Euro at a cross road

I remember telling my sister and brother-in-law that Euro was in a slow-motion suicide. Not much of a future remains for the currency. That was Spring 2010, at the height of the Greece/Iceland debt crisis.

I still maintain my position on the Euro EXCEPT debt-ridden Euro countries like Ireland would default on their EURO debts.

My original position assumed that ECB/IMF would essentially "rescue" every troubled EURO country by issuing more of the EURO out of thin air and every debt-ridden EURO country would just accept the "help". Turns out that's quite an assumption to make.

If Ireland rejected the "bailout", EURO, as a currency, might be spared of a premature death. However, short to medium term, there would be tremendous turbulence for the EURO currency due to the soverign defaults. When the dust settles, the investment world would once again recognize the "soundness" of EURO as it's debts are not monetized into oblivion and adapt their investment decision making to focus on only sound EURO credit nations like Germany or France.

Gold and silver used to be the currencies of all nations in the world, the fact that certain nations went bankrupt didn't make Gold or silver less functional as currencies at all.

Moreover, unlike the USD from the United States, where there are tremendous foreign interests from all over the world "NOT" wanting USD to go kaput (due to their massive USD securities holdings, especially in US treasuries), which, thus, must NOT default, EURO has much smaller of the "reserve currency" role compared to the USD, so the default of even half of the EURO soverignties might not be as hazardous as the defaulting of US government debts (I just realized the coldness of this statement but less face it, defaulting means not paying the debt, it's a "good" thing for those defaulting countries in a sense).

Still pretty bad, of course, but not the worst.

Euro at a cross road

Open the flood gates, why RMB should be freely floating

Well, the most common excuse or reason for China to not want an appreciation of the RMB against USD is that, alledgely, the Chinese export industry has waffer thin margins, say 2-3% only. To which I say, raise the prices ahead of time before letting the RMB go up. Why? China is NOT Japan, despite the fact that the Chinese economy has already surpassed Japan as No. 1 in Asia, the per capita GDP is still approximately only 1/10th of Japan's. Chinese workers are still immensely competitive in the world.

Sure, compared to other "Southern Asians" countries, who are much more competitive/cheaper still in terms of wages, say India, Bangladesh, Indonesian, Chinese workers are typically more productive than South Asians, both according to intelligence quotients measures and historical/anecdotal references. (Well, the averages of the IQ of Chinese/South Koreans/Japanese are similar among themselves, and we already know what the Samsungs and Sonies of the world are capable of. The Taiwanese are part of the Chinese flora as well, Acer lovers anyone?)

So, I am willing to gamble that hiking the prices of goods, say by 20-30%, and then let the RMB freely float and move up by say another 20-30%, which would result in the compounded effect of a price raise of say 50%, is still going to be "competitive" and cheaper than stuff made in the US of A/Europe/Japan and they will still HAVE to go buy stuff Made in China.

Of course, then the South Asians would invade into Chinese's market share, but China got to buy their raw materials cheaper by 20-30%, that's gotta juice up the margin (plus the original price hike, which is a 50% up in profit margin), making up, at least in part, of the lost profits from the shrinking revenue.

Did I mention the BONUS of getting US off of China's back by eliminating the excuse for the US to violate WTO rules by slapping tarriffs on Chinese goods? Sounds like a plan?

Open the flood gates, why RMB should be freely floating

My favorite alumus scores points on big geopolitical trend

Finally, United States is scaling back on her military endeavor and who "knew"? Niall Ferguson, as well as probably many alums like humble little me. Here is a link on me chatting with a gold fund manager about this "prediction" on his blog over half a year ago.

Julia Wong said...
Another theory of the ending by economic historian Niall Ferguson:

http://www.niallferguson.com/site/FERG/Templates/ArticleItem.aspx?pageid=226

Basically, as a historian, he predicts the "U.S. empire" will be shrinking her military to cut costs.

MONDAY, 11 JANUARY, 2010

History is what happens a second from now and listening to the right historians can means everything for your future. I knew that Oxonian is the "right" guy to listen to.

My favorite alumus scores points on big geopolitical trend

Taking credit on the "there will not be hyperinflation" call

Back in October 2009, I put out a debate arguing it is more likely to be "Japan style deflation" than hyperinflation in the medium term: "4) Japan again. Yes, compared to the size of GDP, Japan has "printed" much more money then the United States and have an even bigger public debt than United States. Meanwhile, Germany, Australia, UK, and many others have much bigger size of "external debt" as a % of their GDP then the United States as well. And yet they have not imploded to Zimbabwe style hyperinflation. In fact, when you examine the way the Fed and the U.S. Treasury is collaborating, so long as there is a willing buyer (the Fed) and there is a "preference" for low interests rate(for U.S. treasury to trim the interest bills), in our case, for both of the debt-ridden Japanese and U.S. government, the arrangement will be "stable": meaning BOJ and the Fed will keep on holding near zero interest rates on the one hand and soaking up any excess issues unsold to the open market/monetizing the public debts and as far as any one can see, and this can go on for quite some time as long as 1) holds, which was what has been happening in Japan for close to 2 decades now." http://globalmacrosport.blogspot.com/2009/10/why-hyperinflation-with-usd-is-probably.html

After more than half a year, investors have discovered for themselves that that is indeed the case despite it was the unpopular, counter-intuitive "platform" back then!



I suspect, that post (also available on Linkedin's discussions) even got Barack Obama's followers or the US President himself's attention as can be seen on my linkedin profile with "Viewers of this profile also viewed..." (you got to sign in to Linkedin to be able to see this curious phenomenon):
Barack Obama, President of the United States of America

Well global macro view does not only REQUIRE years of experience in the investment industry and a great education but a WIDE world view, ahem, like someone who has live experience in Europe, Asia and North America, ahem, kinda like the author of GMAAS (Global Macro As a Sport).

Taking credit on the "there will not be hyperinflation" call

"The tragedy of the commons" = society's future generations

The concept is originally used to describe the depletion/destruction of a shared resource like the fish in the oceans or the forests on earth etc.

Seems like it applies to "debt burden on our children" or exploiting "children" as a resource as well.

How?

Well, in the form of mountains of debt, high taxes to pay off such mountains of public debts and lowered disposable income and thus lowered quality of life for the children and their own children and so on and so forth.

And Japan is exacerbating the problem by having fewer and fewer numbers of the "children resource" to exploit, hmmm...........

"The tragedy of the commons" = society's future generations

It should be inherently obvious that China is a political scapegoat

Otherwise, the problem could be solved a long long time ago.

If forcing China to raise the value of Yuan against USD by let's say 30% for instance, the products sold in US from China would still be MUCH cheaper than American made product due to the GIGANTIC purchasing power parity or wage difference between Chimerica.

Roach Spars With Krugman Over Call to Pressure China on Yuan

In fact, let's say U.S. is going full-fledge trade war with China, let's say by imposing tariffs on Chinese goods, for that same 30%, not only the average American family would not gain, in fact, they would still have to buy Chinese or other emerging countries made goods (thus, contributing to the same trade deficits), but at a greater cost to them. Only the government benefits in the short run (higher tax revenue from the tariffs), not the American families.

This is called an inefficiency in economics, nobody benefits.

An example of U.S. "forcing" a big surplus country to appreciate their currency is, Japan! Look what it does to the U.S.-Japan trade deficit! Nothing! Absolutely nothing. Talk about a political scapegoat then, the YEN.

It should be inherently obvious that China is a political scapegoat

All the wealth in the world

Coming out of the Chinese New Year holiday, just wanna say Happy Year of the Tiger!

Just how much wealth are there in the world?

It has ballooned over the last few years. Taken from the CIA world fact book 2010:

First we need an annual Global income to do the maths:
A) GDP at PPP:$70.21 trillion (2009 est.)

B) Key commodities:
i) Oil reserves: 1.343 T Barrels @ 74 USD/barrel roughly equals to 100 T USD
ii) Gas reserve: 177.4 T cu m @ 5.50 USD/ cu m roughly equals to 1000 T USD
iii) Gold: 161000 tons = 4.7 M troy ounces, @ 1100/oz roughly equals to 5.2 B USD

C) Equities:
Publicly traded shares: $64.99 trillion (31 December 2007)
Privately held: Well, this is a little tricky. Total Private consumption is around 60% of GDP, of which, some of them are "produced" by the 65 T publicly traded companies (let's assume their ROE is 5%, which means they generate roughly 3.25 T of returns/incomes for investors annually)70 T * 0.6 - 3,25 T = 38.75 T, and again, let's assume they have ROE of 5%, gives the whole value of the privately held companies a whopping price tag of 775 T USD!

D) Debts: $56.9 trillion (31 December 2009 est.)

E) Real Estate: This is a little tricky. There are commercial, residential and public real estate, as well as land and sea (well, there might be deep sea oil underneath!).

If I just assume wherever we live+work in is worth 6X of the annual income (GDP), we can arrive at 420 T USD for the world's real estate value.

Land is certainly wealth but let's focus on the more readily "marketable" securities" only.

***

Obviously this is a very crude estimate of the world's wealth, let's tally it up nonetheless:
B+C+D+E
2417 Trillion Dollars!

All the wealth in the world

If the world is an Island - a hypothetical future from medium to the longer term

And a great chunk of the islanders are "retiring". Maybe 1/3 of the total population. What do they do after retiring? They just sit around and buy food/goods instead of making/catching/farming and then selling them.

Who is going to do all the food/goods production? The remaining islanders.

You will probably say, hey? How are they going to have equal amount of production with such a huge chunk of labor force taken out of the society? Well, turns out the island has always have excess labour. So that's going to be fine.

How do the oldies "buy" the foods? They buy them via a thing called a "bond paper" or just the "bond coupon".

What is a bond paper? It's a piece of paper that can be converted to "money", currently safe guarded by the island's public and private pension houses.

Here comes the problem. The pension houses don't have the "money".

Huh? Yeah, it's a little unfortunate.

Well, they can always print the money out, at least for the public pension house.

The problem is solved then, isn't it?

Well, there is a little wrinkle. For those who depend on the pension to live, purchasing power of money seems to be eroding at a 10% rate per annum. By the time the islanders are in their 10th year of retirement, the money's purchasing power has shrunk to about 1/3 of the original value. Luckily, a great deal of these oldies still have other "sources of income" or assets for sale, like their homes. But the problem, is, other "smart oldies" are also selling their homes to take out cash to live.

So the home prices (and to a certain extend all asset prices) keep on falling as the oldies needed to "Cash out" and move to a smaller home or just rent, etc. Young people might want to "buy" the assets but they are smaller in numbers (thanks to the aging island demographics) and their purchasing power are not as great due to the wage stagnation with high inflation situation.

Luckily for the island society, the biggest chunk of wealth are concentrated in the select few extremely rich islanders. So while there are selling going on, it has been a limited event; it is stabilized at some point as the non-rich oldies are almost done selling off their assets/dying off. That process lasted for a little more than a decade or so.

This unfolding of events make the younger generation or working islanders nervous as there are less and less "opportunities" in making their savings "work" for them as they are saving for their own retirement as they watch the real value of the assets prices going down for the "lost decade or two".

How can the "real value" of an asset go down? Well, for example, it used to be that the value of a beach house can buy you a few years of "no need to do fishing". Now, the sale of a beach house can only pay for your living expense for 6 months.

And meanwhile, the value of your working hours are going down as well as there are lots of cheap labour and increased productivity coming from technological improvement.

So it used to be that an islander can work for say 15 years, during which his beach house go up in value very fast and then he sell the beach house and live in a beach hut and he is "all set" by retirement age. Now you need to work for your whole life but then your savings keep on getting "eroded" in the 10% a year inflation, heavy island taxation to pay off the vast debt accumulated from the parents' generation while your wage is stagnated.

So other then the offsprings of the very rich, the rest of the working islanders have to pretty much work hand to mouth until they die, unlike the parents who managed to "make ends meet" in their "elderly years".

Due to the poorer-condition of the younger generation, their offspring's numbers are even SMALLER. (Okay, it's partly also due to the running low on resources of the island, making the real cost of living higher and higher for the vast majority of islanders.) So the vicious cycle keep going on until most of the surviving islanders are rich people's descendants. Except for a group of islanders who is called the "underclass", under challenging circumstances, still managed to have offspring thanks to the "public" purse's subsidizing.

At that time, technological advance has come to such sophistication that most "production" are done by machines, so the "shortage" of labour wouldn't be a concern. So despite the disappearance of vast sections of the society, the underclass's value in the labour market is still meager and thus stays poor for generations depending on the public purse. (Why can't they just farm or fish, it's still an island right? Well, the sea is heavily polluted and the fish are dying. The farmland are owned by landlords and they have to pay rents and buy expensive fertilizer just to farm. Robots farm better anyways. Same goes for other markets activities where the rich own the venue itself and the poor is too poor to "earn their way" to durable assets like a shop space or a house, etc).

And the reversal of the "aging" of the high society destroy the old-tiny high society as wealth get scattered into many hands thanks to the high-tech painless reproduction and the trustworthy-robots nannies and daddies which can almost fully replicate the parent's parenting duties for them (you can see why the poorest underclass would still find it hard to compete for jobs in the society). And the technological advance has also allowed those with the resources to live for centuries.

So a new "middle class" is formed from the "off shots" of the very rich thru these avenues.

If the world is an Island - a hypothetical future from medium to the longer term

Au down, Ag down, Jobless rate down the world spins around as usual...

Or so we all hope. I mean, it you believe in this "recovery" is "human", not just "statistical", as per Larry Summers said in Davos.

Well, I actually found it really enjoyable to look at the markets plunging down for the moment. Okay, you guessed it right, my portfolio is set to "high cash" mode for a few months now. The market didn't turn up really much for the last few months anyways, so I wasn't really "too early" in practical sense.

:D

Don't hate me, I am just doing what I do best. Be a great global macro gal.

Au down, Ag down, Jobless rate down the world spins around as usual...

The deeper layer to it: Euro Breaks $1.40 Support

From Zerohedge: "Time to recalibrate all those long stock-weak dollar correlation engines."
Euro Breaks $1.40 Support

It's not a Dollar weakness-Stock Strength correlation. But then in a way it is.

Let me explain the "mechanism": Creditors of Dollar denominated debts want to swap the stuff for non-debt securities like American equities.

The mechanism doesn't involve people from EU in any massive way as they are not the main creditors of Dollar Debts (Far East).

So the mechanism doesn't "work" with Dollar strength against Euro.

The deeper layer to it: Euro Breaks $1.40 Support

Heart warming, tear-pumping TV propaganda from Japan

This is off topic. You are forewarned.

I am not trying to be mean with the use of the word "propaganda" here. But it is nevertheless smelling suspiciously as such. What do I mean? I mean by propaganda, it is deliberate and it is government directed.

How things have changed in Japan. There is a saying about Japan in Asia: they have no friends. Why? For historical reasons, of course. That doesn't stop them from trying to "educate" their citizens to strive to make friends with their neighbors, most importantly, the Chinese.

I have just got tears in my eyes after watching a recent modern-settings Japanese TV drama. And it looks very "propaganda" like.

The theme is about how the Japanese staff members are incorporating the Chinese interns into the integral part of their team. Together, they pulled all-nighters to make up the lost work after a bad accident that erased the critical computer files of that "Chinese girl's".

The Chinese girl is set to have to leave the next day and the team leader asked his supervisor, another Japanese to hire the Chinese as a permanent staff.

A Japanese woman breaks the news about "You don't have to go" to the Chinese girls and tears breaks out for everybody.

Okay, it is not trivial matter. Maybe it is just me. I am not amazed at "the rise of China" is so fast and strong that now the Japs have to make propaganda films to "befriend" China.

Really, I am more amazed at the propaganda machine that Japan has on its people. Or thought they could impose on its highly sophisticated people (with an average IQ of 105-107).

So this is an admiration blog post, not a bragging post for the Chinese.

P.S. Okay, I just realized how creepy it might have sounded. "Admiration of the propaganda machine". I need to clarify. As long as the propaganda is harmless to the people and that dissident voices are not silenced in the society, I guess propaganda is not such a monster after all.

Heart warming, tear-pumping TV propaganda from Japan

Now that's a profitable idea: hire more women hedge fund managers

As they are only a puny 6% of the whole.

Women Hedge Fund Managers Outperform Men

A new study by Hedge Fund Research found that, from January 2000 through May 31, 2009, hedge funds run by women delivered nearly double the investment performance of those managed by men. Female managers produced average annual returns of 9%, versus 5.82% for men and, in 2008, when financial markets were cratering, funds run by women were down 9.6%, compared with a 19% decline for men.

"Moreover, several studies show a link between profit and gender. Companies with several high-ranking women at either officer or director levels tend to have higher earnings per share, return on equity and stock prices than competitors with few or no senior women. Look at some of the more stunning losses incurred at banks in recent years: Barings, Société Générale and UBS. All were caused by men betting with other people’s money."


http://www.businessweek.com/careers/workingparents/blog/archives/2009/12/its_generally_k.html

Now that's a profitable idea: hire more women hedge fund managers

Geopolitics: Will U.S. invade China for "debt cancellation"?

I am not sure if invading China is the best idea though. China is pretty resource poor to begin with. So I am not sure what can be gained from invading China.

If the "reason" is to prevent Chinese from dumping "treasuries", I guess the act of invasion would probably give away the clue that the Dollar is rubbish from now on (and/or irredeemable to other currencies). So it wouldn't be a "booster" of Dollar confidence. One way or the other.

Moreover, let's say "debt cancellation" is the "goal" of the invasion. As such, No one would essentially want to do what China did from before: namely selling to the U.S. and accumulating the dollars.

So what good does it do to the daily lives of Americans? Imports would be expensive to most people and vast sections of the society would fall into poverty as a result.

Remember Taiwan is also heavily armed with weapons purchased from the States. They would be in an awkward situation should Mainland China-U.S. War breaks. Russia would probably side with China, I guess as China would have been the major customer of Russian gas/oil/resources. Same goes for Australia and Japan (China is the biggest trade partner to Japan).

Creditors of U.S. alliance, anyone?

Geopolitics: Will U.S. invade China for "debt cancellation"?

No, this is not gonna work Paul Krugman!

I used to think he is "cool". I stopped following him after his debate or more like "cat fight" with historian Niall Ferguson.

Then he sort of justified my "dis-following" of him by acting like a fool.

Really? Full fledged trade wars/protectionism will help America? Really?

Let's examine his logic:

1)"Instead, it[China] follows a mercantilist policy, keeping its trade surplus artificially high. And in today’s depressed world, that policy is, to put it bluntly, predatory."

Um.....Keeping trade surplus high is predatory? Is Germany predatory as well? You can argue the currency peg is "not helpful" but you then have to take into account the GIGANTIC TREASURIES HOLDINGS in the Chinese Foreign Reserve do we? It is quite *CONVENIENT* to DEVALUE/INFLATE your currency when you found the DEBT BURDEN is starting to bother you???

So predatory huh? Who forced a gun at Americans' temple to buy cheap cheap cheap Walmart goods? No one! I may say it is *cheating* when you devalue your currency after consuming so much in the form of debt when it comes to the time to honor your vast debt obligations.

2) "Again, right now the world is awash in cheap money. So if China were to start selling dollars, there’s no reason to think it would significantly raise U.S. interest rates. It would probably weaken the dollar against other currencies — but that would be good, not bad, for U.S. competitiveness and employment. So if the Chinese do dump dollars, we should send them a thank-you note."

Sorry Krugman, Yes, dollar will further depreciate should China or other debtors dump dollars debts/instruments. AND that the U.S. interest rate probably WON't rise(thanks to Fed Reserve). All true. But DOLLAR itself will be "no good" from that point onwards. Imports will be PROHIBITIVELY EXPENSIVE and many Americans will just have to live in stark poverty or even starvation. So my advice: Don't try it.

No, this is not gonna work Paul Krugman!

Inflation and deflation is too 2 dimensional

What we have been wondering about the inflation and deflation axis has been wholly too 2D.

What we might have been neglected is that the world is at least 3D:

1) Good Old "Inflation-deflation" dimension

2) Time

Most people stopped here. The third dimension:

3) individual "indentations" and "mole hills" of the 2D space allowing the 3rd D axis to exist.

Namely, with the bulk of workers from Asia and other low waged nations. There are at least all these indentation and little mountains forming from the landscape.

A) The price component from wages will be shrinking fast - Indentation (deflationary)

B) The price component of commodities or raw materials go up - Hills (inflationary)

C) Credit has been shrinking due to the retirement spending of the world's old human beings (ahem, babyboomers mostly) and general debt overloaded government (also thanks to the go-go deficit-spending of the babyboomers) - Indentation (debt-deflationary)

D) Food shortages - Hills (inflationary)

E) Commercial Real Estate (Rental costs of land and shop floor spaces) - going down or flat due to C)

An extension of A) This is from Dr. Batra "Wage is source of demand; Productivity is source of supply" - Indentation (deflationary as the wages are going down A) and thus demand is going down and that's deflationary; productivity is going up and that means supply is going up which is deflationary as well)

Since for most DEVELOPED WORLD's commercial transactions/goods/services ever produced and consumed, the price components are mostly from A, C and E, it is going to be "DEFLATIONARY" for the "1st world". More like debt-deflation as debt burden has been excessive till this day.

Since for most of the DEVELOPING WORLD's commerical transactions the major price components are B and D (cos wages has always been dirt cheap and poor people from developing world tends to have less access to credit), it will be inclining towards more of an "INFLATIONARY" situation. More like "stagflation" cos wages are not going up.

Oh well. Happy 2010 anyways!

Inflation and deflation is too 2 dimensional