The Future of Chinese Nationalists
Chinese nationalism (and not in Taiwan) has a great future, writes Mark A. De Weaver, Phd:
Many Americans view China’s emergence as the world’s 2nd largest economy with trepidation. China is a ‘rising power’ destined to take over America’s role as global hegemon in the not-too-distant future.
Recently China’s prospects look less rosy. Q1 GDP grew only 7.7%, down from an already subpar 7.9% in Q4 2012. Exports are slowing and investment-led growth is clearly unsustainable. Beijing is transitioning to a new ‘growth model’ based on consumption and productivity gains.
Yet there is little evidence that this strategy is working. There is no reason to believe that such a transition can be achieved under [China's] current political-economic system.
China’s decline is likely to be a lot less peaceful than its rise.
Slower growth will pose an existential problem for the Chinese Communist Party. Since 1978, economic development has been the [post-Mao] Party’s primary source of legitimacy. A prolonged slowdown will weaken its hold on power the same way that crop failures during imperial times undermined the emperor’s claim to the ‘mandate of heaven’.
If China is not going to be ‘number one’, some other justification for Party rule will be urgently needed.
The Party’s best bet will be to play the nationalist card, making defense of the ‘motherland’ its primary mission.
It will be easy to blame China’s economic failures on the machinations of foreign powers, as Mao did in proclaiming the founding of the People’s Republic in 1949. That China had “fallen behind,” he said, was “due entirely to oppression and exploitation by foreign imperialism and domestic reactionary governments.”
It will also be easy to put the Chinese economy on a war footing. China’s central planning institutions are well suited to the mobilization of resources for defense industries. A military buildup would also help to alleviate excess capacity problems in heavy industry. Total excess capacity in the steel sector, for example, already exceeds total US capacity. Arms manufacturing is likely to be a good way to put idle plants back online.
The implications for China’s neighbors are evident in Beijing’s increasingly bellicose irredentist territorial claims. There have been escalating tensions with Japan over the Senkaku Islands, spats in the South China Sea involving areas claimed by Vietnam, and even a Chinese incursion into an Indian-controlled Himalayan region claimed by both Beijing and New Delhi.
Such incidents are often described as [seeking] control of natural resources such as the South China Sea’s oil and natural gas. They are better understood as consequences of the Party’s domestic agenda. As public relations exercises they have been remarkably successful. Chinese anti-Japanese sentiment is now at fever pitch, with many of China’s netizens expressing strident support for military action against Japan to recover lost territories, right historical wrongs, and avenge past humiliations.
Nationalist sentiment is going to be the Party’s ace in the hole once the economy slows. Beijing [may] prefer that international disputes remain unresolved. Its objective will be to keep the public distracted by possible foreign threats to China’s national security and economic development.
China, not the US, is fated to be the ‘declining power’ for he remainder of this decade Washington’s preferred policy of ‘engagement’ will not work. Beijing will be unable to give ground in disputes with its neighbors because doing so will weaken the Party domestically. Events like the recent summit between President Obama and General Secretary Xi Jinping are not going to improve US-China relations when the Party’s survival depends on escalating tensions.
DeWeaver manages the emerging markets fund Quantrarian Asia Hedge and just published Animal Spirits with Chinese Characteristics: Booms and Busts in the World’s Emerging Economic Giant.
I was going to write about how city hall scandals à l'américaine are hitting Canadian cities like Toronto where the Hizzonher was photographed with crack cocaine gear or Montreal where M. Le Maire was arrested for corruption in public works contracts but I decided that was too trivial. And then my airconditioner started a wailing banshee noise and had to be turned off lest my neighbors march in here with their guns.
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Model Portfolios Posted
The model portfolios and closed positions tables have been posted on www.global-investing.com as usual on Sunday morning. You can view all the portfolios (stocks and bonds; closed-end and exchange traded funds) if you are a paid subscriber. If you are a pre-subscriber you can only view our closed positions. Our average gain in 2013 trades was exactly 7%, a figure achieved by cleaning up the multiple partial sales of some of our holdings. To view the spreadsheets on your computer screen, as always use the key "printer-friendly version".
More for paid subscribers follows:
The commodity cycle is self-correcting, why your editor does not panic over potential lower demand from what had been the leading importer of raw materials, China. China is now definitely showing slower growth levels.
When demand from a big importer falls, supply can be aligned more closely by various natural means. First, recycling goes down. Scraping the silicon off old electronic devices, for example, is no longer economic.
Heroic measures to find more copper or more oil are now out of fashion because of glut and alternative fuels like shale gas.
Then too planned capital expenditure to bring on more supplies of what had been selling so well is delayed or even halted altogether when those imminent sales lag. Being the first with the biggest mine or oilwell no longer provides a competitive advantage.
One trend that helps the producers cut output is greed by the countries where the gasfields or potash or gold-bearing rocks are found. When countries demand that old concessions be renegotiated because they were too generous (or involved corruption), the producing company may simply walk away. The result is that supplies don't grow. So existing minerals or raw materials or hydrocarbons are in shorter supply.
Early last year one of the Spanish resident readers of my newsletter tipped the publisher of El Pais, a respected newspaper in Spain with important media interests elsewhere (mostly in the Spanish-speaking world). He was excited about Promotora de Informaciones SA B preferred shares called PRISA B (PRIS.B on the NYSE). The shares came with a supposed high yield. I tend not to invest in media because I have so much money at risk with this newsletter, but he persuaded me with the help of his broker.
We bought and rather than getting the expected cash we got shares of the parent in lieu, PRIS A common stock, also on the NYSE. Your editor got fed up with PRISA altogether although it was not the only Spanish company to pay dividends in scrip rather than currency. So late last year we sold the whole lot, which was the only way I could figure out our total losses on the PRIS.B and PRIS common.
Now the deeply indebted Spanish media group is back in favor with the A shares up 4.7% yesterday because it is negotiating to sell its stake in Digital Plus, a Spanish satellite pay-TV broadcaster. PRIS.B is unaffected.
PRISA owns 56% and wants euros 900 mn. Meanwhile it is in perpetual renegotiation with its banks over the euros 3 bn it owes them for acquisitions in Latin America made just before the global financial crisis.
More on this follows for paid subscribers along with another sell and another buy from our reporters writing from South Africa and Japan today. Plus news from Israel, Canada, Japan, Ireland, Finland, Spain, and Brazil.
The Road to Mandalay
In Mandalay and Manhattan, the dawn came up like thunder today. It's not just fear of the Fed prematurely "tapering" off its QE and ZIRP programs. We got a right royal soaking here in NYC with thunderstorms and floods. Asian markets were seriously under water as well, starting with Tokyo' Nikkei index now 20% below its peak. That counts as a correction in stock market terminology.
Things are not much better in China where new, lower growth estimate have come from the World Bank. As a result, the WB estimate of global economic growth this year has been revised to 2.2% from 2.4% earlier.
In the shakeout or wring-out, Asia is tending to plain negative. Pacific emerging markets (but not the antipodes) are looking expensive for both stocks and bonds.
In the western hemisphere there is good news. Brazil has eliminated the tax it imposed on sellers of reais against the US$, following an earlier removal of a tax against dollars flowing in to buy its bonds.
More good news in the USA should not be drowned out. Inflation is at its lowest level in 53 years here. Our country's fiscal deficit for the FY which began last Oct. is down 26% from the prior level, at the lowest red ink in 5 years. This came about despite a marginally higher deficit in May, u-p 10% over the level of May 2012, caused not by reciepts falling, but from the often short-term impact of outlays which can reflect one-time big-ticket spending.
Adding to my slightly sunnier outlook is the latest US retail sales and jobless claims data which both beat forecasts, with sales up 0.6% in May and filers for benefits down 8.3%, both sequentially.
ADR owners are the main holders of Irish drug firm Elan, fighting off a takeover bid from Royalty Pharma now raised to $13/sh by using its cash hoard to buy other drug startup firms. The Elan board seeks a yes vote on any of 4 proposals approving these transactions, whose financial worth is, to put it mildly, unproven. Then it can block the bid from the private equity outfit which finances drug research worldwide. Elan is also playing on distrust of private equity.
More for paid subscribers from Israel, Britain, Indonesia, India, Finland, Belgium, Canada, and Singapore including a sell recommendation.
Forex Fiddle and Reasons for Hope
The latest scam revelation is that banks not only misreported interest rates and oil companies not only misreported the price of crude oil. Now it appears that exchange rates between currencies were also fiddled.
I wanted a bit of good news to offset that bad so here goes. In Jenin, on the West Bank, a large $500 mn 200 megaWatt power plant may be built to supply electricity to the Palestinian territory. This is under US Secy of State John Kerry's $4 bn plan for West Bank and Gaza economic development. This was initially proposed by the former UK Prime Minister, Tony Blair, to raise living standards.
And our companies are involved, as I explain in the blog below which also reports on news from the frontier emerging markets notably Dubai, Canada, India, Israel, Britain, and Ireland.
Wall Street's Biases
Jason Hsu, PhD, the Chief Investment Officer of Research Affiliates, prefers a "Monkey Throwing Darts" to allocate investment assets to the usual capitalization-weighted indexes. Innovative quantitative allocation strategies AKA "monkey business" delivers outperformance when compared to supposed sensible investment rules.
So Hsu says Burt Malkiel’s legendary blind-folded monkey, throwing darts at the Wall Street Journal's stock page, would wind up with a portfolio with a value and small-cap bias. The monkey would historically have outperformed the S&P 500. (Malkiel wrote "A Random Walk Down Wall Street" which developed the efficient market hypothesis. This argues that the pricing of all publicly-traded assets reflect all publicly-available information. Malkiel is an advisor to Research Associates.)
Oddball strategies deliver large and statistically significant excess returns compared to capitalization-weighted market benchmarks in nearly all regions and countries over long periods of time, Hsu argues. Dr Hsu says “upside-down” strategies' outperformance results from their tendency to increase positions in value and small-cap stocks. These portfolios do not match market valuations of shares, shown in indexes. Capitalization-based indexes focus on big companies regardless of their valuation.
The monkey's portfolio would have value and small-cap tilts because non-price-based weighting schemes end the double-counting of big companies. Being big increases both its share price and its weight in the portfolio so if the stock price falls, the drop is magnified by its fall to lower down in the index as well.
So a non-price weighted strategy with a value and small-cap tilt would have outperformed historically.
That is one Wall Street bias to watch out for, particularly when going long with index-based exchange-traded funds.
Here is a warning about another Wall Street bias. Dozens of analysts, often with conflicting views, pile into disputed positions over some of the most popular consumer goods, from Lululemon to Apple, from Microsoft to Amazon, from Nokia to Blackberry. This is not because they have a changing point of view. It is because brokerage houses make their money by getting people to trade a lot. So the constant reversal in opinion feeds business.
*More for paid subscribers from Ireland, Israel, Brazil, Britain, Mexico, Finland, Greece, Switzerland, Australia, South Korea, and Thailand. Updates from our funds lead off and lots of pharma and medical news.
Jewish Belly Dancing Need
My Orthodox Jewish ancestors like my paternal Opa were followers of German Rabbi Samson Raphael Hirsch who allowed women to sing along in synagogue services and prayers. But they had to be accompanying men also singing and in a divided-off part of the synagogue. Among other things, Hirsch cited that Miriam, Moses's sister, led the women in singing hymns after the Hebrew children crossed the sea and escaped from Egypt.
There is no ban on female singing in the Sephardic tradition of Judaism either.
But female singing is not allowed by the Chassidic movement of Ashekenazic Judaism whose male members engage in lots of song and dance. Women are banned under a rather tenuous interpretation of "The Song of Songs" in which Solomon writes: "your voice is sweet and your face is beautiful." This leads to the view that a woman's voice, "Kol Isha", is always sexually enticing.
When the Chabad Lubavichers light the Chanukah candles with a cherry-picker in Manhattan outside Central Park, the Hebrew song Moaz Tsur (Rock of Ages) is sung. But your editor cannot join in because she is female. This outrage on one piece of property owned by my city permits Christmas trees to be put up on others.
The split on female singing within Orthodoxy became a headline matter yesterday when a few hundred women from outside the Chassidic movement held a New Moon ceremony at the Western (Wailing) Wall protected by Israeli policemen for the first time. Women, for reasons I will not bother explaining, have a special link to the New Moon although among the most Orthodox, only men get to say the New Moon prayers.
Until this month the cops kept the women from the Wall, also called the Kotel, because their worship was offensive to the Black Hat Brigade in part because they wore phylacteries and prayer shawls which women are not required to wear when praying under Jewish rules. But they may wear them.
These Chassidic men, who do not recognize the State or Israel or serve in its armed forces (while the women do), until the latest Jerusalem coalition was cobbled together were able to block women singing at the Wall lest the guys be tempted to think of sex. Chassidic men also avoid the Israeli draft by zealous Talmud study while supported by the Israeli State and their working wives.
They also don't shake womens' hands or open doors for them. Many will not drive a car or enter an elevator where an unrelated woman is the only passenger.
Islam of course is full of rules against female temptation, but it is also the home of belly dancing; after peace is made we should develop Jewish belly-dancing in Israel.
Japan revised upwards its Q1 growth figures to an annualized 4.1% from 3.5%, which, along with another drop in the yen, set the Nikkei back on the rise by 4.9%. The yen is now 98.26 to the greenback vs 94.98 last Friday. Chris Loew from Japan warns that there is "a lot of speculative premium" in Japanese shares and it is hard to find good deals now. But he found something to write about later this week, a stock at under 7x earnings despite the boom with a 3.36% yield. Watch this space.
More from Myanmar, Brazil, Argentina, Israel, Switzerland, Sweden, Panama, Spain, Britain, Canada, India, and Sweden.