Haunting's economics blog

When GE speaks, Americans better listen... worth a read.

"While some of America's competitors were throttling up on manufacturing and R&D, we de-emphasized technology," he said. "Our economy tilted instead toward the quicker profits of financial services."

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Spot on! The primitive driving force behind capitalism is human greed... and when the primary driver behind a nation's economy is made up solely on human ingenuity and greed, the march to economic doom is almost assured. Even for a super power.

The worst part of this gigantic mistake by the Americans is the loss of their US$ hegemony. Without the US$ as a chain to bind the rest of the trading/financial world under their control, they have practically given up their leadership in the global financial system and set the rest of the trading nations free to challenge their US master.

By the time the USA has recovered from this disaster in a few years' time, the world will never be the same again. At least not the world the Americans had been living in the last 50 years.

I hope you are right...Here is a report to support your view.

For long term IO play, larger IO export volume may be. Higher price? Don't think so... at least not in the next few years. Unless inflation/hyper-inflation kicks in much earlier than I thought. But then I have a suspicion China will not be paying US$ for our IO. It would be some other currency and possibly RMB.

The return of 'Mrs Watanabe'

TOKYO - Mrs Watanabe, the market's metaphor for Japan's housewife yen speculators, has come back to life. A star of the yen trade's golden days from 2000 until mid-2007, she suffered big losses in the financial turmoil over the past few years. But like a phoenix - or a zombie - she is rising from the ashes as market stability increases risk appetites and yen-selling positions pile up...
...
Yen sales by Japanese individual investors against the Australian and New Zealand dollars rose to their highest in almost nine months this week, according to data from the Tokyo Financial Exchange (TFX). Net long positions held by individual investors on the Southern Hemisphere currencies reached 127,752 contracts on June 23, the highest since October 3, the data from Japan's largest financial futures market showed. Long positions are bets that a currency will rise.

Most notably, net long positions on the Australian dollar against the yen rose to 97,643 contracts among retail investors on June 23, the highest since August 29, returning to record-high levels similar to those before the collapse of Lehman Brothers in September 2008, data also showed...

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** for as long as RBA and NZCB are keeping a relatively high interest rate, these proverbial ladies will be piling on their bets until... something breaks. What and how will be the holy grail for this round, I guess.

Here is another write-up on why the Chinese butt deserves to be kicked - like it or not, the Chinese should swallow what Australia has dished out...

Fair point and no argument on this. It's just this minor point I have been raising all these while - if and when China decides not to deal with RIO and channel all their purchases to Vale; or simply, reduces RIO's share of the iron ore they buy normally, I guess we will have no choice but to swallow what they dish out to us.

Whilst it is fair that Rio has the right not to sell to Chinalco, or choose whom it likes to deal with. It would be equally fair to assume the Chinese has their right in dealing with someone they feel comfortable with.

Let's hope they won't go that far, but if/should they do, I guess someone over here will have to learn to swallow like the Chinese. But I won't be surprise by then I will read a whole lot of different slant from the local media brains.

It really bugs me to learn this is how we deal with our biggest customer where the stake is so high and the real benefactors of the RIO/Chinalco "no-deal" are really the big UK funds and overseas investors; whilst the real casualties are the local mining contractors/sub-contractors/workers and the regional govt.

I think its a high price to pay, esp considering the damage to the goodwill between the two countries. Let's hope no one here will live to regret this "right call".

Nigel No Friend... from FNArena

Whenever FMG popped up as a topic in the media, I would almost never failed to think of this quote from Ab.Lincoln...

You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time.

Such negative reaction! ... gotta say there's a cognitive bias in me somewhere when come to this Nigel.

Here is a good write up on an interview. Worth a read as it has touched on many issues raised by many people in this forum.

While you are reading, keep this mind though... economists have this tendency to look back and then talked themselves into some kind of pessimistic lunatics that if you are not careful you might just be converted into one yourself. So, always remind yourself of this "danger" whilst you are seeking knowledge and wisdom from people who are brilliant in hindsight analyses.

Always remember the main objective of your quest of knowledge - it's supposed to provide you with an understanding that would allow you to develop an edge in your market venture be it trading or investing. Your activity time frame may be very different from theirs, as in this case, Dr. Hunt's point of view could very well mean 20 years, if not, many years before he would say with confidence of what has happened...

As an investor, you are not interested in what has happened, rather you are interested in what is happening now and what is likely to happen from now, with respect to what has happened in the recent past. It probably makes more sense and more profitable to you if you can look back, learn from the past and adapt that knowledge into some kind of wisdom or foresight that would allow you to develop a plan for your market venture - this, to me, is the primary reason why you bother to dabble into this dismal science.

Adaptability, flexibility, common sense and contrarian perception are some of the basic attributes I believe crucial to survive and to prosper from the market. The ability to spot a market weakness and to exploit what it has provided, is the primary goal of any market participant. It's the action that counts, the rest... are just words, as in this blog.

Here are the main points...

* The US is in a period of debt deflation that may take up to 15 to 20 years to normalise
* The S&P is at risk of some 'false dawns'
* There will be a major shift in US consumer behaviour as savings start to rise and people live more within their means
* He describes the US stimulus in its current form as a grab bag of political promises and says it may be doing even more damage
* Diversified equity portfolio models may not work in the debt deflation environment

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Here are some random thoughts in reaction to the above main points:

1) if the global economy were to decouple, and the US economy has become less influential, does the above points still carry that much weight? In other words, would the global economy still this US-Centric?

2) if the US$ were to lose its hegemony, will what is happening in the USA still exerts that much impact to an economy such as Australia?

3) if the US$ were to be replaced with a "global currency" built on a basket of the current major currencies (EUR, US$, YEN, RMB for eg), would the US financial stability still play this crucial a role in the stability of the global financial system as well as the global economy?

4) with this major shift in the US consumer behaviour, is it time to consider the relevance of the argument of global economy's dependence of US consumer recovery? Is it time to move on?

5) saving, in general is deflationary, whilst the US economy may be going through a deflationary period, say up to 15 years (pick any number), what does that mean considering the monetary inflationary effect of the current QE exercise? Which will prevail? Deflation or inflation at the end?

6) more... like these which I generally find issues with them economists...

a) most economists' view are US-centric and they rely too much on hindsight which as usual is US-centric - but at this juncture, since the GFC, it is very clear with evidence that there's a break down in the US-centric, US-focussed global financial and economic system. The QE and the runaway printing of the US$ and the runaway deficits in the USA are both unprecedented - how could they relied what is in the past mainly and based on that observation to assume the future of without taking into consideration of what has changed?

The rise of China was never in the past equation. But they are now, esp considering their large holding of US debt.

The USA taking a QE move in such scale and scope has never happened before. The synchronised crash of both US+EU economies in this scope and scale is also quite unprecedented. Whilst other economies such as the Chinese' are showing growth and strength - they may yet proved to be the ultimate change agents to this US-centric world... this, I doubt has been taken into consideration by many economists.

How valid are their views if the Chinese influence in the US$, bonds, interest rate and international trades are totally left out of their considerations?

Is there a paradigm shift happening right before their eyes and they are not seeing it?

If there is a paradigm shift, if it is happening, then how much is this shift, I guess, is the key to the future, and possibly a whole lots of fortune awaiting those who can think of the box.

Can you?

The supply side has increased whilst the demand side has slowed... just read another media brain (from UK as usual) is saying that the Asian economies (other than China) whilst are busily exporting to China and avoiding a prolonged recession, but eventually, the final finished goods that are produced in China would have to go elsewhere - and other than US as the final and ultimate consumer, where else can the Chinese export to? Surely this would mean the growth in China is not sustainable?

Could be. Would be. Might be... who knows? But if he were to compare the decline in the Chinese economy vs that of the Japanese, he would have noticed the substantial difference between the two - there is a marked difference between the type of goods being exported to the USA. The Japanese' are mostly high valued, hitech, luxury goods whilst the Chinese' are mainly low end, if not, essential goods and/or food that the Americans could do without. This probably explains why the Japanese economy suffers that much more than the Chinese. But this probably also explains in a way the Americans, like it or not, they can't do away with Chinese exports absolutely...

So to answer to that media brain's negative slant I guess, he is partially right, but I won't be surprise once the consumer spending in the US were to pick up, the Chinese exports into that country will be correspondingly increased.

Unless the USA begins to raise their protection barrier to keep the Chinese exports out and opt for the higher cost locally produced goods or produce.

...and raise the spectre of a trade war with China.

Here is a good one to provide more "colour" to the current economic landscape.

More dismal analysis...

"But whatever the exact figures are, the bottom line is that consumption accounted for 70 per cent of US GDP, or about 14 or so per cent of global GDP.

"So if that US consumer stops consuming, that could be a major whole in global demand.

"And to go back to the effectiveness of China's fiscal stimulus, there is a risk that Chinese investment might actually increase production and in the absence of global and domestic demand, might actually exacerbate some of the overcapacities we have in the global economy, which could lead us further into deflation."

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** do you believe the US consumers as a whole will stop consuming? How much would you assume in order to emphasise a point for your overall argument?

How objective is that assessment, the US consumer as a whole will stop consuming? It is not quite realistic to assume both the US+EU would reduce their imports totally in this case. Yes, it's true that the Chinese demand will never replace the combined demand of both the US+EU, but making the assumption that the demand will completely stopped is nonetheless disingenuous.

The pick up in the Chinese domestic demand will never save the global economy anyway. The Chinese demand has been brought up time and time again not because it really matters but because it serves a dismal purpose coz it sounds convincing and logical.

I can play along this line of argument by arguing that the Chinese domestic demand whilst will not replace the combined demand of both the US+EU, nevertheless it suffices to provide a cushion to China and the rest of the Asian neighbours and the commodity countries such as Australia a breathing space to tide over the recession. It is sufficient to generate enough growth for this part of the world and the regional economy to break away from the recessionary impact of the advanced economies, thereby paving the road for the eventual recovery.

In short, the Chinese demand and growth engine might just be sufficient to effect a decoupling of the global economy, allowing this regional a chance to breakaway from the advanced economies. How about that?

In any case there has been a whole lots of upgrade in Chinese GDP growth from the World Bank to the OECD recently, so let's just wait and see if the Chinese econ is that fragile as she is saying.

Chinese whisper and so he says...

In my second incident, last week the Chinese were stating in the various metal bulletins that they were going to stop strategic stockpiling of copper, aluminium and other minerals. In Eureka Report I alerted readers that there could be a short term metal price correction if China actually plays that game...

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** hmmm, hmmm... there could be a short term metal price correction? Only short term?

I am not that sure if that will turn out to be just a short term maneuver in this metal game with some of the recent Chinese initiatives. Of these, the most important being their purchase of bulk ships in the second hand market. With that number of ships, they have practically removed a transportation price premium from the S.American iron ore; and in retrospect, Marius K's tact in buying up all shipping capacity to push for the last 15% has done tremendous harm to the Australian iron ore sector because he has practically singlehandedly taught the Chinese a lesson and highlighted one of their vulnerabilities.

Now that the Chinese have learned from the lesson and have covered their base by owning their own fleet of ships, there goes a strong negotiation point on the Aussie ore advantage of low shipping cost comparing with the Brazilian's.

Secondly, the recent restocking of most base metals, esp iron ore although has helped pushing up the price but I believe its strategic value is the one that is being overlooked by the Aussie miners - the Chinese have bought themselves a strong lead time/buffer to play an attrition game - whoever blink first lose, or whoever need the cashflow for on going operation will crack under the pressure first.

Of the three BHP, RIO and Vale, I think RIO is the most vulnerable and without the big long term contracts to provide a regular stream of cash flow, I can't see how it can operate effectively. On top of that, it still carries a large debt in its book. The possibility of it buckles first frankly is high. As pointed out earlier, those who are paying a premium to get into the rights issue will be crying all the way to bed, and not to the bank.

Thirdly, from the way the CISA is pushing its case, it seems to be getting top level support from the Chinese leadership, it won't be a surprise to see it fixing up those non-cooperative steel mills who have broken rank earlier. More than likely there will be another round of shake up and shake out. Longer term, this can't be good for the suppliers when they have a unified voice.

With all the above developments and after spending billions covering all or most bases, I am not sure if the Chinese are just planning for short term only... if the above Chinese expert is still believing that is a short term maneuver, well, let's just wait and see.

A follow up news item from Bloomberg

“We have a number of contracts that when they get to June 30 there is the potentiality for those agreements falling away and then moving to spot,” Sam Walsh, chief executive officer of the London-based company’s iron ore unit, said on May 26. “I don’t think that would be a good thing for either iron ore producers or steel producers but that’s the reality.”

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Cheers for the comments. Some food for thought on the deflationary topic.

Here's the tale...

Money is leaking instead into Shanghai's stock casino, or being used to keep bankrupt builders on life support. It is doing little to help lift the world economy out of slump.
...
If the world's biggest surplus state ($US400 billion) is too structurally deformed to help offset demand shock as Western debtors retrench, we are trapped in a long deflation slump.

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** the hope and expectation that a Chinese superman would fly in and help the rest of the advanced nations to avoid a painful recession seems to be quite ingrained within the psyche of western media brain. I am not sure if this is how the Chinese leadership is seeing their role in the global arena.

The old foggies in the Chinese communist politburo may be old and not talking much, that don't mean they are all senile. You can bet they have been briefed at least of this fact, that is, the total Chinese domestic consumption would never replace the combined consumption of both the US+EU, there's not a shred of hope that the China would lead the world recovery through her consumption and spending. It's simply not realistic (laughable actually) to expect that.

In addition, I am not sure if the Chinese are that keen to overhaul their internal welfare system and open up her domestic market for the advanced nations just so they can avoid the necessary recessionary adjustment in each respective economy. QE has never been a long term solution. It was just a short term move to arrest the credit freeze and restore confidence back into the banking system. Now that it has done its trick, it's about time QE to be phased out just so the threat of inflation/hyperinflation can be contained before it gets out of hand. But based on BIS reported caution yesterday, it seems there's great doubt if the advanced nations would be able to do what is required of them.

So here's the situation, accordingly the Chinese domestic structure is too deformed to save the west whilst the west is too lame to help themselves out of the hole - what's the future gonna be?

Deflation in the west and inflation in the East?

If what is reported regarding the abuse of the Chinese stimulus is true, god helps Australia because the question of where's the next two quarters' commodity demand is coming from if the past few months' demand are just speculators betting with Chinese stimulus money and there's no genuine fundamental demand... now I am waiting to see how RIO is going to report its outlook and then I would like to check again if it has made the "right call".

Read all about it here.

Short-term prospects for global mining companies are bleak, as rising costs eat into profit margins already depressed by the recession, according to a report by PricewaterhouseCoopers (PwC).

"There is no doubt that the industry is facing a tough road ahead," said Steve Ralbovsky, the professional services firm's U.S. mining industry expert.

"Reducing capital and operating expenditures and managing production levels to ensure they operate at the lowest possible cost will be crucial for mining companies.

"However, given the long-term nature of mining projects and associated capital commitments, it may be difficult for companies to drastically reduce costs in the short-term," Ralbovsky said...

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** one of the major reasons why GM went to the wall was because of its high cost, deal it has done with the union back in the 60s. Now that it has reborn as a new entity, I am not sure how many of the old employees are still working for the company. ??

May be there is a moral in the GM's story for the mining companies and the mining unions over here? It's better to compromise than going for broke?

Sometimes taking a step backward could mean a much wider sky and a much deeper ocean for the warring parties. Instead of a deadlock, it's become a whole new ball game with the prospect of a win-win outcome than a complete LOSE-LOSE failure.

The iron ore negotiation is in such a situation - without the long term contract with the Chinese, it will be very difficult for RIO to plan, budget and operate efficiently. Without a certainty in cash flow and with a large debt, I don't think it is a desirable position to be in. A complete breakdown in the contractual dealing would mean exactly that. To make it worse, with every supplier start selling into the spot market - just imagine what it will do to the spot price?

Unless they can hold back, but for how long? The Chinese has been spending big in the last few months stocking up preparing for this moment... can the suppliers outlast the Chinese reserves?

According to the latest news, the Chinese are compromising - they are now demanding a 33-40% cut instead of the 40-45%, I reckon it's about time someone start sitting down and reappraise the whole mess and start working out a win-win solution instead of holding fast for a disaster.

In any case, if this PWC report and the expert knows what he is talking about, here's a question - why the heck investors in ASX are still this gung ho about all these miners? In a separate report, Morgan Stanley was saying they are expecting a 12% cut in mining capex this year. This seems to rhyme with the PWC report...

Personally, I have a projection on the XMJ index (and some of its component stocks), it is pointing to a possible 18-20% drop from the current level. Not sure if anyone cares, but I reckon it will be fun to watch when it happens. Let's wait.

...otherwise there won't be so many threads on what why how TA or FA works or doesn't work. It's quite clear (to me anyway) that self doubts are creeping in when people suddenly realise they are not winning, or not winning that easily any more. And they react with their old habit of asking the most basic and fundamental question of whether the "tool" they have chosen is still working or not...

Most people find it hard to accept the market moves in ebb and flow, the low is never far away behind a high... and that its impossible for a market to remain at a "high" all the time because without a market low there wouldn't be any opportunity to "buy low", and without a market high, there wouldn't be any opportunity for those who have "bought low" earlier to "sell high" to lock in their profit. This observation is actually quite obvious and simple and yet surprisingly not many can "see" it and make full use of the opportunity provided.

The time to go long is at a market low. The time to go short (or do nuthin' if you are a one-way streeter) is at a market top... but if you are not sure, wait for the market to show you it's in a low or at a high. But until then, it's no point trying to "force" it, or force yourself, or force a change in your belief or in your tool.

The market has reached a critical juncture both TA and FA wise. It needs time to digest the confluence of data before deciding if it will continue its rise or make a retreat. This is the "thinking" behind the big money and the market movers. For small fries? The best thing they can do is to wait for the big fellas make their moves first. There's no need to "rush".

Be patient... and time will tell. Be flexible and adaptive to allow yourself to "flow" with the big fellas, it's no point fighting them. Be perceptive of the change and if you can exercise your common sense - believe in yourself and your own observation.

While I wait, here are some interesting reads, it may help or may not help, it all depends on your attitude. If you want proof, there's none. But if you are willing to understand (and accept) what is described and adapt or incorporate the idea into your trading, who knows, it might work for you too.

Exploit your competitive advantages

Dialing down the aggression

Moving aggressively in financials and real estate

Risk control

Before I go any further, the primary objective of the proactive strategies that I offer is risk control. Without risk control, the returns of the strategies we use could never be realized. Please review my performance for details. The only reason our strategies perform as well as they do is that we focus on controlling our risk first.

Instead of chasing performance, we consider performance to be a natural byproduct of risk control. Though my effort in this is difficult, I am trying to coin the phrase "chasing risk control" for my clients. If we are able to control our risk at all times, we are able to realize opportunities when they surface. However, if we relinquish risk controls we may identify opportunities, but be handcuffed in losing positions when it comes time to act.

Interestingly, the strategy that I am proposing is not something that should only be used at select times. We can use it in any market environment, regardless of economic conditions, it works on both the long and short sides of the curve, and I have developed a way to do it without sacrificing time or lifestyle.

This strategy has a set of rules. The most general of these rules are as follows:

- Risk controls must be used at all times

- Keep it simple

- Use the market to guide decisions

- Use market-based ETFs to take advantage of oscillation cycles...

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ps: if you find this post damn patronising, it is, and my apology here coz I am reacting badly to those silly discussions on whether what works or what doesn't... I am sure they know there's a search facility provided in this forum.

Keating urges positive China stance

The former prime minister Paul Keating has warned against Australia taking a defensive stance towards China.

Mr Keating has taken a swipe at the Federal Government, saying its defence white paper makes ambivalent references about China.

Speaking at Curtin University in Perth last night, Mr Keating said China's dominance would be inevitable, because the world's greatest economies have always become strategic powers.

But the former prime minister said this would be positive for the region and there would be opportunities for Australia.

Mr Keating said that unlike previous prime ministers, he always believed the rise of China was certain.

"This great state, with its profound sense of self and the wherewithal to make a better life for its citizens - 1.3 billion of them - has eased itself into a major role in world affairs," he said.

"A role which I believe will be an altogether positive one for the world."

Australia would need to make adjustments, as China would not allow itself to be cast as a client of the US...

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** PK is the man with real guts when he was the Treasurer, the PM and now in speaking up what is really important for Australia. Not too long ago (about 1 year ago) Krudd has proposed APAC to the Asia-Pacific region but the plan was shot down by the USA. The reason was simple - there's no way China will want to continue serving as a client state to the USA at these days and age.

Japan may want to be one and doesn't mind. S.Korea may want to be one. Australia? Seems to be fighting/wanting to be somebody's lapdog, from not wanting to live independently as a Republic to wanting to be the Far East Sheriff of the USA... it's not so bad if in bad times, the US and the UK would look after us. But fact and reality are when the UK decided to devalue their currency, they did it without giving Australia a chance. When USA was negotiating in WTO, and FTA with Australia, they hardly gave a damn to Australia's well being. It's all about their own self/national interest. The thought of Australia being their good mate never seems to matter a bit... silly? Blind? Dunno... I just hope one day Australia can see herself clearly in a mirror and decide once and for all, the first and foremost endeavour as a people and a country is to look after her own self interest first.

What a mockery!

If you have time, go check back a month or two and read about those people who were hiding behind their "national interest" cries in the Rio-Chinalco deal. Can't blame my cynicism here. And can't blame me for bringing this up again because these people when come to putting their (shallow and empty?) words into deed, they are grossly falling short!

... by 7,865,410 counts!

Prelude to Vietnam...

The Dirty Brigade

Read this and find out...

These points were well expressed last week by the general manager of the Bank for International Settlements, Jaime Caruana, as he launched the institution's annual report.

"The path to a self-sustaining recovery is narrow and fraught with risks. This is true regardless of short-term prospects, even if we take the 'green shoots' of recovery at face value.

"We need to facilitate the necessary adjustments in the financial system and the real economy, while cushioning the impact of those adjustments on growth and employment.

"And we need to ensure that the short-run responses to the crisis do not mortgage the future, paying close attention to sustainability and exit strategies."

Most international commentary has focused on the need to fix the banks, but Caruana said the deep-seated distortions in the financial sector and those in the real economy were "two sides of the same coin".

The finance sector had to shrink, as it had grown too large and accumulated assets of dubious quality.

In many countries, debt and leverage in both the financial and the non-financial sectors had to decline while household savings had to rise, he said.

Industries that depended on exports for their growth and those that relied upon leverage both had to find new production models.

"Economic adjustment is a precondition for a self-sustaining recovery," he said.

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If you can't see the big deal, here're some numbers...

...growth in credit to business has collapsed from $143 billion in the year to March 2008, to just $15bn over the past 12 months.

...since last November, the total debt outstanding to business has fallen by $20bn

...in the March quarter, the total business call on funds was a paltry $3.7bn...Less capital has to be set aside for home lending than for business lending, so the corporate sector is copping the brunt of the credit tightening...the commercial property sector...the next focus of financial instability

...Lending to households has roughly halved from a peak level of $116bn in the year to January 2008 to $58bn in the last 12 months.

...The level of household debt is now 55 per cent greater than the level of business debt.

Australian households have larger mortgage debts relative to household income -- a ratio of 136.5 per cent -- than any other advanced economy except Britain.

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** assuming there's not much change coming our way, and assuming most of the traditional sources of capital are drying up (which they are)... ask who is going to provide finance or buy up all those distraught comm properties? Have a guess.

Assuming Australia doesn't like to deal with the SWF (which tend to pay a higher premium with an investment focus) and turn her back to them, ask again what will happen to these properties? Sold at a dirt cheap price to some hedge funds from the traditional allies? And further see their next move of job culling and dismemberment of these properties with no regard to impact to the local economies?

... just wait and see.

A follow up on IPL - low at 2.24 today, any short term bounce from here will be a sell, otherwise, you are looking at 1.98-2.00 next down and then further drop to 1.75. If there's a cut loss level, it should have been exercised by now.