Emerging Market Strategies

Is the rise of the dollar sustainable?

William Gamble — Wed, 20 Aug 2008 10:34:18 GMT

The two largest economies, the US and China, are following loose monetary policy. The result is that inflation is still growing throughout the world, which will eventually have to be contained in the US by higher interest rates. Yo Yo Ben Bernanke dropped interest rates too fast and has been too slow to raise them. When he starts they will have to go up faster, which will take the dollar with them.

Although China’s notoriously wonky numbers have shown a drop in inflation, the factory gate is running about 10%. The government is worried about social unrest due to the drop in export industries and has signaled that the renminbi will not continue to increase to encourage growth. In the US inflation is rising over 5%. The Fed has not raised interest rates, because they feel that inflation will be tamed by slower growth. World wide demand is still strong and growth, especially in the US export industries, will result in higher inflation and eventually higher rates and a stronger dollar. The ECB has taken a more conservative course, which has slowed growth and will result in a weaker Euro and the end of the cycle.

Russia Crushes Georgia, Loses War

William Gamble — Thu, 14 Aug 2008 14:00:33 GMT

Russia recently had a big victory over the Georgia. Russian tanks and aircraft easily defeated the Georgian armed forces. The Russian attack was apparently a response to a Georgian assault on the breakaway province South Ossetia. Commentators have written that this war is not about a small piece of mountain real estate run by a provincial mafia with Russian support. It is more about Russian pride. It was punishment to Georgia, which Russia considers its near abroad; its sphere of influence; an important remnant of the lost Soviet Empire. Russia certainly won the battles. It crushed the Georgians and humiliated the West that could offer no response. But it lost the war.

Russia’s oil fueled economy has been running at full speed over the past few years. Personal incomes have been rising. It boasts some of the most expensive and profitable real estate in the world. Until recently, its stock market had reached new highs. These triumphs masked deeper problems.

Russia for all of its recent successes has not managed to build the institutions, specifically the legal institutions, to protect citizens and foreign investors from government interference. The result is a fragile state and economy that will suffer extensive problems during the worsening global down turn.

Over the past several years the world has been awash in liquidity. This mountain of cash not only fueled the US real estate boom, but the economies and stocks of emerging markets. Russia is no exception. The demand for its oil and other commodities looked like it would continue indefinitely. With all of this success, Vladimir Putin and his band of siloviki felt there were no limits to their power either in Russia or internationally. Russia and the power of government were resurgent and there was little anyone could do about it. Not true. There is something that will do something about it, the market.

Investors are a timid lot. They want a return on their investments, but more importantly they want their investments returned. If it looks like there is a threat to their money, they will flee like frightened sheep and are loath to return. What appeared to be easy Russian profits have turned into a minefield.

Originally when Putin destroyed Yukos and chief, Khodorkovsky, most investors wrote it off as a local political power play. It wasn’t. With the decline of Yukos, went the growth of Russian oil production. Since Putin wasn’t punished for this attack he repeated the process; first against Shell and Exxon in the Sakhalin projects, and then against BP-TNK and the steel maker, Mechel. It appeared that the market did not care, but the reality was different. Foreign investment, the real fuel of sustainable economic growth, began to decline. Foreign investment fell 42% in the first quarter of this year. The stock market, no longer buoyed by sky high oil, has lost a third of its value.

The main economic growth is now inflation. It is up 16% this year and rising. Even Russia’s leaders understand its problems. According to President, Mr. Medvedev, Russia’s biggest problems facing Russia are "endemic corruption and a dysfunctional legal system". Its finance minister Alexei Kudrin has pointed out that growth in central Russia would lead to the "collapse of the railway and transportation infrastructure". Even Putin himself has stated that business owners deserve medals for trying to operate in a dysfunctional environment. According to the Moscow Times, more money is paid in bribes in Russia than the government collects in taxes. Even the Russians understand that the problems have not been solved. According to a survey by an EU-Russia Centre 50 per cent of Russia's best-educated and most prosperous citizens would emigrate if they could.

Russia’s handling of the problem in Georgia will make these issues infinitely worse. Whatever the success of their forces on the ground, they have certainly lost the publicity war. Russia has been painted as an unreformed bully invading a democratically elected sovereign state. This sort of story sends chills down the spine of every citizen of a former Soviet republic or satellite and adds weight to arguments that Russia should be treated as a pariah rather than a partner.

The arrogance of Russia’s leaders and the economic consequences are hardly unique. The benefits of globalization have been extensive, but the leaders of many emerging markets have taken the credit rather than understand that it belongs to free trade, protection of people, property, and capital markets. Economists have projected unlimited growth for developing parts of the world. Investors have rewarded their economies. But due to the miscalculations of their leaders and the lack of institutional limits, this is about to change. The real losers will be like the unfortunate citizens of Gori. It is not necessary for anyone to punish Russia. They have already done that to themselves.

I am William Gamble, JD, LLM, Ex MBA, KSC, a consultant specializing in emerging markets. I have been quoted or interviewed by ABC, CNN Asia, Bloomberg, Fox, CNBC, NPR and other television and radio stations around the world. I have published 24 letters in Financial Times and articles in Foreign Affairs, and Harvard International Review. I have been quoted USA TODAY, The Far Eastern Economic Review, The International Herald Tribune, The South China Morning Post, Sankei Shimbun. I have written two books Investing in China and Freedom: America’s Competitive Advantage in the Global Market. In the past year I have spoken to CFA societies in 10 countries and 9 US cities as well as other conferences all over the world.

William Gamble
Author: Freedom: America’s Competitive Advantage in the Global Market
EMERGING MARKET STRATEGIES
Suite 1D
1990 Pawtucket Ave
East Providence, RI 02914
Tel: 401-272-8906; Fax:401-272-8139; Cell 401–829-6729
Internet: william@emergingmarketstrategies.com
http://www.emergingmarketstrategies.com/

Chinese Headline: Stock and Real Estate Markets Hit Bottom! Bottom Falls Out!

William Gamble — Fri, 01 Aug 2008 09:59:41 GMT

Chinese Headline
Stock and Real Estate Markets Hit Bottom! Bottom Falls Out!

According to Fan Gang a member of the Chinese central bank’s monetary committee "Adjustments in the stock market, the housing market and energy prices have all already happened. I think the correction has almost finished by now and (prices) might trend up in the future," He also asks “How could (stock) prices drop any further?" When the Titanic was filling with water, I am sure that many of the passengers were sure that the ship could not sink any further.

Standard &Poor’s, the people whose ratings helped create the subprime mess, apparently agree with Mr. Fan. They have upgraded China’s sovereign debt. Logical for a country with $1.8 trillion in foreign reserves. They do make one interesting point. According to S&P, China could have an abrupt slowdown because of distress in the banking sector made worse by the reliance on administrative measures to manage the economy. In other words, China may have a bad debt problem that makes the US’s issues look tiny and China does not have the financial or regulatory institutions to deal with the problem.

Well how could such a bad debt problem occur? First, there are the old bad debts. According to a report by Earnst &Young in 2006, Chinese financial system had bad debts of close to a trillion dollars. The Chinese government quashed the report, but that does not mean that the debts have gone away. Second there are new debts. If your stock and real estate market collapse by 50% in less than 6 months, doesn’t that indicate that there might be some major financial losses? Isn’t it just possible that some of those losses were leveraged by debt?

The US economy has been kept afloat by increased exports from a declining dollar. What would be the effect on the Chinese economy from a rising currency? Yet despite the negative impact on the important export sector, the Mr. Fan said a gradually rising currency is in China's best interests. Of course a rising currency means a greater inflow of speculative capital, liquidity, and eventually more inflation and bad loans.

So of course the stock market can drop further, the real estate and export market can get worse, inflation can rise and the economy can continue its abrupt slowdown. But as Mr. Fan points out, Beijing does not have a better policy alternative.

I am William Gamble, JD, LLM, Ex MBA, KSC, a consultant specializing in emerging markets. I have been quoted or interviewed by ABC, CNN Asia, Bloomberg, Fox, CNBC, NPR and other television and radio stations around the world. I have published 24 letters in Financial Times and articles in Foreign Affairs, and Harvard International Review. I have been quoted USA TODAY, The Far Eastern Economic Review, The International Herald Tribune, The South China Morning Post, Sankei Shimbun. I have written two books Investing in China and Freedom: America’s Competitive Advantage in the Global Market. In the past year I have spoken to CFA societies in 10 countries and 9 US cities as well as other conferences all over the world.

http://www.ft.com/cms/s/0/a4dd327e-1855-11db-99a6-0000779e2340.html

7 thing you do not know about China

William Gamble — Fri, 01 Aug 2008 09:59:38 GMT

Soon the coverage of the Beijing Olympics will overwhelm the media. There will be never ending stories about China’s spectacular growth and forecasts of what that means in the future. But there is another story, a darker story. There are things about China that are not well known and every economic forecast at some point in time is wrong.

1. The Chinese stock market has lost over 50% in value in less than 8 months.

2. In Shenzhen, a city that borders Hong Kong, the average price of property dropped 30% this year in 3 months. Sales of apartments in Shanghai are off 50% this year. Housing prices are also vulnerable in Beijing, Shanghai, Hangzhou, Ningbo and Haikou on the coast, and Wuhan, Nanning, Xi'an, Lanzhou and Urumqi in the interior. Can you say subprime in Chinese?

3. The number of shoe factories in the province of Guangdong outside of Hong Kong, the so called work shop of the world, has dropped 40% since 2002. Over 10,000 factories have closed since the introduction of a new labor law at the beginning of the year.

4. Of the top 20 most polluted cities in the world, 16 are located in China.

5. According to the Chinese Ministry of Public Security there were over 74,000 protests in 2004 involving more than 3.7m people; up from 10,000 in 1994 and 58,000 in 2003. The number is increase geometrically. Although the protests in Tibet were widely covered, a violent protest in June brought 30,000 residents on to the streets of Wengan, in Guizhou province.

6. China is experiencing the worst power shortage in at least four years. The miss match between soaring coal prices and government-set electricity rates have resulted in the closure of over 58 power stations. Almost half of China’s provinces have started to ration electricity.

7. In 2006 a report by Earnst & Young estimated that the Chinese financial system had bad debts of close to a trillion dollars. No doubt the number is much higher as a result of the real estate and stock market crash.

Information, Markets and China

William Gamble — Fri, 01 Aug 2008 09:59:33 GMT

The main problem with any information in China is that no one really knows, for the very simple reason that information is controlled. Markets are about choice. To make a choice you need one thing, information. You need to know if a detergent will get your shirts white or if your investment will make money. To get accurate, complete and timely information you need to protect free speech and enforce disclosure. If you do not then the information will be incorrect and the choices will be ill informed. If you have bad choices then you have an inefficient allocation of capital which, over time, will have severe consequences.

A good example is the Chinese stock market. I predicted that the Chinese stock market was a bubble in a letter to the Financial Times on May 15, 2007. What is interesting about the Chinese stock market is that it follows the same pattern of the Saudi market and the Vietnamese stock market. All of these markets have many things in common, the most important is information

These markets are dominated by state owned companies. State owned companies are very difficult to regulate because they are part of the same state that controls the regulator. They also operate for political reasons not for profit. If you want to see another similar example you have only to look at the Fannie Mae, Freddie Mac mess in the US. If there is an economic incentive not to disclose accurate, timely and complete information, and there are few legal or economic disincentives that require adequate information, people anywhere will lie. Since any market dominated by state owned companies have enormous conflicts of interests with the regulator (see Fannie and Freddie), the markets will not have accurate information. The markets will move by rumor and government statements. The result will be an inevitable bubble.

Information is more important in real estate markets, because the product is not fungible. As a result they often are ‘sticky’, but when they move the moves can be dramatic even in systems where the information is the best available. There have been improvements recently with things like the Case Schiller index in the US, but these things are still in their infancy. In emerging markets, they don’t exist especially in China.

The real problem is the lack of institutions, specifically a reliable legal system. Investors want a return on their investment, but even more they want their investment back. When things go sour during down turns, investors and home owners will turn to the law to see that their investments are protected. Without an adequate system, there will be problems. No market goes up forever. No economy grows forever. The real test of sustainable economic growth is how flexible an economy will be in a down turn. The ‘tiger’ economies of South East Asia have never recovered their rapid growth after 1997 basically because their legal institutions including corporate structures have not been able to adapt.

The real problem for China will be social unrest which I pointed out has been rising. De Tocqueville pointed out that the French Revolution did not happen because the poor revolted. It occurred because people were getting rich and had something to protect.

Manufacturing Outlook

William Gamble — Wed, 23 Jul 2008 13:06:43 GMT

In fact for US manufacturing the environment could not be better. Thanks to the rapid decline of interest rates orchestrated by the US Federal Reserve, the America dollar has tanked, making Americas exports available at bargain basement prices. For example, Caterpillar just recorded record profits. The problem is that inflation is growing throughout the world. Two thirds of the world will have double digit inflation by the end of the summer. Inflation is already out of control in the US, so Yo-Yo Ben Bernanke will have to rapidly raise interest rates. This will strengthen the dollar, which along with the global turndown, will negatively affect manufacturing.

The Myth of the Black Swans: Financial Times

William Gamble — Wed, 21 May 2008 15:46:54 GMT

The main point about black swans and credit crises

Published: May 17 2008 03:00 | Last updated: May 17 2008 03:00

From Mr William Gamble.

Sir, I agree with John Authers (The Short View, May 14) about the present interest in ornithology. The point about black swans is not that they were unique; it is simply that the Europeans did not know about them. The same is true of the credit crises.

The issue is not the rarity of the event, but the quality and the availability of information. The present subprime crises occurred because securitisation changed the economic incentives for lenders. Since it was no longer necessary to keep a loan on their books, their economic incentive was to make as many as possible without regard to quality.

They lost the economic incentive to get and update information. As George Soros put it: “Securitisation had the effect of transferring risk from people who are supposed to know risk and know the borrowers to people who don’t.”

No set of regulatory regimes can provide sufficient legal disincentives to solve the problem even in the most open law abiding markets. They do not exist in others. As Warren Buffett points out: “If I cannot understand an annual report, perhaps someone does not want me to.”

The point for risk managers is not that the numbers or models do not accurately forecast rare events. It is that obtaining and understanding accurate and complete information is in itself a rare event. It's not the unexpected that causes trouble. It’s what is ignored, unavailable or untrue.

William Gamble,
Emerging Market Strategies,
East Providence, RI 02914, US

End of High Oil Prices

William Gamble — Wed, 21 May 2008 15:45:06 GMT

Despite all of the dire predictions about the price of oil, the truth is that it will go down, all markets do. What we are witnessing is the last stages of a buying frenzy as part of a commodities bubble. If for no other reason the price of oil will go down, because the higher it rises, the greater the possibility of recession. A high price of oil means that one of the largest inputs for any economic activity is priced out of reach. Margins go down as the price of oil goes up. Either inflation goes up or the economic activity stops or both. If the economic activity stops or slows, a recession occurs. If inflation goes up, eventually the central bank or government will have to slow the economy to get rid of inflation or face social and economic disaster. In either event, the country goes into recession. Since the price of oil is high around the world, the process repeats itself in country after country as the world goes into recession. With economic growth stifled around the world, the demands for oil declines as will its price.

The analysis of why there is an oil shortage is also wrong. The real reason for high prices is socialism. From a supply side, the problem is state owned oil companies. While everyone focuses their criticism on large multinational oil companies, the real culprits, huge state owned companies, never get mentioned. The truth is that the multinational oil companies are midgets compared to the state owned companies like Saudi Aramco, Qatar Petroleum, Venezuela’s PDVSA, National Iranian Oil Company, and Russia’s Rosneft and Gazprom. These are the real companies who control the price of oil and they all have a problem. They are run by politicians who steal and who can’t develop the reserves they have. As a result the amount of oil that these companies produce is often declining resulting in less oil for the world market.

The other part of the socialist problem is demand. Countries from China, Russia, India, Indonesia and many others subsidize the price of fuel. This is supposed to help the poor, but it also encourages people to be wasteful and economies to be inefficient. It wastes scarce resources, but many of these countries are not democracies, so the social unrest from the loss of these subsidies cannot be contemplated. Eventually the costs from these subsidies will be simply too great. China is running its national oil companies into the ground by forcing them to subsidize the price of energy. Its power plants are closing because the price of electricity is fixed but the price of coal is not. Eventually this system collapses and will result in less demand and lower prices, to say nothing of the misery that these countries will inflict on their own citizens.

Risiing Food and Oil Prices II

William Gamble — Wed, 14 May 2008 13:12:31 GMT

The causes of rising food prices have been ascribed to ethanol production, rising standards of living in India and China and even evil speculators. It is true that ethanol production has contributed an estimated 20% to the rise of food prices. It is also true that rising standards of living have pushed up the price of food as more meat, which requires more grain, to be included in the diets of people in developing world. Speculation has also played a part, but the real reason is for the present rise in food and oil prices is poor government policy.

Most of the large grain exporting countries, Argentina, Russia, Ukraine and Kazakhstan and the rice exporting countries like Vietnam and Egypt have placed higher export tariffs or restrictions to lower local food prices and mollify restive populations. This has restricted supplies on international markets and raised prices everywhere. It also lessens economic incentives to local farmers in those countries to produce more. Worse, many countries have instituted price controls that just delays increases in prices.

Oil has been restricted by nationalizations of oil industries in Venezuela and Russia by inefficient and corrupt national corporations have lowered the amount of oil produced. Increases in national taxes and exploration restrictions have lowered the incentives for oil companies to produce and discover new sources.

Eventually both oil and food prices will come down as the world demand lessens as result of a global recession. However, the point is that the world has always been resource poor for any species including us. We should encourage markets to provide alternatives rather than provide subsidies or restrictions that discourage them.

Black Swans

William Gamble — Wed, 14 May 2008 13:04:43 GMT

Recently there have been a great deal of interest among financial analysts in ornithology, specifically black swans. This is due to a book by Nassim Nicholas Talebs best-selling book Black Swans. When Europeans explored Australia, they were surprised to find black swans, something they did not think existed. The idea was that past experience in markets does not always predict extreme and rare situations that can create panic and disaster.

The point about black swans is not that they were unique; it is simply that the Europeans did not know about them. The same is true of the credit crises. The issue is not the rarity of the event but the quality and the availability of information. The present subprime crises occurred because securitization changed the economic incentives for lenders. Since it was no longer necessary to keep a loan on their books, their economic incentive was to make as many as possible without regard to quality. They lost the economic incentive to get and update information. As George Soros put it, "Securitization had the effect of transferring risk from people who are supposed to know risk and know the borrowers to people who don’t."

The problem with any management model is that it is based on the information put into it. If there are economic incentives to provide bad, late or incomplete information to the markets, problems will occur. There are enormous economic incentives in both developed and emerging markets to obfuscate, spin or simply lie. No set of regulatory regimes can provide sufficient legal disincentives to solve the problem even in the most open law abiding markets. They do not exist in others. As Warren Buffet points out, "If I cannot understand an annual report, perhaps someone does not want me to".

The point for risk managers is not that the numbers or models do not accurately forecast rare events. It is that obtaining and understanding accurate and complete information is in itself a rare event. It’s not the unexpected that causes trouble. It’s what is ignored, unavailable or untrue.

Real Cause of Rising Food Prices

William Gamble — Tue, 29 Apr 2008 09:08:57 GMT

It is generally agreed that food prices have risen for three reasons:

1) The first is the sharp rise in demand for grain in China. The Chinese are increasing the quantity of meat in their own diet. (Meat production requires significant input of grain.)

2) the promotion of alternative sources of energy -- primarily ethanol -- by the governments of developed countries, which has significantly cut into the supply of grain in the world market.

3) ongoing droughts in Australia

This is wrong. All of these factors do contribute to the rise of the food prices, but they are also all foreseeable. They would not cause such a rapid increase of food in such a short period of time. The main problem has two aspects. Global inflation which is running at all time highs almost everywhere in the world. Second, and more importantly, government regulations. With a few exceptions all of the major exporters of wheat and rice have slapped either high tariffs or export bands. This has reduced the amount of food getting to market at the expense of local farmers and the poor around the world. The bands are in place to placate and protect restive populations usually in totalitarian countries from rises in food prices. The price rises happened rapidly because these controls were put in place recently and their effects on the markets have been dramatic.

There is no food crises. There is a crises of bad government.

I am William Gamble, JD, LLM, Ex MBA, KSC, a consultant specializing in emerging markets. I have been quoted or interviewed by ABC, CNN Asia, Bloomberg, Fox, CNBC, NPR and other television and radio stations around the world. I have published 24 letters in Financial Times and articles in Foreign Affairs, and Harvard International Review. I have been quoted USA TODAY, The Far Eastern Economic Review, The International Herald Tribune, The South China Morning Post, Sankei Shimbun. I have written two books Investing in China and Freedom: America’s Competitive Advantage in the Global Market. In the past year I have spoken to CFA societies in 10 countries and 8 US cities as well as conferences all over the world.

William Gamble

Author: Freedom: America’s Competitive Advantage in the Global Market

EMERGING MARKET STRATEGIES

Suite 1D

1990 Pawtucket Ave

East Providence, RI 02914

Tel: 401-272-8906; Fax:401-272-8139; Cell 401–829-6729

Internet: william@emergingmarketstrategies.com

http://www.emergingmarketstrategies.com/

Problems with the Chinese Economy: The real China Story

William Gamble — Tue, 22 Apr 2008 09:48:06 GMT

The real China story is not really about the Olympic or Tibet, but it is about China’s image. It is far more damaging and will last a long time. It is about the collapsing Chinese economy. The stock market is off 50%. Real estate in Shanghai is off 10%. In Shenzhen real estate prices have fallen an average of 28% and there are reports of falls of up to 50%. These have occurred since last fall! Far faster than anywhere in the world. The collapse of these markets will undoubtedly have an effect on the Chinese bad loan problem and its financial system. Can you say subprime in Chinese? The number of shoe factories in Guangdong has dropped 40% since 2002. Over 40% of Chinese textile factories are losing money. After the lunar New Year, 30% of the Guangdong migrant workers did not return. According to a survey of the American Chamber of Commerce in Shanghai, two thirds of the members thought China was losing its edge as a source for manufacturing and 17% were thinking of leaving. Of course we don’t really know what the real numbers are because the press is restricted. Markets are about choice. To make a good choice you need information. To get accurate and timely information you need free speech. Without information markets eventually collapse.

Solving the Immigration Problem: Declining Dollar and Recession

William Gamble — Wed, 02 Apr 2008 14:52:20 GMT

Why build a fence when you can stop immigration with the value of the dollar? One of the unintended consequences of the falling dollar is falling illegal immigration. It has been generally reported that the dollar has fallen against the Euro and the Yen. What has not generally been reported is that it has also fallen against the Filipino Peso and the Brazilian real. This makes any money earned in the US worth less when it is sent home. As a result the US is not longer the country of choice for illegal immigrants from countries with strong currencies. They would rather go to Europe. The US share of remittances to Latin America has declined from 90% to 80%. The Mexican Peso has been relatively stable against the dollar, but construction jobs in the US have fallen and with them the lure of better wages.

The total projected that remittances to developing countries increased to $240bn in 2007 compared to $221bn in 2006, but the value of some of those remittances has declined with the dollar. India was the biggest remittances recipient last year with $24.5bn, followed by Mexico at $24.2bn and China with $21bn. However, because of the dollar's decline against the Filipinos peso (25%), and against the Brazilian real (21%) have been particularly acute, remittances to those countries have declined in purchasing power. Of course, most Filipinos do not work in the US. They are still hurt by the dollar's decline because they work in Arab Gulf countries and Hong Kong where the local currency is pegged to the dollar.

Financial Experts: Chinese Stock Market

William Gamble — Fri, 28 Mar 2008 10:20:22 GMT

The Chinese stock market closed down over 5% yesterday, 45% off of its all time high last October. With one notable exception this is contrary to most analysts’ predictions. IT is always impressive how much financial experts are paid to be wrong.

"The collapse of the Chinese stock market is not a question of if, only when. The real question will be how many dominoes it will take with it." William Gamble Financial Times May 15, 2007

"This month Stanley Ho, the Macao gaming king, signaled his bullishness about the Hong Kong market by predicting that, once the flagship index breached 30,000 (it finally did yesterday, hitting 30,405.22), it would power towards 40,000" Financial Times Oct 27, 2007

"Jing Ulrich, JPMorgan chairman of China equities, rates the A-share market as expensive but doesn't believe it will crash - corporate earnings growth remains robust, the quality of listed companies joining the stock market is rising every month and the macroeconomy remains strong." Financial Times Oct 27, 2007

"If share prices in Shanghai continue to soar and more Chinese companies carry out IPOS, it will push China’s total stockmarket capitalisation ahead of Japan’s and second only to America’s. Chinese firms will increasingly dominate international corporate rankings. Already, by late 2007, three of the world’s six biggest companies by market capitalisation were Chinese. In 2008 PetroChina could even eclipse Exxon Mobil as the world’s largest company by market value " Pam Woodall | HONG KONG From The World in 2008 Economist print edition

"Jim Rogers, the investor and author, has warned of an "incipient bubble" in the mainland Chinese stock market in an interview with the Financial Times. He is recommending that investors should buy Hong Kong-listed shares in Chinese companies instead." Financial Times Oct 30, 2007

"Adrian Mowat, JPMorgan's chief Asian and emerging markets equity strategist, says this huge discount on Hong Kong-listed mainland companies now represents an excellent buying opportunity for investors to accumulate Hong Kong-listed shares of mainland companies. What message is Mowat conveying to clients in the U.S.? "I am telling them to buy, and buy aggressively," he says." Business week August 22, 2007

"Gene Sit of Sit Investment Associates says once the hot market cools down, a soft landing will make many stocks attractive. Gene Sit thinks China's stock market is ready to burst. But he figures the damage won't go deep. A soft landing to us means a correction to about 5,300—so 1,000 points, or around 15% below where we are now. That would bring the p-e to 35 on next year's earnings. If we're wrong and all hell breaks lose, you could see 4,500, or a p-e of 30." Business Week October 17, 2007

"Some fearless forecasters predict that the Dow will streak to 16,000 and that the Standard & Poor's 500-stock index will go to 1,700 over the next 6 to 12 months. I agree with that forecast. Why? Let me be brief: It's the global economic boom" Gene Marcial Business Week October 17, 2007

The Flaw in Carbon Trading Sysems

William Gamble — Fri, 21 Mar 2008 14:52:42 GMT

What people do not understand about these things is that they are totally synthetic creatures of law. Their effectiveness is only as good as the law itself. The premise of carbon credit trading is that by putting a value on what otherwise would be a free externality you provide an economic incentive for people to reduce pollution or carbon emissions. For example, a coal burning utility in the US Midwest pays Brazil to preserve rain forest. Fine, but the problem is that who insures that the parties to the transaction don’t cheat? Most markets are self enforcing because each party has a large economic incentive to be sure the thing works. If I buy wheat futures, I have a large economic incentive to get the wheat. What economic incentive does the utility have in insuring that Brazil does not destroy rain forest? Then what power do they have to force the Brazilian government to perform? There are independent certifying organizations but I have doubts as to how well they can police the process especially in emerging markets.

Yo Yo Ben

William Gamble — Wed, 19 Mar 2008 09:10:12 GMT

Rate cuts by the Fed are generally considered to help the economy, but do they? Rate cuts always have the possibility of increasing inflation. This is more true today than at any other time since the late 70’s. Inflation is everywhere. In China it is at an 11 year high of 8.7% and climbing. Russia is up to 12%. Egypt and the middle east are over 12% . Venezuela and Argentina are over 20%. Both oil and food prices are breaking records. A crashing dollar will push inflation. The Fed’s cut in January resulted in higher long term bond yields, as markets became wary of inflation, making the Fed look impotent. The cut also will narrow margins for shaky banks. Large cuts may result later in large raises to stem inflation. The remote deity Greenspan may be replaced by Yo-Yo Bernanke.

Neurology of Rate Cuts

William Gamble — Wed, 19 Mar 2008 09:06:35 GMT

Prior to the use of law, people used something more basic, trust. There is a neurological basis for this. The work of Nobel laureate, Vernon Smith, and Professor Paul Zak has shown that there is actually a neurological pay out for trust in the form of the feel good neuropeptide, oxytocin. The problem with trust is illustrated in game theory. It has to be built up over repeated games before reputations are established. What occurs in these repeated games is that information about the dependability of the counter party is transferred. With more information, the parties can establish a relationship and their transactions can become more efficient. This is the problem with the Fed’s actions. This is the problem with markets around the world.

Rate cuts and liquidity cannot by themselves restore trust. This takes time. What can help the process is for all markets to require as much transparency and disclosure as possible. Unfortunately, the economic incentives to withhold information are enormous, so markets are left with as many suspicions as the partner of a philandering spouse. These problems are exacerbated in emerging markets were weak legal systems allow silence or fraud. It is only when the truth finally comes out, that markets can determine true value again. Rate cuts only provide the presumption of solvency, not the reality.

William Gamble
Author: Freedom: America's Competitive Advantage in the Global Market
EMERGING MARKET STRATEGIES
Suite 1D
1990 Pawtucket Ave
East Providence, RI 02914
Tel: 401-272-8906;Fax:401-272-8139; Cell 401–829-6729
Internet: william@emergingmarketstrategies.com
http://www.emergingmarketstrategies.com/

The Bear FAQs

William Gamble — Mon, 17 Mar 2008 14:19:16 GMT

The Bear FAQs

1. As a result of Bear Stern commodities are falling:

These were bubbles. Speculative bets. When the market becomes unstable, traders get margin calls and have to close out positions preferably in assets that have some gains. These things feed on themselves. Oil was 7% net long which is theoretically the place for a price correction. There was also the fear of settlement risk. See below

2. What happens to the positions that Bear Stearns has had in commodities, for example?

My bet is that this is what scared the Fed. If Bear Stearns went belly up, counter parties would become creditors in a bankruptcy proceeding. It would mean that they could not close out their positions, because their counter party no longer existed. When this happens the dominos start to fall. In 1974, German regulators forced the troubled Bank Herstatt into liquidation. There was a time difference and Herstatt's counter parties in NY did not receive their dollar payments for money they had delivered to Herstatt in Frankfort before it ceased operations. This has become known as Herstatt risk. Specifically it occurs when one party to a foreign exchange trade pays out the currency it sold but does not receive the currency in return. This type of counter party risk or settlement occurs when the markets are in turmoil. It occurred with energy futures back in 2002 with Enron and Dynergy. If Bear went under, there would have been a lot of counter parties hanging.

3. Does JP Morgan take them over, or liquidate? What do you think?
Depends what they find. They got Bear pretty cheap. My bet is that they will keep it.

4.What's your own macro analysis of the Bear Stearns fireside sale: in other words, what's the next shoe to drop, you think?

The next shoe will be banking systems in emerging markets. For example the Kazak banking system borrowed $40 billion from the international banking system. The Russian banks borrowed $140 billion. They lent a lot of the money on consumer, retail and mortgage loans. Right now this does not look like a problem in some of these economies because they have high reserves, high oil, and, for now, strong economies. But as the recession starts to bite, these things will go south. You are starting to see problems every where from the Balts, to Romania to India. The 40% fall in the Chinese stock market must have hurt any number of the 33 million of people who opened new accounts. These countries will probably dip into their reserves to pay back western banks and prop up the locals, but it will hurt.

Investing in Down Markets

William Gamble — Fri, 14 Mar 2008 09:54:46 GMT

I used to tell my boy scout personal management merit badge class that after thirty years of investing, I was sure of only one thing about markets. They go up and down. We just don't know when. When something like oil hits a new high, you know that the probability of it going higher is much lower than the probability of it going lower. So how do you profit from a decline in oil? If you use options, the option could expire before oil declines. You could short an oil stock, but the stock may move independently of the price of oil or other companies in the sector. You could buy a hedge fund, but the fees will kill you. If you short an ETF, it costs you very little, it is diversified, and you can hold it until the market moves, which, in time, it will.

Declining Gas Prices?

William Gamble — Thu, 13 Mar 2008 08:40:04 GMT

The International Energy Agency, western countries' watchdog, was quoted yesterday that "only a protracted and severe global recession would justify a sustained dip in oil prices below" $60 a barrel. Guess what? Ask and you shall receive. A global recession is here. My recent trip to Budapest and Istanbul revealed the paradox and the problem. The large traffic jams to cross the Bosporus illustrated why the global demand for oil has been pushed beyond $100 a barrel. But where did all of these people with incomes of less than $10,000, a quarter of the US, get the money to buy cars? Simple. They borrowed it.

Income growth, increasing bank credit, and remittances from abroad have driven consumption booms around the developing world. According to Alan Greenspan there have been real estate booms in 40 countries. A Russian bank has issued over 80,000 credit cards a day. But this lending in emerging markets is as vulnerable to a down turn as it was in the US. How many languages can you say subprime?

As global credit markets contract, the cracks are starting to show. Kazak banks owe $40 billion. Russian banks owe $140 billion. Default rates are soaring. Trading in Hungarian government bonds stopped twice in the last two weeks. China’s stock market is off 36%. Its real estate market is crashing. Developers and real estate agencies are closing their doors. The shoe industry in Guangdong is down 40% since 2002 and 17% of textile factories lose money.

The global boom of the past five years that has caused the rise of gas prices was fueled by cheap credit and it is now running on empty. As the global expansion turns into a global contraction, the demand for oil and other commodities will lessen along with the high price, but at a large cost.

William Gamble

Author: Freedom: America’s Competitive Advantage in the Global Market