Today the Chinese currency, the renminbi or yuan, broke through the level of 6.50 to the dollar for the first time since 1993. Your yuan is getting you more dollars at last.
Meanwhile South Koreans are sending pamphlets to the North by balloon, along with both dollar bills and RMB bills, both of which are used in the Hermit Kingdom's markets.
This yuan rise will ease Chinese problems with foreign countries claiming a cheap yuan is distorting trade flows, like the USA. But as Jim Jubak wrote for the Money Show Digest, it also meets Chinese needs to fight inflation. Meanwhile China is cracking down hard on dissidents, bloggers, their lawyers, and other critics of the regime. These moves are related:
By taking a weak stance on inflation, China is inviting political unrest. That sets it on a dangerous course toward greater political repression and even less action on inflation.
China's leaders have turned an economic problem, rising inflation, projected to go from 5.4% in March to 6% in April, into a political problem. They now face increasing protests over higher pricesl.
It's still unlikely that China's political problem will turn into a political crisis. China's internal security forces have met even the smallest demonstration with massive force.
But China's efforts to defuse its political problems before they flare into violence will push the country into an economic crisis. The political solutions implemented so far make China's inflation worse.
China's economy isn't slowing significantly. GDP grew 9.7% in the first quarter. Nor do underlying trends suggest that China's growth rate is about to drop. New bank lending increased by 16.6% in March from 2010. The money flows driving China's growth aren't abating.
Why does China want to slow its economic growth rate? Because inflation has climbed well over the government's 4% target for 2011.It cuts most heavily into the buying power of the part of the population with the least money.
China is a poor country so families spend more of their income on basics such as food. Food consumes 30% to 40% of the median family budget.Food price inflation of almost 12% in China (the annual rate in March). Although China is on average wealthier than it was a decade ago, some Chinese are much, much wealthier—and that has led to a rise in social tensions, which high inflation exacerbates. According to a recent study by Bain [Consulting], 585,000 Chinese have more than 10 mn yuan (about $1.5 mn) in investible assets. The fastest growth is among those worth more than $15 mn.
On the other hand, the average employment income in China—even adjusted upward to take into account the higher purchasing power of the yuan in China—is just $4,325. And that average hides the huge difference between urban and rural incomes. Urban incomes were about 3.33 times higher than rural incomes in 2010.
Inflation might increase social tensions and resentment on the part of those [not in] the lucky upper 585,000. If you're scrambling to find cheaper bok choy as food prices soar, you might find yourself thinking about throwing a rock at the next BMW you see.
Inflation is a big political problem in China, because history, as read by the Communist Party, says it is.
Unrest caused by higher prices was a key component leading up to the Tiananmen Square protests of 1989, the official explanation goes. The army eventually put down that demonstration by firing on unarmed protesters. Hundreds, perhaps thousands, were killed. China's official history also says that the inability of the Nationalist government to control inflation undermined popular support during its war with the Communist Party for control of China after World War II. This contributed to the Communist victory.
If you look at what China has done in the context of what it hasn't done, the inflation measures have been smaller, far more incremental, and much more predictable than the job requires.
Look at the increase in reserve requirements. Barclays Capital calculates that the most recent move took $56 bn out of the bank system's lending capacity.That seems like a lot—until you weigh it against the potentially inflationary $197 bn China added to its foreign-exchange reserves in the first quarter.
Or look at China's interest-rate increases.You can make the argument that, in historical terms, China's interest rates are still too low and too expansionary.
Another thing China's leaders haven't done—they haven't raised deposit interest rates to the point where it pays to keep money in the bank. In the last increase, the People's Bank raised the deposit rate to 3.25%. With inflation at 5.4%, money in the bank now guarantees an annual loss of more than 2%. To slow down the economy and the speed of money, this isn't the way to do it.
Finally, there's the exchange rate. Keeping the renminbi limited to 2% annual appreciation versus the US dollar guarantees that the country will remain wedded to its export growth model. Chinese products will remain artificially cheap on world markets, regardless of how many speeches leaders deliver about the need to rebalance the Chinese economy.
In addition, it makes Chinese consumers less well off than they would be if the renminbi bought more in everything from oil, to Coach handbags, to US chickens.
Since every currency trader in the world is convinced that the renminbi is headed upward against the dollar, the artificially cheap currency guarantees big flows of overseas cash into China. That, of course, makes inflation tougher to tackle.China could really ramp up interest-rate increases, increase the rate of appreciation in the renminbi, and pay bank depositors a positive rate of interest. But so far it hasn't.
A combination of fear and politics stands in the way. Ramping up interest rates might produce a real slowdown in growth that's probably needed to stop the growth of inflation. But that slowdown strikes many of China's leaders as too risky. It could, they worry, endanger the legitimacy of Communist Party rule in China, which rests on the ability of the party to deliver the growth bacon.
Some changes if at the level necessary for them to be effective, also run smack into the self-interest of powerful economic groups. Significantly increasing the speed of appreciation of the renminbi would drive many of China's least efficient exporters into the red. These companies, officially 'profitable', are big sources of income and wealth for current and retired members of the People's Liberation Army and the Communist Party—and their children and grandchildren. Those interests are only too ready to make the argument that any change would force such companies to lay off tens of thousands of workers.
Jubak's argument sounds right. Chinese savings produce a negative return. Lacking a social safety net, Chinese middle class members (by Chinese standards) need savings for education, illness, disability, retirement. The way they save is to buy real estate. Real estate transaction volumes in several Chinese cities jumped last week, signalling steady demand, and supporting asking prices despite higher interest rates and bank reserve requirements.
An uptick in the number of housing transactions across Chinese cities was reportered by the ETF, Claymore Alpha Shares China Real Estate (TAO). The government may have to clamp down harder on speculation and start blocking home buying. But this risks triggering more political unrest, adding to the squawks from truckers, Christians, parents of children killed in shoddily-built schools, Tibetans, Uighurs, supporters of a Jasmine Revolution.
More for paid subscribers on China and other places like Brazil, Britain, Canada, South Korea, India, Iran, France, Finland, and Japan follows:
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Why You Diversify
Last night your editor dined with a Pimco employee who will remain nameless for his own protection. He told me that the $238-bn (under management) firm's CEO and co-chief investment officer, Mohammed El-Erian, took his family to Egypt last Dec. There the fund manager visited relatives and friends. He speaks Arabic with an Egyptian accent. He had access to off-the-record and spontaneous grouches. El-Erian is an analyst with brilliant credentials.
When he returned from Egypt early this year his Pimco colleagues asked him about his impressions of his family's homeland. El-Erian said he did not see what could go wrong.
A few weeks later Tahrir Square erupted, and Egypt's president resigned.
There is a message here. For all his ability to connect the dots in Egypt, El-Erian did not foresee the upset. Nobody can be certain of the future even in his ancestral homeland where he speaks like a native and can tap sources unavailabel to others.
The lesson is that nobody should think he knows what is going to happen. My Pimco source stressed that the El-Erian experience is a wake-up call for concentrated portfolios. You need to diversify because you cannot predict what will come next.
More for paid subscribers from our highly competent team follows, starting with me from the UK, and then some mea culpa from India, and news from Israel, Australia, Finland, South Africa, Canada, and Spain. As you can see we are diversified.
We have a new stock pick from Canada to join the existing portfolio I highlighted for subscribers yesterday. This issue is late because I had too much overlapping copy from the reporters which had to be spliced together. More about splicing also from out Biotech maven in today's information packed issue follows for paid subscribers only.
Our Neighbour to the North
Chinese stock bandits appear to have done another dirty deed, this time on the NYSE. Longtop Financial Technology, LFT, was attacked yesterday by Citron, the analyst who looks for lemons, for misstated accounts, employing Chinese convicted crooks, and misdirecting money raised on US markets. LFT was a favorite of institutional investors who presumably bailed out at last, but the stock had been weak since the latest Chinese scandals began.
The marks include a hedge fund. I learned from Cheat Sheet, which helps other investors copy big hedge funds and famous investors, that Longtop was the 4th largest holding of Eton Park Capital Hedge Fund, which also has major positions in two gold stocks we own, and whose largest holding is JP Morgan Chase (which your editor owns in her USA portfolio.) We are talking $60 mn-plus as of the close of 2010. Cheat Sheet, a monthly, tells smaller investors how to track positions taken by hedge funds, Warren Buffett, Bill Gates, and other role models.
With gold cracking new highs, and silly investors rushing in, I think today EPCHF will be taking cash out of goldmines.
More on what this means for our subscribers follows, along with a takeout on Canadian favorites. I am responding to a paper published in www.SeekingAlpha.com by Gen. Joe Shaefer, USAF-Ret., a fund manager (Stanford Wealth Management), a newsletter-writing rival, and an occasional contributor to Global Investing. Joe wrote up the simple facts of Canada without getting deep into investment ideas:
“It is better and safer to buy those who supply the faster-growing emerging markets than to buy the smaller, less-known-quantity start-ups in those remote locations.
“Canada has 35 million people spread across the 2nd-biggest nation in the world. They are blessed with abundant water, timber, coal, oil, natural gas, iron, gold and all other manner of industrial and precious metals. Their people don’t need all this, nor do they need the copious grains and other foods they are capable of producing. What to do? Benefit from the population growth and headlong rush into industrialization and consumerism that characterize the emerging markets: sell to these nations.
“Canada is the quintessential export economy, with a banking system in better shape than the US. (The World Bank ranks Canada #1 for banking stability.)
“The world needs what Canada has -- and is needing more of it every day. Canada is blessed with water to spare -- water to drink, but also water to use in fracturing and processing its massive energy fields (huge users of water, making this source of energy available to Canada.)
“Canada has more proven reserves of oil than Saudi Arabia. The difference, of course, is that it is light crude in Saudi that yields to simply finding it and pumping it. (It’s not quite that easy, but compared to Canada, it may as well be.) Most of Canada’s proven reserves are in bitumen (heavy sands, tar sands, or heavy oil). It’s laying there, right on the surface, but processing it is both energy- and water-intensive. It needs to be much more heavily-refined, and that makes it more expensive. But it is there. And once liquefied, it can be sent via pipeline to some nation that really needs it -- like, say, the USA.
“But it isn’t only fossil fuels that Canada has in abundance. It is the world’s major player in hydroelectric power, generating more than 350 bn kW-hours of power (roughly 60% of its total electricity needs) from flowing water.
“Then there is the fuel source I believe the world must embrace if we are to meet the needs of the earth’s inhabitants in the coming years. Solar, wind, biomass and geothermal are currently incremental to the energy equation, not game-changing. No matter who builds the plant, or where, or using what breakthrough technology, the operators will need uranium (and maybe some day thorium) to provide the world’s energy needs. Get on board this train before it leaves the station. And when you seek the uranium heavyweights (no pun), you will once again find that it is Canada that has the resources -- over one-third of all known uranium deposits on earth are in Canada.
“As for the precious metals desired by many who cannot trust their own governments to honor their currencies, and the base metals so necessary to build a modern nation, again, some of the world’s largest deposits exist in Canada. Would I rather trust some dictator in an 'emerging' nation to honor the contracted price for these metals or a nation that has a rich history of doing so?
When it comes to grains for human and livestock consumption, Canada is also a giant. You have only to drive across Canada, to see, not acres or even miles, but endless horizons filled with wheat and other grains.”
After Joe's posting, I will fill in the blanks for my readers. Canada is our nearest neighbor and has a respectable stock market, but one not without blemish. Back when Joe and I were both a lot younger, every now and again a Canadian gold or uranium mining share turned out to be a scam just like the current “hot ticket” Chinese stocks are today. The mines and the stocks were under water.
Canada was the first foreign market I invested in, back in junior high when I also learned about Canada's geography. That was over 50 years ago. In those beknighted days children were allowed to buy stocks and not have a social security number. We learned to invest in our math class taught by a former US diplomat and stock market expert who had been fired for allegedly supporting Chinese Communism. (No, it did not make sense.) Back then kids did not learn Chinese or he could have taught us that too as he had an Chinese wife and bilingual kids.
More Canada ideas for paid subscribers plus news from Argentina, Australia, Britain, Israel, France, Germany, Panama, Singapore, South Africa, and a new stock from India.
As North Koreans starve while their regime totters on, as Bashir Al-Assad shoots people in areas of Syria opposed to his dynasty, a question springs to mind: Who is the sovereign for whom sovereign wealth funds are invested?
Is it the regime? Is it the people? Is it the politicians? Is it the princelings? Is it the guy who controls the army? Is it the autocrat who kills citizens opposed to his rule? Is the sovereign wealth fund the property of the sovereign (however illegitimate) or of the population?
China is proposing to add up to $200 bn more to its sovereign wealth fund for investing outside the country, an alternative to putting the national trade surplus into depreciating US Treasury bills. Is this the best use of the money for the people of China?
Middle Eastern princelings enchanted by horse racing want to buy Irish stud farms with the sovereign wealth funds of their tiny emirates and kingdoms. Ireland will be happy to have its race horses subsidized by Arab oil. But is this the best use of the money?
Meanwhile Mustafa Zarti, the former manager of the Libyan wealth fund, (a reasonably qualified Libyan liberal appointed thanks to his friendship with former Libyan liberal 'white hope" Saif Qaddafi, son of Muammar, now no longer credible as a reformer) fled to Austria. There Zarti got his MBA. He flew out because he opposed the suppression of the revolt. Now his own personal bank accounts are blocked by Vienna and the European Union.
While reportedly the wife of the deposed president of Tunisia helped herself to the national gold supply before fleeing the country, some diffentiation between sovereign wealth and the wealth of the sovereign (in this case the Clan Qaddafi) might be useful. It began in the west about the time of Henry VIII.
Brazil's sovereign wealth fund is in the worst conflict of interest of all. Its largest holdings are in Petrobras, a state-controlled oil company, which accounts for 57% of the Reais 14.3 bn ($9.1 bn) fund. But PBR has fallen nearly 10% in the past half year because the Brasilia govt has imposed pressures to keep oil prices down. Petrobreas gasolene prices have been kept steady since 2008 while the price of a barrel (bbl)of oil has soared by over 60% in that same period. So Brazil is hurting its poor and marginal citizens in order to subsidize motorists. Even ones driving a Ferari or a Rolls.
More for paid subscribers follows including a follow-up to my note to them yesterday about a stock we put a strong buy on then. I expect many of them used spare cash to buy more. News also from France, Colombia, Canada, Israel, Singapore, South Korea, and Spain.
Charts Have Been Posted
I have just posted the charts on the www.global-investing.com website. Paid subscribers can read our current recommendations for all the stocks, bonds, Closed-end and Exchange-traded Funds we write about. Pre-subscribers can view our recent trades and performance and gnash their teeth because they did not make the profits we did.
Renminbi Revaluation Coming?
Being an early baby boomer, I was delighted to become eligible for Medicare on turning 65, mainly because as a self-employed businesswoman it was expensive to buy health insurance. Until my husband's benefits were cut by a New York Times-Newspaper Guild raid on retirees, I was covered by his health plan.
Last Nov. we both signed up for supplemental insurance offered by the AARP, a supposed non-profit which barrages us with senior temptation to spend money almost daily. We applied using written forms we mailed to the United Healthcare outfit which provides the Medicare supplemental insurance.
My first use of the plan in early March was when I had to see a dermatologist about a sore on my nose which would not stop bleeding. I got hundreds of dollars worth of bills from the referring physician, the dermatologist, the lab. What had happened to my coverage?
Today I finally got a hold of the AARP customer service office to try to sort it out. It turns out that my insurance was being properly billed to my bank account but it was linked to my husband's Medicare number. And my husband's AARP supplemental insurance was being properly billed to his bank account but was linked to my Medicare number.
I bet you did not know that your editor is a 74-year-old London Cockney male. It was only when I realized my account was linked to his Medicare number that I persuaded the AARP to check that the cards had not been reversed. They had.
After hours researching the computador, Ana in Atlanta said my bills and accounts would be corrected.... in June at earliest. Meanwhile my medical bills will go unpaid although my check account will be debited at least twice before someone makes the correction.
Of course all this is not inefficiency. It is a deliberate program to keep seniors on the ball by requiring them to figure out errors in their accounts.
China and Russia are already at each others' throats over payments by China for Gazprom supplies running through the brand new Chinese-financed 1000-km pipeline between the gasfields and the Chinese consumers inaugurated Jan. 1. Scott Martin in Seeking Alpha today considers a way China can pay its debt more cheaply. I have no idea if this is likely.
A bit of buzz out there about a revaluation of the yuan. Not many are talking about it yet, but it could happen this weekend. A central bank advisor reportedly says a one-off revision of the Chinese currency’s official exchange rate could be possible.
Granted, this is a news portal in Russia talking about an unnamed source, so it needs to be taken with a grain of salt. But if Beijing wants to let the yuan appreciate to its natural level, the Easter holiday - when Western markets are slow to react - would be a perfect time for it.
Dow Jones reports:
While a clash between the Argentine government and leading steelmaker Siderar over government efforts to vote for company directors makes its way to the courts, the chief of a powerful manufacturers chamber urged calm and dialog to smooth over the dispute. "This isn't an issue that should get tied up in the courts...consensus should be reached through dialogue," said Jose Ignacio De Mendiguren, president-elect of Argentina's UIA chamber told Dow Jones Newswires.
However, Mendiguren said the government had clearly changed the rules of the game and the UIA has urged the government to reconsider. "This is bad for everyone, because there's a positive [economic] climate right now."
On April 14, President Cristina Fernandez issued a emergency decree giving the government more power to name board members to companies in which it holds shares. The state's voting rights at such companies were previously capped at 5% even if its actual ownership in a firm exceeded that. Anses acquired stakes in 42 companies after Congress nationalized the private pension system at the peak of the 2008-09 financial crisis. The government has a 26% stake in Siderar through the national pension agency Anses, and has its largest stake at over 30% in Banco Macro.
It is sinister that what set Cristina Fernandez against Siderar's board was its decision to vote a shareholder dividend last week. Siderar is a subsidiary of Ternium, a Luxembourg company controlled by an Italo-Argentine family, another cause for concern. We sold our TX shares years ago.
More for paid subscribers follows including advice on playing the potantial yuan (RMB) revaluation and news from the Dutch Antilles, China, Brazil, Guinea, Switzerland, Canada. Australia, Britain, and Thailand. Today's blog is late because of the Medicare mess. There will be no blog on Good Friday or Easter Monday.
Today's trading alerts cover two days worth of activity, because I took off Tuesday for Passover. On Monday afternoon we sold several Chinese positions following my article about risks ranging from scams to inflation to reserve requirements, and we took profits elsewhere related to Chinese demand.
Then today Martin Ferara in Canada found a new purchase for us. This is information we only give to paid subscribers to help them trade.