows.

On October 20, Brazil surprised investors with a 2% tax on capital inflows to both equity and bond markets. Likewise, in March 2008, Brazil used a 1.5% tax on fixed income inflows only to contain the Brazilian real’s appreciation then, which was lifted in October 2008 shortly after the Lehman collapse.

Chile is no stranger to capital controls, having imposed a 20% unremunerated reserve requirement on foreign loans from 1991-98. Chile’s foreign exchange regime is free floating and it tends to let the markets know of its intentions well in advance and their mechanisms are very transparent in length and quantity.

And in Asia-Pacific, despite a flood of portfolio investments, it still needs foreign capital to simulate investment and finance its current accounts. Most have opted to contain the currency appreciation via verbal and actual interventions, which has led to reserve growth of over US$70 billion in Q3 alone, ex-China. Based on the pace of reserve growth, and flow of hot money, this has led to an appreciation of domestic real assets, especially property. It is even clearer in the case of China, given its quasi dollar peg, which suggests inflows will persist. Tolerance for greater currency movement will be more visible for countries like South Korea, India and Indonesia with low export dependence, reliance on energy imports, and inflation risks.

Gold – Chinese?

We know gold is one of better investment options, but not all golds that will yield the same. Don’t buy another ounce of gold until you finish reading this!

In short, Chinese government has created a secret new gold investment and the last time the government did something like this, investors could have made more than 1,000% gains. China has gone crazy for gold.

In April, the government’s Foreign Exchange Agency announced the purchase of an additional 16 million ounces for state coffers. And recently, the National Geographic Magazine reported that for the first time China had surpassed the US as the buyer of gold jewelry. What has really gone unreported is that the Chinese government has created a gold investment that could dwarf the returns of gold bullion, ordinary gold stocks, and any other type of gold investment that you have heard of before.

In the late 1990s, the Chinese government created two similar investments – one to help the local insurance industry went up more than 600% in just a few years – China Life Insurance – the only company with a national license and the other one to aid the energy industry has gone up more than 100% over a similar period – China National Offshore Oil Corporation – with an exclusive right to explore, develop and produce oil with overseas partners as well PetroChina and Sinopec – another spin-off from the state-run monopoly.

And now they are doing for gold. Most investors don’t realize that China is now the world’s largest gold producer. They passed South Africa last year. China is one of the few countries in the world where known gold reserves are increasing, not shrinking. For essentially the past 50 years, no one was allowed to tough gold in China, except government and now is changing and in a hurry….

They realize gold is one of the only buy-and-hold investments in the world right now and they have nearly $2 trillion to spend, according to a recent report in The New York Times. The Ministry of Land and Resources is set to re-write the country’s mining laws, known as the Minerals and Resources Law to encourage local and foreign companies toe explore for and produce more gold.

The government has recently created the Shanghai Gold Exchange to allow anyone to trade gold on the open market. Also, that the government helped created and took nearly 50% ownership stake in a very small gold mining company as well as a new company that formed by key members of China’s National Non-Ferrous Metals Industry Corporation – a state-owned company.

RMB – Most Undervalued

G-20, the IMF, the OECD – all of the major institutions and central banks of the world are talking about the importance of repairing imbalances. Countries running large trade deficits, like the US would save more, consume less and produce more while export-driven economies like China would spend more and export less.

And again it all boils down to China. While most of China’s major economic competitors around the world have seen their currencies climb against the dollar by 20%, 30% and 40% in the last 8 months, the RMB has been virtually unchanged.

That is because China controls the value of its currency. And that creates a major advantage for China in the competition for world exports. It has long been a problem for the United States as cheap Chinese goods and cheap credit fueled a consumption binge for US consumers and a massive trade deficit. Only after the US Congress threatened to impose a tariff on Chinese imports, the RMB appreciates 17% against the dollar between 2005 and 2008. But since the financial crisis, China has returned to a peg against the greenback.

That is why while the rest of the world was in recession, China was still churning out growth and is now outperforming in the early global economic recovery.

Pressures are again rising for RMB appreciation. The recent depreciation of the RMB because of its peg to a weakening USD, the lack of restructuring in China’s growth model, rising trade protectionism, mounting capital inflows and surging FX reserves indicate that external imbalance is not repairable without price adjustment. The US-China trade negotiations will only move forward only if there is an underlying agreement for RMB to appreciate and this virtually guarantees that appreciation would resume in the near future.

I am looking for about 5-6% appreciation early next year for RMB easily and expectations for further appreciation may accelerate, but policy-makers are in no hurry given weak external environment and over-capacity in China.

Low Yield Market Dilemma

A year ago, ultra-low interest rates was supposedly meant to be a temporary measures, but it has persisted for so long now and if you are fixed-income investors, it will be a key challenge for all of us in 2010. Can we expect short-term rates to move higher anytime soon?

Long term interest rates may drift higher due to worries about US’ rapidly growing deficits and the potential for inflation down the road. But it remains quite unlikely to see short-term rates heading anytime higher soon. In fact, Fed’s most recent policy statement, they fully intend to keep rates ‘at exceptionally low levels ..for an extended period’.

It is a great dilemma for this generation and possibly the generations that come after me. Given this situation, I may have to work past my retirement age, not because I loving every minute of it. Just think, how difficult it is to cope with the triple whammy of potentially rising inflationary pressure, low yields and plus falling dollar.

I talk to a lot of people lately, but many don’t know what to do with this and many are taking on significantly more risk to make up for low yields. They are investing in higher risk stocks and other growth investments hoping to improve their cash-flow. And that is the real problem, but what choices do we have?

Do you know that in-spite of the headline-grabbing rally in stocks over the past year, government and corporate bonds have actually performed better than stocks over the past 12-months through the end of September. The key trouble is that most investors don’t own enough bonds to help stabilize their investment mix. According to a fund manager that I know quite well, investors own four times as much as in equities as in fixed income securities today.

Not all bonds or bond funds are created equal. Different types of bonds have different sensitivities to changes in interest rates and credit conditions. I note that many people make their own investment decisions rather than use an advisor. I wonder how they differentiate among the many bond funds in all different areas of the fixed income universe. After all, there are thousands of it and millions of bonds the world over to choose from today.

Now, I am slowly moving to manage my bond funds more actively, something that I never take it too seriously before. I am constantly reviewing, restructuring my portfolio to earn extra income and reduce risk, including paying more attention to emerging market bonds to protect me from falling US dollar scenario, and Treasury inflation protected securities (TIPS) with duration concentration in the shorter-to-intermediate range – 2-10 year range, indeed, which generally tend to have low or even negative correlation with stocks.

The Third Element

Battery power – a technology market that is heating up in a big way. I have seen some projections that market for rechargeable batteries is expected to zoom from $36 billion in 2008 to $51 billion in 2013. And yet, the battery market gets less attention than solar or wind power, its higher profile, but less technologically developed cousins.

Modern battery technology is the keystone of the global push to find an energy alternative for oil. In fact, a specific new category of rechargeable batteries is actually a ‘breakthrough’ technology that has the potential to replace as much as 148 billion barrels of oil over the next 50 years with a potential savings of $10.4 trillion at current prices.

What these numbers don’t tell you is that there is a big powerful catalyst at work, one that is behind the big push to develop new, rechargeable battery technologies – the electric or ‘hybrid’ car. In response to the oil price surge in 2008, US President Barack Obama promised to invest at least $150 billion on alternative energy during his term.

The technology in question: Lithium-ion.

Sometimes referred as the ‘Third Element’ – because of its No 3 position on the Periodic Table of the Elements, lithium is believed to have been one of the few elements synthesized in the ‘Big Bang’ that created the universe. Now it is a key ingredient of the new class of rechargeable batteries used to jump-start the plug-in car market.

President Obama’s American Reinvestment and Recovery Act allocates $2 billion for the development of battery systems, components and software for advanced lithium-ion batteries and for hybrid electric systems. Another $300 million will support an Alternative Fueled Vehicles Pilot Program.

Automakers have latched onto lithium-ion battery technology as the road to the future. Right now, nearly every automaker on the planet is gearing up to flood the market with some form of electric-powered car.

Daimler AG plans to roll out a hybrid version of its S-Class sedan later this year. Nissan Motor retooled a factory in Smyrna, Tenn to produce a pure electric vehicle and expect to sell as many as 50,000 units of the hybrid Altima in its first year. Meanwhile, Ford Motor is bringing out the pure electric Transit Connect commercial fleet van in 2010 and Chinese carmakers Hafei and Coda are planning to bring a mass-produced electric car to market in California in fall 2010.

Big Bet on Commodities

If you think the run up to July 2008 was a wild ride, you have not seen anything yet. In the next 5 years, investors who focus on medium-to-small sized producers and oil-field companies having a well-developed specialty niche will outperform the overall energy sector.

We are entering a period of rising prices. There is still some plays in the large verticals but the primary profits will be made with smaller, leaner exploration-and-production outfits, field-service companies and specialized producers such as shale gas, coal bed methane, tight gas, hydrates – heavy oil and biodiesel.

The market is rapidly approaching will be more volatile with valuation often more difficult to determine than in the past, even when prices increasing. It is tough to decide how much of the increases result from actual product margins and how much results from oil becoming a financial asset rather than just a commodity is major concern. It requires some careful homework.

As America enters an accelerating field maturity curve and an intensifying decline in well debit, the efficiency of production will decline. 60% of crude produced in the US market is a stripper wells, providing less than 10 barrels of crude a day but more than 20 barrels of water – a major by-product. Therein lies a significant area for innovation and leaner companies and that spells greater profitability at lower entry prices.

As such price rises for Westerners will occur anyway, not just because of China. Moving forward, China, India, a resurgent East Asia, Japan and even regions such as West Africa will occupy important positions in this regard.

To offset a more rapidly declining traditional production base, primarily Western Siberia, Russia must move north of the Arctic Circle, into Eastern Siberia and out on the continental shelf. As foreigners are not allow to own 50% of strategic fields under new laws this means watch out for the smaller, focused operators and oil field service companies.

Off the track little bit – do you know that under the Eiffel Tower – the French Oil Ministry has confirmed that there is a 40-billion-barrel reserve under the historical landmark – enough to fuel total US oil demand for 5.2 years, based on EIA estimates.

It isn’t China

But you are looking in the correct part of the world! The economy in question is South Korea, which has enjoyed an astonishing rebound since it reached a recessionary bottom last winter. The economy wasn’t much affected by the US-led subprime mortgage crisis, which infected many foreign banks, but rather the Asian Tiger was pole-axed by a collapse in world trade in the first three months of this year.

The South Korean won declined by 40% against the US dollar during the 12-month-strecth that ended in February. It has since recovered about half that drop, so it remains undervalued.

The overall outlook on the stock market is even highly upbeat. From its low point in December 2008, the Korea Composite Stock Price Index (KOSPI) is up 65%. Exports have recovered, particularly on the back of surging demand from China – a trading partner that is growing a bit more slowly than Korea, but that has considerably more muscle with 27 times the population.

Korea’s current account balance once again shows a healthy surplus. Fitch Ratings Inc, which had placed Korea on ‘credit watch’ for a possible downgrade from it’s a+ rating, recently announced that the downgrade would be unnecessary and said that Korea could expect to run a budget surplus in 2011.

Its elected pro-business government, led by President Lee Myung-bak in the beginning of 2008 is doing pretty well with the global financial crisis. Since its trade agreement with the United States is on indefinite ‘hold’ in the Congress of US House Speaker Nancy Pelosi, Korea recently signed a similar pact with the European Union, which may boost exports somewhat.

In any case, Korean government spending as a percentage of GDP is one of the lowest of the world’s most affluent developed economies. That means it will be much less of a burden than on the Korean economy that will similar outlays in the higher spending Japan, United States and European Union.

One admittedly annoying reality is that most large Korean companies abolished their dividends during the credit crunch and have yet to restore the payouts. The market, however, is still below its mid-2008 level, when the overall P/E ratio was only 11.

Hedge Funds

I guess a lot people heard, but not really know who are they – hedge funds? A lot people claimed that they have a good working knowledge about this business, but in reality, not many though. Hedge funds and the managers who run them have been getting a lot of publicity lately, but not of the flattering kind.

We have massive Ponzi schemes, equally massive losses and outsized systemic risks that are enough to frighten away many people, even the hardiest of investors. Nonetheless, they are an integral part of our financial investment landscape and they often outperform the broad stock market by wide margins. And they are now more accessible to investors via a fast-growing new vehicle – funds of hedge funds.

The first hedge funds came out in 1949 – as a strategy to neutralize the effect of overall market movements on a portfolio. Then, the strategy was simply to buy stocks that were expected to rise and selling short stocks expected to fall. The concept was simple – to add balance – to produce returns that were not market-dependent and tended to hedge a portfolio’s market exposure.
Nowadays, that has changed in a very fundamental way – besides protecting a portfolio from downside risk, hedge funds often go for a maximum return by deploying large amounts of leverage and investing in several asset classes among global markets.

Hedge funds are private partnerships that are open to a limited number of investors. To be qualified, usually you need a net-worth greater than $1 million and meet a minimum income requirement.
Institutional investors are also a dominant force behind the rising popularity of hedge funds. Firstly, pension funds – US corporate and government pension funds rarely have enough money in their kitty to cover all their expected future liabilities to their members and this is a major reason why them have reached beyond traditional investment vehicles to seek outsized returns. Secondly, endowments – include colleges and universities as well as charitable institutions. The larger the institution, the higher the percentage of assets invested in hedge funds.

One should not ignore the benefits of investing in hedge funds, including true diversification across multiple asset classes, true global diversification, non-correlation with traditional investments and the concept of absolute returns. Hedge funds exist to make money in any market environment.

Commodities – Room of Opportunity?

Thus far, gold is the only major commodities that are trading at all-time high in US dollar terms. And that sets and shapes a lot expectations and opinions about the general situation of commodity market.

However, if we week at gold’s price performance against, and correlation with other types of commodities and asset classes, it may reveal some interesting observations.

Since late August, gold has strong positive correlation to silver, palladium, platinium, hogs, coffee, zinc, natural gas, corn, lead and even Baltic index and low or negative correlation with sugar, cattle, soybeans, wheat, nickel, copper, light crude, heating oil and aluminium.

In essence, soft commodities have weak relationships with gold and precious metals tend to have closely allied to gold, especially silver with a correlation of over 95%. The precious metal sector has continued to make new highs in US dollar terms, but these latest moves are at risk of some correction. Speculative activity has been far more influential than industrial buying interest and the speculative component on the futures exchanges increased sharply in all four metals in recent weeks.

Speculative interest has increased again with the net speculative long position on NMYEX rising and these patterns of trading also tend to suggest that precious commodities may have overshot itself in the near term and it has already been experiencing some profit-taking in the Far East.

The correlation gaps between gold and soft commodities, however may present a good investment opportunity. This entry point will only be logical after price adjustment on precious metals come to an end. Time for a pull-back on precious commodities can take place for quite a while for full rewind as economic numbers are still mixed and industrial demand still remains sparse.

China’s New Shopping Mall - Canada

What has these three names in common – Aluminium Corp of China (Chinalco), Jiangxi Copper Co Ltd and China Minmetals Corp, except they are Chinese owned companies? Both made acquisition in mineral related business in Peru.

The truth is that these mineral-related business that acquired by them in Peru were Canadian mining ventures. This year’s conference of the Prospectors and Developers Association of Canada in Toronto, there was one obvious thing to note i.e. the attendance of the Chinese delegation, which signaled that country’s continued interest in Canadian mining assets.

So it was no surprise to me when, in July, the state-run China Investment Corp (CIC) bought a $1.5 billion stake in Canada’s Teck Resources Ltd. CIC is one of the new breed of so-called “sovereign wealth funds” (SWF), essentially government controlled investment funds that all told control trillions in foreign reserves. CIC manages about $200 billion of China’s estimated $2.3 trillion in foreign-exchange holdings.

For Teck, the 17.2% stake taken by CIC provided a badly needed cash infusion, since the Vancouver-based producer of copper, zinc, gold, metallurgical coal, and a host of specialty metals and excess energy was saddled with debt.

Since then, China has picked up the pace.

Now PetroChina Co. Ltd. is purchasing a 60% interest in two undeveloped projects of the privately held Athabasca Oil Sands Corp of Calgary. That puts nearly 3 billion barrels of crude oil under PetroChina’s ownership, while operational control of the projects remains with Athabasca. With reserves surpassed only by those of Saudi Arabia, Canada’s oil sands are seen as a world-class asset – as well as one that’s highly strategic.

China’s large acquisitions are raising eyebrows and spooking national governments. And that’s to be expected. In 2005, when the Chinese National Offshore Oil Corp. (CNOOC) failed in its attempt to take over Unocal Corp., a U.S.-based refiner/retailer of gasoline. Unocal later merged into Chevron Corp. Several subsequent China-led takeovers of properties in North America were thwarted for apparent political reasons.

It’s that type of behaviour that makes Canadian assets so attractive. Essentially, China has become a key supplier of badly needed capital, with a focused interest in a multitude of Canadian mining-and-commodities projects. But most observers assume China is only after the big fish – advanced-stage projects, with near-term production. If you can spot the trend, you’ll see why it’s a costly mistake to focus exclusively on larger, high profile projects. China itself has now realized how much attention its bigger deal making attracts. So China’s advanced guard has cast a much wider net: It’s now studying smaller mining and commodities projects that have at least passed certain regulatory hurdles and (ideally) have proven reserves.

China & Africa

Not many people know very well about this continent. If there is any association to it, it is very unlikely to be positive. Famine, civil wars, riots, killing, clashes are among common points that we hear from CNN and magazines. Despite such a bad publicity, China, another giant at the other side of the world, is raising its bet on it.

China’s trade with Africa has increased ten-fold over the past decade, as the rising Asian power has rapidly matured into a political and economic powerhouse. And with China still in the thralls of an epic growth spurt, its designs on Africa’s resources are beginning to conflict with those of the West.

Africa is blessed with abundance with natural resources – is shaping up to be the mostly hotly contested battlefield of the 21st century. Financial Times reported that China’s state owned CNOOC Ltd is in talks with Nigeria to buy 6 billion barrels of oil – equivalent to one-sixth of the country’s total proven reserves, which is likely to cost between $30 to $50 billion. It would put China at odds with western oil groups including Exxon Mobil, Royal Dutch Shell, Chevron Corp and Total SA, which partly or wholly control and operate the 23 blocs of interest.

With government backing, Chinese firms have been able to devote billions of dollars to the development of African resources. Chinese oil companies alone have announced plans to spend at least $16 billion to gain access to the continent’s energy assets.

China’s oil consumption has doubled in the last decade, soaring to 8 million barrels per day last year from 4.2 million barrels per day in 1998, according to BP Plc Statistical Review. China imported 3.6 million barrels per day last year, equivalent to about 45% of its needs.

Sinopec Corp in June agreed to buy Swiss oil explorer Addax Petroleum Corp for $7.24 billion in a deal that will give access to China to high potential oil blocs in West Africa and Iraq. And a month later, China’s largest oil refiner CNOOC agreed to purchase a 20% stake in an oil block offshore Angola from Marathon Oil Corp for $1.3 billion.

China is also making huge investments in Africa in exchange for large supplies of iron ore, nickel, copper, cobalt, bauxite, silver and gold. China has invested in 49 African countries, Chen Jian, vice minister of commerce told the China Daily.

However, China’s friends in Africa include President Omar Bashir of Sudan, who is currently wanted by the International Criminal Court for war crimes and Zimbabwe President Robert Mugabe, who has been accused of driving his country into economic ruin and starvation and is heavily sanctioned by the United States and European Union. China is also the largest supplier of arms to Sudan, which received $7 billion of Chinese defense exports between 2003 and 2007, according to US Department of Defense.

Long on Oil

I am not an insider, but there are many insiders are telling me to lock-in oil. They say the world’s best investors are betting billions on oil. Since January this year, they have pumped an astonishing $3.8 billion into oil and gas funds – 171% increase from last year.

OPEC members are scaling back on production. Global recession has frightened OPEC member nations, who were hit hard when oil prices collapsed last fall. They have cut production by 4.2 million barrels a day and even Venezuela and Iran, who often ignore OPEC recommendations, are sticking to their quotas. Compounding the decline in production, OPEC nations are also putting new drilling projects on hold. IEA expects a 21% drop in oil and gas investment budgets in 2009. Although there are recent reports said that there is a glut of oil supply, but smart investors know that the long term outlook isn’t so fruitful. And because it takes a big increase in price to produce a small change in oil demand, prices will spike as soon as supplies tighten.

The IEA predicts global demand will rebound next year with bulk of demand coming from emerging economies. Leading the charge is China, which has been using low commodity prices to stock up on their oil reserves and they are not planning to stop anytime soon. By hoarding oil, China is doing exactly what the rest of the world’s best investors are doing – buying now before oil prices surge.

It cannot be denied that the Fed’s expansive monetary policy and the stimulus package rolled out earlier this year are doubling the money supply, which will raise some inflationary concerns. Precisely for this reason that oil is priced in US dollars, any decline in the value of the dollar makes oil relatively more expensive.

Morgan Stanley’s head of commodities research Hussien says the bet in the long term is one way and that is just up. Deutsche Bank’s chief energy economist Adam predicts oil will be at $100 in 2015 and it could happen faster if the economy recovers while Goldman Sachs raised its 2009 oil price forecast to $85 a barrel and says prices would reach $95 a barrel in 2010.

Having said that, I believe volatility will continue in short term.

Yen Intervention

It used to be a good game for carry trade when the yen is trading above 105 with almost practically zero funding cost. Now, the USD has crashed with Yen cross at below 89 and investors who had enjoyed a handsome return from borrowing cheap yen and using that to buy high yielding currencies are running for cover. They quickly found that the yen carry trade is akin to picking up pennies in front of a steamroller…. Yen has gone up 28% against the USD since June 2007 (+20% against RMB, +21% against SGD, +31% against IDR and +43% against KRW).

That in turn, makes Japanese exports significantly more expensive than their Asian competitors. That is why markets are expecting a weaker recovery for this economy. And that lead to a speculation that Japan could return to recession as soon as the fourth quarter of this year, hence will drive the authority to intervene to keep yen competitive.

Japan’s new ruling party, the Democratic Party of Japan, entered office last month and the newly appointed finance minister, Hirohisa Fujii was happily to publicly comment on exchange rates. His initial remarks that a strong yen could actually be good for the economy caught the markets by surprise and sent the yen soaring even further. Since then, the minister had done an about face, joining other major countries with verbal threats against the strength of their respective currencies.

Japan has reputation for being sensitive to movements in the currency markets and the last time Japan intervened to weaken the yen was between 2003 and 2004. Over the course of 126 days, the Ministry of Finance purchased $135 billion and sold yen in the open market and ultimately sent the yen 11% lower.

But the overall success of interventions in changing the long-term path of a currency is not great. It tends to have a higher success rate when countries act together in support of (or against) the same currency. These coordinated interventions will have a greater spillover effect on other currencies.

Last week, leaders from the G-7 met in Istanbul and the probability of a coordinated response in currencies is high. And for Japanese exporters dealing with a yen near 14-year highs against the dollar – that will spell relief.

Fed – Two Collision Courses

I got this report from DBS Bank two weeks ago. It argues that Fed policy is on two collision courses with a likely possible scenario of explosive monetary base, hence it forces the Fed to raise rates faster-than-expected once banks start to withdraw their $800 billion of reserves from the Fed. Essentially, Fed is not in the driver’s seat, banks are.

Below is the flow of its arguments, which I tend to agree.

Fed purchases of US Treasuries, especially mortgage-backed securities (MBS) comprise roughly 90% of the monetary base. But the base is being kept stable because the Fed offsets (sterilized) these purchases with sales of other assets. Now, the issue is that Fed is nearly out of assts it can use for sterilization purposes. Under current plans, Fed purchases of Treasuries and MBS will collide with the monetary base in less than 2 months. Either the Fed is finding a new way to mop up these purchases or the monetary base will expand by another $634 billion (35%) by March 2010.

Related to it, if Fed has to sterilized MBS purchase, one may ask why not just purchase fewer MBS? The answer is simply that the Fed is trying to support the housing market and financial institutions exposed to it. Traditionally, the Fed sets the risk-free rate of interest and allows the market or the Congress to pick the winners and losers via fiscal policy. Now the Fed is encroaching on Congressional territory and Congress is beginning to bite back. Two wrongs don’t make a right.

In short, Fed has already expanded the monetary base by some $800 billion since October 2008. So far, banks and other financial institutions have not lent this money out into the economy. Rather, they have kept it on deposit at the Fed. But financial institutions are taking more risk now and as the economy improves, they will withdraw those deposits from the Fed and lend these deposits where they earn a higher return. The Fed will have to match or otherwise markets will be flooded with liquidity.

Rate policy going forward will be determined more by bank willingness to take risk rather than it will be by the Fed per se. DBS argues that Fed would start to raise interest rates in 2Q10, about two quarters sooner than current market consensus, predicated on the view that this downturn was less a garden-variety recession than it was ‘shell-shock’ arising from the Lehman Brothers collapse.

Cautious Flags

It reminds me of the 1985 Plaza Accord, where James Baker committed the US to a depreciating dollar, bulldozing over the creditors and ultimately precipitating the 1987 Crash. The difference – back then the US was in position to lead the devaluation. Today, it is not. The creditors are going to bulldoze over it. The G-7 leaders meeting last weekend in Instabul, are all worried about currencies. Market fears of possible intervention to support the USD proved unfounded. For now, currencies represent one of the more troubling drags on economies.

So far, this rally has been confirmed by numerous advancing stocks with an expanding number of new highs compared to shares that are lagging. Since early August, over 90% of S&P 500 stocks have been trading above their 50-day moving averages. That is over-bough and keeps a share eye for a reversal. Watch out for market breath turning bad.

Surveys show that bullish sentiment at nearly 50%, while the number of bears in hibernation has fallen to just over 24%. That is a 2:1 ratio of bulls over bears, which is considered a negative sentiment signal from a contrarian perspective. That is because if the majority of investors are bullish, then who is left to buy? In fact, insiders at American companies are selling stocks – cashing in on the market’s big rally this summer.

Since the rally began, two market segments in particular have really taken off and have led the broad market higher – China and technology. Chinese stocks actually bottomed in November 2008, about five months ahead of the S&P 500 Index. As a result, China’s Shanghai Composite Index soared over +100% from November to August…but since then, shares suffered a decline of -23% in just four weeks. Likewise, technology has been one of the best performing US stock sectors since the rally began in March 2009. But since late July, while the S&P 500 surged +12% higher, tech stocks gained only +8%.

Should any of the indicators deteriorate further, it could be a signal that a correction could be imminent.

Biodiesel – On Empty Run

Two thirds of US biodiesel production capacity now sits unused, reports the National Biodiesel Board. Key reasons – (i) global credit crisis, (ii) a glut in capacity, (iii) lower oil prices and (iv) delayed government rules changes on fuel mixes are now threatening the viability of two of the three main biofuel sectors – biodiesel and next generation fuels derived from feedstocks other than food. Ethanol, the largest biofuel sector, is also in financial trouble.

Earlier this year, GreenHunter Energy Inc, operator of the nation’s largest biodiesel refinery stopped production and it may have to sell its Houston plant. Dozens of other new biodiesel plants, which make a diesel substitute from vegetable oils and animal fats, have stopped operating because diodiesel production is no longer economical and numerous established producers have filed for Chapter 11 bankruptcy-court protection.

Producers of next generation biofuels – those using non-food renewable materials such as grasses, cornstalks and sugarcane stalks – are finding it tough to attract investment and ramp up production to an industrial scale.

In 2007, Congress set targets for the US to blend 36 billion gallons of biofuels a year into the US fuel supply in 2022, from 11.1 billion in 2009. That would increase biofuels’ share of the liquid-fuel mix to roughly 16% from 5%, based on US Energy Information Administration fuel-demand projections. Corn ethanol, which has been supported by government blended mandates and other subsidies for years, has come under fire for driving up the price of corn and other basic foodstuffs.

The mandate to blend next-generation fuels, which kicks-in next year, is unlikely to be met because of lack of enough viable production. The EPA, which implements the congressional blending mandates, still hasn’t issue any regulations to allow biodiesel blending, though they supposed to start in January.

The business models for most biofuel companies were predicated on a much higher price of crude oil and government-guaranteed is the central to business plans. Thus far, the survival of this industry depends on the commitment and support of Mr Obama. He has supported biofuels throughout his campaign, and is working to roll out grants and loan guarantees for bio-refineries and green fuel projects.

In the meantime, carcasses are everywhere.

Bubble or Recovery?

I have heard a lot about recovery stories last couple of months. Brokers are telling me that recovery is real, but when I talked to economists, they are selling me the opposite story. So, who is telling the truth here?

So the easiest way out of this rumble is to ask what constitutes a bubble and a recovery and let the data make the final justification for it.

Bubble is a condition where prices are shooting higher and higher without strong and sustainable economic justification to it. Liquidity and shift in relative risk preference in the space of profit optimization could be the driving forces. On the other hand, economic recovery is often associated with stable growth in industrial production along with greater demand in labour. Unemployment rate usually trended downwards on sustainable basis with some signs of support for wages.

Between the lines of the writing on the Wall Street, we often led to believe the recovery is real as asset prices like commodities, metal, currencies, bonds and stock markets are leading the change – change for better, I guess. Governments are committed to support the economy and the Fed will continue to stay supportive until and unless recovery is deeply rooted. By all means, they are there and will be there to ensure that the world economy will not go to hell in a hand-basket.

In my recent meeting with some Chinese officials, I am convinced that banks in China are positioning for a bubble to burst and to take position on it. They are conserving cash, cutting lending and ready to work along with the central government to support the economy again.

Recruiters and bankers say the hiring is really yet to pick up. They told me that bubble-fueled recovery is highly unlikely to be sustainable, yet to feed into job market. Broad unemployment in the US is still rising, a normal pattern even after economies begin to emerge from recession. But economists say that any early signs of job growth are a prerequisite for a more solid-based recovery — one in which more confident consumers, and not just huge government stimulus packages, can play a role in lifting the economy.

But on the other hand, the US dollar is sliding to a new trade-weighted low as month-and quarter-end rebalancing flows moved into commodity currencies and equities, indicating some forms of acceptance of risk in the pursuit of yield. The tide could turn fast, in speed unimaginable, pretty much like art of earth-quake forecasting.

In short, this is a trading market. Never take long position because you may not have enough time to shift. Duration of bubble-feed recovery is generally far shorter and more volatile than the reverse causation.

Traders say oil prices will drop

I observe that the number of traders betting that oil prices will drop outnumbers the number of traders, who believe they will rise by the largest margin ever. Some believe prices will fall significantly lower in the near future – at least into the low of $60 a barrel range after soaring to $75 a barrel in August.

Supply has outrun demand this year, yet oil prices more than doubled from February to August and are up about 50% from where they started the year. Now, many traders are positioning themselves to profit from a pullback. The gap between prices of options betting on a decline in prices and those that would profit as a result of a rise in oil has widened to a record 10 percentage points, according to five years of data compiled by Bank of America Securities-Merrill Lynch.

Put options, which give right to sell oil in December below current prices have an implied volatility of 54.3% compared to 43.3% for options to call. Implied volatility generally increases when the market is bearish and decreases when the market in bullish. If puts are pricing higher than calls, we are looking at situation where the market is more averse to the downside and is looking for more compensation.

Perhaps the biggest reason the market is worried is that a generous supply of oil remains on the market, some of it piled up in offshore tankers. US stockpiles of crude are 14% higher than they were a year ago, according to the International Energy Agency (IEA). US gasoline supplies are 2.2% higher than they were in May at the start of peak summer driving season. The story is much the same where gasoil stockpiles – the European equivalent of heating oil reached a record 23 million barrels on September 10, according to PJK International BV, Bloomberg reported. The Centre for Global Energy Studies in a monthly report that it expects high crude stockpiles will continue to constraint the market.

Saudi Arabia’s oil minister, Ali al-Naimi weeks ago told reporters that the OPEC is more concerned with reinvigorating the global economy rather than oil prices. But according to Bloomberg estimates, the cartel’s production exceeded its quotas by 1.2 million barrels a day in August.

Fair But Fairer to Someone

For once, let us put anger and emotion to one side. The United States is home to four of the nine largest banks in the world – JP Morgan, Bank of America, Wells Fargo & Co and Citigroup Inc. It is also home to four of the six most handsomely rewarded bank CEOs. If America’s make-believe capitalists want to pay their CEOs exorbitant wages, that is their business.

On the other hand, China boasts three of the world’s biggest banks, yet the leader of those banks – Industrial and Commercial Bank of China (ICBC), China Construction Bank and Bank of China – are among the lowest paid of those surveyed by Reuters. The chairman and the president of each of the banks are paid roughly $230,000 per annum. Mr Jian Jianqing, chairman of Industrial and Commercial Bank of China made just $234,700 in 2008 and that was less than 2% of the $19.6 million awarded to Jamie Dimon, chief executive of the world’s fourth largest bank, JP Morgan Chase & Co. In fact, ICBC’s Jiang took a 10% pay cut in 2008, even as ICBC’s profit jumped 36% to US$16.23bil.

In the case of China, one needs to acknowledge the fact that some of the Chinese bank executives may be willing to accept the pay level of a top government official in the hope of moving into a powerful political position in the future
Kiwi Sir Ralph Norris, chief executive officer of the Commonwealth Bank of Australia, is one of the world’s highest paid bank CEOs. Sir Ralph's pay came in seventh in a Reuters survey of CEO pay levels at the world's 18 biggest banks by market value. Commonwealth Bank 's market capitalization, by contrast, was sixteenth out of 18.

HSBC Holdings, the world’s third largest bank by market capitalisation, paid CEO Michael Geoghegan US$2.8mil in 2008 – much more than his Chinese counterparts but far less than JPMorgan paid Dimon.

I am pretty sure that one of the consequences of the ongoing economic crisis is a harder look at the compensation given to company leaders. The multi-million dollar packages have long been criticized, but in times of economic growth many were content to reward success. Financial Times columnist Michael Skapinker commented that ill-feeling about high pay is widespread in both the U.S. and Europe. It turns out that in the United States nearly five thousand bankers and traders were paid more than $1 million in bonuses in 2008. According to a July 31 report by the New York Times this came at a time when profits at the biggest banks plummeted, and many of them accepted tens of billions of dollars of taxpayer money.

While the banking and finance sector might be holding on to past patterns of behavior there are, however, signs of change in other areas. Added to this was the admission by Goldman Sachs CEO Lloyd Blankfein, who said Wall Street compensation needs to be overhauled. In short, it’s easier to point to the problem of excessive executive salaries than it is to provide a solution.