Posted by Doug Rice on Sun, Mar 28, 2010 @ 09:56 PM
Often times I hope I am wrong.
The FT reported that forest land that is to be preserved has been used as collateral in bank loans to build infrastructure by local governments. So if the loans go bad, they will have to sell the land to pay off the debt.
Since they are unlikely to be willing to part with large tracks of forest and other natural wonders, a bank bailout would be the natural option.
But why would the loans go bad?
Because no one is using the buildings that were built by their funds.
The FT reported that Chenggong is a new town near Kunming, one of the main cities in the south-west of China.
Construction started in 2003 and the results are now apparent in 13 immaculate local government buildings, each clad in marble tiles.
A high school boasts an impressive indoor swimming pool and several of the region's main universities have built large campuses.
Pristine high-rise apartment blocks stand in rows, their new windows glinting in the subtropical sun.
The one drawback: at the moment, Chenggong is almost completely empty. Its wide streets are all but bereft of traffic, a bank branch has no customers and leaves collect in the foyers of the municipal offices.
What's worse is that haven't stopped building or borrowing to do so. While China's GDP has grown substantially, the debt to GDP ratio has barely budged. The explanation of this is that the growth was from spending by state-owned financial institutions, not directly from the government. Loans last year more than doubled to nearly a third of GDP.
Can you say unsustainable?
To put that in perspective it would be as if Bank of America Wells Fargo, etc. were state owned and they loaned out 33% of GDP, which would be almost $5,000,000,000,000.00 (trillion) if it were happening here.
Investment that was once 25% of the Chinese economy is now more like 50%.That means that for every dollar (yuan) spent in China, 50 cents of it is by the government. Again in perspective, that would be $7,000,000,000,000.00 (trillion) in government spending if it were happening here.
China is trying to increase domestic consumption, reduce foreign demand, and reduce government spending, but it's a long and difficult process. One that we hope will go smoothly, but as I often say, hope is not an investment strategy.
Here's why it matters to you
When the highly likely burst of the China property bubble occurs, the repercussions won't stay inside their borders. It would easily drag the rest of the world into a double dip recession.
And we are pretty much out of economic bullets to shoot at another recession, so the next one will likely be worse than the last one.
Worse yet, China could be forced to quickly appreciate their currency which they have pegged to the dollar and is keeping our imported purchases of their goods at low prices, or they might dump the US government debt which they own plenty of. Either would send the dollar plummeting and the prices of imported goods skyrocketing.
And if that happened with no economic bullets left in our gun, well...let's just not go there before we have to.
In conclusion, with no one living in an entire new city, it's hard to think that everything will be fine and this will all work itself out, but I sure hope I am wrong.
Posted by Doug Rice on Tue, Mar 16, 2010 @ 05:23 PM
The Federal Reserve Open Market Committee (FOMC) left interest rates unchanged and released a statement that updated their position on the economy just a bit. A comparison of this statement vs. the previous one in January can be found HERE.
Notable changes were changing the words "Deterioration in the labor market was abating" to "The labor market is stabilizing." While that's little consolation if you are out of a job, it's clearly a minor improvement.
Also, the addition of "business spending has risen significantly" is a positive sign as is the removal of the special liquidity they put in place during the crisis.
Could this be a return to normalcy? Are we going to just go chugging ahead?
Maybe.
But before we go to our cabin and take a nap feeling all is well, it should be noted that what they didn't change may be more telling.
They continue with language that "bank lending continues to contract" which means that banks are doing something other than lending with their money.
The one dissenting vote, from Thomas Hoenig, President of the Federal Reserve Bank of Kansas City, continued his stance that things have "improved enough that the expectation of low rates for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability."
What can you learn from this?
The economy is still in need of help because otherwise they would be moving interest rates up to more normal levels.
The rear view mirror shows some positive signs that we are headed on the right path, but the windshield is still foggy and there are still some icebergs out there.
So full steam ahead is very risky.
The reduction in the special liquidity is the first step in normalizing monetary policy and before they move interest rates, the Fed will have to see how the market reacts to the reduction this action.
The potential for another bubble is already forming. (or worse, one has already formed!) This is the concern of Fed President Hoenig.
Me too.
The banks are able to borrow money at basically zero percent. Anything they do with it is a positive return. They could lend this money to consumers or businesses, but consumers aren't interested in excessive borrowing and small businesses are risky. So banks take that interest free money and invest it in stocks and other assets that they can sell quickly should an iceberg appear. Also, they are still using leverage, perhaps high leverage, which exacerbates the problem and increases their desire to pull back quickly at any sign of real trouble.
That desire to pull back the sign of trouble wouldn't be there if asset prices were fairly valued. But the markets are priced at levels that anticipate a solid future expansion. If that's not what happens, all that money put into the markets will disappear, probably fairly quickly. The potential for a quick pull back combines with plenty of potential reasons to have a pull back to provide clear concern about the foggy future.
Icebergs...I hate icebergs.
Posted by Doug Rice on Mon, Mar 01, 2010 @ 12:23 PM
Warren Buffett, the Oracle of Omaha and the second richest person in the world, released his annual shareholder letter recently.
This is required reading for any investment professional. They already know that.
You should read it too. But assuming you won't, I will try to summarize the salient points from which you can learn and apply to your own situation.
In case you aren't aware Mr. Buffett has a partner and consigliere in Charlie Munger.
And that's where we'll start.
Mr. Munger's sharp mind has been written about for quite sometime as he clearly sees through the fog and cuts to the chase. His recent article entitled, "Basically, It's Over" isn't to be taken lightly.
Again, THIS IS MUST READING for anyone concerned about the world around us.
He calls it a parable about how one nation came to financial ruin. Clearly this as a warning shot across the bow of our current economic brouhaha.
Pessimistic? Yes.
Too pessimistic? Maybe.
Clearly on point with a valuable message? Duh! Of course.
Expect nothing less from Mr. Munger.
Here's here's a quick take on this:
- People with a vested interest don't care about much else. It's difficult to fix our problems because to do so would impact the profiteering of someone else. To protect those profits, they make political contributions to prevent the fix. Hence, same old, same old. Which won't work forever, because...
- Avoiding trouble doesn't make it go away. Our health care situation is untenable long term as is our fascination of short term "casino" profits over long term wealth creation. But...
- This can go on for a long time. We won't collapse overnight, again. We almost did that just a short time ago. So we have a bit of time until it will happen again. However we are clearly still speeding toward a cliff. If we don't change our course...
- It will very likely will come to a sorrowful conclusion. The longer we continue on our current road, the more painful the conclusion will be. And if course isn't going to change, you need to...
- Make sure you aren't sorrowful when it concludes. If leaders won't listen to BenFranklin LeeKwonYou Volkker (read the article to understand this reference), they aren't going to listen to you or me. So your best move is to stay abreast of the situation and use our understanding of it to your advantage.
(Warning... this requires real work - actually reading and thinking. If you are out of practice at either, now is the time to start training.)
So is it basically over?
Clearly not for Mr. Munger or Mr. Buffett.
I am doing what I can to make sure it's not over for me either.
Hopefully, it won't be over for you. But that depends on you.(Did you read the article yet? Again, work required. You might want to start there.)
Posted by Doug Rice on Tue, Feb 23, 2010 @ 10:40 AM
This can't be spun to be anything that painful, bad news.
Today, the new economic data shows a decided drop in consumer confidence.
The Conference Board, a private research group, said its index of consumer confidence declined by 10 points or fell by almost 20%!
In February the index fell to 46.0, 
from a revised 56.5 in January. The February reading was far below expectations by economists.
The present situation index, a gage of consumers' assessment of current economic conditions, fell to 19.4 this month from 25.2 in January, originally reported as 25.0. The February index was the lowest in 27 years.
(Note: Always pay attention to numbers that are the the highest or lowest in decades.)
Why this is important to you
The economy is comprised of (C) consumer spending, (I) business spending or investment, (G) government spending, and (NX) net exports - the difference in what is spent on domestic goods minus what is spent on foreign goods.
The breakdown (in round numbers) is 70% C + 20% I + 20% G + (-10%) NX for 100% of the Gross Domestic Product or GDP.
If consumers aren't confident, they don't spend. If they don't spend, given that they (we) are 70% of the economy, the economy can't grow. If they economy doesn't grow, it does the opposite. It goes into recession.
What's worse than one isolated number is that now it will hit the news wires and stories will circulate, like this one, that say the economy is in trouble. That will add to a downward pressure on confidence which can start feeding upon itself creating a downward spiral.
That's why this wasn't good news at all for anyone.
Ouch! That's going to leave a mark.
Posted by Doug Rice on Mon, Feb 08, 2010 @ 01:45 PM
On Meet the Press yesterday, former Federal Reserve Chairman Alan Greenspan said a U.S. economic recovery is "going to be a slow, trudging thing," and that he "would get very concerned" if stock prices continue to fall.
He went on to say that a drop in stock prices is "...more than a warning sign. It's important to remember that equity values, stock prices, are not just paper profits. They actually have a profoundly important impact on economic activity."
He's right.
And we should be worried about this.
The masses that feels like they are hanging on by a thread, but at least their 401K has recovered somewhat, could easily become very discouraged at significant return to lower stock prices.
The result of that would be to spend less, which in turn would slow the economy, which in turn would lower stock values further, which would push people to spend even less.
If the downward spiral isn't broken fairly quickly, which is easier said than done, then the description of the economy recovery being "a slow trudging thing" would start to sound good.
Downward spirals can last a long time. Look at what happened to Japan over the last two decades.
In the last 20 years the Nikkei 225, the broad measure of the Japanese stock market, has fallen from a high of 40,000 to around 10,000 today. The last 20 years in Japan show clearly that a major modern industrial nation can go long periods in a downward spiral.
Will we slide this much or this long?
We already lost a decade as the Dow is basically at the same place it was 10 years ago and the NASDAQ is down over 50% from 2000 highs. So one could view this as 10 years down, 10 years to go.
Looking out the foggy windshield doesn't often provide clarity, but it's where we should be looking nonetheless.
Greenspan's right. If the markets continue to slide, the economic road ahead may be not only twisty and bumpy, but downhill.
Posted by Doug Rice on Thu, Feb 04, 2010 @ 10:21 AM
Portugal's ability to borrow money stopped yesterday. They tried to sell bonds to raise money to pay its bills. There weren't enough buyers and they canceled the sale.
(I wonder if they actually cut up the national credit card in front of the heads of state or if they just take it away and give them the look of shame?)
This is bad, very bad.
Here's why:
Countries borrow money.
We know that the U.S. borrows money. We see it in the news all the time as national debt and the yearly deficit adding to that debt make top headlines.
And most people understand that there will be a point when all this debt comes due and those that have loaned the money will want the borrowers to pay it back. So how much is borrowed and how easily it can be paid back is important in determining if investors are willing to loan you money.
While continual borrowing hasn't been a problem for the US yet, it is a problem in many other countries right now. Portugal, Italy, Ireland, Greece, and Spain (PIIGS) have put themselves in to a situation where they need to borrow money to pay their bills, but fewer and fewer people are willing to lend to them.
Other countries like former Soviet Union nations share similar circumstances.
Lenders lend based on several factors not least of which is the ability to repay the loan. Repayment risk in the aforementioned countries is rising, and therefore so are interest rates. At some point, the risk isn't worth any reward and all the lenders simply stop lending.
This is what happed in Portugal.
The result of not being able to borrow to pay your bills is that you go bankrupt. While Portugal isn't quite there yet, clearly having a failed attempt at borrowing is a sign they are close.
Countries have gone bankrupt before and will continue to do so in the future. While never a good thing, if the country is small and somewhat isolated, like Zimbabwe, the impact on everyone else is small.
However, if the country isn't isolated, for example part of the European Union (EU), then the damage can spread, potentially like wild fire.
Another major issue with the EU is the separation of monetary and fiscal policy. When a nation joins the EU they give away the monetary function of that nation to the overall EU. They lose a bit of their sovereignty.
Now, just when they need to have control over their monetary policy, they are forced to go to outside organization that doesn't have only the interests of one nation at heart.
For Americans that would be like allowing the Federal Reserve functions to be carried out by someone other than Americans with the goal of doing what's best for everyone even at the expense of Americans. Americans wouldn't think of giving up that control.
The obvious solution is to raise taxes, cut spending, and painfully change the way the debtor nations operate. Equally obvious is the political turmoil that will cause and the strong desire of politicians to avoid it.
It's possible that many of the nations in trouble, if this continues to get worse, will want that control of monetary policy back and wonder why they gave it away in the first place. While it's still unlikely that the EU would break up, it's not beyond the realm of possibility.
Because someone better loan Portugal and several other nations some money, look for the European Central Bank (ECB), headed by Jean-Claude Trichet, to announce a plan to help. But the extent to which other nations are willing to help at the expense of their own fragile situation isn't clear.
Depending on what is proposed, this could calm the markets or stir controversy and pit nations against each other with the ECB in the middle. Regardless, much like our own bailouts, the fix isn't always a smooth transition to good times and uncertainty will linger.
Uncertainty increases risk and that hurts rewards and market prices fall. That's why few investors will lend money to Portugal and why this could be very, very bad.
Posted by Doug Rice on Thu, Jan 21, 2010 @ 01:41 PM
Forbes published my article on unemployment. Check it out at
HERE
Posted by Doug Rice on Fri, Dec 04, 2009 @ 11:11 AM
Here's my take on today's unemployment numbers. They aren't what they appear at first glance.
http://technorati.com/business/article/november-unemployment-statistics-analyzed/
Posted by Doug Rice on Fri, Jun 26, 2009 @ 05:21 PM
It would come to no surprise to anyone that knows me that I love this advice from Pimco's Mohamed El-Erian. Pushing for objective independent thought in today's world is often a lonly business. It's hard to convince a jaded public filled biased media that what you have to do is read sources from all points of view. It's nice to see that I am not alone, and that it can pay off as handsomly as it has for Mr. El-Erian.
Mohamed El-Erian's Advice
Here's my add to this line of thought: Read diverse and independent sources, think for yourself, and then come to your own conclusion. Easier said than done, methinks.
Posted by Doug Rice on Wed, Jun 10, 2009 @ 02:33 PM
This Financial Edge Article focuses on 7 hot brands that are riding out the recession pretty darn well.
Check it out at HERE