"The US national debt is now over $11 trillion dollars. The interest on our national debt is now $340 billion. This is about at 3.04% rate of interest. In ten years the Obama administration admits that they will add $9 trillion to the national debt. That would take it to $20 trillion. Let's say that by some miracle the interest on the national debt in 10 years will still be 3.09%. That would mean that the interest on the national debt would be $618 billion a year or over one billion a day. No nation can hold up in the face of those kinds of expenses. Either the dollar would collapse or interest rates would go through the roof."
From Richard Russell
Monday, August 31, 2009
Friday, August 28, 2009
Barron's article on Asia
AFTER THE RECENT JUDDER IN THE ASIAN MARKETS, WHO BETTER to ask about the region's prospects than Christopher Wood? The Hong Kong-based strategist for CLSA Asia-Pacific Markets, a unit of Crédit Agricole, pens the widely followed newsletter Greed & Fear.
He was early to spot the problems in the U.S. mortgage market and their global financial implications, writing about them back in 2005.
Even earlier, he espied the troubles brewing in Thailand, before the 1997 Asian crisis.
[qa]
Darrin Vanselow for Barron's
"When I say you want to be overweight Asia and emerging markets, I'm talking predominantly about investing in domestic themes such as financial services, real estate and infrastructure." --Christopher Wood
Midway through last week, the MSCI AC Asia ex-Japan index had risen by 79% in U.S. dollar terms since the October 27 bottom, while the Standard & Poor's 500 is up just 17% over the same period. Wood acknowledges a modest correction may be in order, but believes prospects are good for a long-term bull market in Asia. To learn why, keep reading.
Barron's: You sure got this crisis right. Where are we now?
Wood: This financial crisis in the Western world will lead to a long period of anemic growth. The data that is making people more optimistic on the U.S. right now is tending to be production-oriented data like the ISM [a survey of manufacturers] or car sales. But there is very little sign to me that U.S. consumer demand is recovering or that real releveraging is taking place.
In fact, all the evidence both in the U.S. and Euroland is that the consumer is going into long-term retrenchment. Even when the banks in America and Europe become healthier in coming quarters and years, I believe demand for credit will be much less than it was in the last five, ten years. So, we are going into a long-term period of deleveraging. We'll continue to see deflation backdrops in the Western world. The best case is a long period of subpar, anemic growth.
What does this mean for equities?
My formal target has been a 1050 on the S&P 500 [versus the current level around 1,000]. But that is just a technical view. Either in the fourth quarter of this year or definitely next year, the S&P is going to have a proper correction, by which I mean declines below the technical level of 875. There is no evidence that the U.S. or British consumer is really recovering. Actually, America and Europe remain at risk of Japanese-style liquidity traps despite all this fiscal monetary policy activism you have seen in the West.
From a global equity investor's standpoint, Asia and the emerging markets stand out as a place to invest. I haven't been surprised that Asia and emerging markets have outperformed since the autumn lows. It is a very positive sign that Asia and emerging markets did not make new lows when the S&P did in March. It's also positive that trading volumes have increased for most of the period since the start of the year in the Asian stock markets' recovery, whereas trading volumes were broadly static on the S&P. Those rising volumes I attribute to growing domestic investor participation within Asia.
The biggest beneficiaries of Western monetary easing aren't going to be indebted Western consumers. The biggest beneficiary of monetary easing in the West is going to be Asia...and emerging-market asset prices. That's primarily equities and real estate, because the money generated by all this excess liquidity from dramatic monetary easing in the past year or more, is going to flow to the best story.
Which one?
When I say you want to be overweight Asia and emerging markets, I'm talking predominantly about investing in domestic themes in [Asia and emerging] markets, such as financial services, real estate, domestic infrastructure. If I was advising a big global or domestic U.S. investor that didn't have emerging-market expertise that just wanted to concentrate on three big markets, I would advise them to invest in China, India and Brazil, because they are all good stories.
Different, though.
Well, China is a weird mix of command economy and private-sector capitalism. If you invest in the blue chips, you are predominantly investing in state-owned enterprises, be they China Mobile [ticker: CHL], Industrial & Commercial Bank of China [1398.Hong Kong], China Life Insurance [LFC], PetroChina [PTR].
The advantage is that these are dominant companies without competitive threat. You're not going to have huge corporate-governance abuse, because [people who do that in China] are at risk of being executed.
The negative is, they are not pure capitalist enterprises, and you have always got the regulatory risk if they decide to change the rules of the game. That's the China story. The China index is predominantly domestic demand.
India is very different. What's good about China tends to be bad about India. And what's bad about India tends to be good about China. India is much more the U.S. model of the stock market. You have a huge number of companies, a wide diversity of sectors. In India, the question of who wins and who loses in any sector is much more important than in China. You have more than 100 years of stock-market history, and a more Western-style legal system. In other words, a real element of due process, which is not the case in any other emerging market. India is great, India is my favorite emerging-market equity story. If I was only going to invest in one, I would invest in India because of the wide diversity of companies you could invest in. But it will always have a premium, good price/earnings rating.
The other virtue about India is that export is unimportant in terms of gross domestic product. China is more about exports than India, but it's not all about exports, either. That's why both China and India this year have confounded most economists' forecasts, growing much more than most people were predicting at the start of the year despite the fact that the U.S. is barely growing.
Then there's Brazil, which I don't follow closely, because CLSA is an Asia specialist. The big story there remains the ability for real interest rates to really collapse, because they finally cracked inflation. Inflation is very low. They can bring rates to single-digits, and that will encourage the development of a middle class. Obviously, it has the resources as well.
BRICs without Russia? Why not Russia?
Russia is okay, but less diversified than Brazil and more a pure oil play.
The decoupling story, once debunked, is being revived.
I wouldn't put it that strongly. I would look at it like this: At the beginning of 2008, the investment community had basically largely embraced the notion of decoupling. By the end of '08, the investment consensus had embraced the precisely opposite notion that China and Asian emerging markets would prove to be export train wrecks correlated with the U.S. consumer.
The reality is something in the middle, what I call macroeconomic, incremental decoupling -- a boring, middle-of-the-road view. China, India growth has slowed, but not to the extent of some of the more bearish forecasts. Many were correctly bearish on the U.S. and Euroland...[while] China will grow 8% to 9% this year. It has the help of a big command economy stimulus. The natural excuse for a breather is renewed tightening concerns in China, but I don't think China will be slamming on the brakes.
India will probably grow more than 6%. In India, there's no command-economy stimulus, because the government couldn't organize one. But it's not a train wreck correlated with the U.S. consumer. Today, the trend in bank-lending in India remains healthy.
Stock-market decoupling is a different story. As of today, we have zero evidence of the stock-market decoupling. We've had dramatic outperformance by Asia and emerging markets since the October low.
When stock markets correct, Asian and emerging markets normally underperform on the downside as much as they outperformed on the upside. We can't stress-test if Asia and emerging-market stock markets have started to decouple until the next time the S&P has a proper correction -- let's say below 875. The key issue for people involved in Asian emerging markets is how resilient they prove to be. Now, if they only go down as much as the S&P in the context of the dramatic outperformance we've seen to date, that would be incredibly positive. But they've demonstrated this year their macroeconomic resilience.
You've talked about an asset bubble in Asia. How far into it are we? Valuations have expanded quite dramatically.
No way I would call it an asset bubble yet. All we've had is outperformance. And Asian valuations collapsed late last year way beyond where common sense suggested they should stop, simply because hedge funds and funds-of-funds were liquidating the one investment they still had made some money on, and didn't face lockouts in Asian and emerging-market equities. If you were a fund-of-funds with a lot of hedge funds owning garbage credit, you just redeemed what you could sell. Asian valuations are not cheap today. But in a real bubble, Asia ends up trading two or three times the P/E of the S&P.
In the very short term, frankly, Asia has outperformed so much that there's a risk of the S&P outperforming Asia. On a three-month basis, if you had not invested anything in Asia up to now and had $100 to invest, I'd only invest a third of the amount today, and the rest after a correction.
What are some of the stresses in Asia?
The big stresses remain in the West, where monetary policy remains very easy for a long time. If Western policy remains very loose, that could trigger a speculative bubble in Asia. You know, that doesn't have to happen. The Asian policy makers can counter that by tightening aggressively. But there is a remarkable lack of stress in Asia and emerging markets, because there's a remarkable lack of consumer debt, corporate debt, and government debt. There are high savings rates. They are just in much better condition than the developed world.
What themes do you like and dislike?
I like financial services, real estate and domestic infrastructure -- the three broad domestic sectors linked to a domestic demand, asset-reflation theme. If you have got the ability to buy smaller stocks, then you can buy consumer stocks. [Wood's thematic model portfolio is shown on the nearby table.] Search-engine stocks are also domestic demand proxies. I would be less aggressive investing in exporters, but there's nothing I aggressively dislike in Asia, I'd say.
[woods]
I also think Asian currencies are long-term appreciation stories, another reason to own the equities. Asian currencies are going to be relatively safe havens compared with Western currencies, because they are not going to blow up their solvent balance sheets bailing out banks. And basically, on a five-year view, I'm expecting investors to lose confidence in Western paper currencies.
Tell us about Taiwan.
This is a specific story that has nothing to do with the general Asian theme, based on political developments. Sooner or later, you will see a formal end of hostilities or tensions between China and Taiwan, which will lead to a dramatic improvement in economic links. That will lead to a huge rerating in equity prices in Taiwan, and probably also an appreciation of the [New Taiwan] dollar. Over the past year you've already seen pretty significant developments, most importantly a growing number of direct flights. On a five year view, I'd expect more integration: Chinese banks would be able to function in Taiwan and vice versa, growing investments by big Chinese companies in Taiwan, and Taiwan companies integrating their China operations into reported results. This is a very good story and people should buy Taiwan on pullbacks if they don't already own it, and take a long-term bullish view of the NT$.
How about Japan, which votes in a parliamentary election on August 30?
It isn't an emerging market. But if the DPJ [Democratic Party of Japan] does win the election as expected, that can only be a potential positive. It creates the hope of change and [of] a more domestic-demand-driven policy.
If the equity-market rally keeps going, Japan is overdue some outperformance, particularly the exporters, which are actually doing some genuine cost-cutting. But it has all kinds of structural issues that the rest of Asia doesn't have. The most interesting domestic sector in Japan is the real-estate investment trusts, like Japan Prime Realty [8955.Japan] and the Japan Retail Fund [8953.Japan]. The REITs have distressed valuations and very high yields -- 6% to 9% -- relative to very low Japanese interest rates. And the government is now supporting the sector.
Thank you.
He was early to spot the problems in the U.S. mortgage market and their global financial implications, writing about them back in 2005.
Even earlier, he espied the troubles brewing in Thailand, before the 1997 Asian crisis.
[qa]
Darrin Vanselow for Barron's
"When I say you want to be overweight Asia and emerging markets, I'm talking predominantly about investing in domestic themes such as financial services, real estate and infrastructure." --Christopher Wood
Midway through last week, the MSCI AC Asia ex-Japan index had risen by 79% in U.S. dollar terms since the October 27 bottom, while the Standard & Poor's 500 is up just 17% over the same period. Wood acknowledges a modest correction may be in order, but believes prospects are good for a long-term bull market in Asia. To learn why, keep reading.
Barron's: You sure got this crisis right. Where are we now?
Wood: This financial crisis in the Western world will lead to a long period of anemic growth. The data that is making people more optimistic on the U.S. right now is tending to be production-oriented data like the ISM [a survey of manufacturers] or car sales. But there is very little sign to me that U.S. consumer demand is recovering or that real releveraging is taking place.
In fact, all the evidence both in the U.S. and Euroland is that the consumer is going into long-term retrenchment. Even when the banks in America and Europe become healthier in coming quarters and years, I believe demand for credit will be much less than it was in the last five, ten years. So, we are going into a long-term period of deleveraging. We'll continue to see deflation backdrops in the Western world. The best case is a long period of subpar, anemic growth.
What does this mean for equities?
My formal target has been a 1050 on the S&P 500 [versus the current level around 1,000]. But that is just a technical view. Either in the fourth quarter of this year or definitely next year, the S&P is going to have a proper correction, by which I mean declines below the technical level of 875. There is no evidence that the U.S. or British consumer is really recovering. Actually, America and Europe remain at risk of Japanese-style liquidity traps despite all this fiscal monetary policy activism you have seen in the West.
From a global equity investor's standpoint, Asia and the emerging markets stand out as a place to invest. I haven't been surprised that Asia and emerging markets have outperformed since the autumn lows. It is a very positive sign that Asia and emerging markets did not make new lows when the S&P did in March. It's also positive that trading volumes have increased for most of the period since the start of the year in the Asian stock markets' recovery, whereas trading volumes were broadly static on the S&P. Those rising volumes I attribute to growing domestic investor participation within Asia.
The biggest beneficiaries of Western monetary easing aren't going to be indebted Western consumers. The biggest beneficiary of monetary easing in the West is going to be Asia...and emerging-market asset prices. That's primarily equities and real estate, because the money generated by all this excess liquidity from dramatic monetary easing in the past year or more, is going to flow to the best story.
Which one?
When I say you want to be overweight Asia and emerging markets, I'm talking predominantly about investing in domestic themes in [Asia and emerging] markets, such as financial services, real estate, domestic infrastructure. If I was advising a big global or domestic U.S. investor that didn't have emerging-market expertise that just wanted to concentrate on three big markets, I would advise them to invest in China, India and Brazil, because they are all good stories.
Different, though.
Well, China is a weird mix of command economy and private-sector capitalism. If you invest in the blue chips, you are predominantly investing in state-owned enterprises, be they China Mobile [ticker: CHL], Industrial & Commercial Bank of China [1398.Hong Kong], China Life Insurance [LFC], PetroChina [PTR].
The advantage is that these are dominant companies without competitive threat. You're not going to have huge corporate-governance abuse, because [people who do that in China] are at risk of being executed.
The negative is, they are not pure capitalist enterprises, and you have always got the regulatory risk if they decide to change the rules of the game. That's the China story. The China index is predominantly domestic demand.
India is very different. What's good about China tends to be bad about India. And what's bad about India tends to be good about China. India is much more the U.S. model of the stock market. You have a huge number of companies, a wide diversity of sectors. In India, the question of who wins and who loses in any sector is much more important than in China. You have more than 100 years of stock-market history, and a more Western-style legal system. In other words, a real element of due process, which is not the case in any other emerging market. India is great, India is my favorite emerging-market equity story. If I was only going to invest in one, I would invest in India because of the wide diversity of companies you could invest in. But it will always have a premium, good price/earnings rating.
The other virtue about India is that export is unimportant in terms of gross domestic product. China is more about exports than India, but it's not all about exports, either. That's why both China and India this year have confounded most economists' forecasts, growing much more than most people were predicting at the start of the year despite the fact that the U.S. is barely growing.
Then there's Brazil, which I don't follow closely, because CLSA is an Asia specialist. The big story there remains the ability for real interest rates to really collapse, because they finally cracked inflation. Inflation is very low. They can bring rates to single-digits, and that will encourage the development of a middle class. Obviously, it has the resources as well.
BRICs without Russia? Why not Russia?
Russia is okay, but less diversified than Brazil and more a pure oil play.
The decoupling story, once debunked, is being revived.
I wouldn't put it that strongly. I would look at it like this: At the beginning of 2008, the investment community had basically largely embraced the notion of decoupling. By the end of '08, the investment consensus had embraced the precisely opposite notion that China and Asian emerging markets would prove to be export train wrecks correlated with the U.S. consumer.
The reality is something in the middle, what I call macroeconomic, incremental decoupling -- a boring, middle-of-the-road view. China, India growth has slowed, but not to the extent of some of the more bearish forecasts. Many were correctly bearish on the U.S. and Euroland...[while] China will grow 8% to 9% this year. It has the help of a big command economy stimulus. The natural excuse for a breather is renewed tightening concerns in China, but I don't think China will be slamming on the brakes.
India will probably grow more than 6%. In India, there's no command-economy stimulus, because the government couldn't organize one. But it's not a train wreck correlated with the U.S. consumer. Today, the trend in bank-lending in India remains healthy.
Stock-market decoupling is a different story. As of today, we have zero evidence of the stock-market decoupling. We've had dramatic outperformance by Asia and emerging markets since the October low.
When stock markets correct, Asian and emerging markets normally underperform on the downside as much as they outperformed on the upside. We can't stress-test if Asia and emerging-market stock markets have started to decouple until the next time the S&P has a proper correction -- let's say below 875. The key issue for people involved in Asian emerging markets is how resilient they prove to be. Now, if they only go down as much as the S&P in the context of the dramatic outperformance we've seen to date, that would be incredibly positive. But they've demonstrated this year their macroeconomic resilience.
You've talked about an asset bubble in Asia. How far into it are we? Valuations have expanded quite dramatically.
No way I would call it an asset bubble yet. All we've had is outperformance. And Asian valuations collapsed late last year way beyond where common sense suggested they should stop, simply because hedge funds and funds-of-funds were liquidating the one investment they still had made some money on, and didn't face lockouts in Asian and emerging-market equities. If you were a fund-of-funds with a lot of hedge funds owning garbage credit, you just redeemed what you could sell. Asian valuations are not cheap today. But in a real bubble, Asia ends up trading two or three times the P/E of the S&P.
In the very short term, frankly, Asia has outperformed so much that there's a risk of the S&P outperforming Asia. On a three-month basis, if you had not invested anything in Asia up to now and had $100 to invest, I'd only invest a third of the amount today, and the rest after a correction.
What are some of the stresses in Asia?
The big stresses remain in the West, where monetary policy remains very easy for a long time. If Western policy remains very loose, that could trigger a speculative bubble in Asia. You know, that doesn't have to happen. The Asian policy makers can counter that by tightening aggressively. But there is a remarkable lack of stress in Asia and emerging markets, because there's a remarkable lack of consumer debt, corporate debt, and government debt. There are high savings rates. They are just in much better condition than the developed world.
What themes do you like and dislike?
I like financial services, real estate and domestic infrastructure -- the three broad domestic sectors linked to a domestic demand, asset-reflation theme. If you have got the ability to buy smaller stocks, then you can buy consumer stocks. [Wood's thematic model portfolio is shown on the nearby table.] Search-engine stocks are also domestic demand proxies. I would be less aggressive investing in exporters, but there's nothing I aggressively dislike in Asia, I'd say.
[woods]
I also think Asian currencies are long-term appreciation stories, another reason to own the equities. Asian currencies are going to be relatively safe havens compared with Western currencies, because they are not going to blow up their solvent balance sheets bailing out banks. And basically, on a five-year view, I'm expecting investors to lose confidence in Western paper currencies.
Tell us about Taiwan.
This is a specific story that has nothing to do with the general Asian theme, based on political developments. Sooner or later, you will see a formal end of hostilities or tensions between China and Taiwan, which will lead to a dramatic improvement in economic links. That will lead to a huge rerating in equity prices in Taiwan, and probably also an appreciation of the [New Taiwan] dollar. Over the past year you've already seen pretty significant developments, most importantly a growing number of direct flights. On a five year view, I'd expect more integration: Chinese banks would be able to function in Taiwan and vice versa, growing investments by big Chinese companies in Taiwan, and Taiwan companies integrating their China operations into reported results. This is a very good story and people should buy Taiwan on pullbacks if they don't already own it, and take a long-term bullish view of the NT$.
How about Japan, which votes in a parliamentary election on August 30?
It isn't an emerging market. But if the DPJ [Democratic Party of Japan] does win the election as expected, that can only be a potential positive. It creates the hope of change and [of] a more domestic-demand-driven policy.
If the equity-market rally keeps going, Japan is overdue some outperformance, particularly the exporters, which are actually doing some genuine cost-cutting. But it has all kinds of structural issues that the rest of Asia doesn't have. The most interesting domestic sector in Japan is the real-estate investment trusts, like Japan Prime Realty [8955.Japan] and the Japan Retail Fund [8953.Japan]. The REITs have distressed valuations and very high yields -- 6% to 9% -- relative to very low Japanese interest rates. And the government is now supporting the sector.
Thank you.
Wednesday, August 19, 2009
Money Confidential
I will have Wayne Jett on my show on September 2. It shoots live at Santa Monica City Hall at 2:00 pm. Let me know if you'd like to attend.
Holmes
WAYNE JETT is managing principal and chief economist of Classical Capital LLC, a San Marino CA registered investment advisor engaged in economic analysis. Since 2005, he has spoken to chartered financial analysts across the U. S. and in Canada on topics of monetary policy reform and U. S. financial markets. He speaks in support of the Fair Tax Act reform of federal taxes with comments titled “The Trillion Dollar Sure Thing.” His 2000 book A General Theory of Acquisitivity buttresses free markets with theoretical, moral and ethical underpinnings. In private law practice 1970-1999, he argued cases in the Supreme Court of the United States, the U. S. Court of Appeals, and the federal and state trial and appellate courts. He has led seminars in supply-side economics for CFA Society of Los Angeles and for Security Analysts of San Francisco, and speaks and writes on constitutional and economic topics. Classical Capital LLC sponsors a website called The Fruits of GraftTM, which is the title of his recently completed book explaining the causes of the Crash of 1929, the Great Depression and the current economic collapse. Email: wjett@socal.rr.com
Holmes
WAYNE JETT is managing principal and chief economist of Classical Capital LLC, a San Marino CA registered investment advisor engaged in economic analysis. Since 2005, he has spoken to chartered financial analysts across the U. S. and in Canada on topics of monetary policy reform and U. S. financial markets. He speaks in support of the Fair Tax Act reform of federal taxes with comments titled “The Trillion Dollar Sure Thing.” His 2000 book A General Theory of Acquisitivity buttresses free markets with theoretical, moral and ethical underpinnings. In private law practice 1970-1999, he argued cases in the Supreme Court of the United States, the U. S. Court of Appeals, and the federal and state trial and appellate courts. He has led seminars in supply-side economics for CFA Society of Los Angeles and for Security Analysts of San Francisco, and speaks and writes on constitutional and economic topics. Classical Capital LLC sponsors a website called The Fruits of GraftTM, which is the title of his recently completed book explaining the causes of the Crash of 1929, the Great Depression and the current economic collapse. Email: wjett@socal.rr.com
Subscribe to:
Posts (Atom)
