Stocks rebounded but one still need to be mindful about the situation in North Korea, which relationships between two Koreas seemingly to be deteriorating with latest North Korea expelling eight South Korean government workers and threatening to close its borders to its neighbor to the south completely. Also, persistent concerns about the debt situation in Europe and the potential of it to evolve into a global problem have already wiped out about 6 trillion USD of value in global equities.
On top of that money supply had stopped increasing. Liquidity is drying up and a few short weeks ago, mutual fund cash levels reached a record low of 3.4% , according to Jason Geopfert, president of SentimentTrader.com. The old record of 3.5% was set in the summer of 2007 at the very end of a cyclical bull market off the 2003 lows. Back then, it took fund managers 41/2 years to get fully invested.
The chart pattern is clear to me. Valuation is still very high and monetary indicators are clearly negative for stocks. Longer-term sentiment indicators have not changed for the better – patterns that look like potential topping formations. If prices break below the lower boundary, the huge rally off the March 2009 low is over and the bear market is back.
Right now, the arguments for an eventual rather than an immediate.
Wednesday, May 26, 2010
Tuesday, May 25, 2010
In East and In West
Tensions mount in Korea and investors see caution flags in Spain as it bails out struggling savings banks. Overnight equity marts throughout Asia and Europe slumped.
North Korea has reportedly put its military on alert, either it is a bluff or not, it will weigh heavily on investor sentiment all the way. South Korean currency KRW has dipped to new 14-month lows against the greenback, adding to the 11.3% decline it has been forced to endure this month alone. It is perched to record its second-worse performing month since the Asian banking debacle shredded markets in the late 1990s. Relations between the two Koreas are at their worst for decades. The North says it has abrogated its non-aggression agreement with the South, trade links have been cut, shipping lanes closed, and the armed forces of both sides are on alert.
The latest move by the US isn’t helping either to lower the tension with its jets deployment in the peninsula. The arrival of the top-of-the line aircraft at Kadena air force base comes after U.S. President Barack Obama reassured Prime Minister Taro Aso in a telephone conversation this week of Washington's commitment to the defence of its Asian ally. And on the other hand, China, being the North Korea's most important ally, biggest trading partner, and main source of food, arms, and fuel, is not fully convinced by Seoul’s arguments. The communist North denies sinking the Cheonan, one of the South's worst military losses since the Korean War.
On the other end of this planet, Spain’s central bank has decided to bail out regional savings bank CajaSur with $621.75 million. The savings banks’ ownership models make it difficult to raise money as they are controlled by local politicians and cannot easily sell shares. CajaSur, formerly run by the Catholic Church, lost $748 million last year and there are 45 savings banks in Spain and investors have yet another reason to pull out of Europe and head for United States.
As risk aversion looks to be in full swing, commodities, coupled with equities and high yielding currencies have taken it on the chin. Oil prices have fallen in tandem with the slumping stock markets and sits south of $68/bbl.
North Korea has reportedly put its military on alert, either it is a bluff or not, it will weigh heavily on investor sentiment all the way. South Korean currency KRW has dipped to new 14-month lows against the greenback, adding to the 11.3% decline it has been forced to endure this month alone. It is perched to record its second-worse performing month since the Asian banking debacle shredded markets in the late 1990s. Relations between the two Koreas are at their worst for decades. The North says it has abrogated its non-aggression agreement with the South, trade links have been cut, shipping lanes closed, and the armed forces of both sides are on alert.
The latest move by the US isn’t helping either to lower the tension with its jets deployment in the peninsula. The arrival of the top-of-the line aircraft at Kadena air force base comes after U.S. President Barack Obama reassured Prime Minister Taro Aso in a telephone conversation this week of Washington's commitment to the defence of its Asian ally. And on the other hand, China, being the North Korea's most important ally, biggest trading partner, and main source of food, arms, and fuel, is not fully convinced by Seoul’s arguments. The communist North denies sinking the Cheonan, one of the South's worst military losses since the Korean War.
On the other end of this planet, Spain’s central bank has decided to bail out regional savings bank CajaSur with $621.75 million. The savings banks’ ownership models make it difficult to raise money as they are controlled by local politicians and cannot easily sell shares. CajaSur, formerly run by the Catholic Church, lost $748 million last year and there are 45 savings banks in Spain and investors have yet another reason to pull out of Europe and head for United States.
As risk aversion looks to be in full swing, commodities, coupled with equities and high yielding currencies have taken it on the chin. Oil prices have fallen in tandem with the slumping stock markets and sits south of $68/bbl.
Wednesday, May 19, 2010
The Fate of EUR
From Greece to France and latest German … the story line remains EUR bear. The common currency tumbled to its lowest point in over four years on the news that the German government temporarily banned naked short-selling. Instead of solving the problems, it created wilder volatility and more speculations with measures included bans on naked short-selling and naked credit default swaps of the Euro area government bonds, as well as a ban on the naked short-selling of shares from ten major German banks and insurers.
Let me clarify, there is one critical difference between conventional short-sell and naked short-sell – in the practice of a conventional short trade, the party executing the short trade secures or borrows the underlying assets if is shorting from a third party, whereas in the naked short, this is not done.
With investors shedding risk and seeking out the safe haven assets, pretty much all major currencies have retreated against the Greenback and the JPY. Oil will be at its lowest level and it is going to be interesting to observe the gap between the GBP and EUR to widen further. The coming US-China Strategic and Economic Dialogue that will commence in Beijing on May 24, will be less an event to talk about RMB revaluation. Still, the agenda this year bears similarities to the 2009 edition with trade and savings imbalances to dominate the economic talks followed by reviving ‘Six-Party Talks’ with North Korea among other. The RMB at this point will remains pegged to USD, though concerns about the EUR have boosted the Chinese currency’s valuation on a trade-weighted basis in any case, which could forestall a move or limit its degree.
Our markets will continue to be under selling pressure with the support level at 1,280 and lesser attention will be paid to current reporting season. For one strange reason or another, the usual dictum ‘ Sell in May, Go Away’ seems quite applicable in this case. Perhaps, just another coincidence, I guess. Of course, the run-up to the Jun-Jul 2010 FIFA World Cup finals in South Africa is not helping either.
Let me clarify, there is one critical difference between conventional short-sell and naked short-sell – in the practice of a conventional short trade, the party executing the short trade secures or borrows the underlying assets if is shorting from a third party, whereas in the naked short, this is not done.
With investors shedding risk and seeking out the safe haven assets, pretty much all major currencies have retreated against the Greenback and the JPY. Oil will be at its lowest level and it is going to be interesting to observe the gap between the GBP and EUR to widen further. The coming US-China Strategic and Economic Dialogue that will commence in Beijing on May 24, will be less an event to talk about RMB revaluation. Still, the agenda this year bears similarities to the 2009 edition with trade and savings imbalances to dominate the economic talks followed by reviving ‘Six-Party Talks’ with North Korea among other. The RMB at this point will remains pegged to USD, though concerns about the EUR have boosted the Chinese currency’s valuation on a trade-weighted basis in any case, which could forestall a move or limit its degree.
Our markets will continue to be under selling pressure with the support level at 1,280 and lesser attention will be paid to current reporting season. For one strange reason or another, the usual dictum ‘ Sell in May, Go Away’ seems quite applicable in this case. Perhaps, just another coincidence, I guess. Of course, the run-up to the Jun-Jul 2010 FIFA World Cup finals in South Africa is not helping either.
Tuesday, May 18, 2010
Investing in Commodity
It is not as simple as you think and I see kind of air turbulence for commodity in next couple of months. Things do look a little bit too perky for my taste in the short term.
There has been rapid demand for commodities from financial investors to the point that commodities have become a mainstream asset class. According to Barclay Capital, total commodity linked asset under management 36% last year to US$257 billion, with ETF program growing even faster. Only a few years ago, commodity-linked ETFs were a rare phenomenon and it has grown to become the product of choice for many commodity investors. Commodities now are becoming more financial rather than real assets. Over the past 15 years, financial futures have grown from 2 times the size of physical markets to almost 12 times the size.
As commodity markets are tiny compared to the size of financial markets, prices are easily distorted. In this respect, China – the largest nation on earth, is intimately linked to the growth story of commodities and there is no doubt at present, a desire of the Chinese authority to cool down things a notch or two. Deutsche Bank now expects growth in Chinese infrastructure spending to be slashed from 120% last year to just 4-10% this year. Industrial metals such as lead, zinc, copper and nickel are particularly sensitive to such investments.
It is also a fact that China stockpiled commodities en-masse last year and Royal Bank of Scotland has found a ferocious appetite for industrial metals from Chinese buyers throughout 2009. By stock piling commodities on a large scale, China is effectively placing their excess dollars in hard assets rather than buying the more dubious paper assets – US treasuries. It is also helped to lower large trade surpluses - a point of contention that will set RMB to appreciation path.
One should also beware of contango effects i.e. when the future is priced higher than the spot price and the roll yield is negative. Most commodities are in contango more often than not, effectively costing investors the spread between the nearby future and the more distant future every time the position is rolled. The danger is that for passive investors to be taken out by professional and active traders every time they need to roll their positions.
There has been rapid demand for commodities from financial investors to the point that commodities have become a mainstream asset class. According to Barclay Capital, total commodity linked asset under management 36% last year to US$257 billion, with ETF program growing even faster. Only a few years ago, commodity-linked ETFs were a rare phenomenon and it has grown to become the product of choice for many commodity investors. Commodities now are becoming more financial rather than real assets. Over the past 15 years, financial futures have grown from 2 times the size of physical markets to almost 12 times the size.
As commodity markets are tiny compared to the size of financial markets, prices are easily distorted. In this respect, China – the largest nation on earth, is intimately linked to the growth story of commodities and there is no doubt at present, a desire of the Chinese authority to cool down things a notch or two. Deutsche Bank now expects growth in Chinese infrastructure spending to be slashed from 120% last year to just 4-10% this year. Industrial metals such as lead, zinc, copper and nickel are particularly sensitive to such investments.
It is also a fact that China stockpiled commodities en-masse last year and Royal Bank of Scotland has found a ferocious appetite for industrial metals from Chinese buyers throughout 2009. By stock piling commodities on a large scale, China is effectively placing their excess dollars in hard assets rather than buying the more dubious paper assets – US treasuries. It is also helped to lower large trade surpluses - a point of contention that will set RMB to appreciation path.
One should also beware of contango effects i.e. when the future is priced higher than the spot price and the roll yield is negative. Most commodities are in contango more often than not, effectively costing investors the spread between the nearby future and the more distant future every time the position is rolled. The danger is that for passive investors to be taken out by professional and active traders every time they need to roll their positions.
Wednesday, May 12, 2010
UK – Will the New Government Helps?
We know for sure now the British general election produced a truly knife-edge results. With 326 of 650 members of parliament needed for a majority, the conservatives have 306, labour has 258 and the liberal democrats 57 and minor parties 28.
Question is that how this coalition government to change the façade of the UK economy and possibly lead to better days ahead. Out from the shadows comes the wrongly derided ghost of such coalition – the 1931 First National Government. The last such coalition took place in a time of equivalent financial crisis – the autumn of 1931. Then, as now – a Labour government (then a minority government) had increased public spending and run up deficits. Remember – we are talking about a period that was only two years removed from Wall Street’s Great Crash and one in which the global Great Depression was deepening.
The National Government was formed to solve the financial crisis. It acquired a mixed posthumous reputation and in its form, it lasted only a year as Home Secretary Samuel resigned over the issue of modest Imperial Preference tariffs in 1932. It then became a largely Conservative government, although it retained several ‘Liberal National’ cabinet ministers, including Sir John Simon.
However, its economy policy was remarkably successful. It took British off the Gold Standard, devaluing pound by about 20%. It cut public spending sharply, reducing public sector pay by 10% and ended the British policy of unilateral free trade, introducing modest tariffs with exemptions for the British Empire. As a result of that, Britian enjoyed the highest five-year GDP growth in its history – lasting until 1937. New industries such as automobiles, chemicals and aircrafts – energized the economy, as did such new inventions as radar, nylon and the intellectual underpinnings of the jet engine, the computer and atomic power.
The National government was able to take unpopular decisions because of its broad popular support – 67.2% of the voters had supported it in 193e1 and it was re-elected in 1935 with 53.3% of the vote.
This would be the principal advantage of a Conservative-Liberal Democrat coalition today, which would have 59.1% of the vote and would also have a House of Commons majority of 76 seats.
Question is that how this coalition government to change the façade of the UK economy and possibly lead to better days ahead. Out from the shadows comes the wrongly derided ghost of such coalition – the 1931 First National Government. The last such coalition took place in a time of equivalent financial crisis – the autumn of 1931. Then, as now – a Labour government (then a minority government) had increased public spending and run up deficits. Remember – we are talking about a period that was only two years removed from Wall Street’s Great Crash and one in which the global Great Depression was deepening.
The National Government was formed to solve the financial crisis. It acquired a mixed posthumous reputation and in its form, it lasted only a year as Home Secretary Samuel resigned over the issue of modest Imperial Preference tariffs in 1932. It then became a largely Conservative government, although it retained several ‘Liberal National’ cabinet ministers, including Sir John Simon.
However, its economy policy was remarkably successful. It took British off the Gold Standard, devaluing pound by about 20%. It cut public spending sharply, reducing public sector pay by 10% and ended the British policy of unilateral free trade, introducing modest tariffs with exemptions for the British Empire. As a result of that, Britian enjoyed the highest five-year GDP growth in its history – lasting until 1937. New industries such as automobiles, chemicals and aircrafts – energized the economy, as did such new inventions as radar, nylon and the intellectual underpinnings of the jet engine, the computer and atomic power.
The National government was able to take unpopular decisions because of its broad popular support – 67.2% of the voters had supported it in 193e1 and it was re-elected in 1935 with 53.3% of the vote.
This would be the principal advantage of a Conservative-Liberal Democrat coalition today, which would have 59.1% of the vote and would also have a House of Commons majority of 76 seats.
Methane Ice
For the second time of my useful life, geology is becoming part of me. The latest news to-date is that the 100-ton dome, which is designed to funnel leaking oil from the Gulf, is lowered into sea to cap oil leak this Friday. It is expected to be operational next Monday, when a large part of the oil would then be funneled up to a containment vessel on the surface for storage and processing. The BP is racing to contain an estimated 200,000 gallons of crude spewing into the sea daily, threatening the ecologically fragile Gulf Coast wetlands and shorelines.
Well, it is not my intention to dwell more than being told. What interesting to my finding is the possible cause to what went wrong in the Gulf. What possibly happened was that the drilling hit the area of unusual ice-like crystals called methane hydrates, hence the catastrophic oil spills.
We know for sure in the last 10 or 15 years, the industry will avoid methane hydrates, which a well known geological hazard and they are dangerous. But the rush to produce more oil for domestic consumption has forced companies like BP to take bigger risks by drilling in deep waters that are a breeding ground for hydrates. More worrying it’s the recent approval by President Barack Obama to drill in the Arctic Ocean, which could expose a fragile and remote environment to additional risks from catastrophic oil spills.
Methane hydrates only exist in cold water – just above or below freezing and at the undersea pressures found in deep water off the continental shelf. This slushy of sea mixture and methane gas makes drilling more complicated and makes the seafloor unstable. If hydrates are warmed by oil moving through pipes, they can turn into methane gas (known as ‘kick’ to drillers) that can shoot back up the drilling pipe and ignite the rig – a possible cause of the blast aboard the Deepwater Horizon rig on April 20.
In 2003, Unocal abandoned plans to drill in the deep water off Indonesia for the same reason. China has delayed plans for offshore oil development after finding large hydrate fields. The location of methane hydrate fields are well mapped but decisions are always commercial – a tug between risk and reward. As at now, the industry’s drilling and spill clean-up technology hasn’t caught up with the economic imperative to produce more oil.
Well, it is not my intention to dwell more than being told. What interesting to my finding is the possible cause to what went wrong in the Gulf. What possibly happened was that the drilling hit the area of unusual ice-like crystals called methane hydrates, hence the catastrophic oil spills.
We know for sure in the last 10 or 15 years, the industry will avoid methane hydrates, which a well known geological hazard and they are dangerous. But the rush to produce more oil for domestic consumption has forced companies like BP to take bigger risks by drilling in deep waters that are a breeding ground for hydrates. More worrying it’s the recent approval by President Barack Obama to drill in the Arctic Ocean, which could expose a fragile and remote environment to additional risks from catastrophic oil spills.
Methane hydrates only exist in cold water – just above or below freezing and at the undersea pressures found in deep water off the continental shelf. This slushy of sea mixture and methane gas makes drilling more complicated and makes the seafloor unstable. If hydrates are warmed by oil moving through pipes, they can turn into methane gas (known as ‘kick’ to drillers) that can shoot back up the drilling pipe and ignite the rig – a possible cause of the blast aboard the Deepwater Horizon rig on April 20.
In 2003, Unocal abandoned plans to drill in the deep water off Indonesia for the same reason. China has delayed plans for offshore oil development after finding large hydrate fields. The location of methane hydrate fields are well mapped but decisions are always commercial – a tug between risk and reward. As at now, the industry’s drilling and spill clean-up technology hasn’t caught up with the economic imperative to produce more oil.
Sunday, May 9, 2010
Euro in deliberate devaluation
Over last five months, euro has fallen 17% against the US dollar. It is clear that euro is in devaluation mode. Now, I think it is a covert policy decision by the European Central Bank (ECB) to use currency devaluation as a tool for the European monetary union to survive.
Of course, if that is the direction, then, it puts countries like Portugal, Spain, Italy, Greece and Ireland at a competitive disadvantage when trying to salvage themselves from debt burdens and feeble economic activity. It is also highly likely that the ECB to aggressively and openly buy up the government debt of the weak economies to keep them breathing.
Germany is the biggest and most robust country in the euro zone and for this plan to succeed, it has to be drag Germany headlong into it. Of course, they have already done so by agreeing to provide bailout funds to Greece. Germany has a lot to lose if other euro countries end up in shambles. Firstly, Germany is on the hook for $668 billion in PIIGS sovereign debt, and not to mention the fresh $30 billion they have agreed to give Greece. Secondly, if these countries continue their downward spiral, Germany’s intra-Europe exports of about 10% of total exports promise to dwindle with it.
Europe, the IMF and the ECB are demonstrating this week that it is ready to go all out to keep monetary union intact. They announced a massive multi-year bailout for Greece and perhaps to the extent of accepting Greece junk bonds for collateral, which may jeopardize the credibility and independence of the central bank.
In latest ECB press conference, its president Jean-Claude Trichet adamantly said that a Greek default is ‘out of question’ and a biggie…he ignored all questions about the value of euro, despite its slippery slide.
Of course, if that is the direction, then, it puts countries like Portugal, Spain, Italy, Greece and Ireland at a competitive disadvantage when trying to salvage themselves from debt burdens and feeble economic activity. It is also highly likely that the ECB to aggressively and openly buy up the government debt of the weak economies to keep them breathing.
Germany is the biggest and most robust country in the euro zone and for this plan to succeed, it has to be drag Germany headlong into it. Of course, they have already done so by agreeing to provide bailout funds to Greece. Germany has a lot to lose if other euro countries end up in shambles. Firstly, Germany is on the hook for $668 billion in PIIGS sovereign debt, and not to mention the fresh $30 billion they have agreed to give Greece. Secondly, if these countries continue their downward spiral, Germany’s intra-Europe exports of about 10% of total exports promise to dwindle with it.
Europe, the IMF and the ECB are demonstrating this week that it is ready to go all out to keep monetary union intact. They announced a massive multi-year bailout for Greece and perhaps to the extent of accepting Greece junk bonds for collateral, which may jeopardize the credibility and independence of the central bank.
In latest ECB press conference, its president Jean-Claude Trichet adamantly said that a Greek default is ‘out of question’ and a biggie…he ignored all questions about the value of euro, despite its slippery slide.
Friday, May 7, 2010
Hit from Down Under
This is a bad news. Australia just unveiled a mining "super tax" that the country plans to levy against its natural-resources sector starting in 2012.
Not that because mining is Australia's most important economic sector, this country is also an enormously important supplier of resources to the fast-growing economies of East Asia, where so many of the world's products are now manufactured. The mining super tax will cause prices to rise on the raw materials that are the key ingredients in so many of those products. And that means the levy from "down under" truly is bad news for the overall global economy as well.
The rationale for the super tax was that the percentage of mining revenue taken in taxes and royalties by Australia's state and national governments has declined during the past few years despite mineral prices have risen.
Since Australia's corporate tax rate is already 30%, the new super tax would raise the marginal rate on most profits to 70%. That's grossly excessive. It will badly discourage new exploration in boom years, since the additional profits to the mining company from a new discovery would be modest, indeed. The new super tax would take an additional 40% of mining-company earnings - over and above a "reasonable" return on capital, defined as the yield on long-term Australian government bonds.
You can see why Australian Prime Minister Kevin Rudd wanted the new tax as this tax will give him lots of juicy new revenue to spend on pet projects. After all, he faces an election in October.
Instead of improving Australia's budget position, the new mining super tax will actually make it much more difficult. And here's why. When prices are high, the tax will generate a bonanza of revenue - which will no doubt be funneled into all sorts of new projects and programs. But when prices fall, the tax will serve as a spigot that shuts off the revenue stream - leaving officials to search for funding for those new programs and thus exacerbating the cyclicality of Australia's resource-based economy.
The effect will be similar to that of California's capital gains tax, which left the state with a horrendous budget problem when the dot-com bubble burst in 2001. The only saving grace of this super tax is that - even if passed by parliament after the October election - it will not come into effect until 2012, by which time resources prices may have declined, making it irrelevant.
Not that because mining is Australia's most important economic sector, this country is also an enormously important supplier of resources to the fast-growing economies of East Asia, where so many of the world's products are now manufactured. The mining super tax will cause prices to rise on the raw materials that are the key ingredients in so many of those products. And that means the levy from "down under" truly is bad news for the overall global economy as well.
The rationale for the super tax was that the percentage of mining revenue taken in taxes and royalties by Australia's state and national governments has declined during the past few years despite mineral prices have risen.
Since Australia's corporate tax rate is already 30%, the new super tax would raise the marginal rate on most profits to 70%. That's grossly excessive. It will badly discourage new exploration in boom years, since the additional profits to the mining company from a new discovery would be modest, indeed. The new super tax would take an additional 40% of mining-company earnings - over and above a "reasonable" return on capital, defined as the yield on long-term Australian government bonds.
You can see why Australian Prime Minister Kevin Rudd wanted the new tax as this tax will give him lots of juicy new revenue to spend on pet projects. After all, he faces an election in October.
Instead of improving Australia's budget position, the new mining super tax will actually make it much more difficult. And here's why. When prices are high, the tax will generate a bonanza of revenue - which will no doubt be funneled into all sorts of new projects and programs. But when prices fall, the tax will serve as a spigot that shuts off the revenue stream - leaving officials to search for funding for those new programs and thus exacerbating the cyclicality of Australia's resource-based economy.
The effect will be similar to that of California's capital gains tax, which left the state with a horrendous budget problem when the dot-com bubble burst in 2001. The only saving grace of this super tax is that - even if passed by parliament after the October election - it will not come into effect until 2012, by which time resources prices may have declined, making it irrelevant.
Wednesday, May 5, 2010
Thailand – Red versus Green
Without military into action, current dead-lock will remain. General Anupong, the Army’s chief made it clear on April 12 that he was opposed to another crackdown on red shirt demonstrators, instead favouring the house dissolution and the use of political measures to solve the impasse. The use of force will lead to more deaths, and more importantly will break army right in the middle.
Military controls essentially have turned weaker after the first clash with the Red Army. Certain battalions especially right outside Bangkok have voiced their dissatisfaction through the command and there is a good likelihood that the chain of command could be compromised, if being stressed further. Their dissatisfaction with current government is increasing because of pressure from the government to use force to end the protests. Both field commanders and senior officers oppose the use of the military to end the rallies. To kill is easy, but what happen next is with far more implications - soldiers will become their targets after the crackdown. That will bring the country closer to civil war. And there will be more red shirts coming out in other provinces.
The Red spirit will turn bolder as they know for the fact that Abhisit’s government at most can do is to threaten and cannot push boundary more than being set.
Chairman of the United Front for Democracy against Dictatorship (UDD) Veera Musigkapong said on Wednesday that the rally against the government by red-shirts will soon come to an end as UDD agrees with the national reconciliation plan proposed by Prime Minister Abhisit Vejjajiva. He announced in a television appearance on Monday night that a general election would be held on Nov14. The government has shown spirit in taking one step backwards but the outcome remains uncertain.
The role of military will remain crucial and it has become the norm for change of political leadership and government. The modernization and strengthening of the armed forces has led only to an increase in the political power of the military elite, strengthening their advantage in the struggle for state power while personalization of politics bred factionalism within the armed forces.
Military controls essentially have turned weaker after the first clash with the Red Army. Certain battalions especially right outside Bangkok have voiced their dissatisfaction through the command and there is a good likelihood that the chain of command could be compromised, if being stressed further. Their dissatisfaction with current government is increasing because of pressure from the government to use force to end the protests. Both field commanders and senior officers oppose the use of the military to end the rallies. To kill is easy, but what happen next is with far more implications - soldiers will become their targets after the crackdown. That will bring the country closer to civil war. And there will be more red shirts coming out in other provinces.
The Red spirit will turn bolder as they know for the fact that Abhisit’s government at most can do is to threaten and cannot push boundary more than being set.
Chairman of the United Front for Democracy against Dictatorship (UDD) Veera Musigkapong said on Wednesday that the rally against the government by red-shirts will soon come to an end as UDD agrees with the national reconciliation plan proposed by Prime Minister Abhisit Vejjajiva. He announced in a television appearance on Monday night that a general election would be held on Nov14. The government has shown spirit in taking one step backwards but the outcome remains uncertain.
The role of military will remain crucial and it has become the norm for change of political leadership and government. The modernization and strengthening of the armed forces has led only to an increase in the political power of the military elite, strengthening their advantage in the struggle for state power while personalization of politics bred factionalism within the armed forces.
Tuesday, May 4, 2010
2Es in UK - Election and Economy
At this point, it appears to be anybody’s game with strong likelihood of a ‘hung parliament’ outcome, in which no party has a majority and a government is formed through backroom haggling.
Until 2008, the British economy looked to be in decent shape. Once the pound was allowed to float downward in 1992, the economy never looked back. From 1992-1997, Britain had the best-sustained growth in Europe but very sloppy about public spending. It was allowed to rise and the increase accelerated after 2000 as the Labour government elected in 1997 settled in and started implementing its wish list. British public spending, which had bottomed out at around 38% of GDP in 1989, Thatcher’s last full year – would actually exceed 50% of GDP by 2009. What more, tax revenue was allowed to fall behind, so that in 2007-2008, a boom year, Britain still ran a budget deficit of 5.3% of GDP. The other problem was that the economy became increasingly dependent on revenue from the City of London financial district. Needless to say, that is why there is a problem now.
In fact, a budget deficit of 12% of GDP is now nearing Greek territory and with the financial services business itself may get smaller and house prices in Britain yet to adjust as fast as its counterpart US, which could well mean that there are more huge losses to come in the housing-finance sector.
The expansion of government was twice rewarded with thumping election victories – one in 2001 and the other in 2005. Only now when disaster has occurred, is there any possibility of change? BOE Governor Mervyn King recently said that the party that wins this election would become so unpopular because of the policies it was forced to introduce that it would be out of power for a generation. I tend to agree!
The possibility of any reformer to be tossed out of office after one term is high as the eventual outcome of this long and painful story will either rebuild the country or else the probability of an eventual British default on debt to be high. In short, Britain is country in a great jam and it is going to take strong leadership and wisdom to fix its problems – possibly another Margaret Thatcher to leave a lasting legacy.
Until 2008, the British economy looked to be in decent shape. Once the pound was allowed to float downward in 1992, the economy never looked back. From 1992-1997, Britain had the best-sustained growth in Europe but very sloppy about public spending. It was allowed to rise and the increase accelerated after 2000 as the Labour government elected in 1997 settled in and started implementing its wish list. British public spending, which had bottomed out at around 38% of GDP in 1989, Thatcher’s last full year – would actually exceed 50% of GDP by 2009. What more, tax revenue was allowed to fall behind, so that in 2007-2008, a boom year, Britain still ran a budget deficit of 5.3% of GDP. The other problem was that the economy became increasingly dependent on revenue from the City of London financial district. Needless to say, that is why there is a problem now.
In fact, a budget deficit of 12% of GDP is now nearing Greek territory and with the financial services business itself may get smaller and house prices in Britain yet to adjust as fast as its counterpart US, which could well mean that there are more huge losses to come in the housing-finance sector.
The expansion of government was twice rewarded with thumping election victories – one in 2001 and the other in 2005. Only now when disaster has occurred, is there any possibility of change? BOE Governor Mervyn King recently said that the party that wins this election would become so unpopular because of the policies it was forced to introduce that it would be out of power for a generation. I tend to agree!
The possibility of any reformer to be tossed out of office after one term is high as the eventual outcome of this long and painful story will either rebuild the country or else the probability of an eventual British default on debt to be high. In short, Britain is country in a great jam and it is going to take strong leadership and wisdom to fix its problems – possibly another Margaret Thatcher to leave a lasting legacy.
Risk Appetite
I begin to sense kind of decline in risk appetite as investor sentiment ran dry. The reduction in positive price action can be due to several reasons, but much of the broad headlines are on news out of China, Greece and the Gulf of Mexico.
Forcing unwanted pressure on capital markets, China has once again been a catalyst for traders to largely take profits as it continues to take measures in an attempt to cool its booming economy. April PMI slipped to a reading of 55.4, compared to a March appraisal of a 57 – just enough among other to keep traders to lose faith and flee their positions. This one add to evidence that plenty of uncertainty persists through the global market place.
Weighing equally hard on equities and natural resources alike is the April 20 oil rig explosion that pumped at least 5,000 barrels a day of crude oil into the Gulf has been a disaster in countless ways. According to newswires, a concentrated efforts to mop up over the 200,000 gallons spilled on a daily basis since then could cost BP more than $12 billion.
Moving inline with the reduction in risk appetite, currency traders have favoured the safe USD at the expense of other majors such as the EUR and CAD. The eurozone currency has fallen through 1.31 for the first time since April last year as debt crisis in Greece has odds to multiply and stretch to peripheral countries like Spain and Portugal.
Forcing unwanted pressure on capital markets, China has once again been a catalyst for traders to largely take profits as it continues to take measures in an attempt to cool its booming economy. April PMI slipped to a reading of 55.4, compared to a March appraisal of a 57 – just enough among other to keep traders to lose faith and flee their positions. This one add to evidence that plenty of uncertainty persists through the global market place.
Weighing equally hard on equities and natural resources alike is the April 20 oil rig explosion that pumped at least 5,000 barrels a day of crude oil into the Gulf has been a disaster in countless ways. According to newswires, a concentrated efforts to mop up over the 200,000 gallons spilled on a daily basis since then could cost BP more than $12 billion.
Moving inline with the reduction in risk appetite, currency traders have favoured the safe USD at the expense of other majors such as the EUR and CAD. The eurozone currency has fallen through 1.31 for the first time since April last year as debt crisis in Greece has odds to multiply and stretch to peripheral countries like Spain and Portugal.
Monday, May 3, 2010
A Geologist’s Point of View
I am a trained but a practicing geologist. I guess not many people know this fact, simply that I hardly make use of this knowledge, except for my jade collection.
I have been following the broken Deep Horizons oil well for quite a while, but my sense is that this will not fade away in the foreseeable future. The flow is estimated at anywhere from 5,000 to 25,000 barrrels per day based on satellite imagery as well as BP’s deep-sea rovers that can see the oil pouring out of the well. One thing for sure, the deepwater Horizon disaster off the coast of Lousiana is not the first oil spill, but it is becoming among the worst.
Oil spill clean-up crews are already on the job, doing their best to contain the oil, disperse it, burn it or skim it. Burning oil on the water surface, however, does very little to help and is more of a public relations stunt that an effective way to reduce the oil. As of April 29, BP said it had deployed 76,104 gallons of dispersant and had the 89,746 gallons available. The solvent mix with oil and break it down into fine droplets that then disperse with natural water currents. I know for a fact that dispersants are more effective on fresh oil as opposed to crude oil that has become emulsified with wave of action over time.
Relief drilling remains the best option but it will take time to stop oil gush. First, is to drill down to the same oil-bearing rock from which the leaking well is getting its oil, but we cannot go too near the original hole with the drill rig because oil is under pressure.
Once the rig is in location, the long, difficult process of drilling can begin. We are drilling through mostly rock. Once it reaches the broken well, sealing can be started by having seawater pumped into the rock through the relief well. If all goes according to plan, that water should make its way into the lower end of the leaking well, displacing oil. If that succeeds, the next step is to pump in a mineral mud, which follows the sea water up the broken well. Once that mud fills the well, concrete can be pumped into the relief well. Until that happens, there could be a lot of oil pouring into the ocean for some time.
Many ocean scientists are now raising concerns that a powerful current could spread the still-bubbling slick from the Florida Keys all the way to Cape Hatteras off North Carolina. There is a lot of shoreline to be protected so it is not possible to boom off the entire shoreline.
I have been following the broken Deep Horizons oil well for quite a while, but my sense is that this will not fade away in the foreseeable future. The flow is estimated at anywhere from 5,000 to 25,000 barrrels per day based on satellite imagery as well as BP’s deep-sea rovers that can see the oil pouring out of the well. One thing for sure, the deepwater Horizon disaster off the coast of Lousiana is not the first oil spill, but it is becoming among the worst.
Oil spill clean-up crews are already on the job, doing their best to contain the oil, disperse it, burn it or skim it. Burning oil on the water surface, however, does very little to help and is more of a public relations stunt that an effective way to reduce the oil. As of April 29, BP said it had deployed 76,104 gallons of dispersant and had the 89,746 gallons available. The solvent mix with oil and break it down into fine droplets that then disperse with natural water currents. I know for a fact that dispersants are more effective on fresh oil as opposed to crude oil that has become emulsified with wave of action over time.
Relief drilling remains the best option but it will take time to stop oil gush. First, is to drill down to the same oil-bearing rock from which the leaking well is getting its oil, but we cannot go too near the original hole with the drill rig because oil is under pressure.
Once the rig is in location, the long, difficult process of drilling can begin. We are drilling through mostly rock. Once it reaches the broken well, sealing can be started by having seawater pumped into the rock through the relief well. If all goes according to plan, that water should make its way into the lower end of the leaking well, displacing oil. If that succeeds, the next step is to pump in a mineral mud, which follows the sea water up the broken well. Once that mud fills the well, concrete can be pumped into the relief well. Until that happens, there could be a lot of oil pouring into the ocean for some time.
Many ocean scientists are now raising concerns that a powerful current could spread the still-bubbling slick from the Florida Keys all the way to Cape Hatteras off North Carolina. There is a lot of shoreline to be protected so it is not possible to boom off the entire shoreline.
Sunday, May 2, 2010
The Big Picture
The drama continues in Europe following S&P’s slide on Greece debt to junk status and the two notch decline to Portugal’s rating. There are some news-flow that IMF is about to announce a stepped-up aid package and ECB’s Trichet is set to make a trip to Berlin to meet with German parliamentarians today. Perhaps, it would not be too long after Greece bailout then surely next to be Portugal, Ireland, Spain and may even be the Italy.
What is more important to note from this development is that the inability of Greece and others within EMU to enact an independent monetary policy at a times of crisis has exposed the flaws of the union. The lack of cohesive national government is another flaw in times of turbulence, which is why the US has longevity and the Eurozone likely does not. It seems that it strikes some similarities in attempts at unionization in the region – the Latin Monetary Union and the Scandinavian Monetary Union in the late 19th century, which ultimately fizzled out.
In the recent NYT, Barclay’s analysts believe that Greece needs Euro90 billion to see it through, Euro40 billion for Portugal and Euro350 billion for Spain. That is Euro480 billion of refinancing help, which dwarfs the latest Euro45 billion EU-IMF joint and announcement by a factor of ten.
Beyond Greece and Portugal to Spain, its combined fiscal and current account deficits are the highest in the industrialized world. Think of all the global banks, most of them in Europe, which hold onto all this spurious Club Med debt. The reality is that the downside to the Euro, even at 1.32, is huge. Think of a retest to the lifetime lows of 0.85 at some point down the line.
What is more important to note from this development is that the inability of Greece and others within EMU to enact an independent monetary policy at a times of crisis has exposed the flaws of the union. The lack of cohesive national government is another flaw in times of turbulence, which is why the US has longevity and the Eurozone likely does not. It seems that it strikes some similarities in attempts at unionization in the region – the Latin Monetary Union and the Scandinavian Monetary Union in the late 19th century, which ultimately fizzled out.
In the recent NYT, Barclay’s analysts believe that Greece needs Euro90 billion to see it through, Euro40 billion for Portugal and Euro350 billion for Spain. That is Euro480 billion of refinancing help, which dwarfs the latest Euro45 billion EU-IMF joint and announcement by a factor of ten.
Beyond Greece and Portugal to Spain, its combined fiscal and current account deficits are the highest in the industrialized world. Think of all the global banks, most of them in Europe, which hold onto all this spurious Club Med debt. The reality is that the downside to the Euro, even at 1.32, is huge. Think of a retest to the lifetime lows of 0.85 at some point down the line.
Wednesday, April 28, 2010
The Angry or Hungry China?
From once a ‘low profile’ China, and now to be transformed one that loves a good international bust up, it really comes with a price. Putting an Australian mining executive behind bars for 10 years, squeezing out Google, keeping EU at bay for the important dialogue and letting a mid-level official wag his finger at US President Obama at the Copenhagen Climate summit indeed a big doubt that China is engaging on constructive manner.
This is not withstanding that China has been stubbornly watering down sanctions on Iran and other African countries and it seems it is behaving very much like a ‘normal’ super- power, sharing world’s stage with other G-5. Having said that in the recent National People’s Congress, China Premier Wen Jiabao stressed that China should not punch above its weight and that the People’s Republic still needs stability if it is to become a society that offers a decent life to all of its citizens.
Nationalism in China is getting stronger by days. A foreign policy goal closely related to nationalism has been the desire to achieve territorial integrity and to restore to Chinese sovereignty. With China hosting its first-ever Olympics, the country has seen a surge in national pride. But Chinese are angry at what they see as the West trying to spoil their party. China’s nationalism today is shaped by its pride in its history as well as its century of humiliation at the hands of the West and Japan. China perceives itself as a victim of Western imperialism that began with the First Opium War and the British acquisition of Hong Kong in 1842 and lasted until the end of World War II in 1945, during which it suffered humiliating losses of sovereignty.
Beijing’s top priority today is to maintain peace at home while pursuing its development goals and a greater role in global affairs. Experts say while nationalism may be an effective tool for the Chinese regime to maintain control at home, it can harm its claim of “peaceful rise” globally. Nationalism is certainly an obstacle in China’s image as a responsible stakeholder.
Essentially, China needs a mature strategic dialogue, and comradeship should not guide policies. It should take a step back on its offensive charm, and back up with deeds and more initiative in fostering more effective cooperation.
This is not withstanding that China has been stubbornly watering down sanctions on Iran and other African countries and it seems it is behaving very much like a ‘normal’ super- power, sharing world’s stage with other G-5. Having said that in the recent National People’s Congress, China Premier Wen Jiabao stressed that China should not punch above its weight and that the People’s Republic still needs stability if it is to become a society that offers a decent life to all of its citizens.
Nationalism in China is getting stronger by days. A foreign policy goal closely related to nationalism has been the desire to achieve territorial integrity and to restore to Chinese sovereignty. With China hosting its first-ever Olympics, the country has seen a surge in national pride. But Chinese are angry at what they see as the West trying to spoil their party. China’s nationalism today is shaped by its pride in its history as well as its century of humiliation at the hands of the West and Japan. China perceives itself as a victim of Western imperialism that began with the First Opium War and the British acquisition of Hong Kong in 1842 and lasted until the end of World War II in 1945, during which it suffered humiliating losses of sovereignty.
Beijing’s top priority today is to maintain peace at home while pursuing its development goals and a greater role in global affairs. Experts say while nationalism may be an effective tool for the Chinese regime to maintain control at home, it can harm its claim of “peaceful rise” globally. Nationalism is certainly an obstacle in China’s image as a responsible stakeholder.
Essentially, China needs a mature strategic dialogue, and comradeship should not guide policies. It should take a step back on its offensive charm, and back up with deeds and more initiative in fostering more effective cooperation.
Euro to Pound
Political situation in the UK looks to be much murkier than ever suggested, but reaction to pound could suggest otherwise.
A sea-changed in British politics looks likely on general election day on 6 May. But it is not to everyone’s liking. The apparently sharp increase in voting popularity of the UK Liberal Democratic Party – the perpetual ‘third force’ in British politics – has thrown up a specter for the bond markets. A ‘hung parliament’ where no one party wins enough seats to command power on its own, could be highly dangerous for sterling and the markets. That is at least the view being put around by the Opposition Conservatives, who see the Liberals as possibly thwarting their bid to overturn the Labour government that has been in power since 1997.
I believe this pessimism has gone too far. The higher the Liberals voting score, the more apparently ‘uncertain’ the election results, the higher sterling will be against the euro, I believe. But because of dramatic deterioration of the euro situation, I see pound as one of the stronger currencies in the next six months.
A ‘cliffhanger’ election results, that give no party an absolute majority might actually quite good for sterling. Coalition government can be effective as happened in the past in the UK.
A sea-changed in British politics looks likely on general election day on 6 May. But it is not to everyone’s liking. The apparently sharp increase in voting popularity of the UK Liberal Democratic Party – the perpetual ‘third force’ in British politics – has thrown up a specter for the bond markets. A ‘hung parliament’ where no one party wins enough seats to command power on its own, could be highly dangerous for sterling and the markets. That is at least the view being put around by the Opposition Conservatives, who see the Liberals as possibly thwarting their bid to overturn the Labour government that has been in power since 1997.
I believe this pessimism has gone too far. The higher the Liberals voting score, the more apparently ‘uncertain’ the election results, the higher sterling will be against the euro, I believe. But because of dramatic deterioration of the euro situation, I see pound as one of the stronger currencies in the next six months.
A ‘cliffhanger’ election results, that give no party an absolute majority might actually quite good for sterling. Coalition government can be effective as happened in the past in the UK.
Tuesday, April 27, 2010
Eyjafjallajokull
This word is not only difficult to pronounce but also difficult to remember. This mighty Icelandic volcano that has wrecked havoc with European air traffic will be something to be remembered for a long time, if what being predicted is correct.
There is most definitely has investment point. I learned yesterday from some hedge fund sources that scientists believe the real threat is from the relatively small Eyjafjallajokull volcano that it could trigger an eruption in its much larger neighbor, which is called Katla.
University of Iceland geologist Andy Hooper told Reuters that an eruption of Katla would make the ash cloud from Eyjafjallokull look trivial. I was told there is better than even chance that this would happen, if our planet continues to warm. At the end of the last ice age, the rate of eruption in Iceland was some 30 times higher than historic rates. This is because the reduction in the ice-load reduced the pressure in the mantle, leading to decompression melting there.
The melting ice due to changing climate, this will lead to additional magma generation, so we should expect more frequent and more voluminous eruptions in the future.
Greg Neale, who edits BBC History magazine saidt hat the Laki volcanic fissure in southern Iceland erupted from June 1783 to February 1784, spewing lava and poisonous gases that devastated the island’s crops and livestock and lead to the deaths of a quarter of the island’s population through famine. The sky turned dark across Europe and even cast a shadow over the United States that was recorded by Benjamin Franklin.
The Krakatoa eruption of 1883 in Indonesia, one of the most violent natural events in recorded history, threw up so much ash that crops were devastated as far away as the United States.
In short, volcanic eruptions can have significant effects on weather patterns for from two to four years which in turn have social and economic consequences. As such, we should keep a close eye on companies and commodities in the food complex, including raw grain and livestock prices, fertilizer producers and packaged food makers.
There is most definitely has investment point. I learned yesterday from some hedge fund sources that scientists believe the real threat is from the relatively small Eyjafjallajokull volcano that it could trigger an eruption in its much larger neighbor, which is called Katla.
University of Iceland geologist Andy Hooper told Reuters that an eruption of Katla would make the ash cloud from Eyjafjallokull look trivial. I was told there is better than even chance that this would happen, if our planet continues to warm. At the end of the last ice age, the rate of eruption in Iceland was some 30 times higher than historic rates. This is because the reduction in the ice-load reduced the pressure in the mantle, leading to decompression melting there.
The melting ice due to changing climate, this will lead to additional magma generation, so we should expect more frequent and more voluminous eruptions in the future.
Greg Neale, who edits BBC History magazine saidt hat the Laki volcanic fissure in southern Iceland erupted from June 1783 to February 1784, spewing lava and poisonous gases that devastated the island’s crops and livestock and lead to the deaths of a quarter of the island’s population through famine. The sky turned dark across Europe and even cast a shadow over the United States that was recorded by Benjamin Franklin.
The Krakatoa eruption of 1883 in Indonesia, one of the most violent natural events in recorded history, threw up so much ash that crops were devastated as far away as the United States.
In short, volcanic eruptions can have significant effects on weather patterns for from two to four years which in turn have social and economic consequences. As such, we should keep a close eye on companies and commodities in the food complex, including raw grain and livestock prices, fertilizer producers and packaged food makers.
Sunday, April 25, 2010
G20/IMF – Quick Update
The meeting over the weekend was quite about the RMB issue as predicted earlier. Of course, they understand the more and lauder they clamor about RMB revaluation, the stronger the likelihood of Chinese government to resist to ending its stable currency policy.
I expect more discussion to take place in next month’s US-China Strategic Economic Dialogue and the G20 leaders’ summit in June.
Because of this development and the unlikelihood that China will make any change to its currency policy short term plus EUR weakness and Greek uncertainties, I am expecting a less dovish Fed, which will underpin performance of the USD, and naturally for market to shift its strategy towards buying Asian currencies for two reasons. Firstly, Asian currencies as a proxy for the CNY and secondly more against the JPY and EUR as opposed to the USD. It remains to be seen if the EU can work with the IMF to help Greece to put its fiscal house back in order and to prevent the debt woes from spreading to other weak EU nations such as Portugal, and Spain.
What would be more critical to watch is the April 28 US FOMC meeting with recent statement that coming out from the US is getting us closer to US Fed hiking cycle as there are signs that US recovery is showing signs of broadening. The futures market is expected to start discounting the US hike cycle if the Fed drops key terms like ‘exceptionally low rates’ and ‘extended period’. Since the start of April, we are beginning to see speculators are reversing from net short to net long positions in USD/JPY in the CFTC market.
I expect more discussion to take place in next month’s US-China Strategic Economic Dialogue and the G20 leaders’ summit in June.
Because of this development and the unlikelihood that China will make any change to its currency policy short term plus EUR weakness and Greek uncertainties, I am expecting a less dovish Fed, which will underpin performance of the USD, and naturally for market to shift its strategy towards buying Asian currencies for two reasons. Firstly, Asian currencies as a proxy for the CNY and secondly more against the JPY and EUR as opposed to the USD. It remains to be seen if the EU can work with the IMF to help Greece to put its fiscal house back in order and to prevent the debt woes from spreading to other weak EU nations such as Portugal, and Spain.
What would be more critical to watch is the April 28 US FOMC meeting with recent statement that coming out from the US is getting us closer to US Fed hiking cycle as there are signs that US recovery is showing signs of broadening. The futures market is expected to start discounting the US hike cycle if the Fed drops key terms like ‘exceptionally low rates’ and ‘extended period’. Since the start of April, we are beginning to see speculators are reversing from net short to net long positions in USD/JPY in the CFTC market.
Thursday, April 22, 2010
Ecuador – Game Changer
They say commodity producers are price-taker and that has been the belief since then. Today, I am sharing you with a piece on Equador’s recent move to redefine this rule.
Ecuadorean President Rafael Correa is pressuring foreign oil investors to change from production-sharing agreements (PSA) to service contracts, else to face expropriation. Correa is looking to make the state’s authority over oil revenues, hence his political security and also perhaps at the expense of Ecuador’s long term economic development.
The left-leaning President Rafael, an economist by training has frequently expressed his disillusion with market reforms in Latin America and believes economic power should reside within the state. Shifting from PSA to servicing contracts, under which producers would have to pay a production fee and then get reimbursed for the cost of their investment. The state will end up getting more revenue for itself and the producers end up making less money overall since it can only make profits from remuneration fees – the amount per barrel that government is willing to pay companies for producing its oil. In another words, the foreign companies will incur risk of investing resources into a project with none of the potential rewards associated with high oil prices.
With his populist-driven handouts to the poor, Rafael will certainly strengthen his political base, which also showing stronger signs of coordinated opposition.
Equador’s economy depends heavily on oil, which accounts for roughly a quarter of GDP, 68% of total export earnings and 35% of fiscal revenues. The country is exporting about 470,000 barrels per day of oil this year – a heavy sour crude called Napo and a medium-heavy, medium sour crude called Oriente that is produced in the northeast of the country.
Many of these companies have reasons to take Rafael’s expropriation threats seriously. After the state took over US oil company Occidental Petroleum’s asset in 2006, claiming the firm’s contract had expired, Rafael further raised investor fears in late 2007 when he imposed a 99% windfall revenue tax on foreign energy firms to help make up for the state’s commercial bond debt obligations. And that led to a number of arbitration suits at the World Bank’s International Centre for Settlement of Investment Dispute. Equador has also expropriate two blocks belonging to Anglo-French oil firm Perenco over tax disputes.
It looks like most firms will have to settle reluctantly on the new contractual terms to remain in the country and maintain minimal production. But they will not have good incentive to invest further in exploration and deep drilling, particularly in the technically more complex fields in the Amazon.
Ecuadorean President Rafael Correa is pressuring foreign oil investors to change from production-sharing agreements (PSA) to service contracts, else to face expropriation. Correa is looking to make the state’s authority over oil revenues, hence his political security and also perhaps at the expense of Ecuador’s long term economic development.
The left-leaning President Rafael, an economist by training has frequently expressed his disillusion with market reforms in Latin America and believes economic power should reside within the state. Shifting from PSA to servicing contracts, under which producers would have to pay a production fee and then get reimbursed for the cost of their investment. The state will end up getting more revenue for itself and the producers end up making less money overall since it can only make profits from remuneration fees – the amount per barrel that government is willing to pay companies for producing its oil. In another words, the foreign companies will incur risk of investing resources into a project with none of the potential rewards associated with high oil prices.
With his populist-driven handouts to the poor, Rafael will certainly strengthen his political base, which also showing stronger signs of coordinated opposition.
Equador’s economy depends heavily on oil, which accounts for roughly a quarter of GDP, 68% of total export earnings and 35% of fiscal revenues. The country is exporting about 470,000 barrels per day of oil this year – a heavy sour crude called Napo and a medium-heavy, medium sour crude called Oriente that is produced in the northeast of the country.
Many of these companies have reasons to take Rafael’s expropriation threats seriously. After the state took over US oil company Occidental Petroleum’s asset in 2006, claiming the firm’s contract had expired, Rafael further raised investor fears in late 2007 when he imposed a 99% windfall revenue tax on foreign energy firms to help make up for the state’s commercial bond debt obligations. And that led to a number of arbitration suits at the World Bank’s International Centre for Settlement of Investment Dispute. Equador has also expropriate two blocks belonging to Anglo-French oil firm Perenco over tax disputes.
It looks like most firms will have to settle reluctantly on the new contractual terms to remain in the country and maintain minimal production. But they will not have good incentive to invest further in exploration and deep drilling, particularly in the technically more complex fields in the Amazon.
Wednesday, April 21, 2010
G20/IMF Meeting
The G20/IMF meeting starts today in Washington and that will last until 25 April 2010. The message will be very clear – those with heavy debt should allow their currencies to depreciate and those in surplus position should allow their currencies to appreciate.
To add to the pressure on China, a US Senate Banking sub-committee will be holding a hearing today to examine the impact of the RMB on US manufacturing. US Senate Banking Committee Chairman Chris Dodd has responded to reporters concerning his expectation of what President elect Obama will do concerning the China Yuan currency manipulation. Higher-ups in the international economy are quietly buying China currency while the American dollar is strong and waiting for U.S. pressure legislatively to be applied to the Obama administration. Huge potential profits await as the RMB gets released from captivity to rise to all-time highs.
We could expect to see Obama administration to seek greater international cooperation via the G20 forum to pressure China into action. So far, two of the BRIC economies – Brazil and India, have joined in calls for a stronger RMB. Russia on the other hand, holds a common position with China to promote the greater use of IMF SDR for international trade and investment transactions.
In the end, the reality remains that China will make the final decision. Last night, the Commerce Ministry declared China will not be subjected to international pressure to revalue its currency. China doesn’t subscribe to the view that its currency is primarily responsible for US’s trade deficit woes, especially now that it has reported a trade deficit. China is more concerned now with its efforts to address its domestic imbalances – cooling its property sector.
With Eurozone in crisis, it makes less sense for China to abandon its stable RMB policy, which it said was an emergency against the global financial crisis. The IMF warned recently that Greece could mark the starting point of a new phase in the global financial crisis.
A RMB revaluation remains a possible but improbable outcome at this week’s G20/IMF meeting. One just should take note of the larger issue for the foreign exchange market is the depreciation pressure on the EUR from the deterioration in Eurozone’s sovereign debt crisis. Following next is the April 28 FOMC meeting as well as the Senate hearings on Goldman Sachs a day before.
To add to the pressure on China, a US Senate Banking sub-committee will be holding a hearing today to examine the impact of the RMB on US manufacturing. US Senate Banking Committee Chairman Chris Dodd has responded to reporters concerning his expectation of what President elect Obama will do concerning the China Yuan currency manipulation. Higher-ups in the international economy are quietly buying China currency while the American dollar is strong and waiting for U.S. pressure legislatively to be applied to the Obama administration. Huge potential profits await as the RMB gets released from captivity to rise to all-time highs.
We could expect to see Obama administration to seek greater international cooperation via the G20 forum to pressure China into action. So far, two of the BRIC economies – Brazil and India, have joined in calls for a stronger RMB. Russia on the other hand, holds a common position with China to promote the greater use of IMF SDR for international trade and investment transactions.
In the end, the reality remains that China will make the final decision. Last night, the Commerce Ministry declared China will not be subjected to international pressure to revalue its currency. China doesn’t subscribe to the view that its currency is primarily responsible for US’s trade deficit woes, especially now that it has reported a trade deficit. China is more concerned now with its efforts to address its domestic imbalances – cooling its property sector.
With Eurozone in crisis, it makes less sense for China to abandon its stable RMB policy, which it said was an emergency against the global financial crisis. The IMF warned recently that Greece could mark the starting point of a new phase in the global financial crisis.
A RMB revaluation remains a possible but improbable outcome at this week’s G20/IMF meeting. One just should take note of the larger issue for the foreign exchange market is the depreciation pressure on the EUR from the deterioration in Eurozone’s sovereign debt crisis. Following next is the April 28 FOMC meeting as well as the Senate hearings on Goldman Sachs a day before.
Tuesday, April 20, 2010
A Standstill Thailand
Neither party wants to budge. The stake at hand is large and it is oversimplification to view the current saga as a conflict of interest between Red Shirts and current government. Royal family has been dragged into this mess as part of preparation of power transfer, likely to Crown Prince Vajiralongkorn and the coming promotion in army in October following the retirement of Army chief Anupong Paochinda. The violence and the ongoing presence of protestors on the streets of Bangkok will stress Thailand’s current institutional framework to its full limit.
I could not discount the possibility of a violent confrontation between Red Shirts and government security forces, as both parties are building up their arsenal. Army chief talked tough and the stage seems set for operations to remove the red-shirted protesters from the Rajprasong intersection as the military boosted its forces while the protesters were in defensive mode yesterday, erecting barricades and assembling home-made weapons for the next battle. There are as many as 10,000 troops in position now in the areas near Rajprasong, the main protest site. source said the protesters also have M67 grenades, M79 grenade launchers and rocket-propelled grenade launchers. They also seized many assault rifles from the military during the clashes with security forces on April 10 at Khok Wua intersection, the sources said. Of the 500 Israeli-made Tavor Tar-21 assault rifles seized by the protesters on that day, only 200 were returned to the Army, the source said, suggesting the protesters might use the weapons in the next clash.
Crown Prince Vajiralongkorn rumored to be closely associated with former Prime Minister Thaksin and people have privately asked whether he has the natural authority to unify the nation, especially given his partisanship towards the military.
One should not also forget that commander-in-chief Anupong is going to retire soon and it is not too hard to see round of jockeying for positions among those in line of command. Military support for Prime Minister Abhisit and its ruling coalition may not be as committed as before, and if current government is losing its monopoly of the use of the force, PM Abhisit’s days in power would seem to be numbered. The Red Shirt protestors know this and those with long patience will win.
Early elections remain a remote possibility and at this stage, it would a task for royal intervention, especially so when His Majesty the King who is still recuperating at Siriraj Hospital.
For now, portfolio managers are taking a neutral stance, at best with portfolio rebalancing with a domestic flight to safety but if situation turns violent given the current political divide, this could lead to a clear reversal of previous Thai equity market outperformance.
I could not discount the possibility of a violent confrontation between Red Shirts and government security forces, as both parties are building up their arsenal. Army chief talked tough and the stage seems set for operations to remove the red-shirted protesters from the Rajprasong intersection as the military boosted its forces while the protesters were in defensive mode yesterday, erecting barricades and assembling home-made weapons for the next battle. There are as many as 10,000 troops in position now in the areas near Rajprasong, the main protest site. source said the protesters also have M67 grenades, M79 grenade launchers and rocket-propelled grenade launchers. They also seized many assault rifles from the military during the clashes with security forces on April 10 at Khok Wua intersection, the sources said. Of the 500 Israeli-made Tavor Tar-21 assault rifles seized by the protesters on that day, only 200 were returned to the Army, the source said, suggesting the protesters might use the weapons in the next clash.
Crown Prince Vajiralongkorn rumored to be closely associated with former Prime Minister Thaksin and people have privately asked whether he has the natural authority to unify the nation, especially given his partisanship towards the military.
One should not also forget that commander-in-chief Anupong is going to retire soon and it is not too hard to see round of jockeying for positions among those in line of command. Military support for Prime Minister Abhisit and its ruling coalition may not be as committed as before, and if current government is losing its monopoly of the use of the force, PM Abhisit’s days in power would seem to be numbered. The Red Shirt protestors know this and those with long patience will win.
Early elections remain a remote possibility and at this stage, it would a task for royal intervention, especially so when His Majesty the King who is still recuperating at Siriraj Hospital.
For now, portfolio managers are taking a neutral stance, at best with portfolio rebalancing with a domestic flight to safety but if situation turns violent given the current political divide, this could lead to a clear reversal of previous Thai equity market outperformance.
The Recalcitrant China
Just as the US makes an impassioned push for tougher economic sanctions on Iran and Venezuela, China is reportedly increasingly building up relationships with these countries.
According to Reuters, the state-owned China National Petroleum Corp (CNPC) trading unit – shipped two cargoes totaling 600,000 barrels of gasoline to Iran in exchange for $55 million. Additionally, Unipec – the trading arm of China Petroleum & Chemical Corp (Sinopec) agreed to sell 250,000 of gasoline to Iran. It can be worse for its relationship with the US as Washington has spent months lobbying the international community to tighten sanctions on Iran, which is openly expanding its uranium enrichment capacity. In November 2009, Iran has announced its plans to build 10 uranium enrichment facilities and earlier this year, officials said construction would start at two sites by March 2011. In retaliation, US trade officials asserted that China undervalues its currency and earlier this year, the US followed through with a $400 billion arms sale to Taiwan and welcomed the Dalai Lama in spite of Chinese admonishments.
On the other hand, Venezuelan President Hugo Chavez, a staunch ally of Iranian President Mahmoud Ahmadinejad said that China has agreed to extend $20 billion in loans to his country. CNPC confirmed that it signed several agreements with Venezuela on a long-term credit-for-oil and a joint-venture to develop the country’s Junin 4 oil block. The Chinese state-owned oil company said it also signed a crude oil supply contract with Petroleos de Venezuela to guarantee the repayment of a 10-year loan. In return, Venezuela said it sends some 460,000 barrels a day of crude oil to China, although figures from Chinese government indicate China only imported an average of 132,000 barrels per day from Venezuela during the first couple of months of 2010.
Similarly, China has anted up to secure resources in Africa, even if that is meant dealing with some unsavory regimes. China’s friends in Africa included 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 the largest supplier of arms to Sudan, which received $7 billion of Chinese defense exports between 2003 and 2007, according to the US Department of Defense.
Still, Beijing insists that its relationship with these countries is mutually beneficial. One thing that I am sure is that China is not as concerned as they used to be about irritating the US.
According to Reuters, the state-owned China National Petroleum Corp (CNPC) trading unit – shipped two cargoes totaling 600,000 barrels of gasoline to Iran in exchange for $55 million. Additionally, Unipec – the trading arm of China Petroleum & Chemical Corp (Sinopec) agreed to sell 250,000 of gasoline to Iran. It can be worse for its relationship with the US as Washington has spent months lobbying the international community to tighten sanctions on Iran, which is openly expanding its uranium enrichment capacity. In November 2009, Iran has announced its plans to build 10 uranium enrichment facilities and earlier this year, officials said construction would start at two sites by March 2011. In retaliation, US trade officials asserted that China undervalues its currency and earlier this year, the US followed through with a $400 billion arms sale to Taiwan and welcomed the Dalai Lama in spite of Chinese admonishments.
On the other hand, Venezuelan President Hugo Chavez, a staunch ally of Iranian President Mahmoud Ahmadinejad said that China has agreed to extend $20 billion in loans to his country. CNPC confirmed that it signed several agreements with Venezuela on a long-term credit-for-oil and a joint-venture to develop the country’s Junin 4 oil block. The Chinese state-owned oil company said it also signed a crude oil supply contract with Petroleos de Venezuela to guarantee the repayment of a 10-year loan. In return, Venezuela said it sends some 460,000 barrels a day of crude oil to China, although figures from Chinese government indicate China only imported an average of 132,000 barrels per day from Venezuela during the first couple of months of 2010.
Similarly, China has anted up to secure resources in Africa, even if that is meant dealing with some unsavory regimes. China’s friends in Africa included 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 the largest supplier of arms to Sudan, which received $7 billion of Chinese defense exports between 2003 and 2007, according to the US Department of Defense.
Still, Beijing insists that its relationship with these countries is mutually beneficial. One thing that I am sure is that China is not as concerned as they used to be about irritating the US.
The ‘Lucky’ Australia
When the late Donald Horne called Australia the ‘Lucky Country’ in 1964, it was meant as an insult. But today, I guess the insult turns blessing simply that this country is sitting on a pile of valuable natural resources. She is the prime beneficiary of that new reality to global wealth.
Just after 2005 – the rise in those global commodity prices as well as the insatiable demand for raw materials from China and India that combined to fundamentally change Australia’s competitive position. It has since developed into a commodities powerhouse and is now the principal source of raw materials from the immense Chinese industrial engine. Last year, China’s automobile market leapfrogged the US market to take over the No. 1 spot in the world for the first time ever and it is growing at better than a 20% annual clip.
China needs particularly iron ore for its rapidly expanding steel industry and coal for its power stations. There is a ‘double-whammy’ effect on the Australian economy. While now there is no danger of inflation and the strength of the AUD up 22% on a trade-weighted basis last year, but the Reserve Bank of Australia has raised short-term interest rates five times in the last seven months, taking rates from 3% to 4.25%. Key fear is an asset bubble with home prices up 13% last year on an already inflated market and the stock market up 60% since its lows of last March. Australian consumers are spending like there is no tomorrow – a propensity they share with their cousins in the United States.
The situation is made more dangerous by the Australian budget deficit. At 4.7% of GDP for the fiscal year ended June, this is modest compared to the US deficit but it still represents an addition to the problem rather than solution.
With money pouring in from foreign investors, consumers are not saving adequately and the state also spending more than it takes in. Monetary tightening is not enough and the challenge remains with the ability to eliminate the budget deficit as quickly as possible.
Despite this, investors really cannot afford to avoid this economy especially it continues to increase its importance to the overall global economy.
Just after 2005 – the rise in those global commodity prices as well as the insatiable demand for raw materials from China and India that combined to fundamentally change Australia’s competitive position. It has since developed into a commodities powerhouse and is now the principal source of raw materials from the immense Chinese industrial engine. Last year, China’s automobile market leapfrogged the US market to take over the No. 1 spot in the world for the first time ever and it is growing at better than a 20% annual clip.
China needs particularly iron ore for its rapidly expanding steel industry and coal for its power stations. There is a ‘double-whammy’ effect on the Australian economy. While now there is no danger of inflation and the strength of the AUD up 22% on a trade-weighted basis last year, but the Reserve Bank of Australia has raised short-term interest rates five times in the last seven months, taking rates from 3% to 4.25%. Key fear is an asset bubble with home prices up 13% last year on an already inflated market and the stock market up 60% since its lows of last March. Australian consumers are spending like there is no tomorrow – a propensity they share with their cousins in the United States.
The situation is made more dangerous by the Australian budget deficit. At 4.7% of GDP for the fiscal year ended June, this is modest compared to the US deficit but it still represents an addition to the problem rather than solution.
With money pouring in from foreign investors, consumers are not saving adequately and the state also spending more than it takes in. Monetary tightening is not enough and the challenge remains with the ability to eliminate the budget deficit as quickly as possible.
Despite this, investors really cannot afford to avoid this economy especially it continues to increase its importance to the overall global economy.
How Ill is the UK?
There is one point that I think everyone agrees is the depth of the fiscal hole at a ratio of 4:1 and today’s fiscal deficits exceed those of any previous period in peacetime. Huge questions remain over the timing and content of such action.
Question is whether or when a further fall in sterling could turn into a rout. Such a loss of confidence might then undermine inflationary expectations and raise long-term interest rates. The result could b both a renewed recession and an explosive path for public debt. At the same time, a further fall in sterling seems desirable, if not inevitable. Weak demand in the euro-zone, the UK’s biggest trading partner, only makes such a fall even more necessary. This is going to be a very tricky policy performance.
What is the right economic medicine for the UK? Sterling is set for a white-knuckle ride in the run-up to the general election, as the fiscal face-off between the Conservatives and Labour keeps the UK's hefty deficit in the headlines, and investors fret about the consequences of a hung parliament.
The British economy is mired in its longest recession on record. Investment by UK businesses on new buildings and equipment plunged by a record amount over the past year. The sharp overall and ongoing decline in business investment could threaten to have significant long-term damaging repercussions for the economy's potential output.
The latest unemployment rate for the UK is 7.8%. For England it stands at 7.8%, for Scotland 7.6% and for Northern Ireland 6.3%.
Poor consumer confidence index figures in March suggest that people are losing faith in recovery after January and February rises. The 2,000 adults interviewed by GfK NOP also took a more negative view of the overall economic situation over next 12 months. This measure came in at zero, compared with +4 in February. The index also indicated that consumers are becoming more cautious about of their own personal financial situation, with this measure falling to -15 from -13 in February. With the election only weeks away the government will be disappointed that consumer confidence has slipped this month.
The upside for consumer spending will be limited for some time to come as households continue to face very challenging conditions, notably including high unemployment, low earnings growth, elevated debt levels, January's VAT hike and the prospect of further fiscal tightening ahead that will very likely include more tax hikes.
Question is whether or when a further fall in sterling could turn into a rout. Such a loss of confidence might then undermine inflationary expectations and raise long-term interest rates. The result could b both a renewed recession and an explosive path for public debt. At the same time, a further fall in sterling seems desirable, if not inevitable. Weak demand in the euro-zone, the UK’s biggest trading partner, only makes such a fall even more necessary. This is going to be a very tricky policy performance.
What is the right economic medicine for the UK? Sterling is set for a white-knuckle ride in the run-up to the general election, as the fiscal face-off between the Conservatives and Labour keeps the UK's hefty deficit in the headlines, and investors fret about the consequences of a hung parliament.
The British economy is mired in its longest recession on record. Investment by UK businesses on new buildings and equipment plunged by a record amount over the past year. The sharp overall and ongoing decline in business investment could threaten to have significant long-term damaging repercussions for the economy's potential output.
The latest unemployment rate for the UK is 7.8%. For England it stands at 7.8%, for Scotland 7.6% and for Northern Ireland 6.3%.
Poor consumer confidence index figures in March suggest that people are losing faith in recovery after January and February rises. The 2,000 adults interviewed by GfK NOP also took a more negative view of the overall economic situation over next 12 months. This measure came in at zero, compared with +4 in February. The index also indicated that consumers are becoming more cautious about of their own personal financial situation, with this measure falling to -15 from -13 in February. With the election only weeks away the government will be disappointed that consumer confidence has slipped this month.
The upside for consumer spending will be limited for some time to come as households continue to face very challenging conditions, notably including high unemployment, low earnings growth, elevated debt levels, January's VAT hike and the prospect of further fiscal tightening ahead that will very likely include more tax hikes.
Monday, April 19, 2010
Iceland’s Volcanic
We have heard and talk a lot in the wake of Iceland’s misbehaving volcano. These volcanic antics have disrupted air travel worldwide and it must be a bitter pill to swallow for all of us. Demonstrating the unpredictability of volcanic eruptions, Britain’s National Air Traffic Service said on Monday afternoon that airspace in Scotland and parts of northern England would reopen on Tuesday morning, and sounded optimistic that the rest of Britain would be cleared for flying later in the day; but later switched to a more cautious tone as a new ash cloud began spreading. Earlier, Norway, Sweden and Finland had allowed a few mainly domestic flights to operate.
It will have material impact for European carriers, especially for premium/business travel as time critical business trips will not get rebooked and business travelers will look at other options, like video conference etc. It will also have an impact on the near term earnings of the Asian/Australasian airlines as well, but the impacts are likely to be relatively smaller.
The mainland Chinese airlines have minimal exposure to Europe with most of their business largely coming from domestic revenues, and most of the airlines have a single digit exposure. Singapore Airline has a larger exposure to Europe, historically about 20-25% of their revenues coming from Europe route. Load-factors for Europe have also been picking up recently with passenger load factors averaging +80% since October last year. Taiwanese Airlines, EVA and China Air said they cancelled some of their flights to Europe and estimate the number of passengers to be influenced to be around 1,000 people per day. Europe contributes 17% for China Air and 14% for EVA Air, including both cargo and passenger revenue. Cathay Pacific has about 18% exposure to Europe route but the company has not been seeing too much growth on the Europe route in recent months. Korean Airlines seems to be negatively impacted with Europe route accounts for about 20% of total revenue. The impact on the cargo business seems to be more negative, but will likely to pick up significantly due to delays once current volcano issue dampens.
More worrying is the impact on Thai Airways because European routes account for 38% of RPK. Despite the recent political turmoil in Thailand, passenger load factors of these routes had been holding up well – high 70s. THAI has cancelled 22 flights per day into Europe, but is offering additional services to three airports in southern Europe – Rome, Madrid and Athens as an alternative for standard passengers. Management says the cancellations are affecting 6,000 passengers per day and currently 15,000 passengers are stranded.
It will have material impact for European carriers, especially for premium/business travel as time critical business trips will not get rebooked and business travelers will look at other options, like video conference etc. It will also have an impact on the near term earnings of the Asian/Australasian airlines as well, but the impacts are likely to be relatively smaller.
The mainland Chinese airlines have minimal exposure to Europe with most of their business largely coming from domestic revenues, and most of the airlines have a single digit exposure. Singapore Airline has a larger exposure to Europe, historically about 20-25% of their revenues coming from Europe route. Load-factors for Europe have also been picking up recently with passenger load factors averaging +80% since October last year. Taiwanese Airlines, EVA and China Air said they cancelled some of their flights to Europe and estimate the number of passengers to be influenced to be around 1,000 people per day. Europe contributes 17% for China Air and 14% for EVA Air, including both cargo and passenger revenue. Cathay Pacific has about 18% exposure to Europe route but the company has not been seeing too much growth on the Europe route in recent months. Korean Airlines seems to be negatively impacted with Europe route accounts for about 20% of total revenue. The impact on the cargo business seems to be more negative, but will likely to pick up significantly due to delays once current volcano issue dampens.
More worrying is the impact on Thai Airways because European routes account for 38% of RPK. Despite the recent political turmoil in Thailand, passenger load factors of these routes had been holding up well – high 70s. THAI has cancelled 22 flights per day into Europe, but is offering additional services to three airports in southern Europe – Rome, Madrid and Athens as an alternative for standard passengers. Management says the cancellations are affecting 6,000 passengers per day and currently 15,000 passengers are stranded.
Goldman Sachs
The news hit the financial market like a carefully targeted bomb when the US Securities and Exchange Commission announced it had filed a fraud action against Goldman Sachs, which relates to the investment bank’s sub-prime mortgage business. Depending on how rough the SEC wants to play it, the case has the potential to shut down the cartel known as Wall Street.
For more than a year in 2006-07, while the market was falling apart, Goldman was issuing sub-prime mortgage collaterized-debt obligations (CDOs) to investors even as it was shorting the hell out of the sub-prime mortgage market. Goldman was doing this both directly and through credit-default swaps (CDS), most of which were written by American International Group. When the market collapsed, Goldman made a huge trading profit, including about $13 billion provided by US taxpayers as part of the AIG bailout.
In its initial form, the SEC suit is limited and in any case includes only civil charges of fraud. In one particular subprime mortgage CDO deal called ‘ABACUS’ done in early 2007, Goldman allegedly colluded with the hedge fund operator Paulson & Co, which was seeking to short the sub-prime mortgage market, hence making the company founder John A. Paulson, a multi-billionaire in what has become known as the greatest trade ever. Goldman told investors that the residential MBS for ABACUS had been chosen by a neutral ‘portfolio selection agent’, but in reality Goldman allowed Paulson to sort among the RMBS – choosing, of course, the most likely to go wrong. In return, Paulson paid Goldman a fee of $15 million, while he reaped $15 billion on his greatest trade. Paulson’s role in the deal was nowhere disclosed to investors. By January 2008, less than a year after the issue, 99% of the RMBS in the ABACUS portfolio had been downgraded by the rating agencies. Goldman then sold CDOs in ABACUS to investors, including ABN AMRO Bank, IKB Deutsche Industriebank AG, who lost more than $1 billion.
Given this situation, it seems the financial-reform bill introduced by US Senator Christopher Dodd will likely to pass both houses without all that much alteration. And if that is the case, it should immediately raise our suspicions. After all, the US financial services business has a very effective lobby. Now, the real risk to the economic recovery is that regulators could over-regulate.
For more than a year in 2006-07, while the market was falling apart, Goldman was issuing sub-prime mortgage collaterized-debt obligations (CDOs) to investors even as it was shorting the hell out of the sub-prime mortgage market. Goldman was doing this both directly and through credit-default swaps (CDS), most of which were written by American International Group. When the market collapsed, Goldman made a huge trading profit, including about $13 billion provided by US taxpayers as part of the AIG bailout.
In its initial form, the SEC suit is limited and in any case includes only civil charges of fraud. In one particular subprime mortgage CDO deal called ‘ABACUS’ done in early 2007, Goldman allegedly colluded with the hedge fund operator Paulson & Co, which was seeking to short the sub-prime mortgage market, hence making the company founder John A. Paulson, a multi-billionaire in what has become known as the greatest trade ever. Goldman told investors that the residential MBS for ABACUS had been chosen by a neutral ‘portfolio selection agent’, but in reality Goldman allowed Paulson to sort among the RMBS – choosing, of course, the most likely to go wrong. In return, Paulson paid Goldman a fee of $15 million, while he reaped $15 billion on his greatest trade. Paulson’s role in the deal was nowhere disclosed to investors. By January 2008, less than a year after the issue, 99% of the RMBS in the ABACUS portfolio had been downgraded by the rating agencies. Goldman then sold CDOs in ABACUS to investors, including ABN AMRO Bank, IKB Deutsche Industriebank AG, who lost more than $1 billion.
Given this situation, it seems the financial-reform bill introduced by US Senator Christopher Dodd will likely to pass both houses without all that much alteration. And if that is the case, it should immediately raise our suspicions. After all, the US financial services business has a very effective lobby. Now, the real risk to the economic recovery is that regulators could over-regulate.
Ready VIX
Volatility waned and financial, industrial and retail stocks waned. Could this be the sign that investors are becoming too complacent and I do expect to see a correction in weeks to come. To be sure, the volatility is really dropping. Since mid-February, just three of the 37 trading days have featured a change in the Dow Jones Industrial Average of 100 points or more. Compared that to the 13 of 100 points day from mid-January to mid-February.
The last time CBOE Volatility Index (VIX) broke under a multiyear line of bottoms was mid-2003 following the 2000-2002 bear market. The VIX then proceeded to fall for four more years and all the while the S&P rose. Now, the VIX has broken a multiyear bottoms line again, but the VIX now is only at the place where it began the last four-year bull cycle and has much, much farther to fall to equal its lows of the last cycle, even after the spike higher on Friday.
The last time CBOE Volatility Index (VIX) broke under a multiyear line of bottoms was mid-2003 following the 2000-2002 bear market. The VIX then proceeded to fall for four more years and all the while the S&P rose. Now, the VIX has broken a multiyear bottoms line again, but the VIX now is only at the place where it began the last four-year bull cycle and has much, much farther to fall to equal its lows of the last cycle, even after the spike higher on Friday.
Sunday, April 18, 2010
Vietnam
After a long silence on Vietnam since three years ago, I am turning positive again on it. Couple of my friends just came back from tour of duty and their ground feeling is that Vietnam remains a land of opportunity with rising middle class from a large population base of 85 million – the 15th most populous country in the world. The rising affluence of the middle class is apparent judging by the strong take up rate for Berjaya Land and SP Setia launches and the sprouting of more luxury brands such as Gucci, LV, Bally and more vehicles on the road.
There are now five 100% owned foreign banks namely HSBC, ANZ, Standard Chartered, Hong Leong and Shinhan Bank, Korea and credit card growth appears to be very fast developing service with Vietnam being predominantly a cash economy. But banks need applicants to deposit 120% of the maximum limit in saving accounts, while housing loans are increasing with tenures up to 10 years and loan amount of 70% of total purchase price.
Property market activity continued to remain robust. Rapid middle class, urbanization and improvement in transportation system in HCMC with metro lines, more highways and sky trains will boost property prices further. There seems to be strong preference for well-planned, mid-end township developments, judging by Phu My Hung in HCMC and Ciputra in Hanoi. According to a property developer, there will be an increase in residential launches in 2Q10 and likely to be skewed towards high rise developments. The affordable housing markets – US$1,000 to US$1,600 sq meter and below, have the most potential. District 2 and 7 are the more popular township residential areas. There are still very tight restrictions on foreign ownership of property. Only very high ranking foreigners are allowed to own property and this is limited to condominiums.
More investments are flowing in. There is increasing interest from the Spanish and Korean governments while China investments are more concentrated in Hanoi. Japan is more focused in the industrial sector.
Consumer spending, which constitutes 65% of GDP is the anchor of the economy. The number of credit card users has hit 20% versus 7% when Parkson first opened. Levis brand during peak periods can rake in US$70,000 per month.
Dong is likely to hold steadily with mild risk of more devaluation this year. The State Bank of Vietnam has devalued the Dong by a total of 9% since end-2009, which has helped the trade deficit. Since then, the government has implemented a series of fiscal and monetary tightening measures that were effective in stabilizing the currency. Reserve requirements were raised from 5% to 11% and the State Bank of Vietnam increased the policy base rate to 14%.
There are now five 100% owned foreign banks namely HSBC, ANZ, Standard Chartered, Hong Leong and Shinhan Bank, Korea and credit card growth appears to be very fast developing service with Vietnam being predominantly a cash economy. But banks need applicants to deposit 120% of the maximum limit in saving accounts, while housing loans are increasing with tenures up to 10 years and loan amount of 70% of total purchase price.
Property market activity continued to remain robust. Rapid middle class, urbanization and improvement in transportation system in HCMC with metro lines, more highways and sky trains will boost property prices further. There seems to be strong preference for well-planned, mid-end township developments, judging by Phu My Hung in HCMC and Ciputra in Hanoi. According to a property developer, there will be an increase in residential launches in 2Q10 and likely to be skewed towards high rise developments. The affordable housing markets – US$1,000 to US$1,600 sq meter and below, have the most potential. District 2 and 7 are the more popular township residential areas. There are still very tight restrictions on foreign ownership of property. Only very high ranking foreigners are allowed to own property and this is limited to condominiums.
More investments are flowing in. There is increasing interest from the Spanish and Korean governments while China investments are more concentrated in Hanoi. Japan is more focused in the industrial sector.
Consumer spending, which constitutes 65% of GDP is the anchor of the economy. The number of credit card users has hit 20% versus 7% when Parkson first opened. Levis brand during peak periods can rake in US$70,000 per month.
Dong is likely to hold steadily with mild risk of more devaluation this year. The State Bank of Vietnam has devalued the Dong by a total of 9% since end-2009, which has helped the trade deficit. Since then, the government has implemented a series of fiscal and monetary tightening measures that were effective in stabilizing the currency. Reserve requirements were raised from 5% to 11% and the State Bank of Vietnam increased the policy base rate to 14%.
Quick Update on Market
Usually, I don’t read into short-term signals, but happening over the last couple of weeks worth a look. Sell down last Friday, triggered by the US Securities Exchange Commission, who sued Goldman Sachs for defrauding investors via a product-related to subprime mortgages, has made markets turned defensive. Pay close attention to equity futures which are already looking for Dow to break below the psychological 11,000 level this week.
If US banks become the dominant theme this week, look for USD and JPY to become safe haven currencies, and stronger profit-taking in emerging Asian currencies and commodities currencies is anticipated. The Asian currencies are vulnerable to risk aversion. Owing the strong appreciation from last week’s surprise ‘twin-tightening’ in its exchange rate policy, the SGD will be most vulnerable for short-covering. Likewise, USD/IDR, which has not been able to break sustainably below 9,000 and is now most vulnerable to upside risks, if the Jakarta Composite Index starts retreating from its all-time high. And in the case of Thailand, the finance ministry and the central bank have warned about more THB weakness as the army and protestors moved closer towards a showdown in Thailand. Under the circumstances, I expect China is likely to get some respite from recent US-led international pressures toi revalue its RMB.
If US banks become the dominant theme this week, look for USD and JPY to become safe haven currencies, and stronger profit-taking in emerging Asian currencies and commodities currencies is anticipated. The Asian currencies are vulnerable to risk aversion. Owing the strong appreciation from last week’s surprise ‘twin-tightening’ in its exchange rate policy, the SGD will be most vulnerable for short-covering. Likewise, USD/IDR, which has not been able to break sustainably below 9,000 and is now most vulnerable to upside risks, if the Jakarta Composite Index starts retreating from its all-time high. And in the case of Thailand, the finance ministry and the central bank have warned about more THB weakness as the army and protestors moved closer towards a showdown in Thailand. Under the circumstances, I expect China is likely to get some respite from recent US-led international pressures toi revalue its RMB.
Urban Migration in China
This is going to be the greatest story in China for next 10 years. We are talking about a group that is 1.6 times the entire US population, moving from China’s countryside to its cities in next decade. Some analysts are estimating some 500 million Chinese citizens are expected to have moved into China’s cities as part of the greatest urban migration ever recorded and there are couple of long-term institutional investors that I have good relations are rushing to lock up some valuable land parcels before 2020. Wang Mengkui, head of the cabinet's think-tank, told the Financial Times that the country's urban population would rise to around 800 million by 2020, up from an official 502 million at the end of last year.
A population shift of this magnitude cannot help, but to be a major catalyst for increasing real estate values, especially in such top-tier cities as Beijing, Shanghai and Guangdong, where I am partly based now. It will also significantly shift the market dynamics of second-tier municipalities such as Chongqing, where literally millions of people are pouring in from countryside. China’s urbanisation rate of 39 per cent now is equivalent only to that of the UK in the 1850s, that of the US in 1911 and that of Japan in 1950.
China just announced its 1Q growth of 11.9% - the country’s fastest expansion in nearly three years and a rate that was faster that what analysts were expecting. As a matter of fact, central planners are raising reserve requirements for lenders, are tightening up on permits and construction licenses and are even taking steps to halt illegal development. In some parts of China, local developers will often construct entire buildings and never pull a permit.
As the property prices in Beijing and Shanghai increase in expense, many companies, investors, and developers are shifting their focus to the second-and-third tier cities that have yet to experience the urbanization rush of their much-larger first-tier counterparts. I cannot deny that the speculative excesses that exist in very high-end residential real estate in the primary cities.
Is there a real estate bubble? No there isn’t because urban migration will create a near infinite future demand for residential and commercial real estate. Does China under consume? Yes but urban migration will raise consumption rates.
This latter claim was highlighted in an article in the the South China Morning Post, which claims that“President Hu Jintao’s pledge to spur urbanisation and domestic demand next year has been seen as an attempt to tackle the growing problem of industrial overcapacity.
A population shift of this magnitude cannot help, but to be a major catalyst for increasing real estate values, especially in such top-tier cities as Beijing, Shanghai and Guangdong, where I am partly based now. It will also significantly shift the market dynamics of second-tier municipalities such as Chongqing, where literally millions of people are pouring in from countryside. China’s urbanisation rate of 39 per cent now is equivalent only to that of the UK in the 1850s, that of the US in 1911 and that of Japan in 1950.
China just announced its 1Q growth of 11.9% - the country’s fastest expansion in nearly three years and a rate that was faster that what analysts were expecting. As a matter of fact, central planners are raising reserve requirements for lenders, are tightening up on permits and construction licenses and are even taking steps to halt illegal development. In some parts of China, local developers will often construct entire buildings and never pull a permit.
As the property prices in Beijing and Shanghai increase in expense, many companies, investors, and developers are shifting their focus to the second-and-third tier cities that have yet to experience the urbanization rush of their much-larger first-tier counterparts. I cannot deny that the speculative excesses that exist in very high-end residential real estate in the primary cities.
Is there a real estate bubble? No there isn’t because urban migration will create a near infinite future demand for residential and commercial real estate. Does China under consume? Yes but urban migration will raise consumption rates.
This latter claim was highlighted in an article in the the South China Morning Post, which claims that“President Hu Jintao’s pledge to spur urbanisation and domestic demand next year has been seen as an attempt to tackle the growing problem of industrial overcapacity.
Sovereign Debt Crisis is Underway
I have written couple of notes on Greece in the past couple of weeks, but I have yet to show you that this problem actually can be a much bigger part of the growing mound of looming landmines in the global economy that has been damaged by the worst economic crisis in more than 80 years.
Last November, Dubai sent tremors through financial markets by announcing it would be ‘restructuring’ its debt. The government later offered its bondholders just 60 cents on the dollar for their investment. Now, Greece’s shaky finances represent another threat to the lifespan of the euro, the second most widely held currency in the world. And it stands on wobbly footing as the second domino in an unraveling global sovereign debt crisis. The other potential candidates include Portugal, Italy, Ireland, Spain and even the UK, Japan and the US.
That is a lineup of suspects that if under the gun of global investor scrutiny for their respective burgeoning debt problems. Even though one argues that the euro zone and the IMF as they stepped up last week and provided details of aggressive financial aid as a lifeline to Greece, the hope was that Greece’s default threat to be finally been put to bed. My sense, the Greece problem is far from over. Those initial favourable responses to the aid plan are well expected. It has 11.6 billion euros of government debt to refinance over the next month – and another 20 billion euros by the end of the year. Funding from its fellow euro zone countries at best will only allow Greece to roll-over that debt.
The potential debt burden from those next in-line could become even more vulnerable – a recipe for a political and economic disaster in Europe and a potential break-up of the euro. In short, I continue to expect the sovereign debt crisis to continue to build and be cautious of a quick downturn in global risk appetite, especially when the US stock market climbing, almost daily, to new post-crisis highs.
Headlines are usually about what happened already. I fully recognized the extraordinarily optimistic sentiment that now blankets the financial world.
Last November, Dubai sent tremors through financial markets by announcing it would be ‘restructuring’ its debt. The government later offered its bondholders just 60 cents on the dollar for their investment. Now, Greece’s shaky finances represent another threat to the lifespan of the euro, the second most widely held currency in the world. And it stands on wobbly footing as the second domino in an unraveling global sovereign debt crisis. The other potential candidates include Portugal, Italy, Ireland, Spain and even the UK, Japan and the US.
That is a lineup of suspects that if under the gun of global investor scrutiny for their respective burgeoning debt problems. Even though one argues that the euro zone and the IMF as they stepped up last week and provided details of aggressive financial aid as a lifeline to Greece, the hope was that Greece’s default threat to be finally been put to bed. My sense, the Greece problem is far from over. Those initial favourable responses to the aid plan are well expected. It has 11.6 billion euros of government debt to refinance over the next month – and another 20 billion euros by the end of the year. Funding from its fellow euro zone countries at best will only allow Greece to roll-over that debt.
The potential debt burden from those next in-line could become even more vulnerable – a recipe for a political and economic disaster in Europe and a potential break-up of the euro. In short, I continue to expect the sovereign debt crisis to continue to build and be cautious of a quick downturn in global risk appetite, especially when the US stock market climbing, almost daily, to new post-crisis highs.
Headlines are usually about what happened already. I fully recognized the extraordinarily optimistic sentiment that now blankets the financial world.
Thursday, April 15, 2010
Bull Killed by Overlooked Problems
The US stock market has staged one of its most powerful rallies in history that followed the March o9, 2009 market low. It soared another 5% during the first quarter of this year – its best first quarter in a dozen years. You cannot bury your head in the sand and ignore what’s happening. We cannot fail to acknowledge the cheap money from the government bailout and not a well-rounded economy recovery as the most likely drivers behind the torrid run-up in the US share prices.
I have received quite a significant response over the last two months arguing this bull market is too good to be true. My guess is that the stock market a year from now will be a lot lower that it is now. I suspect that when we are able to look back on the recent ‘bull-market’ in a larger or longer context, it will show up as a large bear market bounce, fueled by a huge government stimulus and ultra-low interest rates that make keeping cash in US Treasuries or money market funds very unpalatable.
The market crash that ended a year ago was triggered by excessive debt, financial manipulation, deceit and lack of true moral hazard. We are now have even more debt, unabated financial manipulation, collaborative deceit between the Fed and Wall Street, and confidence bordering on certainty that if the too-big-to-fail guys fail again, the government will not dare to not bail them out again.
Given that the ‘recession’ did not clean up the problems that caused it, I don’t see any way that we can avoid another drop, deeper and harder, to correct the problems that were not allowed to correct on the previous iteration. I don’t know when the next collapse will begin, but now we have a target-rich environment that fertilizes the land.
But be warned, soothsayers can be accurate or be believed, but not both.
As former US Vice President Dick Cheney famously said, ‘deficits don’t matter’… and that is perfectly true – up until now as most developed economies are now running deficits, it is increasingly to look like the debt will have to be monetized, which in due course can only lead to inflation.
I have received quite a significant response over the last two months arguing this bull market is too good to be true. My guess is that the stock market a year from now will be a lot lower that it is now. I suspect that when we are able to look back on the recent ‘bull-market’ in a larger or longer context, it will show up as a large bear market bounce, fueled by a huge government stimulus and ultra-low interest rates that make keeping cash in US Treasuries or money market funds very unpalatable.
The market crash that ended a year ago was triggered by excessive debt, financial manipulation, deceit and lack of true moral hazard. We are now have even more debt, unabated financial manipulation, collaborative deceit between the Fed and Wall Street, and confidence bordering on certainty that if the too-big-to-fail guys fail again, the government will not dare to not bail them out again.
Given that the ‘recession’ did not clean up the problems that caused it, I don’t see any way that we can avoid another drop, deeper and harder, to correct the problems that were not allowed to correct on the previous iteration. I don’t know when the next collapse will begin, but now we have a target-rich environment that fertilizes the land.
But be warned, soothsayers can be accurate or be believed, but not both.
As former US Vice President Dick Cheney famously said, ‘deficits don’t matter’… and that is perfectly true – up until now as most developed economies are now running deficits, it is increasingly to look like the debt will have to be monetized, which in due course can only lead to inflation.
Bond Bear Market?
US 10-year Treasury bonds briefly pierced the 4% for the first time over a year. Bond investors were panic and their concerns are understandable. The threat of rising interest rates has been hanging over fixed-income markets ever since the Fed began printing money at hyper-speed during the financial crisis.
Question now is the end near for the bond market? I am seeing clearer signs that long-term interest rates will be heading higher eventually given the massive fiscal deficit and US’ reliance on foreign lenders. The ultimate day of reckoning for the bond market is coming, but it is likely to be over time, not overnight.
But it makes prudent sense to begin taking steps to help protect your portfolio against rising interest rates when they occur. What this really boils down to is timing and it is important to understand where and how to make the right moves with your fixed-income holdings. Right now, economic fundamentals still appear too weak for inflation to take hold and the Fed intends to keep interest rates low for an ‘extended period’ as they have repeatedly broadcast. The broad money M2 is still contracting at a record rate, in spite of the Fed’s runaway printing press. The trouble is the Fed’s liquidity is not getting circulated back into the real economy as outstanding bank credit contracts at close to a 5% annual rate.
In essence, the shorter the maturities of your portfolio, the lower the yield but shorter maturities are also less sensitive to price changes as interest rates fluctuate. Bu adding medium-term maturities and emerging market bonds, we may be able to kick-up cash-flow even more.
Question now is the end near for the bond market? I am seeing clearer signs that long-term interest rates will be heading higher eventually given the massive fiscal deficit and US’ reliance on foreign lenders. The ultimate day of reckoning for the bond market is coming, but it is likely to be over time, not overnight.
But it makes prudent sense to begin taking steps to help protect your portfolio against rising interest rates when they occur. What this really boils down to is timing and it is important to understand where and how to make the right moves with your fixed-income holdings. Right now, economic fundamentals still appear too weak for inflation to take hold and the Fed intends to keep interest rates low for an ‘extended period’ as they have repeatedly broadcast. The broad money M2 is still contracting at a record rate, in spite of the Fed’s runaway printing press. The trouble is the Fed’s liquidity is not getting circulated back into the real economy as outstanding bank credit contracts at close to a 5% annual rate.
In essence, the shorter the maturities of your portfolio, the lower the yield but shorter maturities are also less sensitive to price changes as interest rates fluctuate. Bu adding medium-term maturities and emerging market bonds, we may be able to kick-up cash-flow even more.
Sunday, March 21, 2010
US-China Tensions
The fault lines in the US-China relationships have been increasingly exposed in recent weeks, rising from rhetorical barbs exchanged on trade, the treatment of foreign companies in China, strategic issues such as US support of Taiwan, Tibet’s Dalai Lama to possible trade wars between two countries, leading to April 15’s report by US Treasury on China’s status on currency front. Domestic pressure in the US Congress on the need for action with regard to the pegged Renminbi (RMB) is growing and on the other side of the equation, Chinese leaders, including Premier Wen Jiabao, have recently hit back at the US for what they characterized as interference in China’s security and economic affairs.
Arguably that way back in 1971 when the US dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10% surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. Way back then, the Japanese yen was around 350 to the dollar. It is mentioned by Paul Krugman in his recent writing in New York Times ‘Taking on China’ that unless China is facing with the threat of similar action, except that this time the surcharge would have to be much larger, say 25%, it is hard to see China changing its policies.
One thing that I note than despite the changes in Yen, now at around 90 – the Japanese are still producing massive trade surpluses, about half the size of Chinese surpluses with less than one-tenth of the people. That is an almost 75% devaluation and yet the world keeps buying Japanese products.
The Chinese could raise the value of its currency over the next year and they would still run a surplus because like Japanese, they make good stuff that we want at prices we like. And it would also introduce inflationary increases in our imports and higher prices for lower income families.
The US deficit stood at US$40bn, but that is down from the US$70bn it was only a few years ago. Over half that deficit is oil and energy. The US trade deficit is due to a lack of savings in the US. But on the other hand, America sounds increasingly determined to push its exports and its attitude to China has hardened. Mr Obama has set a goal of doubling exports in five years.
A stronger RMB would not suddenly bring back millions of jobs to America and it would not be a magic bullet either within China or outside. Rebalancing China’s economy will require big structural reforms towards domestic spending by boosting Chinese consumers’ purchasing power, discouraging excessive investment in manufacturing and squeezing corporate profits.
Cool and calm multilateral leadership will achieve more than a Sino-American currency spat.
Arguably that way back in 1971 when the US dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10% surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. Way back then, the Japanese yen was around 350 to the dollar. It is mentioned by Paul Krugman in his recent writing in New York Times ‘Taking on China’ that unless China is facing with the threat of similar action, except that this time the surcharge would have to be much larger, say 25%, it is hard to see China changing its policies.
One thing that I note than despite the changes in Yen, now at around 90 – the Japanese are still producing massive trade surpluses, about half the size of Chinese surpluses with less than one-tenth of the people. That is an almost 75% devaluation and yet the world keeps buying Japanese products.
The Chinese could raise the value of its currency over the next year and they would still run a surplus because like Japanese, they make good stuff that we want at prices we like. And it would also introduce inflationary increases in our imports and higher prices for lower income families.
The US deficit stood at US$40bn, but that is down from the US$70bn it was only a few years ago. Over half that deficit is oil and energy. The US trade deficit is due to a lack of savings in the US. But on the other hand, America sounds increasingly determined to push its exports and its attitude to China has hardened. Mr Obama has set a goal of doubling exports in five years.
A stronger RMB would not suddenly bring back millions of jobs to America and it would not be a magic bullet either within China or outside. Rebalancing China’s economy will require big structural reforms towards domestic spending by boosting Chinese consumers’ purchasing power, discouraging excessive investment in manufacturing and squeezing corporate profits.
Cool and calm multilateral leadership will achieve more than a Sino-American currency spat.
From China – RMB
Beijing vowed that it will retaliate if the United States declares China a currency manipulator and imposes trade sanctions, firing the latest salvo in a spat over the RMB. This seems to be the consensus view from people in China itself – a sentiment that I gathered during my recent trip to southern China recently. The Commerce Minister Chen Deming accused Washington of politicizing the RMB issue ahead of an April 15 deadline for the US Treasury to rule whether China is unfairly holding down its exchange rate to gain a competitive edge in global markets.
My sense is that US intensifying political pressure on China to revalue its currency will only be counter-productive. The stronger the pressure, the lower the chance China will bite the bullet. My contacts seemingly to suggest that the RMB revaluation is already on the list of agenda, but it will not be pursued aggressively as China doesn’t want to be seen to be dictated, and preferably want to make the change in its own accord. Over a decade or so, economic interests have strongly intertwined with nation pride and any submission to external pressure will be seen as a sign of weakness in current government. It might not be a sensible thing to do, but it is a big thing to be dealt with in China. Only those who had been suffering the humiliation prior to 1949 tend to have better appreciation of it.
In this trip, I realized that the top priority now for China is to cool down the asset bubble. It is of the opinion that the currency factor will only ignited more fires and to elevate long-term optimism in the investment in China’s properties and that would further complicate current situation. It is not uncommon that investors in China’s property to factor-in at least 15-20% appreciation of RMB in the next 3-5 years when they make decision to invest in property now – especially in the luxurious sector. Today, high property price is almost a nationwide phenomenon, especially after a strong dose of fiscal stimulus of RMB4 trillion and loose monetary policy (new loans made amounted to more than 30% of nominal GDP) to address the credit crisis in early 2009. Consequently, property prices in second, third and fourth tier Chinese cities have surged as well. At present, currency appreciation will not solve the problem of asset bubbles and if the government fails to rein-in inflation expectations, there is a real potential that exchange rate in real terms will even depreciate.
My sense is that US intensifying political pressure on China to revalue its currency will only be counter-productive. The stronger the pressure, the lower the chance China will bite the bullet. My contacts seemingly to suggest that the RMB revaluation is already on the list of agenda, but it will not be pursued aggressively as China doesn’t want to be seen to be dictated, and preferably want to make the change in its own accord. Over a decade or so, economic interests have strongly intertwined with nation pride and any submission to external pressure will be seen as a sign of weakness in current government. It might not be a sensible thing to do, but it is a big thing to be dealt with in China. Only those who had been suffering the humiliation prior to 1949 tend to have better appreciation of it.
In this trip, I realized that the top priority now for China is to cool down the asset bubble. It is of the opinion that the currency factor will only ignited more fires and to elevate long-term optimism in the investment in China’s properties and that would further complicate current situation. It is not uncommon that investors in China’s property to factor-in at least 15-20% appreciation of RMB in the next 3-5 years when they make decision to invest in property now – especially in the luxurious sector. Today, high property price is almost a nationwide phenomenon, especially after a strong dose of fiscal stimulus of RMB4 trillion and loose monetary policy (new loans made amounted to more than 30% of nominal GDP) to address the credit crisis in early 2009. Consequently, property prices in second, third and fourth tier Chinese cities have surged as well. At present, currency appreciation will not solve the problem of asset bubbles and if the government fails to rein-in inflation expectations, there is a real potential that exchange rate in real terms will even depreciate.
Thursday, March 18, 2010
Outlook – Palm Oil
Let me share key forecasts made by reputable houses on palm oil this year. In general, consensus expects CPO to trade in between RM2,400 to RM3,200.
Dorab Mistry, one the giants in this industry, projecting CPO futures to trade in the range of RM2,800 to RM3,200 range after July 2010 as current El-Nino driven hot weather may cause a production shortfall in the 2H2010. His forecasts was within palm oil’s most ‘bullish period’ that runs from the 2H2010 until 1Q2011 – represents a rise of up to 18.3% from current level. The peak soya oil flow from South America should be in the period May to August 2010 and CPO futures post July 2010 will scale new heights – in order to ration demand. He based his forecasts on crude oil trading at US$70-95 a barrel as well for the US dollar to start weakening in the 2H2010.
RHB Research says it is possible for CPO to pierce the RM3,000 level amid the current bullish momentum and it didn’t discount the fact that price may fall in the normal seasonal peak output period in the 2H2010.
Meanwhile, the Malaysian Palm Oil Board expect, palm oil production to slump to the lowest level in almost three years, draining stockpiles amid concerns that the dry weather will limit supplies in 2010. This may help extend 2009’s 57% gain in prices, which surged as demand expanded from China and India, the world’s largest consumers and importers.
Frost and Sullivan believes that supply is not keeping up with demand and this may push price to as high as RM3,500.
LMC International argues that CPO have now become ‘a part of the energy complex’ given the strong link between the vegetable oil and mineral oil prices. Energy prices today had created a floor to the vegetable oil prices and expecting CPO with a forecast of RM2,400 to RM2,600 for 2010. The fact that biofuel demand reacted much faster than food demand, in turn created a price band. Now, the world is studying vegetable oil and petroleum price differentials as the new keys to the market, in addition to the level of edible oil stocks.
ISTA Mielke GmBH forecasting a CPO trading range of RM2,400 to RM2,900 this year. The world is becoming more dependent on CPO and as such the price spread of CPO to soybean and other oils would eventually be eliminated. Palm oil is no longer the cheap, low quality oil and there is no other oil that can meet growing demand. Palm oil now accounts for 57% of world exports. It also raised concerns about the declining growth in the CPO production.
Dorab Mistry, one the giants in this industry, projecting CPO futures to trade in the range of RM2,800 to RM3,200 range after July 2010 as current El-Nino driven hot weather may cause a production shortfall in the 2H2010. His forecasts was within palm oil’s most ‘bullish period’ that runs from the 2H2010 until 1Q2011 – represents a rise of up to 18.3% from current level. The peak soya oil flow from South America should be in the period May to August 2010 and CPO futures post July 2010 will scale new heights – in order to ration demand. He based his forecasts on crude oil trading at US$70-95 a barrel as well for the US dollar to start weakening in the 2H2010.
RHB Research says it is possible for CPO to pierce the RM3,000 level amid the current bullish momentum and it didn’t discount the fact that price may fall in the normal seasonal peak output period in the 2H2010.
Meanwhile, the Malaysian Palm Oil Board expect, palm oil production to slump to the lowest level in almost three years, draining stockpiles amid concerns that the dry weather will limit supplies in 2010. This may help extend 2009’s 57% gain in prices, which surged as demand expanded from China and India, the world’s largest consumers and importers.
Frost and Sullivan believes that supply is not keeping up with demand and this may push price to as high as RM3,500.
LMC International argues that CPO have now become ‘a part of the energy complex’ given the strong link between the vegetable oil and mineral oil prices. Energy prices today had created a floor to the vegetable oil prices and expecting CPO with a forecast of RM2,400 to RM2,600 for 2010. The fact that biofuel demand reacted much faster than food demand, in turn created a price band. Now, the world is studying vegetable oil and petroleum price differentials as the new keys to the market, in addition to the level of edible oil stocks.
ISTA Mielke GmBH forecasting a CPO trading range of RM2,400 to RM2,900 this year. The world is becoming more dependent on CPO and as such the price spread of CPO to soybean and other oils would eventually be eliminated. Palm oil is no longer the cheap, low quality oil and there is no other oil that can meet growing demand. Palm oil now accounts for 57% of world exports. It also raised concerns about the declining growth in the CPO production.
From Guangzhou, China
This time around, I traveled quite extensive in southern part of China, venturing beyond my normal hunt in Guangzhou. I covered south of Guangzhou – Dongguan before heading to Fujian province. Noticeably that development outside the urban areas has been non-linear.
Interestingly, income growth for rural households in recent years has become much more solid than urban household income under the administration of President Hu-Premier Wen era. Going even deeper beneath the surface, I notice that farm income of rural households is rapidly being supplemented with income from both industry and construction. This compared to period of 1998-2002 President Jiang-Premier Zhu period, which such supplementary income had been virtually non-existence.
These shifts do not happen naturally and these are the economic side-effects of the 1990s policy model, which had a huge urban bias, driven by technocratic goals. The 1990s policy model had seen the increased dependency on the external sector and an investment-driven growth model. Another troubling issue was that China is among the most unequal societies in the world as measured by the Gini coefficient. In the 1990s, the Chinese states systematically favoured foreign firms at the expense of indigenous, largely rural-based entrepreneurs. It is no surprise that foreign firms account for over half of imports and exports. At approximately US$500bn and US$600bn, the domestic value-added of these exports could be as low as 20%.
Into the future, growth will be much centered on consumption as principal engine of the economy. Surveys show that young Chinese – the post-80s generations – consumers are attractive segment – not only due to its sheer size, but also because they have a taste for material things, are optimistic about the future and are socially active. Boosting consumption will be a multi-year effort for the government and consumption subsidies are just the start.
Consumption subsidies will continue to be expanded but the next range of policies is to boost income of the low income segment as they have the most pent-up demand and represent the largest part of the population. Various cities have already announced plans to raise minimum wages for 2010, ranging from 10-15% respectively. The minimum purchase price for key crops is likely to be raised again. Government has already expanded the scope and categories for the rural subsidy program and total home appliance sold through the subsidy program last year reached RMB65bn. The next step for the government’s appliance subsidy program could be a possible raise of maximum subsidy cap. High price items should benefit the most such s TV, air-cond, refrigerator, washing machine and PC.
The Chinese government is often pressed to ‘rebalance’ its economy. Usually, this is a code word for currency appreciation.
Interestingly, income growth for rural households in recent years has become much more solid than urban household income under the administration of President Hu-Premier Wen era. Going even deeper beneath the surface, I notice that farm income of rural households is rapidly being supplemented with income from both industry and construction. This compared to period of 1998-2002 President Jiang-Premier Zhu period, which such supplementary income had been virtually non-existence.
These shifts do not happen naturally and these are the economic side-effects of the 1990s policy model, which had a huge urban bias, driven by technocratic goals. The 1990s policy model had seen the increased dependency on the external sector and an investment-driven growth model. Another troubling issue was that China is among the most unequal societies in the world as measured by the Gini coefficient. In the 1990s, the Chinese states systematically favoured foreign firms at the expense of indigenous, largely rural-based entrepreneurs. It is no surprise that foreign firms account for over half of imports and exports. At approximately US$500bn and US$600bn, the domestic value-added of these exports could be as low as 20%.
Into the future, growth will be much centered on consumption as principal engine of the economy. Surveys show that young Chinese – the post-80s generations – consumers are attractive segment – not only due to its sheer size, but also because they have a taste for material things, are optimistic about the future and are socially active. Boosting consumption will be a multi-year effort for the government and consumption subsidies are just the start.
Consumption subsidies will continue to be expanded but the next range of policies is to boost income of the low income segment as they have the most pent-up demand and represent the largest part of the population. Various cities have already announced plans to raise minimum wages for 2010, ranging from 10-15% respectively. The minimum purchase price for key crops is likely to be raised again. Government has already expanded the scope and categories for the rural subsidy program and total home appliance sold through the subsidy program last year reached RMB65bn. The next step for the government’s appliance subsidy program could be a possible raise of maximum subsidy cap. High price items should benefit the most such s TV, air-cond, refrigerator, washing machine and PC.
The Chinese government is often pressed to ‘rebalance’ its economy. Usually, this is a code word for currency appreciation.
Wednesday, March 17, 2010
Greece’s Rescue Plan
As expected, the Eurozone countries drew up a rescue plan to safeguard the euro in case Greece defaults on its debt in the hopes of stabilizing its currency.
Broadcasting the fact that Greece's euro partners have drawn up an emergency loan strategy is meant to steady the bond markets and give investors confidence in Greece's ability to pull out of its debt crisis, in turn that decision will also pressures Greece to rely on its own measures for resolution. The objective would not be to provide financing at average Eurozone interest rates, but to safeguard financial stability in the euro area as a whole, the European finance ministers said in a statement. Contributing to the loan amount will be voluntary, although all Eurozone countries are likely to make a payment, in a sign of unity.
However, key details were omitted from the aid announcement, like what would trigger the emergency loan and how much Greece might receive. The ministers' vague outline of what the plan entails emphasizes their hope that the plan will never actually be needed.
The initial reaction to the Eurozone countries' pledge of support moved markets in a direction favoring Greece: Greek bonds' 10-year yields fell to 6.14%, resulting in a 300 basis-point spread over benchmark German 10-year bonds - the lowest spread since March 5, right after Greece released its austerity plan. Standard & Poor's took Greece off its "CreditWatch negative" list. Greece currently has an investment-grade BBB+ rating.
Greece has not yet made a formal request for aid, but has been asking for a declaration of support from its Eurozone counterparts. This decision marks the first time in the euro's 11-year existence that one Eurozone country might receive aid from another.
The countries have been clear in defining the aid to be different than a government bailout, which is prohibited under the Eurozone law.
The loans are not designed to be a desirable option but instead a last resort for Greece if it is not able to meet its debt obligations. Greece is encouraged to use the capital markets to find a better rate for refinancing to meet its $27.5 billion debt obligations maturing in April-May.
This plan however, will need approval from all European Union (EU) countries, scheduled to meet March 25-26.
Broadcasting the fact that Greece's euro partners have drawn up an emergency loan strategy is meant to steady the bond markets and give investors confidence in Greece's ability to pull out of its debt crisis, in turn that decision will also pressures Greece to rely on its own measures for resolution. The objective would not be to provide financing at average Eurozone interest rates, but to safeguard financial stability in the euro area as a whole, the European finance ministers said in a statement. Contributing to the loan amount will be voluntary, although all Eurozone countries are likely to make a payment, in a sign of unity.
However, key details were omitted from the aid announcement, like what would trigger the emergency loan and how much Greece might receive. The ministers' vague outline of what the plan entails emphasizes their hope that the plan will never actually be needed.
The initial reaction to the Eurozone countries' pledge of support moved markets in a direction favoring Greece: Greek bonds' 10-year yields fell to 6.14%, resulting in a 300 basis-point spread over benchmark German 10-year bonds - the lowest spread since March 5, right after Greece released its austerity plan. Standard & Poor's took Greece off its "CreditWatch negative" list. Greece currently has an investment-grade BBB+ rating.
Greece has not yet made a formal request for aid, but has been asking for a declaration of support from its Eurozone counterparts. This decision marks the first time in the euro's 11-year existence that one Eurozone country might receive aid from another.
The countries have been clear in defining the aid to be different than a government bailout, which is prohibited under the Eurozone law.
The loans are not designed to be a desirable option but instead a last resort for Greece if it is not able to meet its debt obligations. Greece is encouraged to use the capital markets to find a better rate for refinancing to meet its $27.5 billion debt obligations maturing in April-May.
This plan however, will need approval from all European Union (EU) countries, scheduled to meet March 25-26.
Thursday, March 11, 2010
China’s National People’s Congress
China’s National People’s Congress (NPC) remains in session. For the first time, I see less deliberation on income inequality among provinces, and seem to be more concerned about the strength and durability of global recovery and domestic private demand. It also plans a gradual exit of macro stimulus but leaves room for more tightening or relaxation later on.
The economic crisis has also exposed the inefficiencies of China’s export-dependent economic model. For years, China’s leaders have recognized the risks of the current economic model. Chinese President Hu Jintao came into office eight years ago with the ambitious goal of closing a widening wealth gap by equalizing economic growth between the rural interior and coastal cities. Hu inherited the results of Deng Xiaoping’s opening and international trade. Even Hu’s predecessor, Jiang Zemin also recognized these problems. To address them, he promoted a ‘Go West’ economic policy designed to shift investment further inland. But Jiang faced the same entrenched interests that have opposed Hu’s efforts at significant change.
Social pressures are convincing the government of the need to raise the minimum wage to keep up with economic pressures. The basic rural pension pilot program will expand to 23 counties in 2010 while the government’s contribution to rural medical insurance will increase. Tax rebate and other subsidies on electrical appliances and automobiles will continue this year with more funds budgeted for this purpose. At the same time, misallocation of labour and new job formation incentives in the interior are causing shortage of labour in some sectors in major coastal export zones.
The core of the Hu policies is an overall attempt to re-centralize economic control and that would allow the central government to begin weeding out redundancies left over from Mao’s era of provincial self-sufficiency, which the Deng and Jiang eras of uncoordinated and locally-directed economic growth often driven by corruption and nepotism exacerbated. In short, Hu planned to centralize the economy to consolidate industry, redistribute wealth and urbanize the interior to create a more balanced economy that emphasized domestic consumption over exports. However, Hu’s push, under the epithet ‘harmonious society’ has been anything but smooth and its successes have been limited at best.
Resuming some form of RMB appreciation is just a matter of timing, although any large and one-off revaluation is unlikely. Outward direct investment will continue to be encouraged, including in the resource sector and ‘orderly transfer’ of production capacity abroad. It helps to diversify China’s foreign asset holding as well as by-passing some fo the trade protection against Chinese exports.
The economic crisis has also exposed the inefficiencies of China’s export-dependent economic model. For years, China’s leaders have recognized the risks of the current economic model. Chinese President Hu Jintao came into office eight years ago with the ambitious goal of closing a widening wealth gap by equalizing economic growth between the rural interior and coastal cities. Hu inherited the results of Deng Xiaoping’s opening and international trade. Even Hu’s predecessor, Jiang Zemin also recognized these problems. To address them, he promoted a ‘Go West’ economic policy designed to shift investment further inland. But Jiang faced the same entrenched interests that have opposed Hu’s efforts at significant change.
Social pressures are convincing the government of the need to raise the minimum wage to keep up with economic pressures. The basic rural pension pilot program will expand to 23 counties in 2010 while the government’s contribution to rural medical insurance will increase. Tax rebate and other subsidies on electrical appliances and automobiles will continue this year with more funds budgeted for this purpose. At the same time, misallocation of labour and new job formation incentives in the interior are causing shortage of labour in some sectors in major coastal export zones.
The core of the Hu policies is an overall attempt to re-centralize economic control and that would allow the central government to begin weeding out redundancies left over from Mao’s era of provincial self-sufficiency, which the Deng and Jiang eras of uncoordinated and locally-directed economic growth often driven by corruption and nepotism exacerbated. In short, Hu planned to centralize the economy to consolidate industry, redistribute wealth and urbanize the interior to create a more balanced economy that emphasized domestic consumption over exports. However, Hu’s push, under the epithet ‘harmonious society’ has been anything but smooth and its successes have been limited at best.
Resuming some form of RMB appreciation is just a matter of timing, although any large and one-off revaluation is unlikely. Outward direct investment will continue to be encouraged, including in the resource sector and ‘orderly transfer’ of production capacity abroad. It helps to diversify China’s foreign asset holding as well as by-passing some fo the trade protection against Chinese exports.
Wednesday, March 10, 2010
Green Shots in Timber
I am seeing a reasonably strong turnaround in timber business in 2010. Japan housing starts plunged 28% in 2009 to its lowest level since 1964. A pick up in Japan housing starts has been a traditional catalyst for tropical plywood prices, as Japan is the single largest buyer of tropical plywood in the world.
I expect Japan housing starts to accelerate by early 2011 driven by stimulus measures including the largest ever home mortgage tax break, tax-free capital gains of up to 10mn yen and a 6.1mn yen and taxable limit on monetary gifts for buying a home.
Currently, inventories are very low and would have to be replenished in the event of an uptick in housing starts.
While we saw the low in plywood prices in May 2009, prices remained below the break-even points for the rest of the year and continue to be weak in January/February 2010. Our industry sources, however, reported that these are early indications of higher pricing for March contracts, possibly at about US$20/cu m higher versus end-2009. Notably also is that the US is also experiencing a surge in timber product prices on pent-up demand and supply chain destruction.
I expect Japan housing starts to accelerate by early 2011 driven by stimulus measures including the largest ever home mortgage tax break, tax-free capital gains of up to 10mn yen and a 6.1mn yen and taxable limit on monetary gifts for buying a home.
Currently, inventories are very low and would have to be replenished in the event of an uptick in housing starts.
While we saw the low in plywood prices in May 2009, prices remained below the break-even points for the rest of the year and continue to be weak in January/February 2010. Our industry sources, however, reported that these are early indications of higher pricing for March contracts, possibly at about US$20/cu m higher versus end-2009. Notably also is that the US is also experiencing a surge in timber product prices on pent-up demand and supply chain destruction.
Shipping Recovery Mounting
Shipping overcapacity appears to be reduced due to weaker-than-expected growth of shipping tonnage and stronger shipping demand. In the container shipping market, rates are rapidly rebounding on the back of increasing trade volume.
It is around the midpoint of the year when the demand weakens due to seasonality but actual shipping capacity accelerates that we particularly need to check the container shipping market. This year, container shipping stocks have shown better performance than bulk shipping stocks thanks to expectations for a further increase in container shipping rates.
Even though the Baltic Dry Index has turned strong in March, bulk shipping stocks have remained weaker than container shipping stocks due to the BDI moving up and down below 3,000p. The BDI surpassed the 3,000p mark again on March 4, yet the index moved around 2,700p in February, sharply down compared with the monthly average of over 3,000 during November 2009 to January 2010. The main culprit seemed to be negative sentiment caused by China’s monetary tightening moves and price negotiations for iron ore while shipping capacity growth remained still strong.
I think the biggest reason for stronger rates is the efforts to reduce the shipping capacity by increasing the volume of idle ships and slowing down the pace of transportations. In addition, demand has also turned stronger. I continue to expect the shipping companies will continue to keep the upturn in profitability, even without a sudden change in the demand side, given that they are likely to continue to control shipping capacity growth. There will be negotiations for a General Rate Increase for American routes. The Transpacific Stabilization Agreement recommended a $800/FEU increase for US west coast and a $1,000 increase for US east coast for 2010. That should have significant impact on earnings of shipping companies, and that deserve close attention.
Yet if the demand in China weakens, shipping rates will be affected. Whether commodity demand remains strong in China, it will remain to be a key factor to consider.
It is around the midpoint of the year when the demand weakens due to seasonality but actual shipping capacity accelerates that we particularly need to check the container shipping market. This year, container shipping stocks have shown better performance than bulk shipping stocks thanks to expectations for a further increase in container shipping rates.
Even though the Baltic Dry Index has turned strong in March, bulk shipping stocks have remained weaker than container shipping stocks due to the BDI moving up and down below 3,000p. The BDI surpassed the 3,000p mark again on March 4, yet the index moved around 2,700p in February, sharply down compared with the monthly average of over 3,000 during November 2009 to January 2010. The main culprit seemed to be negative sentiment caused by China’s monetary tightening moves and price negotiations for iron ore while shipping capacity growth remained still strong.
I think the biggest reason for stronger rates is the efforts to reduce the shipping capacity by increasing the volume of idle ships and slowing down the pace of transportations. In addition, demand has also turned stronger. I continue to expect the shipping companies will continue to keep the upturn in profitability, even without a sudden change in the demand side, given that they are likely to continue to control shipping capacity growth. There will be negotiations for a General Rate Increase for American routes. The Transpacific Stabilization Agreement recommended a $800/FEU increase for US west coast and a $1,000 increase for US east coast for 2010. That should have significant impact on earnings of shipping companies, and that deserve close attention.
Yet if the demand in China weakens, shipping rates will be affected. Whether commodity demand remains strong in China, it will remain to be a key factor to consider.
Higher Risk of Double Dipping
On one hand, imports into China have surged almost 44.7% from levels seen one year ago, while exports are up 45.7% but on the other hand, on-going troubles in Euro-zone and United Kingdom seems to have racked up spending its way through the global recession scenario. With the euro, the matter no matter longer concerns only one nation, but rather 16 countries simultaneously.
I am seeing the risks of a double-dip recession are rising, backed by a slew of poor economic data over the past two weeks, which lead me to believe that the US economy is heading for a U-shaped recovery. The macro news, including data on consumer confidence, home sales, construction and employment actually suggesting a significant downside risk even to the anemic levels of growth and the US economy continues to face challenges in 2H2010, particularly as historic levels of fiscal stimulus fade – and appears far too close to the tipping point of a double-dip recession.
On the real estate front, new home sales are collapsing again, existing home sales are also falling sharply and construction activity, both residential and commercial is falling sharply. Durable good orders are down, initial claims for unemployment benefits remain stubbornly high – way above the 400k mark. Real disposable income for 4Q has been revised downward while real disposable income before transfers for January was negative again. The manufacturing ISM index, while still expanding being above 50 – has now fallen a couple of notches and its production and new orders index levels are falling too and global PMIs suggests a loss of momentum in the global economy recovery. Real inventories look unchanged in 1Q relative to 4Q; auto sales were at best mediocre. Core CPI was falling and core PCE was closed to 0% suggesting anemic demand and economic weakness.
Along with the euro-zone crisis, in turn will be a drag on the potential for US export growth and the recent rally in the US dollar on risk aversion reflects this risk. Fiscal spending cuts, confidence hits and the looming threat of either rising unemployment or falling wages in the public sector – on top of private sector retrenchment – will remain. A similar retrenchment may well lie ahead in the UK, given rising fiscal sustainability concerns and the threat of a sterling crisis, contributing to the threat of a wider double-dip across high income countries.
I am seeing the risks of a double-dip recession are rising, backed by a slew of poor economic data over the past two weeks, which lead me to believe that the US economy is heading for a U-shaped recovery. The macro news, including data on consumer confidence, home sales, construction and employment actually suggesting a significant downside risk even to the anemic levels of growth and the US economy continues to face challenges in 2H2010, particularly as historic levels of fiscal stimulus fade – and appears far too close to the tipping point of a double-dip recession.
On the real estate front, new home sales are collapsing again, existing home sales are also falling sharply and construction activity, both residential and commercial is falling sharply. Durable good orders are down, initial claims for unemployment benefits remain stubbornly high – way above the 400k mark. Real disposable income for 4Q has been revised downward while real disposable income before transfers for January was negative again. The manufacturing ISM index, while still expanding being above 50 – has now fallen a couple of notches and its production and new orders index levels are falling too and global PMIs suggests a loss of momentum in the global economy recovery. Real inventories look unchanged in 1Q relative to 4Q; auto sales were at best mediocre. Core CPI was falling and core PCE was closed to 0% suggesting anemic demand and economic weakness.
Along with the euro-zone crisis, in turn will be a drag on the potential for US export growth and the recent rally in the US dollar on risk aversion reflects this risk. Fiscal spending cuts, confidence hits and the looming threat of either rising unemployment or falling wages in the public sector – on top of private sector retrenchment – will remain. A similar retrenchment may well lie ahead in the UK, given rising fiscal sustainability concerns and the threat of a sterling crisis, contributing to the threat of a wider double-dip across high income countries.
The UK 2010 Election Guide
The last possible date that a general election could be held is 3 June 2010 but Prime Minister Gordon Brown could call earlier resolution of Parliament. At present, there is a broad expectation that Brown will call the election in early May, coinciding with local council elections.
The general election for the House of Commons is based on a first-past-the-post vote in 650 constituencies. So, for a single party to have an overall majority in the House of Commons, it will need to win 326 seats. In the last election in 2005, the Labour Party won 355 of the 646 seats contested – an overall majority of 64 seats and the Conservative Party – the next largest, won 198 seats.
Recent opinion polls show that the Conservative Party currently has a lead over the Labour Party of around six percentage points, but the gap is narrowing. To the extent to which the Labour Party’s relative recovery in the polls on the back of stronger real economy remains debatable, but it is possible to see its share of the vote continues to rise.
From the market’s perspective, an outcome where no party won an overall majority would be one of considerable initial uncertainty. The possible constitutional processes that would follow such as an outcome may add further to that uncertainty in the immediate aftermath of the election. It is likely too that the party with the most seats would attempt to form a minority government, possibly relying on support from some of the smaller political parties in the House of Commons. If the largest party was well short of an overall majority, it may have to come to an agreement with the Liberal Democrat party, the likely terms of which would be the possibility of reform of the electoral system.
In such circumstances, markets may draw the conclusion that significant proposals for fiscal tightening would be postponed until after a later, possibly more conclusive election. It would be interesting to monitor the application of the government’s new Fiscal Responsibility Act, which requires that net borrowing halves from its peak by 201314 so the deficit could fall below 5.5% of less by that point.
The general election for the House of Commons is based on a first-past-the-post vote in 650 constituencies. So, for a single party to have an overall majority in the House of Commons, it will need to win 326 seats. In the last election in 2005, the Labour Party won 355 of the 646 seats contested – an overall majority of 64 seats and the Conservative Party – the next largest, won 198 seats.
Recent opinion polls show that the Conservative Party currently has a lead over the Labour Party of around six percentage points, but the gap is narrowing. To the extent to which the Labour Party’s relative recovery in the polls on the back of stronger real economy remains debatable, but it is possible to see its share of the vote continues to rise.
From the market’s perspective, an outcome where no party won an overall majority would be one of considerable initial uncertainty. The possible constitutional processes that would follow such as an outcome may add further to that uncertainty in the immediate aftermath of the election. It is likely too that the party with the most seats would attempt to form a minority government, possibly relying on support from some of the smaller political parties in the House of Commons. If the largest party was well short of an overall majority, it may have to come to an agreement with the Liberal Democrat party, the likely terms of which would be the possibility of reform of the electoral system.
In such circumstances, markets may draw the conclusion that significant proposals for fiscal tightening would be postponed until after a later, possibly more conclusive election. It would be interesting to monitor the application of the government’s new Fiscal Responsibility Act, which requires that net borrowing halves from its peak by 201314 so the deficit could fall below 5.5% of less by that point.
British Pound in the Hand of Speculators
I warned that sovereign debt problems posed a major threat to global currency especially the EU-related currencies as early as December 2009. And this threat could represent a catalyst for a return of global risk aversion as it has the ability to be contagious. Such fears can destroy investor confidence in the capital markets of troubled countries.
Despite the European leadership’s attempt to lessen the sense of urgency in the euro zone and the despite the ambitious plans rolling out to shave outsized deficits, the problems with government finances’ finances in the Eurozone and Britian are not finding a resolution.
In late November, the Dubai government created a hiccup in the rosy plans that many market participants were increasingly hitching their wagons and it is a wake-up call. Dubai World’s debt holders now are getting only 60 cents on the dollar for their government bond investment.
Now, Greece is the next in line – the weakest of the 16 members of European monetary union, and is running a budget deficit more than 4 times the limits set forth in the euro-zone’s fiscal constraint guidelines. The ratings agencies took the alert from Dubai.
The next hot spots – Portugal, Ireland and Spain all have severely bloated deficits and debt levels and the spill-over of Greece issue have created an irreparable moral hazard. As for the euro, this total breakdown in the foundation of the currency union has it on a path for destruction or at best, an extended period of uncertainty.
With all this development, I am becoming more worried about the United Kingdom. Among G-7 economies, the UK has the weakest performing economy, the largest deficit and the worst deterioration of its debt position. As conditions get worse in the euro-zone and it becomes increasingly evident that there are no clean fixes, the UK is the most likely candidate to come under the gun.
The British pound plunged to its lowest level in 24 years against the dollar at the height of the financial crisis, and now just a year later it appears another test of that level is in the cards.
While the uncertainty about the UK government’s finances continues to build, I expect the pound to be the next victim of currency speculators.
Despite the European leadership’s attempt to lessen the sense of urgency in the euro zone and the despite the ambitious plans rolling out to shave outsized deficits, the problems with government finances’ finances in the Eurozone and Britian are not finding a resolution.
In late November, the Dubai government created a hiccup in the rosy plans that many market participants were increasingly hitching their wagons and it is a wake-up call. Dubai World’s debt holders now are getting only 60 cents on the dollar for their government bond investment.
Now, Greece is the next in line – the weakest of the 16 members of European monetary union, and is running a budget deficit more than 4 times the limits set forth in the euro-zone’s fiscal constraint guidelines. The ratings agencies took the alert from Dubai.
The next hot spots – Portugal, Ireland and Spain all have severely bloated deficits and debt levels and the spill-over of Greece issue have created an irreparable moral hazard. As for the euro, this total breakdown in the foundation of the currency union has it on a path for destruction or at best, an extended period of uncertainty.
With all this development, I am becoming more worried about the United Kingdom. Among G-7 economies, the UK has the weakest performing economy, the largest deficit and the worst deterioration of its debt position. As conditions get worse in the euro-zone and it becomes increasingly evident that there are no clean fixes, the UK is the most likely candidate to come under the gun.
The British pound plunged to its lowest level in 24 years against the dollar at the height of the financial crisis, and now just a year later it appears another test of that level is in the cards.
While the uncertainty about the UK government’s finances continues to build, I expect the pound to be the next victim of currency speculators.
Thursday, March 4, 2010
Tag Team - Brazil and Iran for US
I hardly make comments on geopolitical matters. But I think it would be interesting to share a report by Stratfor on the relationship between Iran and Brazil and what it means for energy, trade, and US sanctions.
Brazilian President Luiz Lula Da Silva has been getting cozy with Iran of late. Da Silva came to Iran’s defense asserting that ‘peace in the world doesn’t mean isolating someone’. He also defended his decision to follow through with a scheduled visit to Iran on May 15 in spite of Iran’s continued flouting of international calls to curb uranium-enrichment activity. Now Lula is putting Brazil within firing range of one of Washington’s biggest foreign policy imperatives.
Tehran is more than happy to receive such positive attention from Brasilia. Brazil holds a non-permanent seat on the UN Security Council and UN sanctions against Iran require the support of at least 9 of the 15 member councils.
Despite the overabundance of mediators in the Middle East and Brazil’s glaring lack of leverage in the region, Lula remains fixated on the Iran portfolio. Within Brazil, many are puzzled and uncomfortable while countries like Russia and China are taking care to diplomatically distance themselves every time the regime flouts the West’s demand to show some level of cooperation on the enrichment issue.
So far, Washington and others find comfort in the fact that Brazil and Iran currently do not have much to boast beyond the diplomatic fanfare. Although Brazil is Iran’s largest trading partner in Latin America, the total annual trade between the two remains small at roughly $1.3 billion and since Brazil is already sulf-sufficient in oil, the country simply does not have a big appetite for Iranian energy exports.
Question now is that how far Lula go? Iran is facing escalating sanction pressure over its nuclear program and Brazil can be a good help in terms of banking and nuclear energy. One of many ways Iran has tried to circumvent this threat is by setting up money-laundering operations abroad to keep Iranian assets safe and trade flowing. When Ahmadinejad visited Brazil in May 2009, Iranian EDBI and Brazilian banking officials drafted a MOU that was on the surface a mere agreement to facilitate trade between the two countries but that could mean a lot of things, including the establishment of Iranian banks in Brazil to evade the US sanctions dragnet.
There is the ever-controversial nuclear issue. There is a report that Brazil’s Office of Institutional Security, which answers to the president, has begun consultations to establish what points can be included in a possible nuclear deal with Iran that could be signed during Lula visit to Iran in May. Brazil is reportedly working on a new uranium-refining technique called magnetic levitation, which is being developed by the navy at the Aramar lab in Sao Paulo.
There is a possibility that Brazil is not only working toward self-sufficiency in nuclear power, but also may be positioning itself to become a supplier of nuclear fuel for the global market.
Brazilian President Luiz Lula Da Silva has been getting cozy with Iran of late. Da Silva came to Iran’s defense asserting that ‘peace in the world doesn’t mean isolating someone’. He also defended his decision to follow through with a scheduled visit to Iran on May 15 in spite of Iran’s continued flouting of international calls to curb uranium-enrichment activity. Now Lula is putting Brazil within firing range of one of Washington’s biggest foreign policy imperatives.
Tehran is more than happy to receive such positive attention from Brasilia. Brazil holds a non-permanent seat on the UN Security Council and UN sanctions against Iran require the support of at least 9 of the 15 member councils.
Despite the overabundance of mediators in the Middle East and Brazil’s glaring lack of leverage in the region, Lula remains fixated on the Iran portfolio. Within Brazil, many are puzzled and uncomfortable while countries like Russia and China are taking care to diplomatically distance themselves every time the regime flouts the West’s demand to show some level of cooperation on the enrichment issue.
So far, Washington and others find comfort in the fact that Brazil and Iran currently do not have much to boast beyond the diplomatic fanfare. Although Brazil is Iran’s largest trading partner in Latin America, the total annual trade between the two remains small at roughly $1.3 billion and since Brazil is already sulf-sufficient in oil, the country simply does not have a big appetite for Iranian energy exports.
Question now is that how far Lula go? Iran is facing escalating sanction pressure over its nuclear program and Brazil can be a good help in terms of banking and nuclear energy. One of many ways Iran has tried to circumvent this threat is by setting up money-laundering operations abroad to keep Iranian assets safe and trade flowing. When Ahmadinejad visited Brazil in May 2009, Iranian EDBI and Brazilian banking officials drafted a MOU that was on the surface a mere agreement to facilitate trade between the two countries but that could mean a lot of things, including the establishment of Iranian banks in Brazil to evade the US sanctions dragnet.
There is the ever-controversial nuclear issue. There is a report that Brazil’s Office of Institutional Security, which answers to the president, has begun consultations to establish what points can be included in a possible nuclear deal with Iran that could be signed during Lula visit to Iran in May. Brazil is reportedly working on a new uranium-refining technique called magnetic levitation, which is being developed by the navy at the Aramar lab in Sao Paulo.
There is a possibility that Brazil is not only working toward self-sufficiency in nuclear power, but also may be positioning itself to become a supplier of nuclear fuel for the global market.
Tuesday, March 2, 2010
From Berkshire Hathaway
The latest version of Berkshire Hathaway, which released few days ago is really written to a bigger audience than usual. As always, the insights in the company’s letters are absolutely wonderful and it is my pleasure to see deeper into this and how we can apply the lessons to our own portfolio and financial life.
Buffet notes that it is easy to identify many investment areas that will grow quickly but it is not easy to predict how quickly those opportunities will evolve or how individual companies will fare over the years. The idea here is that many investment possibilities – while packed with huge profit potential are also very fleeting. Others, while a bit less exciting, have relatively certain longevity.
Buffet is also speaking to the fact that Berkshire Hathaway doesn’t want to depend solely on financing to do its deals. Quite the opposite – the company carries a large cash hoard that it can use to pursue opportunities, especially at times when the rest of the world desperately needs financing, such as the credit crunch we recently experienced. According to Buffet, having a cash hoard allows him to sleep well. My suggestion is to both keep an emergency cash fund completely separate from the investment portfolio plus a cash position ready to be deployed when new opportunities present themselves.
Don’t micromanage. Buffet says Berkshire keeps the managers of its subsidiaries on rather long lashes. And while he admits that this sometimes means problems get recognized late in the game, he believes of letting talented people perform freely outweighs the downside. In my opinion, as long as you have selected quality to begin with, there is no reason to continually tweak your positions. By all means, keep a watchful eye on things and cut dead weight when warranted.
In his final guiding principle, Buffet points out that Berkshire doesn’t want in-and-out investors but rather partners who are looking for a long term relationship. Once again, I think this is applicable to all of us. As shareholders, we should invest in firms that we want to own for the long haul.
What Buffet really likes are insurance companies, as they provide him with steady cash-flows that he can use to invest elsewhere. Regulated utilities are his second best choice, again, the idea here is predictability and major cash-flows. He also likes those conservatively managed, tends to boast recognizable brands and are focused on products or markets that are already easy to understand. Last but not least are Berkshire’s financial firms.
Buffet notes that it is easy to identify many investment areas that will grow quickly but it is not easy to predict how quickly those opportunities will evolve or how individual companies will fare over the years. The idea here is that many investment possibilities – while packed with huge profit potential are also very fleeting. Others, while a bit less exciting, have relatively certain longevity.
Buffet is also speaking to the fact that Berkshire Hathaway doesn’t want to depend solely on financing to do its deals. Quite the opposite – the company carries a large cash hoard that it can use to pursue opportunities, especially at times when the rest of the world desperately needs financing, such as the credit crunch we recently experienced. According to Buffet, having a cash hoard allows him to sleep well. My suggestion is to both keep an emergency cash fund completely separate from the investment portfolio plus a cash position ready to be deployed when new opportunities present themselves.
Don’t micromanage. Buffet says Berkshire keeps the managers of its subsidiaries on rather long lashes. And while he admits that this sometimes means problems get recognized late in the game, he believes of letting talented people perform freely outweighs the downside. In my opinion, as long as you have selected quality to begin with, there is no reason to continually tweak your positions. By all means, keep a watchful eye on things and cut dead weight when warranted.
In his final guiding principle, Buffet points out that Berkshire doesn’t want in-and-out investors but rather partners who are looking for a long term relationship. Once again, I think this is applicable to all of us. As shareholders, we should invest in firms that we want to own for the long haul.
What Buffet really likes are insurance companies, as they provide him with steady cash-flows that he can use to invest elsewhere. Regulated utilities are his second best choice, again, the idea here is predictability and major cash-flows. He also likes those conservatively managed, tends to boast recognizable brands and are focused on products or markets that are already easy to understand. Last but not least are Berkshire’s financial firms.
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