Haunting's economics blog

[haunting]

Insight: Reservations about the dollar

New global economic trends are changing the costs and benefits of having a reserve currency. In coming years, all countries may have to fight over a shrinking global savings pool as baby boomers retire. This will increase the desire to enjoy the “exorbitant privilege” accruing to the issuer of the global reserve currency. But joining the club is not free. Reserve currency issuers may need to supply large quantities of their currencies, with the concomitant risk of running potentially large current account deficits. They will also surrender a loss of competitiveness to the US by allowing a significant appreciation of their currencies against the dollar...

** just like to point out this fact that most of the current global economic leaders are facing the same "sunset" dilemma not unlike that of the Japanese' - an aging population and a rapidly shrinking economy.

Unless these countries begin to provide free viagara pill to their populace, it's unlikely to see the trend alter in any meaningful way. The alternative is through immigration which probably is not the most desirable option by any measure... not when you are running a democratic system and you rely on popular votes to keep you in power.

The end is nigh for some, there's no running away.

... and there's a simple way to measure the shifting trend, you can start by keeping track of a nation's currency value and its purchasing power.

 

[haunting]

How annoying...

BHP stock price has lost more than 20% since its peak in early June, now it's not that big a loss at this point yet, but if it begins to lose another 20% or so in the next two quarters, that will begin to hurt, esp for those who bought in during its run up from May to June.

Will that happen? I mean BHP losing another 20% from the current 31+? I dunno really but frankly by it losing another 20% would only translate to this - it has taken a round trip back to its Dec low last year. No big deal since in this game, there will always be winners and losers. It will be tough for some but easy money for the other.

Such is life!

But could BHP really drop back that low? Well, here's the bit about economy vs the market, you see. The economy is not the market and the market is not the economy... but sometimes they overlapped. And the connecting glue is? Money! Or liquidity. The market is about fast money whilst the economy is about making real money. Fast money runs fast hence the market is always running ahead of the economy, does it explain the intricacy?

So BHP at 31 is what the market has ordered - the smart money and big instos are doing what they are required to do, they discount its stock price back to be closer to its economic reality. The question here is simply this - does 31.00 reflect economic reality of BHP money making prowess?

Dunno really, coz different people have difference perception. They have this freedom to choose what they want to believe in, esp the stock market. If it's hard to convince others that the market is due for a drop because of economic reality, it's equally hard to tell them the correction may have more to run.

...just watch, more stop loss will be hit. Soon. But do you have to wait for it to happen before you pull the plug? Sometimes you don't, really if you try looking ahead with some other trick than just plain TA... trick like FA or big picture view to gauge the bigger trend that is happening way above your universe. The trick is to discern what is important and what is not... but then again, it will be hard to convince others of things they have not tried before.

Just like the grand old Pope at one time... those who tried to show him the earth is actually round were persecuted.

See? Living a flat earth is that much easier to explain so many things people don't understand... that makes life that much easier,

 

[haunting]

Interesting read - click me!

Beijing's main interest in Latin America has been guaranteeing access to the region's raw materials ”” principally oil, iron ore, soybeans and copper ”” to fuel its continued rapid growth. For many countries, there's a downside in the China trade, through which cheap imports have displaced local textiles.

China's growing role has alarmed policymakers in Washington. However, China has been careful not to establish a military presence in the region, since doing so would antagonize Washington. The U.S. has considered Latin America to be in its sphere of influence since the Monroe Doctrine of 1823.

China "treats (Hugo) Chavez as they do (Alvaro) Uribe and Lula," said Alexandre Barbosa, a consultant to the Sao Paulo-based consulting firm Prospectiva, referring to the presidents of Venezuela, Colombia and Brazil, respectively. "They're interested in business."

And what a voracious interest in business they've shown. Trade between Latin America and China rocketed from $10 billion in 2000 to $140 billion in 2008. China is buying zinc from Peru, copper from Chile and iron ore from Brazil. It's shipping electronic equipment to Brazil, buses to Cuba, clothes to Mexico and cars to Peru...

** I don't want much, of the 140b worth of trades, I am quite sure Australia would be able to fulfill at least 50% of them - all it needs is rather simple - "talk less do more"!

 

[Sean K]

During APEC, held in Lima a few months ago, there were 140 Chinese as part of their delegation....lol

 

[haunting]

I can imagine - 10 are there for the conference. The rest are there checking out the local "dimsim" or "yamcha"

 

[haunting]

Read it here... click me.

First we must understand Chinese culture when it comes to relationship building, or guanxi (pronounced gwan-shee). Having guanxi is utterly essential to doing business in China. There are many definitions of guanxi, but it would best be described as ‘connections’ and ‘relationships’.

Building relationships in China is a time-consuming process and not easy, especially as a foreigner. But once you do build your guanxi, it comes with a level of loyalty and camaraderie that will support you in tough times...

Isabelle missed two of the most aspects of Chinese guanxi, and I don't blame her. They are called TRUST, and its cousin, HONOUR.

Yes, guanxi is actually quite basic. To enforce "trust" between two business parties in the Western world, we rely on laws and a paper contract, spelling out in detail about what why where when who should/must/will/shall do this or that, etc...

Over here, to enforce a paper contract, you rely on the whole legal system, court, judges, lawyers, police, accountants, etc... a whole plethora of state apparatus and trained professionals.

Over there in China, where such legal system is lacking and the "concept" of Western law is still alien to most people, how do you expect the Chinese to conduct business among themselves or with a foreign business party?

That's when trust and honour become important.

That's where guanxi comes in. The longer is the guanxi between two business partners, the deeper is their understand of each other and hence the stronger is the trust and honour linking them together.

It takes time to build guanxi because it takes time to get to know a person, or a business partner... it takes time or event to build up trust.

Event? Yes, sometimes an event or a sincere gesture from one party to another could build trust.

To illustrate in a negative way - the recent Rio's abandoning Chinalco in the last hour and then signing up with BHP almost immediately was a complete "backhander" to their guanxi. It's a treacherous killer move, and Rio's management could assume from then on any deal they sign with the Chinese, that piece of paper contract would be treated with "contempt" - if the Chinese could get away from it, they would.

How hard would that be if the Chinese really return a backhander to Rio? Well, just try imagine Rio going to a Chinese court to sue for their piece of silver...

Trust - a simple yet very powerful word... without which, it would be almost impossible for a business to operate in China. Right now, Rio I believe is falling into that pit - it has dishonoured its reputation and has lost the trust of a very important member in the inner circle of the Chinese leadership.

Just think about this - Rio sold 58% of their iron ore to China last year and is planning to expand their iron ore production next year... hoping to sell more to the Chinese!

... now tell me why the investors are so "bull" on Rio and its management?

 

[MRC & Co]

At the same time, the Chinese need to learn to do business in a Western way.

They need the West as much as the West needs them.

 

[haunting]

True to an extent. But in this context, the elephant is the Chinese demand/market, not Rio's supply. As pointed out earlier - China can live without Australia, but Australia can't live without China. This is a very unpleasant thought that many people in this country find hard to accept. Harder to accept still is China has a market system that is a hybrid of "capitalism" and "communism", one where the rule of laws is not the ultimate deciding factor.

But market freedom will always apply when come to international trades - Rio doesn't have to sell to the Chinese market if it doesn't want to.

Fact of life.

 

[haunting]

OZ vs China...

The issue had to be dealt with in a sensitive yet strenuous way, he said, because the Australia-China relationship was an important one.

"We're friends but we're friends that tell each other what we think and what's on our mind at any particular time.''

Is this how friends treat each other?

Mr Crean met Sha Hailin, deputy secretary-general of the Shanghai Government, yesterday after trying but failing to meet more senior officials.

"In the Shanghai Government you have the mayor of Shanghai, eight vice-mayors, one assistant mayor and then below that you have 11 deputy secretary-generals," said a Shanghai diplomat. "Mr Sha is number five in the hierarchy of deputy secretary-generals."

Those 16 officials are, in turn, outranked by the top 16 in the Shanghai Communist Party.

** been saying for a long time... never never let "faces" be torn coz mending face could take a long time. Your really do not want to speak what is in your mind even when you are talking to your "true friend"... not in the public and not in international diplomacy. Saving face is very important in China and any good and decent advice should be done in private and not in a "lecture". Krudd scored big in the international arena with his talk of human rights on the Chinese expense and now the Chinese is returning the favour...

There is a clear breach of protocol in how Crean is being treated in China as the Chinese official is way too low ranking to his - and this is the Chinese way of "diplomacy". All action, no words. Subtle but effective... the best Krudd can do now is not to get involved personally. That will be asking for humiliation. He should know better.

And with that, the usual diplomatic channel will fall back to the usual "formality"... where the govt will learn it through the Chinese news source.

The way moving forward? May be through a third party, like the Singapore govt or some other "Asian friend" to smooth out the strained relationship... by looking around and doing a quick count, I am not sure if there are still many "true Asian friends" around wanting to take up this role for Australia.

 

[haunting]

Forget about Stern Hu, he is just a small potato... this is what will raise the heat. Wait for it.

Keep those dates and timeline in your diary. Meantime, don't expect the iron ore market to be active. Over there, the Chinese steel sector/market will be going through a shake up and shake out, with CISA banging heads to take down every rogue and delinquent traders... by the time they finished, they would be ready for next round of negotiation. And by that time, the spot market would be quite "dead" too - when no one dares to step out of line.

What left will be the "going broke" scenario - the contract negotiation between the biggest supplier vs the biggest consumer... with serious consequences. If there's a dead lock like this year, attrition will be the name of the game; by then, just use your imagination and visualise what it would mean to China, the consumer and Australia the producer.

 

[haunting]

Chinese business in chains

** it's all over the place, everyone is feeling "hot" with the Stern Hu incident. I even read about this piece on Heavenly signs why China should take note - reflects a lot of the local sentiment but losing a bit on journalistic ethos. Will all these help? Dunno, but it sure helps to put a lot of pressure on the govt of the day. Krudd and his govt will be put under extreme pressure....

But will it really help matter? Will it help to bring Stern Hu out of the lockup? Will China give a damn? Frankly, doubt it. What they are dealing with is an internal corruption matter with nation wide investigation into the iron ore purchase by some big steel mills which in turn resell to smaller steel mills at 40% or more profit. And where do these big steel mills get their supplies from? The investigation is on going and it seems all three big suppliers will get a look into.

Stern Hu's arrest? Well put it simply, if the Chinese doesn't have enough evidence, they won't act so recklessly.

Here's just a simple observation - if the Chinese doesn't have something more credible than just steel mill visit, they wouldn't coin their President' name as the person behind the arrest. If this matter were to go all the way to the top, I doubt if what the Chinese have is just something flimsy.

For a start, having an internal memo/minute of CISA's strategy in negotiation would be bordering to "trade/stater secret" - at this point, no one knows what evidence the Chinese have. The local media responses and reactions at best, all are speculations and emotional outbursts, depending on what one wants to believe... sure, we can always fall back to claim that China should/must show cause in this case etc... they will, but in due time - until they have gone through the whole investigation process.

Meantime, here's a good writeup on what went wrong...

ps: will China's business dealing with the rest of the world be affected? Well, there's this thing "immoral" about the capitalist system, is the unsatiable human desire for profit - as long as there's money to be made in China, the profit seekers will turn up in throngs - these people will find some excuses to overlook or justify their presence over there. Let's not get over melodramtic over all these media brains' claim.

 

[haunting]

Oops! Can't post chart in comment field (any chance this option be turned on so follow up charts can be posted, Mr. Admin?)

... well, let's just put it simply that it looks cheaper at 29.00.

 

[haunting]

Robert McNamara Described as the “Architect” of Vietnam War - by Bill Bonner. Read it here.

...thought the closing line is all about what's wrong with the current US-centric view of the world.

Sometimes it is the brain that fails. Sometimes, it is something else.

** ever wonder what is that "something else"?

It's the heart that is missing!
Plus lacking commonsense.
Plus failing to recognise their cognitive biases, and biases inherent in other culture.
Plus the failure to recognise and appreciate the cultural differences between different countries and different races and these cultures are demanding changes unique to their circumstances.
Plus the wrong belief in American might and abuse of their position as the sole super power...

But most important of all, their inability to perceive change, esp fundamental changes happening in the other side of the globe, and take the necessary adaptive actions.

Hence lies the root of the problem - McNamara has failed. Greenspan has failed. Paulson has failed. And now Tim Geithner and Bernanke?

What is their chance?

They are repeating McNamara, Greenspan and Paulson's failed approaches - they have failed to observe with their heart, with commonsense and are clouding their judgement with the American brand of arrogance - nothing has changed hence they should expect nothing changes in their result.

Let's wait...their last silver bullet has been fired, and it's in mid flight, they are not sure if it has hit or missed as they couldn't see the target, it's shrouded in pitch black fog...

... all they can do is hope and pray.

The sad thing is by the time they know of the result, it's too late. It usually is...

Tragic.

 

[haunting]

Hu is G.Rudd?

** all wild speculation here.

But it sure is timely and urgent for Greg to make this move. A very Chinese approach, gotta say. This shows Krudd does know a thing or two on how the Chinese operate. There is no better person than your own brother to carry whatever message you want to convey as the brotherly relationship demonstrates guanxi and trust to the Chinese counter party clearly. The implicit message to the Chinese would be this - you can tell Greg what is in your mind (what do you want?) directly and frankly and you can trust that it will reach my ears only and no one else...

It's show time.

 

[haunting]

Dreaming of a seat in the Security Council?

Wow! And Doh!

...if this is the ambition and plan, then why published that defence white paper? Don't they know China holds veto power in UN? Surely they know better it's much easier to have China on their side as China commands a sizeable African "allies" and would mobilise them for the Aussie cause?

What the...!

 

[haunting]

The Chinese Brick wall...

Australians doing business in China suggest that prime ministerial references to his prowess at Mandarin and his understanding of China are widely regarded as unbecoming boastfulness by the Chinese. At the same time, Canberra's all too evident apprehension about the level of Chinese investment in Australian resources and about the potential Chinese military threat have resonated loudly. That's even without silly snubs like trying to change seating arrangements to avoid Rudd sitting next to the Chinese ambassador in London.

None of this explains, let alone justifies, the provocative act of the Chinese in detaining four Rio Tinto employees, including a senior Australian executive. But it may help explain why Beijing has been so dismissive of the Australian reaction and sensitivities to the extent there was no prior warning or attempt to deal with the matter through back channels...

** I believe the bold print emphasises the very important point the local media is not addressing, or rather, a point of view they prefer not to accept as credible or valid, that is, the Chinese is treating Hu and his stuffs and the arresting of quite a few high level purchasing GMs from various steel mills as an internal corruption case. It seems the level of corruption in the steel industry has reached a stage where the top level of officialdom has to be called in to provide the necessary authority to cow the regional officials into cooperation.

Right at the beginning the Chinese foreign spokesman Qin Gang has been saying this matter is very much a state matter and has suggested to Australia not to politicise it as it wouldn't do Australia any good...

Now I am not sure if anyone has really listened then or is paying attention now, if the investigation were to reveal with evidence that Hu has played a role in this case... would this still consider a "provocative" act against Australia?

Would it make matter unnecessarily complicated between the two governments?

 

[haunting]

Rudd may contact China?

** well, who is he gonna call? President Hu? I doubt he would get through.... PM Wen? He is not in charge in this matter. So who is he going to call?

Humiliation is waiting for him. But if he doesn't make the call, worse may happen... for example, try contemplating the possibility of China cutting back their commodity purchases from Australia. This is a very real possibility and it would depend a lot on how RIO/BHP's merger being handled by the Australian government. The Chinese retaliation in this case could potentially change the whole election landscape in the forth coming election.

An exaggeration? Possibly, but it sure would give Malcolm Turnbull a big free pass, say if the Australian balance of payment by then is in rapid decline into the negative. Could the Labor govt take such a risk? Would they want to take such a risk?

I can almost see Malcolm's sly smile on his face... what a godsend!

“I did not expect that China would react so harshly,” Roger Groebli, head of market analysis at LGT Capital Management, said in Hong Kong. “China has a serious interest to take stakes in Australian mining companies, therefore this discussion might set the hurdles a bit higher. I rate this as a drag for stock prices as well as investor confidence.”

** Roger might not have expected this... but he shouldn't be that surprised because the relationship between China and Australia was already in downward slide since Krudd gave his human rights speech in China. Since then, the deterioration has been accelerating from the defence white paper to the various FIRB decision clearly showing a discriminatory bias against the Chinese enterprises.

Yes, I am aware of the point that most Chinese enterprises are state owned, but in the Chinese eyes, corporations like Chinalco and Minmetal are as "independent" as they can possibly be by the Chinese standard, and to keep their approach as professional as possible - they both engaged Investment advisors from the West and follow their advices to the dot; and yet they were ruled as unacceptable... if you believe the Chinese are not upset about these, you haven't been paying attention.

... and so here we are - sh** has really hit the fan and the heat and risk are rising by the day; you can call them any name you like but please learn this lesson - don't screw with your biggest customer. It could bakfire...

 

[haunting]

China reviews iron ore import licences

** this should give cause for concern here because of its impact - the house cleaning and head kicking would eventually remove those rogue and uncooperative license holders. The remainder will be so cowed that they probably would not dare to sign up any deal without the aokay from CISA.

Can see its implication or not? It means if the big three suppliers were to pull a stunt like this year by signing up with the Japanese first and if the Chinese were to hold out for more discount, they won't be able to off load their ore in the spot market that easily and push up the spot price. It won't be easy without the "unofficial" Chinese participation. That would also mean there will be plenty of pressure on' the big three suppliers to maintain a consistent production and sales while the negotiation is ongoing...

The longer the impasse the worse will be the numbers for everyone, including the Chinese steel mills. It will be a battle of will and reserves, the attrition will surely wear down the party with the weakest financial reserves. And here's where "hell" will set in for the big three unless they can sign up some big enough contracts with the non-Chinese steel producers - the Chinese has almost unlimited capital resources with US$1.7 trn stashing in the background and cheap bank loans to tide over the hard time...

What's the chance for the big three to score BIG in the next round of iron ore price talk?

Going for broke could have a very devastating impact on all parties. It will almost guarantee a lose-lose outcome with the eventual winner walking off limping whilst the losers lying dead or broke... and this just involves iron ore market only. The Chinese has yet extend that to their copper and coal imports.

Let's hope they won't really go all out for broke with Rio/BHP and they will leave the coal and copper market alone... but if they are really this pissed with Rio/BHP and are hell bent to go for broke , the economic impact would be really devastating for this country and not just these two companies.

.. let's just hope Krudd knows what he needs to do next, but for those Rio/BHP merger proponents I think they should seriously sit down and work out the numbers and the cause/effect and cost/benefit of the whole scheme.

I hope they will take into account and plan on how to deal with a mad elephant charging at them...

But on second thought... this is a free country and no one can really tell Rio/BHP what to do, so regardless the project will be pushed on and surely it must be fun I guess - you don't easily get to tame a mad elephant in anyone's life time. On top of that, it's been all agreed that the deal was a right call... so, what? I worry?

Never!

 

[haunting]

Mixed messages on China leave Kevin Rudd exposed - Paul Kelly

** this is the most balance and rational commentary I have read thus far in the Stern Hu fiasco. Comparing with the others, esp those from the Biz Spectators which are written with vested interests (in my view), Paul Kelly clearly spells out the core issues Australia has with China. Worth a read.

Australia is in unprecedented territory. For the first time in our history our main trading partner is not a strategic ally and not a rule of law democratic state. This is a fundamental change in our national existence. It is a long-run transformation and will demand a more sophisticated Australian diplomacy.
...
It is equally futile to think Australia should retreat from China because it is an authoritarian state. That was not John Howard's policy. It is not the attitude of a sensible Australian government. Our involvement with China will only intensify. What is required is an unsentimental pursuit of the national interest, dismissal of any illusion about a special friendship yet a prudent drive to deepen relations and practical co-operation. That means working through tensions such as the Hu detention.

** there is no reason why Australia cannot work with China and make China a strategic partner in the economic arena. Can't see why not if the Australian govt is pragmatic enough and has the foresight to note Australia's economic future is closely tied in with China's ascendancy in economic power.

Even China's long time enemy, Japan recognises this necessity and is pragmatic enough to adapt to the new economic environment. So is the USA. To date, not one high ranking American officer has stepped onto the Chinese soil and lectured the Chinese on their human right policy. Instead, in the last few months three of their ranking officers - Clinton, Pelosi and Geithner were in China mending fences, talking goodwill. Even the most outspoken of the three, Pelosi who has a record of anti-Chinese speeches did not touch on the sensitive Chinese subject but instead was concentrating on climate issue.

That is the stark reality facing the "free world" - there is an elephant in the room and it's better to deal with it in a friendly way than the other way round coz the cost of mishandling the beast would be disastrous.

Now, ask why would Australia choose a tack that is putting itself in the harm's way? There is simply no reason for Australia to adopt such a policy. It's working against our self/national interest and our future generation's interest.

 

[haunting]

Here is a solution to the GFC... read about it!

The trouble is that Americans can’t spend. They have to save. The combination of a catastrophic decline in wealth and a sudden bulge in retirements gives America the profile of Japan during the lost decade of the 1990s. The Keynesian approach is a one-country model, which states that if the population wants to save rather than spend, the government should spend for them. America appears to be getting away with this because the dollar is a reserve currency and the world has to hold dollars ”” but the grumbling overseas might lead to the rest of the world ditching the dollar eventually, making the US like like Britain in the 1960s and 1970s.

The Keynesian stimulus isn’t working very well, as the miserable employment data tells us, and the stock market clearly doesn’t believe Obama’s demurral that it will work later in the year. There’s already talk about another stimulus package. FInanced by whom, and how? The deficit is already approaching $2 trillion.

If we follow Robert Mundell and throw out the single-country model of the Keynesians, it is obvious that Americans can save in another fashion, that is, by exporting. China’s underdeveloped interior is potentially the world’s biggest export market, flanked by similar markts in Asia and elsewhere in the developing world. The transition would still be painful, and the frictions considerable, but America could reorient itself to th global market. There would be a recovery. As matters stand we face a lost decade...

** make sense? A little too Utopian and based on the responses to the blog, already objections are building... not many people are capable of thinking and reacting sensibly when they are confronting with an overwhelming problem. Fear, pride and ego would make sure they missed the big picture and the inevitable future.

The paradigm shift that has been set in motion will not change until and unless the forces effecting the change are altered. At this rate, and by repeating their past erroneous actions, they are ensuring their own misfortune.