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10 Trends for 2011 by Gerald Celente

After the tumultuous years of the Great Recession, a battered people may wish that 2011 will bring a return to kinder, gentler times. But that is not what we are predicting. Instead, the fruits of government and institutional action – and inaction – on many fronts will ripen in unplanned-for fashions.

Trends we have previously identified, and that have been brewing for some time, will reach maturity in 2011, impacting just about everyone in the world.

1. Wake-Up Call In 2011, the people of all nations will fully recognize how grave economic conditions have become, how ineffectual and self-serving the so-called solutions have been, and how dire the consequences will be. Having become convinced of the inability of leaders and know-it-all “arbiters of everything” to fulfill their promises, the people will do more than just question authority, they will defy authority. The seeds of revolution will be sown….

2. Crack-Up 2011 Among our Top Trends for last year was the “Crash of 2010.” What happened? The stock market didn’t crash. We know. We made it clear in our Autumn Trends Journal that we were not forecasting a stock market crash – the equity markets were no longer a legitimate indicator of recovery or the real state of the economy. Yet the reliable indicators (employment numbers, the real estate market, currency pressures, sovereign debt problems) all bordered between crisis and disaster. In 2011, with the arsenal of schemes to prop them up depleted, we predict “Crack-Up 2011”: teetering economies will collapse, currency wars will ensue, trade barriers will be erected, economic unions will splinter, and the onset of the “Greatest Depression” will be recognized by everyone….

3. Screw the People As times get even tougher and people get even poorer, the “authorities” will intensify their efforts to extract the funds needed to meet fiscal obligations. While there will be variations on the theme, the governments’ song will be the same: cut what you give, raise what you take.

4. Crime Waves No job + no money + compounding debt = high stress, strained relations, short fuses. In 2011, with the fuse lit, it will be prime time for Crime Time. When people lose everything and they have nothing left to lose, they lose it. Hardship-driven crimes will be committed across the socioeconomic spectrum by legions of the on-the-edge desperate who will do whatever they must to keep a roof over their heads and put food on the table….

5. Crackdown on Liberty As crime rates rise, so will the voices demanding a crackdown. A national crusade to “Get Tough on Crime” will be waged against the citizenry. And just as in the “War on Terror,” where “suspected terrorists” are killed before proven guilty or jailed without trial, in the “War on Crime” everyone is a suspect until proven innocent….

6. Alternative Energy In laboratories and workshops unnoticed by mainstream analysts, scientific visionaries and entrepreneurs are forging a new physics incorporating principles once thought impossible, working to create devices that liberate more energy than they consume. What are they, and how long will it be before they can be brought to market? Shrewd investors will ignore the “can’t be done” skepticism, and examine the newly emerging energy trend opportunities that will come of age in 2011….

7. Journalism 2.0 Though the trend has been in the making since the dawn of the Internet Revolution, 2011 will mark the year that new methods of news and information distribution will render the 20th century model obsolete. With its unparalleled reach across borders and language barriers, “Journalism 2.0” has the potential to influence and educate citizens in a way that governments and corporate media moguls would never permit. Of the hundreds of trends we have forecast over three decades, few have the possibility of such far-reaching effects….

8. Cyberwars Just a decade ago, when the digital age was blooming and hackers were looked upon as annoying geeks, we forecast that the intrinsic fragility of the Internet and the vulnerability of the data it carried made it ripe for cyber-crime and cyber-warfare to flourish. In 2010, every major government acknowledged that Cyberwar was a clear and present danger and, in fact, had already begun. The demonstrable effects of Cyberwar and its companion, Cybercrime, are already significant – and will come of age in 2011. Equally disruptive will be the harsh measures taken by global governments to control free access to the web, identify its users, and literally shut down computers that it considers a threat to national security….

9. Youth of the World Unite University degrees in hand yet out of work, in debt and with no prospects on the horizon, feeling betrayed and angry, forced to live back at home, young adults and 20-somethings are mad as hell, and they’re not going to take it anymore. Filled with vigor, rife with passion, but not mature enough to control their impulses, the confrontations they engage in will often escalate disproportionately. Government efforts to exert control and return the youth to quiet complacency will be ham-fisted and ineffectual. The Revolution will be televised … blogged, YouTubed, Twittered and….

10. End of The World! The closer we get to 2012, the louder the calls will be that the “End is Near!” There have always been sects, at any time in history, that saw signs and portents proving the end of the world was imminent. But 2012 seems to hold a special meaning across a wide segment of “End-time” believers. Among the Armageddonites, the actual end of the world and annihilation of the Earth in 2012 is a matter of certainty. Even the rational and informed that carefully follow the news of never-ending global crises, may sometimes feel the world is in a perilous state. Both streams of thought are leading many to reevaluate their chances for personal survival, be it in heaven or on earth….

See also http://www.trendsresearch.com/forecast.html

Source: Gerald Celente, Trendsresearch, 18.12.2010

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Filed under: Banking, Energy & Environment, News, Risk Management, Services, Wealth Management, , , , , , , , , , , , , , , , ,

BlackRock Bob Dolls: 10 prediction for the next 10 years

“10 Predictions for the Next 10 Years” by BlackRock’s Bob Doll and what it means to investors:

  1. U.S. equities experience high single-digit percentage total returns after the worst decade since the 1930s.
  2. Recessions occur more frequently during this decade than only once a decade as occurred in the last 20 years.
  3. Healthcare, information technology and energy alternatives are leading growth areas for the U.S.
  4. The U.S. dollar continues to be less dominant as the decade progresses.
  5. Interest rates move irregularly higher in the developing world.
  6. Country self-interest leads to more trade and political conflicts.
  7. An aging and declining population gives Europe some of Japan’s problems.
  8. World growth is led by emerging market consumers.
  9. Emerging markets weighting in global indices rises significantly.
  10. China’s economic and political ascent continues.

Read Bob Doll’s full report  10 Predictions for the next Decade

Source:BlackRock / Carral Sierra, 02.08.2010

Filed under: Banking, Brazil, China, Energy & Environment, Japan, Korea, Mexico, News, Risk Management, Wealth Management, , , , , , , , , , , , , , , , , , , , , , ,

China’s banking sector Serious Problem with Bad Loans

Professor Pettis at Peking University explains that“in China, even if you believe that all the NPLs currently in the banking system have been correctly identified (a claim which few Chinese bankers believe), no one doubts we are about to see a surge in NPLs thanks to the out-of-control lending expansion of the past two years.  But things are even worse than the nominal numbers imply.  As I discussed in my April 6 entry, when we are trying to estimate the cost of a banking crisis we need to think about more than simply the ability of borrowers to meet current obligations.

This is because, as in the case of the Japanese government obligations, when borrowers are able to benefit from artificially low interest rates, the effect is of hidden debt forgiveness which must be paid for by the net lenders, who are, as in the case of Japan, the beleaguered households.  In other words, if you want to know how much real bad debt there is out there that must be cleaned up, you need to calculate what share of the loans would go bad if interest rates were raised by at least 300-400 basis points, the minimum needed to bring Chinese interest rates in line with an appropriate rate.  This suggests that the Chinese banks, if obligations were correctly counted, might have much larger amounts of bad debt than any of us realize, and this needs directly or indirectly to be cleaned up.”

Here are some recent reports from financial press sources regarding the health China’s banking sector:

-”SHANGHAI -(Dow Jones)- The non-performing loan ratio in China’s banking industry declined to 1.58% by the end of 2009, 0.84 percentage point lower than the figure at the beginning of 2009, China’s banking regulator said Saturday.”(1)

-”BEIJING: Chinese financial institutions’ non-performing loans (NPL) ratio edged down 0.1 percentage points to 1.48 percent in January, the China Banking Regulatory Commission (CBRC) said Friday.”(2)

-”BEIJING, Apr 14, 2010 (SinoCast Daily Business Beat via COMTEX) — Non-performing loan (NPL) ratio of China Development Bank, a policy bank, had reached 0.85% by the end of March”(3)

I don’t believe those reported percentages are accurate.

For context, here is an analysis of China’s non performing loan issue from 2002:

“Standard and Poor’s (S&P), which rates China as investment grade, said on Thursday it would take Chinese banks 10 to 20 years to cut average non-performing loans (NPLs) ratio to a manageable five per cent.

It estimates the Chinese banking sector’s average NPL ratio is atleast 50 per cent, higher than the 30 per cent estimate of China’s central bank governor Dai Xianglong.

“The cost of necessary write-offs could be equivalent to $518 billion or almost half of China’s estimated gross domestic product of $1.1 trillion for 2001,” Mr Terry Chan, a S&P director in Hong Kong said.

The agency said China would be unlikely to cut NPLs in its banking sector to 15 per cent within five years, as its central bank wishes, given the current operating performance of the sector.”

I seriously doubt that the problem identified in 2002 has been resolved yet.  There is an analysis here that supports my assertion.

Source:SinoRock, 07.07.2010

Filed under: Banking, China, News, Risk Management, , , , , , , , , , , , ,

China: The collapse of the Asian growth model

Over the last three decades there has been a dramatic shift in the stance of development policy with import-substitution being replaced by the export-led growth. A significant concern with this latter model is that it may risk turning global growth into a zero-sum game. This can happen if one country’s export growth comes by poaching of domestic demand elsewhere or by displacing exports of other countries.

China on ‘Treadmill to Hell’ Amid Bubble, Chanos, Faber, Rogoff Say

Rather than focusing on production for domestic markets, countries were advised to focus on production for export. This shift away from import-substitution toward the export-led growth was driven significantly by the economic troubles that emerged in the 1970s. At that time many developing countries, who had prospered under regimes of import-substitution, began to experience slower growth and accelerated inflation.
This led to claims that the import-substitution model had exhausted itself, and that the easy possibilities for growth by substitution had been used up.second factor fostering adoption of the export-led model was the shift in intellectual outlook amongst economists in favor of market directed economic activity. Import-substitution requires government provided tariff and quota protections, and economists increasingly came to portray these measures as economic distortions that contribute to productive inefficiency and rent seeking.
The shift in policy stance was also propelled by the empirical fact of Japan’s spectacular success in growing its economy in the twenty five years after World War II, and by the subsequent growth success of the four east Asian “tiger” economies – South Korea, Taiwan, Hong Kong, and Singapore. All of these economies relied on increased exports.

The problem is that the export-led growth model suffers from a fallacy of composition whereby it assumes that all countries can grow by relying on demand growth in other countries. When the model is applied globally in a demand-constrained world, there is a danger of a beggar-thy-neighbor outcome in which all try to grow on the backs of demand expansion in other countries, and the result is global excess supply and deflation. In this connection, it is not exporting per se that is the problem, but rather making exports the focus of development. Countries will still need to export to pay for their imported capital and intermediate goods needs, but exporting should be organized so as to maximize its contribution to domestic development and not viewed as an end in itself.
Export led growth model prompts countries to shift ever more output onto global markets, and in doing so aggravates the long-standing trend deterioration in developing country terms of trade. This pattern partakes of a vicious cycle since declining terms of trade and falling prices compel developing countries to export even more, thereby compounding the downward price pressure. This vicious cycle has long been visible for producers of primary commodities. However, as a result of the transfer of manufacturing capacity to developing countries who lack the consumer markets to buy their own output, the same process may now be present in all but highest-end manufacturing.
In the 1950’s, Western opinion leaders found themselves both impressed and frightened by the extraordinary growth rates achieved by an Eastern economy, although it was still substantially poorer and smaller than those of the West.
The speed with which it had transformed itself from a peasant society into an industrial powerhouse, and it’s perceived ability to achieve growth rates several times higher than the advanced nations, seemed to call into question the dominance not only of Western power but of Western ideology.
The leaders of that nation did not share Western faith in free markets or unlimited civil liberties. They asserted with increasing self-confidence that their system was superior: societies that accepted strong, even authoritarian governments and are willing to limit individual liberties in the interest of the common good, take charge of their economies, and sacrifice short-run consumer interests for the sake of long-run growth that would eventually outperform the increasingly chaotic societies of the West.
China’s economic growth has averaged 9pc a year over the past 10 years, compared with a paltry 1.9pc for the British economy. Last year, despite the credit crunch, China posted a remarkable growth rate of 10.7pc against a British contraction of 3.2pc.some are extrapolating present trends forward, and proclaiming that China will usurp the United States as the world’s largest economy.
However, in the absence of expanding foreign demand for its exports, it has instead come to rely on a massive surge in domestic bank lending to fuel its growth rate. When measured relative to the size of its economy, the 27pc point jump in bank loans to GDP is unprecedented; at no point in history has a nation ever attempted such an incredible increase in state-directed bank lending.
This appetite for cheap Chinese exports, which had at one point seemed insatiable, means that the West has come to owe China over 2 trillion $. China has become the world’s biggest creditor, but creditor nations running persistent trade surpluses has two historical examples. The US economy in the Twenties and the Japanese economy in the Eighties.
In both of the previous examples a failure to allow exchange rates to adjust to the new reality created a large speculative pool of credit that, in turn, led to overvalued domestic assets and, eventually, an economic crisis.
The banks in China are lending money at breakneck speed, but China’s state planners have favoured investment over consumption. High-speed rail networks, first-class infrastructure projects and the urban migration of 55 million people every year are common explanations for the ability of the nimble Chinese to overcome the frailties of this global economy. But the goal of economic policy, is to maximise households’ wellbeing and consumption. Unfortunately, and China’s share of consumption within its economy has fallen relentlessly, reaching 35pc of GDP in 2008.
In China, investment spending has tripled since 2001 and the consequences are staggering. A country that represents just 7pc of global GDP is now responsible for 30pc of global aluminum consumption, 47pc of global steel consumption and 40pc of global copper consumption. The overriding problem is that the Chinese model leads to a deflationary spiral that is perpetual in nature. Domestic consumption never grows fast enough to absorb the supply, prompting the planners to commit to ever-higher levels of investment. Over-capacity inevitably plagues many sectors of the economy and Chinese profitability is already low.

The story in China has been one of imperiled, marginally profitable enterprises relying on generous state-provided incentives for utilities, credit, etc. now having to deal with slowing global demand. The drying up of trade finance isn’t helping, either. The giant stimulus worldwide, and especially in China, helped the world economy for one year but that has now dried up.

Source and full article at  Israel Financial Experts, 08.06. 2010,

Filed under: Asia, China, Energy & Environment, Hong Kong, News, Risk Management, , , , , , , , , , , , , , , , , , , , ,

Vietnam hikes interest rates and devalues currency

The central bank raises interest rates to 8% and devalues its currency – moves needed to keep inflation in check and growth on target.

Vietnam is first out of the gate in a race no one wants to be in. It is the first nation in Asia to raise interest rates in an effort to put a stop to rising inflation.

The State Bank of Vietnam will increase its benchmark interest rate to 8% from 7% as of December 1. This is the first increase since January, as for most of the year the government has been focused on achieving its 5% economic growth target. And indeed, while analysts said the hike was needed it was also a surprise — the central bank had earlier announced that the basic interest rate would be kept stabilised at least until the end of the year.

“The move came as a surprise, well sort of. We did expect interest rates to increase, but expectations were for early next year. The fact that inflation came in today at 4.4% year-on-year against 3.0% year-on-year last month, and that the currency kept weakening in the black market (not to mention the surging price of gold internationally)… probably prompted earlier action than what we believe authorities would have liked,” noted Ho Chi Minh-based analysts at VinaSecurities in a research report issued last night.

The State Bank of Vietnam also reset the US dollar reference rate to 17,961 dong from its current level of 17,034 dong, in its third devaluation of the currency in two years. The central bank will also narrow the trading band of the dollar against the dong to 3% from 5%.

This is an effort not only to bring confidence to the currency, but also to correct the difference versus where the dong is trading on the black market, which has been at about 19,700 per US dollar in recent weeks. The governor of the State Bank of Vietnam, Nguyen Van Giau, acknowledged to Vietnamese press on Wednesday that foreign currency is now overly hot and so the government had to intervene.

Investors were spooked by the moves, with the Ho Chi Minh City Stock Exchange’s VN Index falling 4.5% to a three-month low of 503.41, the biggest slide since April 20. But most analysts praised the government’s efforts as prudent.

At 4.4%, consumer price inflation is at its highest since May and more than double the multi-year low of 2% in August. The food part of the basket registered 3.5% inflation, up from 2.5% in October. Housing inflation rose to 8.4% from 2.4%, while transport/communication inflation went from -4.6% to 2.2%. Inflation isn’t a worry — it has arrived.

Also consider that total outstanding loans are currently up 34% versus this time last year, which means the nation is grappling with a rising credit problem. Non-performing loans, of course, have long been a concern.

“In summary, inflation is heading higher which, together with the recent and alarming deterioration in the trade deficit and associated downward pressure on the currency, has finally triggered a policy response from the authorities. The response is also most unlikely to be the last,” wrote Robert Prior-Wandesforde, senior Asian economist for HSBC, in a research note yesterday.

Other moves bandied about by specialists include the Ministry of Finance raising import tariffs and the Ministry of Industry and Trade taking measures to limit imports.

While Vietnam’s currency issue is unique, the inflation issue is potentially not. China, South Korea and Taiwan will no doubt have to start raising rates next year as their stimulus efforts to spur growth may also lead to inflation.

Source: FinanceAsia.com, 26.11.2009

Filed under: Asia, Exchanges, News, Vietnam, , , , , , , , , , , , , , , ,

Currencies: A Front Line for Global Balance

Fluctuating currency values can make or break foreign exchange traders. On a far wider scale, they affect global economic balance.

(Caijing Magazine) Anyone who has read the Chinese bestseller Currency Wars by Song Hongbing knows about the conspiracy theory that says currencies can be used as instruments of war. As one who witnessed the turmoil among Asian currencies during the 1998 Asian financial crisis, I can confirm that currency speculation can be highly profitable for some traders in over-the-counter and thinly regulated markets.

Even today, I would not encourage anyone to take up foreign exchange trading. Accumulator products that bet on currency volatility are famously called “I’ll kill you later” with good reason: You might never have enough collateral to pay for margin calls, and your counter-party actually has the option to foreclose and crystallize your losses. Read contracts very carefully and make sure a contract seller discloses how much collateral you have to pay when prices hit certain levels.

As far as I am aware, no central bank has yet been able to launch regulatory cases against insider trading or market manipulation involving currencies. That’s because currencies are traded in pairs. Unless both central banks and/or financial regulators overseeing a pair of traded currencies are willing to help with an investigation, it’s unlikely that any investigation targeting market manipulation in this area would succeed.

However, the current financial crisis has convinced financial regulators around the world that naked short-selling during a crisis can have harmful effects, and that markets are not as innocent as free market fundamentalists claim.

The trouble with foreign exchange markets is that a mouse in a large market can be an elephant in a small market, so that a large speculator (or group of them) can move prices fairly quickly unless central banks supervising these markets are willing to cooperate to stop market manipulation activities. Until recently, major central banks tended to shun market intervention.

Yet the importance of currency values exceeds the forex trading sphere. I was reminded of this while returning from a think-tank conference in New Delhi recently, when it came to my attention that global imbalance is once again a hot topic. Some are again trying to blame Asia for saving too much money, claiming Asian saving habits caused the current crisis. It’s the same excuse we hear when a banker blames his non-performing loans on depositors who save too much.

Anyone interested in the technical issues of global imbalance should read the famous debate between Stanford University Professor Ron McKinnon and Michael Mussa, former chief economist at the International Monetary Fund, published by the Bank of International Settlements Working Papers (http://www.bis.org/publ/work277.htm). McKinnon argued China should maintain stable exchange rates to anchor monetary policy while concentrating on fiscal policy to deal with its balance of payment surpluses. Mussa, on the other hand, argued that a revaluation of the yuan is necessary for an adjustment that steers the world away from global imbalance.

The debate turns on the question of whether the U.S. current account deficit is structural and can be resolved through devaluation. By definition, conventional economic theory assumes this means non-U.S. currencies should revaluate. Proponents of this line of thinking, therefore, think Asian currencies should be revalued significantly.

As Nomura Chief Economist Richard Koo argues quite convincingly in his new book The Holy Grail of Macroeconomics – Lessons from Japan’s Great Recession, the Japanese crisis and the current crisis can be described as balance sheet recessions. The trouble with the flexible exchange rate argument is that the Japanese yen has revalued significantly, with hardly any effect on the U.S. current account deficit, implying there are structural reasons for the deficit that must be dealt with through fiscal and non-monetary policy measures.

This comes back to the Triffin Dilemma, which explains why a reserve currency country faces a conflict between its domestic monetary policy and global liquidity needs. If a reserve currency country tightens monetary policy, large capital inflows will negate monetary tightening policy moves. Raising interest rates will make exchange rates stronger and encourage more imports. It’s a contradiction that says the stronger the dominant reserve currency, the stronger is global growth. But the larger the deficit, the less sustainable is the situation.

So in a globalized world of free-flowing capital, a reserve currency country’s monetary policy is largely ineffective. When that country is unwilling to adopt a tight fiscal policy, a current account deficit is a consequence. So why should the blame fall on foreigners who have no say in a reserve currency country’s policy decisions?

This is why Nobel laureate Robert Mundell and others have argued that we should have a single, global reserve currency to replace the current use of four, major reserve currencies in the SDR, in which with the U.S. dollar accounts for roughly 66 percent, euro 25 percent, pound 5 percent and yen 4 percent. A single, global reserve currency would mean the world would become one currency area. This would prevent nations from quarrelling about trade deficits, just as California does not fuss over a deficit or surplus with Texas.

However, since it is unlikely that any sovereign nation will be willing to cede power to a global central bank, a global financial regulator and a global taxation regime that taxes winners and compensates losers, that goal is many years away.

The current recession has already shrunk the U.S. current account deficit to 3 percent of GDP, but the funding requirements of the growing fiscal deficit are rising. This is where Koo’s book is quite helpful in explaining how complicated the world has become, since the Japanese experience shows that a balance sheet recession throws conventional economic theory out the window.

I am convinced that conventional theory has put too much emphasis on the monetary and financial side of the analysis, and not enough on what is happening to the real, structural side of the world’s economies.

Andrew Shen is a guest economist of Caijing and former Chairman of Hong Kong Securities and Futures Commission.

Source: Caijing, 26.10.2009

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The Demise of the Dollar, Robert Frisk

In a graphic illustration of the new world order, Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading

By Robert Fisk

October 06, 2009 “The Independent” — — In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars. The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.

The Americans, who are aware the meetings have taken place – although they have not discovered the details – are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs. Against the background to these currency meetings, Sun Bigan, China’s former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East. “Bilateral quarrels and clashes are unavoidable,” he told the Asia and Africa Review. “We cannot lower vigilance against hostility in the Middle East over energy interests and security.”

This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil – yet again turning the region’s conflicts into a battle for great power supremacy. China uses more oil incrementally than the US because its growth is less energy efficient. The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold. An indication of the huge amounts involved can be gained from the wealth of Abu Dhabi, Saudi Arabia, Kuwait and Qatar who together hold an estimated $2.1 trillion in dollar reserves.

The decline of American economic power linked to the current global recession was implicitly acknowledged by the World Bank president Robert Zoellick. “One of the legacies of this crisis may be a recognition of changed economic power relations,” he said in Istanbul ahead of meetings this week of the IMF and World Bank. But it is China’s extraordinary new financial power – along with past anger among oil-producing and oil-consuming nations at America’s power to interfere in the international financial system – which has prompted the latest discussions involving the Gulf states.

Brazil has shown interest in collaborating in non-dollar oil payments, along with India. Indeed, China appears to be the most enthusiastic of all the financial powers involved, not least because of its enormous trade with the Middle East.

China imports 60 per cent of its oil, much of it from the Middle East and Russia. The Chinese have oil production concessions in Iraq – blocked by the US until this year – and since 2008 have held an $8bn agreement with Iran to develop refining capacity and gas resources. China has oil deals in Sudan (where it has substituted for US interests) and has been negotiating for oil concessions with Libya, where all such contracts are joint ventures.

Furthermore, Chinese exports to the region now account for no fewer than 10 per cent of the imports of every country in the Middle East, including a huge range of products from cars to weapon systems, food, clothes, even dolls. In a clear sign of China’s growing financial muscle, the president of the European Central Bank, Jean-Claude Trichet, yesterday pleaded with Beijing to let the yuan appreciate against a sliding dollar and, by extension, loosen China’s reliance on US monetary policy, to help rebalance the world economy and ease upward pressure on the euro.

Ever since the Bretton Woods agreements – the accords after the Second World War which bequeathed the architecture for the modern international financial system – America’s trading partners have been left to cope with the impact of Washington’s control and, in more recent years, the hegemony of the dollar as the dominant global reserve currency.

The Chinese believe, for example, that the Americans persuaded Britain to stay out of the euro in order to prevent an earlier move away from the dollar. But Chinese banking sources say their discussions have gone too far to be blocked now. “The Russians will eventually bring in the rouble to the basket of currencies,” a prominent Hong Kong broker told The Independent. “The Brits are stuck in the middle and will come into the euro. They have no choice because they won’t be able to use the US dollar.”

Chinese financial sources believe President Barack Obama is too busy fixing the US economy to concentrate on the extraordinary implications of the transition from the dollar in nine years’ time. The current deadline for the currency transition is 2018.

The US discussed the trend briefly at the G20 summit in Pittsburgh; the Chinese Central Bank governor and other officials have been worrying aloud about the dollar for years. Their problem is that much of their national wealth is tied up in dollar assets.

“These plans will change the face of international financial transactions,” one Chinese banker said. “America and Britain must be very worried. You will know how worried by the thunder of denials this news will generate.”

Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars. Bankers remember, of course, what happened to the last Middle East oil producer to sell its oil in euros rather than dollars. A few months after Saddam Hussein trumpeted his decision, the Americans and British invaded Iraq.

Source: The Independent, 06.10.2009

Filed under: Asia, Brazil, China, Energy & Environment, India, Japan, Latin America, News, Risk Management, , , , , , , , , , , , , , , , , , , ,

World Bank warning on status of the US Dollar

World Bank president Robert Zoellick has given the United States a warning over the future of the dollar as the world’s key reserve currency.

He said: “The United States would be mistaken to take for granted the dollar’s place as the world’s predominant reserve currency. “Looking forward, there will increasingly be other options to the dollar.”

Mr Zoellick will deliver the warning as part of a speech at the John Hopkins University in Washington DC later today (Monday September 28th 2009).

In the speech, he will say that the huge economic changes of the last two decades, which started with the breakdown of Communist economies in the Soviet Union and across Eastern Europe, have seen the emergence of India and China as economic powers thanks to the reforms they made.

Mr Zoellick, who replaced Paul Wolfowitz as World Bank president in 2007, will also call on the G-20 to work as a steering group for international economic co-operation.

He will suggest that countries with emerging economies should be treated as responsible stakeholders by the G-20, while recognizing that many developing nations face the challenge of bringing millions of their citizens out of poverty.

Source: Worldbank, 28.09.2009

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‘Bubble-Mania’ in Shanghai Spreads to Global Markets

The S&P-500 Index, a global bellwether for the world stock markets, extended its best five-month winning streak since 1938, by advancing through the psychological 1,000-level, and is up nearly 50% from its 12-year low set on March 10th. The S&P-500 gained 7.4% in July, its best monthly performance since 1997, even as average earnings per-share tumbled -32% and sales slid -16% from a year ago.

Industrial commodities, often viewed as barometers for global economic trends, have also moved sharply higher. So far this year, copper has soared by +96%, nickel is up 62%, and zinc is +50% higher. China, which buys two-thirds of the world’s seaborne iron ore shipments, boosted imports 30% in the first seven-months of this year to 353-million tons, lifting its spot price to $91 /ton, up from $60 per ton in February. Crude oil rose above $71 /barrel this week, doubling in value since December.

In hindsight, while the “Group of Seven” (G-7) economies in North America, Europe, and Japan, were experiencing the most severe economic contractions since the Great Depression of the 1930’s, coupled with unemployment rates ratcheting upward to multi-decade highs, the emerging economic giant – China – was demonstrating its prowess, with the most ambitious stimulus plan the world has ever seen, to rescue its juggernaut economy from the brink of social disaster and unrest.

In a little more than nine months, the pendulum of investor sentiment in Asia has swung from the extreme of terrifying panic and fear, to the opposite side of the emotional spectrum – hope and unbridled greed. The Shanghai stock market index has surged +90% this year, owing its good fortune to 1.2-trillion of bank loans clandestinely funneled into the stock market by brokerage firms, leaving it awash with yuan and lifting share prices above what economic reality can support.

China’s ruling Politburo is demonstrating to the world its command and control over its stock market and economy. Over the past few years, Beijing has proven its ability to either massively deflate a stock market bubble, as seen in 2008, and the wizardry to re-inflate a stock market bubble this year. Beijing is following the Greenspan – Bernanke blueprints, – turning to massive money printing to re-inflate bubbles in asset markets, in order to jump start an economy from the doldrums, or in this latest case, from the grip of the Great Recession.

A relatively healthy banking system enabled the Chinese central bank to work its magic. China’s M2 money supply is growing at a record +28.5% annualized rate, and the money supply surge is coinciding with big rallies in stocks and property, spilling over into neighboring Hong Kong. State-controlled Chinese banks extended 7.4-trillion yuan ($1.2-trillion) of new loans in the first half of this year, equal to 25% of China’s entire economy – helping to fuel a powerful Shanghai red-chip rally.

One of the beneficiaries of the explosive growth of the Chinese money supply is the Shanghai gold market, which is trading near 6,600-yuan /ounce, and is also tracking powerful rallies in industrial commodities. China is poised to overtake India as the world’s top gold consumer this year, and there is speculation that Beijing will quietly buy the gold which the IMF wants to sell in the years ahead.

China, the world’s biggest gold mining nation, is seeking to boost gold output by 3% to 290-tons this year, far less than the 400-tons it consumed last year. Thus, China could become an even bigger importer of the yellow metal in the months ahead, helping to cushion inevitable corrections in the gold market. Given the trade-off between expanding growth and fighting asset-price inflation, Shanghai traders are betting that Beijing will opt to blow even bigger bubbles in asset markets.

Industrial Commodities Eyeing Shanghai

China’s super-easy monetary policy is designed to offset the damage to its export-dependent regions, which are suffering from the collapse in global trade. Beijing is also spending 4-trillion yuan on infrastructure projects, equal to roughly 15% of its economic output per year, to create jobs and stoke economic growth. So it was of great interest to global traders, when the Shanghai red-chips suddenly plunged -5% on July 29th, the biggest daily loss in eight-months, on rumors that Beijing would curb bank lending in the second half of this year.

The Shanghai index is prone to sudden shake-outs, with the index trading at 35-times earnings, and Shenzhen’s small-cap shares trading at 45-times earnings. The Shanghai red-chip index has evolved into the locomotive for key industrial commodities, such as crude oil, base metals, and rubber. Industrial commodities rebounded from a nasty one-day shake-out on July 29th, after the People’s Bank of China wasted little time in denying rumors swirling in the media that it was considering the idea of enforcing quotas on bank loans.

The prospects for Chinese corporate earnings growth are of critical importance, with the Shanghai stock index flying higher in bubble territory. Large-scale industrial companies in 22 Chinese provinces saw their profits decline -21.2% in the first half to 894.14 billion yuan, but the decline rate was less from the first quarter’s 32% slide, and nowadays, “less bad,” means signs of recovery.

The most optimistic scenario calls for Chinese industrial profits to rebound to an annualized growth rate of +30% in the fourth quarter, due to the government’s massive stimulus. China’s Bank of Communications predicts the economy’s growth rate will accelerate to a pace of +9% in the third-quarter and +9.8% in the fourth-quarter. China’s crude steel output would surely top 500-million tons this year, equaling 40% of the world’s total production.

Korea Joins Alignment of B-R-I-C-K

Upbeat markets in China are helping underpin the BRIC nations, including Brazil, India, and Russia, which have the four best performing stock markets this year. Brazil’s Bovespa Index is up 79%, India’s Sensex Index is up 63%, and Russia’s RTS Index has gained 62-percent. The S&P-500 Index by comparison, is up 9.4% this year, while Japan’s Nikkei-225 index is up 7.5-percent.

One could add Korea to the alignment of B-R-I-C-K stars, since the Kospi Index has rebounded by 72% above its November low, emerging as the most favored market among global investors. With growing appetites for risky assets, global investors have rushed to snatch up Korean Kospi shares, particularly those in the information technology (IT) and the auto sectors. Foreigners were net buyers of $4.7 of Korean stocks in July, much larger than net-purchases of $2.6-billion of stocks in Taiwan, $1.9-billion shares in India, and $1.29 billion shares in South Africa.

“Money has no motherland, financiers are without patriotism and without decency, – their sole object is gain,” observed Napoleon Bonaparte. Highlighting the fickle nature of speculators, – foreigners bought a record $18-billion of Korean securities in the second-quarter of this year, or 24-times more than $750 million the previous quarter. In the third and fourth quarters of 2008, foreigners sold $17.9-billion and $17.4-billion, respectively, at the height of the global financial turmoil.

Foreign buying of Korean equities knocked the US-dollar 28% lower against the Korean-won, and the Japanese yen has tumbled 20% to 12.8-won, since March 10th, when global stock markets bottomed out. “Carry traders” are active in Seoul, and profiting from a stronger won. In a world where G-7 central banks are pegging rates at record low levels, it does not take much imagination to envision the Federal Reserve, the ECB, and the Bank of Japan underwriting rallies in the emerging currencies of Brazil, Russia, India, and Korea, just as Tokyo pumped massive liquidity straight into New Zealand and Australian dollars during its flirtation with the hallucinogenic drug – “Quantitative Easing” (QE) between 2001 and 2006.

Virtuous Cycle Swings in the Kremlin’s Favor

The resilience of China’s economy has rekindled the de-coupling debate, which hinges on the premise that the emerging economies in Brazil, Russia, India, China, (BRIC) can grow in spite of a declining G-7 economies. The so-called BRIC countries accounted for half of global growth in 2008 – China alone accounted for a quarter, and Brazil, India, and Russia combined equaled another quarter. Furthermore, the IMF notes that BRIC “accounted for more than 90% of the rise in consumption of energy products and metals, and 80% of grains since 2002.”

The virtuous cycle of events are now swinging back in the Kremlin’s favor, as global speculators flock back into hard-hit resource shares trading in Moscow. Russia’s central bank cut its main interest rates for the fourth time in less than three-months, after Moscow said the local economy contracted an annual 10.2% in the January-May period. Bank Rossii lowered the refinancing rate a half-point to 11% following on initial reduction on April 24th and two further cuts on May 13th and June 5th.

The Russian rouble has rebounded 16% against the US-dollar, since the first quarter, as Urals blend crude oil rebounded towards $70 a barrel, and base metals surged higher, boosting demand for Russia’s currency, a world leader in commodity exports. Russia is the world’s second-largest oil exporter behind Saudi Arabia, and supplies a quarter of Europe’s natural gas needs. Russia is also the world’s largest nickel and palladium miner, the second largest platinum miner, and the fourth-largest iron ore miner, behind Brazil, Australia, and India.

After reaching a record high of $597-billion last August, Moscow’s foreign currency reserves were dramatically depleted in the second-half of 2008, as the central bank spent more than $200-billion supporting the Russian rouble and bolstering the capital position of domestic banks. This year’s rebound in Urals blend crude oil has improved the Kremlin’s coffers, to the tune of $404-billion today. China, the world’s second-largest oil guzzler, imported 3.83-million barrels per day in July, or 25% more than a year earlier, the fastest pace in nearly two-years.

The BRIC nations are rethinking how their US-dollar currency reserves are managed, underlining a power shift from the United States, which spawned the global financial crisis. Russian chief Dmitry Medvedev has repeatedly questioned the US-dollar’s future as a global reserve currency. China is allowing companies in its southern provinces of Yunnan and Guangxi to use yuan to settle cross-border trade with Hong Kong and Southeast Asia to reduce exposure to the US-dollar.

India Weathers the “Great Recession”

Reserve Bank of India chief Duvvuri Subbarao says India’s modest dependence on exports will help Asia’s third largest economy, to weather the “Great Recession” and even stage a modest recovery later this year. Even during the depths of the October massacre in the Bombay Sensex Index, India managed to maintain a 5.3% growth rate in the fourth quarter, and India’s banking system had virtually no exposure to any kind of toxic asset, manufactured in the United States.

India’s factory output contracted by a slim 0.25% in January, the first decline this decade, and export earnings had fallen for six straight months. In January exports were 16% lower from a year earlier tumbling to $12.3-billion. So the Reserve Bank of India (RBI) scrambled to rescue the Bombay stock market, by slashing its lending rates six times from September thru April, by a total of 425-basis points.

click to enlarge

The Indian Sensex index began to decouple from Wall Street and Tokyo in early May, after it rallied 14% for its biggest weekly gain since 1992, when Indian Prime Minister Manmohan Singh won a second term. Bombay stocks soared with enthusiasm at the prospect that Singh’s new government, shorn of Communists, would privatize up to $20-billion of state-owned assets, increase foreign investment in highly profitable crown jewel companies, begin deregulation of banking and financial services, and gut restrictions on the closing of factories.

India’s factory sector, measured by the Purchasing Mgr’s Index, held strongly at a reading of 55.3 in July, or 2-points higher than China’s, signaling a strong industrial recovery in the second half of this year. If the decoupling of China, India, Russia, and Brazil becomes a reality, it could be good for the developed G-7 nations, as growing wealth in BRIC nations could, in theory, increase demand for goods made in battered nations like Japan, Germany, and the United States.

A decoupling between the emerging BRICK nations and the more developed G-7 economies would mean a huge shift in the global financial markets, away from the traditional pattern of emerging markets dancing to the tune of G-7 economies, which still account for 60% of global GDP. Instead, increasing independence could lead to a greater sphere of influence of the emerging giants, led by Beijing.

In the United States, Fed chief Bernanke is pumping a “bailout bubble” for Wall Street, similar to the policies of his mentor “Easy” Al Greenspan, who inflated the housing bubble, the sub-prime debt bubble, and the high-tech bubble. It’s a never ending cycle of boom-and-busts of bubbles, engineered by central banks. The revival of the “Commodity Super Cycle,” might already be in motion, and if a global economic recovery gains traction, soaring input costs would begin to crimp the profit margins of the giant Asian industrialists.

All the liquidity that’s been unleashed into the global banking system would play havoc with accelerating inflation. History shows that central banks won’t pre-empt inflation by withdrawing liquidity early. Instead, the money printers tend to inflate bubbles to dangerous proportions. Add to the mix, the vast leverage of the US-dollar and Japanese yen carry trades, it’s going to be a wild ride for the US Treasury bond market, which is increasingly dependent upon the whims of BRICK.

Source: SeekingAlpha, 05.08.2009 by Gary Dorsch

Filed under: Asia, Banking, Brazil, China, Exchanges, India, Korea, News, Risk Management, Services, , , , , , , , , , , , , , , , , , ,

Beijing in uneasy embrace of the Greenback

FT, 26.07.2009 – When top US and Chinese officials meet on Monday for the first high-level talks of the Obama administration, the American complaints about China’s currency that long bedevilled relations will barely be on the table.

For years, Washington alleged that Beijing unfairly manipulated its currency, the renminbi, to support exports, and demanded that China allow it to appreciate to force structural changes in its economy.

Smoke billows from a Chinese chemical factory. China’s economy and climate change will feature in Monday’s talks

Humbled by the financial crisis and heavily reliant on Beijing to climb out of it, Washington has shifted gear, relegating the currency to a subset of its push for broader economic reforms in China.

“The US has for now given up on pushing China on currency issues, partly because Washington has less leverage over Beijing than at any other point in recent history,” says Eswar Prasad of the Brookings Institution in Washington.

“The US now has enormous financing needs for its budget deficit and current account deficit, making it more dependent on China than ever before.”

Other issues have naturally forced themselves higher on the bilateral agenda for this week’s meeting in Washington, notably climate change and efforts to extend co-operation on green energy initiatives.

Inter-agency rivalry in Washington over management of the China relationship between the Treasury and the state department has also given the so-called strategic economic dialogue a broader remit.

When the top-level dialogue was founded in 2006 on the initiative of Hank Paulson, the then Treasury secretary ensured that its sessions were focused primarily on economic exchanges.

The irony of the US retreat on the renminbi, though, is that China has been powerless to wean itself off its addiction to buying US debt, the other side of the bilateral financial ledger.

The global crisis does not appear to have lifted the confidence of Beijing in its own currency. Instead, Chinese leaders have repegged the renminbi to the US dollar in the past 12 months in the search for a stable environment to ride out the turmoil.

Beijing broke the decade-old US dollar peg in mid-2005, allowing the renminbi gradually to appreciate against the greenback during the following three years. Alarmed by the emerging financial panic and an abrupt collapse in exports, Beijing called a halt to the appreciation last July. The renminbi has been stable against the greenback ever since.

Chinese analysts insist the repegging is a temporary measure, a safe port in the global storm before it is calm enough for the ship of currency reform to head out into international waters again.

“Right now, we need stability above all. If we get through this crisis, the currency will be back on a more flexible track,” says Peng Xingyun of the Chinese Academy of Social Sciences.

In the meantime, the same problems that forced Beijing’s hand in 2005 have returned to haunt Chinese policymakers a second time.

China’s foreign exchange reserves burst through the $2,000bn (€1,400bn, £1,217bn) mark in the second quarter, fuelled by speculative inflows of cash trying to take advantage of the rapid recovery in the Chinese economy.

China’s commitment to a pegged currency means it must swap the dollars flowing into the country for renminbi. The extra funds injected into the system are adding to the already loose monetary policy introduced late last year to counter the global slowdown.

“Strong pressures on, and market expectations for, the renminbi to appreciate will likely re-emerge as early as the end of this year,” says Wang Qing, Morgan Stanley’s China economist.

Beijing’s struggle to manage the renminbi underlines the difficulties with its other significant recent announcement – a call for an alternative to the US dollar as a reserve currency.

Within China, support for an alternative to the greenback is seen more as a political signal than a concrete proposal. “It is our way of expressing our unhappiness with the US,” says a senior Chinese economist, adding that Beijing knew there was no alternative in the short term to the dollar.

Beijing is trying to push money offshore, investing in commodities and overseas companies, and gradually trying to internationalise the renminbi by allowing it to be used for some regional trade transactions.

But the size of China’s reserves means these initiatives have little measurable impact on the pile of foreign cash the People’s Bank of China has under management. In the foreseeable future, the central bank has little choice but to invest its foreign currency holdings in US dollars, because there is no other asset class that can handle such large sums of money.

“The Chinese leadership understands very well that their economy is locked into a difficult and unhealthy embrace with the US and would like to tear themselves away from it,” says Mr Prasad.

“Much as they may detest it, the embrace is only going to get tighter in the short run.”

Issues on the agenda

Climate

As the world’s two top carbon emitters, the US and China acknowledge they will be at the heart of any deal at this year’s Copenhagen conference. But the US dismisses any idea of the two countries forming a “G2” group to thrash out deals other countries would sign up to subsequently. China has resisted calls for a specific cap on emissions and for the scrapping of tariffs on clean energy technology.

Rebalancing

The US wants China to shift away from its reliance on investment and exports and move towards more domestic consumption – a strategy that can be achieved only if Beijing makes substantial changes to its economy. Such reforms would require
China to liberalise its financial sector and promote service industries. Over time, this would reduce the bilateral trade imbalance. China says such reforms are under way, but cannot be rushed because of the challenges of managing the transition of millions of poor rural residents into a more modern economy.

North Korea

The US is worried about North Korean nuclear proliferation. China is concerned about the risk of instability in a transition of power from Kim Jong-il, the North Korean leader. While the two countries helped push through UN sanctions after Pyongyang’s nuclear and missile tests, Beijing expresses fears that some of the tough measures Washington favours could make North Korea more unstable and disrupt trade.

Trade

Washington and Beijing have clashed this year over “Buy American” and “Buy China” provisions attached to their respective stimulus packages that excluded foreign businesses from publicly funded projects. US officials say this spat has highlighted the need for China to sign up to the World Trade Organisation’s “government procurement agreement” in the autumn. “Buy American” was watered down in Congress so that it did not affect GPA signatories.

Investment

US companies have invested heavily in China for years, but recently Chinese companies have started doing the same in the US. Both countries have concerns: Beijing that the US government is hampering access on the basis of national security and Washington that there is a “hardening of attitudes towards foreign investment” in some sectors in China.

Source: Financial Time, 26.07.2009  By Richard McGregor in Beijing and Daniel Dombey in Washington

Filed under: Asia, China, Energy & Environment, News, Risk Management, , , , , , , ,

Coming Doom vs Coming Recovery

While unemployment, bankruptcy and defaults are growing and retail consumtion is falling,  financial institutions which just a few months ago where on the brink of collaps are claiming profits and  the media, analysts and government start claiming to have found the road to recovery.   Too good to be true?  Here are a few alternative view:


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Fund Managers can become farmers: Jim Rogers Interview Economic Times of India

At one stage we were inundated with gloomy forecasts, which were further reinforced by the IMF and World Bank. And then suddenly stocks surged — something most were not prepared for. How risky is the market today?

Central banks all over the world have printed huge amounts of money, and the real economy is not strong enough for all this money to be absorbed… so, it’s going into stocks and real assets such as commodities. It’s a mistake what they are doing. It’s giving short-term pleasure, but there’s long-term pain as we are going to have much higher inflation, much higher interest rates and a worse economy down the road.

The American bond market is already beginning to go down dramatically as people realise that the American government has to sell huge amount of bonds, and secondly, there is going to be inflation, serious inflation, as it was always in the past when you had governments printing huge amounts of money.

Stocks are rising even as fiscal deficit is widening. Somewhere it has to snap…

It’s going to snap. Later this year, next year, we are going to have currency problems, maybe even a currency crisis. I don’t know with which currency — maybe with the pound sterling, maybe with the US dollar, who knows. It maybe with something none of us have at the moment. When you have a currency crisis, stocks will be affected, many things will be affected. It is not sound, what’s happening out there in the world.

In the 1930s, we had a huge stock market bubble which popped. And then politicians started making many mistakes. They became protectionist. They made solvent banks take over insolvent banks and then both banks failed in the end.

They are doing many of the same mistakes now. What’s different this time is that we are printing huge amounts of money which they did not print at that time. So, we are going to have inflation this time.

What do you do? No politically-elected government can afford so much pain, unemployment and hardships…

America could have. America just had an election. The guy was elected in November and he could have come in the beginning of a four-year term and said the guys before me were hopeless idiots. They ruined things. We have to solve this problem. We have to take some pains now. But don’t worry, we will get through this pain, and in two to three years or four years, things would be fine. And he could have been re-elected.

If the pain comes in 2010, 2011 or 2012, there will be nobody he can blame. Especially, if things go bad later, the opposition will say, wait a minute, 2009 looked good. The next guy is going to say you did it… But you are right. It’s very difficult for an elected government. You have a newly-elected government in India. Whenever you have a new government they can take some of the pain.

You recently said that you would invest in China and Sri Lanka but not in India. Aren’t you betting on the new government in India?

I was trying to make a point that if anyone wants to invest in this particular part of the world, the best place would be Sri Lanka. Because it looks like the 30-year war is coming to an end.

Throughout history, if you go to a place after the war ends you usually find everything as very cheap, everyone is demoralised, people are just depressed and there are enormous opportunities if you have energy.

In my view, investing in Sri Lanka in May 2009 is probably a better bet than Pakistan, Bangladesh, India or some of the other countries nearby. Let’s hope the new Indian government does something. I have heard wonderful things from Indian politicians for 40 years.

And rarely do they produce. It’s not the first time that the Congress party has been in the power. If they mean it, India’s going to be one of the greatest development stories in the next 20 years. But I don’t know if they mean it.

What kind of reforms?

Why isn’t the currency convertible, why isn’t foreign capital encouraged, why isn’t foreign expertise encouraged, why is it so protectionist? Why are farmers only allowed to own five hectares? India should be the greatest farming nation in the world. You have the soil, the weather, you have everything and yet an Indian farmer can own only five hectares.

How can an Indian farmer compete with a guy in Ireland who can own 1,000 hectares or a guy in Brazil who can own 5,000 hectares? Smart people don’t become farmers. Because what’s the future? Whenever prices start going up, Indian politicians ban futures trading, as if futures trading makes prices go up. It’s the craziest and the most absurd thing in the whole world. Prices go up because there is a reason for prices to go up.

Last year you were buying only Chinese stocks. Why?

The market collapsed in October-November. That’s when I bought more Chinese shares. I have not bought any Chinese shares since then. I have not bought shares anywhere in the world since then. My way of participating in what’s going on now is to buy commodities.

In my view, commodities are the only place where fundamentals are improving. Farmers can’t get loans for fertilisers now, even though inventories of food are the lowest in decades. Nobody can get a loan to open a mine. So, you will have supplies of everything continuing to decline.

What else are you looking at while investing?

There are some industries in India that would do exceedingly well in the next few years, one of which is water. You have a horrible water problem. China also has a horrible water problem. So, I bought water companies in China. There are some great opportunities if America falls off the face of the earth. China is spending hundreds of billions of dollars to solve the agricultural problem.

So, I am buying agricultural stocks and water stocks in China. There are other industries in India which have a great future. I am very bullish on Indian tourism. Wherever I go for speeches around the world I tell people, if you have to go to one country in your lifetime, you should go to India.

Your government is going to re-build the military, they say. So, there’s going to be great opportunities here. Also, they may build the infrastructure. So, I see many opportunities in India.

The possibility of a sovereign default in the developed world could further depress sentiments. You think it’s possible?

In 1918, the UK was the richest and the most powerful country in the world. Within one generation it was in shambles, within two-and-a-half generations it defaulted. The UK defaulted in 1970s and had to be bailed out by the IMF. Many of the countries in the developed world are in serious trouble right now.

Iceland has already defaulted. I think there could be a currency crisis because of sovereign debt problems later this year, next year or 2011. Developed nations have defaulted before. Remember the Asian crisis. It was a default of one kind or the other. It has happened before and it will happen again.

Are you worried about any particular market or region?

I am glad that I have no investments in the UK. Neither long, nor short. I am convinced that it’s in trouble. I am worried about the US. I have sold nearly all of my US dollars. I always had some as I am an American citizen. But I see serious problems developing there. Those two of the big developed countries are the ones that I see with the most likely problems.

But the problem is that it never works that way. Everybody is sitting here watching the UK and US and it may happen in say Portugal or some place we haven’t thought of and it will come suddenly to surprise us all.

If US unemployment touches the 10%-mark, it would further impact retail sales. How bad could this be for Asia?

Let’s pick on China for a minute. If you sell to Wal-Mart in the US and if you are a Chinese supplier you know there is a problem. And you are going to be suffering. Any company that deals with the West is going to have problems. On the other hand, companies that are in the water-treatment business in Asia will care less if the West disappears. They are too busy making money, too busy going to work everyday.

What kind of commodities will smart money chase? Can money be made in crude?

I own gold but think silver is better right now. Natural gas is cheaper than oil right now, but I own them all. If you want to buy crude, you should probably buy cotton. Because all farmers in the US are planting corn to turn into energy. That means they are not going to plant any cotton. The best way to play crude oil is to buy cotton.

Right now, there are huge subsidies around the world for farmers to plant corn, maize, for instance, so that they can be converted into energy. If energy prices go higher, there will be even more of that.

If everybody plants his fields with soya, corn or palm oil to turn it into oil or energy then no one is going to plant cotton.

And you can make a lot more money in cotton than oil. Between oil and gold, buy cotton. Between oil and gold buy silver. The other way to invest in oil is to buy sugar as everybody is converting a lot of sugar into energy.
Silver is so much cheaper on a historic basis. And gold is near its all-time high. Silver is 75% below its all-time high. So, I would suspect that silver and cotton are going to do better than gold and oil.

Global population is close to its peak and genetically-modified crops will increase productivity. What makes you so bullish on agriculture?

It doesn’t matter. The world has been consuming more than it produced. Food inventories are at a multi-decade low. And we haven’t had any bad weather. We had isolated cases of droughts and things. That may never happen again. But if it does, the prices of food would go through the roof.

If there is climate change taking place, the best way to participate is through agriculture or through agriculture products. There are many positive things happening. Right now, there is a shortage of everything in agriculture — seeds, fertilisers, tractors, tractor tyres. We have a shortage of farmers because farming has been a horrible business for the past 30 years.

What kind of a market are you witnessing now?

Jim Rogers

It’s a bear market rally. I was going to say I don’t think S&P 500 will see new highs. But I have to quickly temper that by saying against the dollar because the S&P 500 could triple from here if they print enough money and the value of the US dollar collapses, then S&P could go to 50,000, Dow Jones can go to 1,00,000.

Which is one reason why I am not shorting stocks right now. Because there is a possibility of this sort of a thing. There is a possibility that stocks could go through unheard of levels, but would be in worthless currency.

That naturally brings us to the debate on a new international reserve currency

Several countries have raised the issue once again. The US dollar is terribly flawed right now. Something has to be done to the US dollar and something will be done just as something was done about the pound sterling. After World War II, people stopped using the pound sterling and converted to the dollar for many reasons. Something’s going to be done about the dollar.

We are much closer to be doing something about it or will be forced to do something about it. India was forced to change in 1991 and the world will be forced to change the currency situation in the foreseeable future.

There is already an underlying fear that this mountain of cash will chase assets and eventually force central banks to mop up liquidity. How do you think this would play out?

I know they all say, ‘Don’t worry, we will reverse gears and take the excess liquidity out in time.’ I don’t believe them for a minute. No one has ever done it that way. When central bankers started trying to, it caused so much pain that they quickly reversed or have got rid of that central banker and put somebody else in.

I just don’t think they could do it. That’s why I am worried about the bond market and the inflation. If all central banks do it together, that’s going to lead to higher unemployment, riots in the streets, civil unrests.

Your track record as an investor has been more than impressive. But in todays market can you replicate your performance of the past 20 years?

One can. I probably cannot as I am not spending enough time at it. But it can be done. There are going to be people who we will read about in 20 years having made legendary fortunes starting now. In the 1930s, there were people who built huge fortunes and laid the foundations like Templeton.

He started in the 1930s. He saw opportunities and took advantage. These are people who saw great advantages and opportunities in the 1930s, acted and became fantastic successes. There may be somebody out there now. I don’t know who she is. Maybe she is in Brazil, China or India.

What will you tell a confused fund manager who seeks your advice?

Become a farmer. The world has tens of thousands of hotshot fund managers right now. If I am correct, the financial community is not going to be a great place to be in for the next 30 years. We have many periods in history when financial people were in charge, we had many periods when people who produced real goods were in charge — miners, farmers, etc.

The world, in my view, is changing and is shifting away from the financial types to producers of real goods, and this is going to last for several decades as it always has. This may sound strange but it always happens this way. Ten years from now, it may be farmers who will drive the Lamborghinis and the stock brokers will drive tractors or taxis at best.

Source: Economic Times, 04.06.2009

Filed under: Asia, Banking, Brazil, China, Energy & Environment, Exchanges, India, Latin America, News, Risk Management, , , , , , , , , , , , , ,

What Are The People Who Predicted the Financial Crisis Predicting Now?

There are only a handful of people who predicted this financial crisis, or at least its severity. What are they predicting now? George Washington’s Blog

Peter Schiff and Ron Paul

Schiff, the manager of over $1 billion dollars in investments, says the U.S. will enter a long period which could be worse than the Great Depression. Schiff also thinks that the economic crisis might lead to martial law.

He thinks that Asia and Europe, after a period of economic downturn, will “decouple” from the U.S., eventually enjoying great prosperity long before the U.S. recovers. Schiff has admitted that he did not foresee the current rally in the dollar, and his investors – long in Asian and European stocks – are way down. Schiff was Ron Paul’s chief economic advisor during his campaign. Paul has himself predicted the crisis for many years, and has warned that America is spending more than it can afford. Paul has also repeatedly warned of martial law.

Nouriel Roubini

Roubini, the PhD economist, thinks we are going to have what he calls “stag-deflation”, meaning severe stagnation and deflation. Basically, he thinks that we’re heading into a depression without extreme government action. He’s also warning of possible food riots.

Marc Faber

PhD economist Faber, who called both the 1987 crash and the current crisis, believes that there will be a bear rally for a couple of months, and then a further crash. He is convinced the U.S. will go bankrupt sooner or later. Faber also thinks that the crisis may spell and end for the traditional American form of government, to be replaced by martial law or some other unsavory form of government.

Nassim Nicholas Taleb

Economist, highly-regarded investment advisor, and one of the world’s foremost authorities on derivatives Nassim Nicholas Taleb, thinks that “capitalism I” is over, and things will get very bad before we get to a new form of “capitalism II”, where banks will act like utilities instead of money-making pirates. Taleb has warned that supermarkets may shut down. While he wouldn’t directly tell Charlie Rose how bad he thinks things will get, he did say he thinks things will be worse than Roubini is predicting.

Antal E. Fekete and Darryl Schoon

Professor Emeritus of Mathematics Antal E. Fekete and author Darryl Schoon think that our entire modern society will crash and break down (gold bugs, they believe all assets will crater except gold).

Afterword: The Greatest Depression

As an afterword, it should be pointed out that – while it was really bad – the Great Depression was not the greatest crash in history. Indeed, one writer describes the Great Depression as “a mild and brief episode, compared to the bank crash of the 1340’s . . . .”

That’s a stunning piece of information: the Great Depression was nothing compared to the crash in Venice in 1340. How can anything have been that much worse than the Great Depression?

Well, the 1340 crash ushered in the dark ages.

Now I don’t think anything nearly that bad is coming. But discussions about whether we are going to experience something as horrible as America’s Great Depression should not be taken in a vacuum. Unless our government stops messing things up and making them worse, things could get quite ugly.

Source: PrisonPlante.com, 09.12.2008

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