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Vivian Lewis is editor and founder of Global-Investing.com, the daily blog newsletter for Americans and others seeking to internationalize their portfolios. She brings unique experience and competence to the business of picking foreign stocks.
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Death Panels
Some of the shibboleths and slogans readers trotted out responding to the economists' (and my) views published yesterday need rebutting.
A Texan doctor decries my zeal for resuming estate taxes (after the heirs of Dan Duncan of his home state inherited $7 bn without any such tax). He claims that taxing estates is “double taxation.” Yeah, sure. So is taking benefits away from a welfare recipient who has found a job and is paying taxes. So is not giving the same size college scholarships to children whose parents saved for their education rather than spending profligately. Double taxation is part of life. And life is unfair, as John Kennedy famously said.
With government budgets constrained worldwide and locally, something has to give. And billionaires' heirs look like a popular candidate to pay up.
Another reader theory is that any increase in taxes or regulation is somehow nefarious, socialistic, statist. Financial innovation is always good, they argue.
We tried that. Deregulation and leaving it to the markets are how we got into the present fix. Crafting the right regs is not easy and politics is icky. But doing nothing is not an option.
Perverse incentives and moral hazard do not only result from laws and regulations. They also result from human nature.
Globalization is not only part of the problem. It is part of the solution. To stop regulation shopping and the search for havens for high-risk or illicit operations, major countries need to agree on controls and taxes. I don't think short selling or hedge funds are bad, as some European countries say.
I do think money has to be put aside to save banks which are too big to fail from bringing down the system as they nearly did two years ago. I want there to be greater protection not just of home buyers and credit card users, but also of supposed sophisticated purchasers of complex derivatives from investment banks sold worldwide.
A tax to cut the profits of rapid-fire electronic trading of stocks and other financial entities would be in the interests of the markets, but it has to be coordinated across borders.
Criticizing BP is not anti-capitalist or anti-market. BP screwed up partly because of silly cost-cutting creating a mess there is no technology to clean up. It is far sillier to blame Washington for what happened. Lex regulations were at fault, but Uncle Sam cannot turn off the gushing oil flow.
Blaming the guys you defeated in an election for current messes is standard political procedure. The danger is that you overstate the crisis, as in Greece, Hungary, and even Britain. The Obama Administration should be credited with trying to restore the ecnomy and maintain continuity of policy and personnel post-Bush. Critics from both left and right (my readers come from both sides) underestimate how hard the president worked to keep the debate over financial reform civilized and positive.
Two popular slogans terrify me: We need cheap oil; We need cheap Chinese exports. Actually we need more expensive oil to develop alternatives to the stuff flowing into the Gulf of Mexico and blowing up in PA. And like it or not we face more expensive Chinese labor after factory strikes and protests at the wages and working conditions around eastern China. Both cheap oil and cheap Chinese goods are addictions we would be better off without.
More for paid subscribers about Death Panels and other matters follows:
My Panel of Experts
While your editor opposes fiscal tightening and measures to cut the deficit short-term, because of the risks of Japanese style deflation, there are a few quickie fixes I would like to see.
Congress should close the inheritance tax loophole for billionaire deaths for the rest of 2010. It cannot be done retroactively but it can cover the rest of the year.
And the carried interest tax break for hedge fund manager fees should be cut.
And an international measure to tax rapid-fire electronic trading in stock, forex, and bond markets would be a boon to the world.
Meanwhile the chances of cracking down on US tax evaders with accounts at UBS is falling because the necessary legislation is being blocked by the lower house of William Tell's mini-parliament in Berne. Swiss bank secrecy has to be lifted by law, and the locals don't like giving in to foreign pressures.
From Nobel-prize winning economist Joseph Stiglitz:
As long as there are the megabanks that are too big to fail, government will, more likely than not, 'blink' again. Too-big-to-fail institutions have an incentive to engage in excessive risk-taking: Heads they win; tails taxpayers lose.
They also have a competitive advantage not based on greater efficiency but on the implicit subsidy of a future government bailout. Thus, every provision that levels the playing field — imposing additional restrictions on risk-taking, setting higher capital requirements or imposing additional fees — needs to be retained.
Distorted incentives that encourage excessive risk-taking and shortsighted behavior were, of course, endemic throughout our financial system.
There is a legitimate debate about whether certain derivatives should be viewed as insurance or gambling instruments. But in either case we should regulate them, and not encourage or subsidize them — as we do today. For example, derivatives are given priority over other elements of the capital structure when a firm fails. This preferential treatment needs to end.
In the final [finance reform] bill, there must be provisions ensuring that taxpayers are not underwriting these risky products. But the law doesn’t stop that. It says only that such 'insurance' shouldn’t effectively be subsidized by taxpayers.
Another specious argument is that it is better to have the derivatives written by well-regulated banks rather than by unregulated entities. Such arguments are an admission of failure to achieve effective comprehensive regulatory reform.
But if that were the case, the answer would be: Fix the real problem. Fill in the gaps in regulatory oversight. Don’t shift the burden of another regulatory failure onto taxpayers.
Regulators must have a clear congressional mandate: The country needs, indeed, the country demands, real reform.
From Paul Krugman's New York Times blog of today:
Some thoughts on the fiscal austerity mania now sweeping Europe: is anyone thinking seriously about how this affects the rest of the world, the US included?
We do have a framework for this issue: the Mundell-Fleming model (does anyone still learn this stuff?) Fiscal contraction in one country under floating exchange rates is contractionary for the world as a whole. Fiscal contraction leads to lower interest rates, which leads to currency depreciation, which improves the trade balance of the contracting country — partly offsetting the fiscal contraction, but also imposing a contraction on the rest of the world. (Rudi Dornbusch’s 1976 Brookings Paper went through all this.)
Now, the situation is complicated by the fact that monetary policy is up against the zero lower bound. This transmission mechanism seems to be happening right now, with the weakness of the euro turning eurozone fiscal contraction into a global problem.
Folks, this is getting ugly. And the US needs to be thinking about how to insulate itself from European masochism.
Beggar my neighbor was the insane tactic which extended the Great Depression. We need to avoid doing this again. Fiscal tightening risks exactly that outcome.
Paul Volcker writing in the New York Review of Books:
Ireland has been caught up in its own speculative excesses and financial deficits, culminating in a sharp economic decline. There is a lot of grumbling, about banks in particular. But I came away with another impression. The people I spoke to had an understanding that the boom had gotten out of hand. There seems to me a determination to do something about the situation, reflected not just in the words of the political leaders but in support for action among the public. And there is a sense of what is at stake, that the gains they made in recent years have been placed in jeopardy. The urgent need to get back on a sustainable budgetary and economic track is well understood.
In the United States, we don't seem to me to share the same sense of urgency. We view ourselves as a huge and relatively self-sufficient country, in control of our own destiny. We have time to sort out our priorities, to decide what to do, and to do it. There are elements of truth in those propositions, but the time is growing short.
Restoring our fiscal position, dealing with Social Security and health care obligations in a responsible way, sorting out a reasonable approach toward limiting carbon omissions, and producing domestic energy without unacceptable environmental risks all take time. We'd better get started. That will require a greater sense of common purpose and political consensus than has been evident in Washington or the country at large.
After this collection of expert comments, we have a new stock pick and some news of our companies. Today we have a new Canadian stock pick, and bad news from Greece and Britain, along with good news from China, Mexico, Spain, and Brazil. Become a paid subscriber to read the full version of Global Investing. Your portfolio will benefit.
Just the Facts, Ma'am
The doyenne of the White House Press Corps, Helen Thomas, 89, has had to resign from the Hearst publications group over remarks she made to a rabbi (filmed by his son). She said Israelis should "get the hell out of" the Middle East and move back to Poland and Germany and America. Ms Thomas, born in Kentucky, is of Lebanese Greek Orthodox Christian heritage. She made her remarks before the Israelis killed 9 volunteers sailing to Gaza in violation of the Israeli blockade intended to stop the supply of weapons to the Hamas regime. So she was not reacting to Israel's stupid raid.
No one is suggesting that Ms. Thomas should be banished to her ancestral home in Lebanon. As a first generation American, I do not think anyone can advocate sending me back to the Germany from which my parents fled. Had they stayed, they would have been murdered for their religion. If Jews are not to be allowed to remain in Israel where they found refuge, what is to stop them being expelled from the USA where they also found refuge? If people have to go back to their ancestral homes, why should Irish Americans not be sent to the Auld Sod, and Italian Americans hauled home to Sicily. Pres. Obama would have to choose betwen England and France, where his mother's ancestors came from, or Kenya, whence his father came.
Sending people where they belong or where you would like to push them has dangerous precedents. Think of the partition of India and Pakistan. Another personal example. My mother's parents, who did not escape to America, were shipped from the Germany where they were born, for which my grandfather had fought in a war, where they had lived all their lives, deported in cattle cars to what is now Belarus, where they were killed because Hitler wanted Germany to be Judenfrei. In 1943 when this happened, Ms. Thomas was 23 years old and working for UPI. A few years later, when the Concentration camps were liberated, she was 25, still with UPI. As a newshen, she would have learned the facts.
So Ms. Thomas's suggestion for Israelis to move from the Middle East to the site of the Holocaust is indefensible. Jews lived in what became Israel (and the West Bank) not just in Biblical times. Jews were driven from Hebron and east Jerusalem after the creation of Israel when Ms. Thomas was 28 and presumably devouring newspapers she was writing for. Some of them are Israeli refugees who could also seek a right of return. The Jewish communities of most Arab countries were expelled after Israel was founded and voted into existence by the Security Council of the United Nations. Do Egypt or Algeria want to take their Jewish refugees back? Do Iran or Iraq? Will Tunisia and Yeman welcome former Israelis home? What about Jews from Pakistan, Afghanistan, Ethiopia, Russia, Kurdistan, Uzbekistan, Kirghizstan, Kazakhstan? Surely they will not be sent to Germany or Poland. Will their ancestral homelands welcome them? What about Lebanese Jews, Ms. Thomas? Will they be treated any better in that country than the Christian minority you parents belonged to?
I am opposed to the Gaza blockade as readers know. But to deny Israeli Jews the right to their homeland is not a solution. Ms. Thomas is old enough to know better. So is reader MA who has just cancelled his sub because I am considered too Zionist, presumably because I cover Israeli shares.
Just the facts ma'am.
Trained to sell at 3 pm EST, Wall Street dropped as programmed yesterday without any clear catalyst. As usual, there was no discernable reason and pundits were reduced to citing the low-jobs recovery data from last week to explain the move. Meanwhile German factory orders rose 2.8% in April after a 5% surgee in March. Annualized, that's 30%. Good numbers also came from the UK Engineering Employers Federation. Taiwan reported boosted exports and imports (mainly to and from China.)
In fact global manufacturing and trade is resurgent.
So what are the bears up to? The answer is that they are fearful, very afraid. But as I have been saying for weeks, this fear is irrational. Last year bears suggested the world faced "a global growth coma" for years to come. How wrong they were.
Recall what bears said in early May. Greece was about to default on its debt, and maybe leave the euro zone. The common currency would collapse. That didn't happen. The new bear song is that Euro austerity will push the world into a double-dip recession.
There is plenty of talk about austerity but not many countries are practicing it. Germany’s announcement yesterday that it would cut public spending by €80bn (roughly 5% of expenditures) does not count. And given union reaction, the beleaguered Merkel govt may not even follow through.
Today's Financial Times reports that Britain is keeping a host of silly subsidies to older folks (who vote) like a winter fuel allowance left over from Good King Wenceslas, and free city transport for anyone over 60. I have a "Freedom Pass" for London Transport myself, which I use when I am at our pied-à-terre, but surely I could afford to pay my own fares. In reality, we are in a V-shaped recovery here and in Asia, thanks to demand picking up.
Mr. Bear, stop the panic. Give me a real reason for selling stock. I’m not interested in bearish forecasts, fear, conspiracy theories, Chicken Little panics. Just the facts, ma'am.
More for paid subscribers follows from the Iberian Peninsula, Australia, China, India, Switzerland, Brazil, Britain. Today's blog is late because we had a recommendation for a share I could not get a quote for so I had to kill the article; and because my personal ATM account was compromised. Read more »
Compagnie du Mississippi
They famously do not ring a bell at the bottom, but I think Friday's selloff came close. First of all, Fridays are scary,e ven if they are not Friday the 13th, which comes on Sunday this year. Facin a weekend when markets are volatile means the safest option is to just sell hard.
There was ultimately no good big bad reason for the perilous market drop Friday except that it was Friday. Yes, we are in a jobless recovery; so what else is new? But the gossip about Société Générale being in trouble was probably a miscue from the pending beginning of the trial of Jerôme Kerviel, the man who broke the bank 3 years ago.
As for Hungary, which gave the world both Houdini and George Soros, its newly-elected Fisdusz govt decided to blame its predicessor socialist coalition for everything that had gone wrong and could go wrong.
Anyway, for the record, Hungaray has a current account surplus. It has a $20 bn finance deal from the International Monetary Fund it can draw down. It has a 4-4.5% governenment deficit. It is nowhere like Greece except in one particular: it is a small peripheral European country in a political bind.
What terrifies me today is that the Cameron Tory government of the UK is taking a leaf from Hungary PM Viktor Urban's playbook, talking up the mess left by the prior Labour govt.I expect better from a traditional and experienced leader in the Mother of Parliaments.
It is not often appreicated how mature Barack Obama was on taking office from W, for not overstating the perils of our own economy. One reason he faces so much animus from diehard deficit hawks and zealots for regulatory innovation is that he did not take advantage of the opportunity to blame the Bush lot for the mess he inherirted. Rather than reject the old administration tactics for dealing with the economic crisis, he stressed continuity in the way the government dealt with it, and even kept on many of the same officials.
While we are on the subject of recovery, Portugal today not only married its first gay couple (of lesbians.) It also reported a 1% rise in Q1 GNP, making it one of the fastest growers in sluggish Europe. It has imposed a healthy dose of privatization and restraint on its state sector and will boost revenues from these measures by 3.7% this year, cutting its budget deficit. In any event, the Portuguese company I recommend is very international and unlikely to suffer any consequences from being Lusitanian.
All of which leads me to boldly forecast that the market is seriously oversold and that the time has come to get back in. But to do so carefully.
Do not rush to buy BP shares. I can't believe that Wall Street seems to be focussing on how to play British Peterleum, a pure gamble.. The dividend is not safe; the US sub may have to sell its crown jewels (in Alaska); it is being squeezed out of Siberian oilfields (a matter barely noticed given the world's focus on the Deepwater Horizon disaster); management is in disarray; the company's image (and sales) are at risk; and if bought out may not pay current owners a premium. More for paid subscribers from France, Switzerland, Finland, Germany, Sweden, South Africa (non-World Cup related), Britain, and Israel follows.
Summertime Forecast
There is bad news for the summer for folks along the Atlantic Ocean shore like me. It is promising to be a scorcher based on the high temperatures we have had since June began. But therre will be little relief.. Not only are our Shreck glasses contaminated with cadmium, a carcinogen, but also our east coast beaches will be hit by currents carrying gunk from the Gulf oil disaster.
There is no alternative: we will have to study stocks and invest wisely. The stock markets globally are severaly oversold in part because control freaks are freaking out. If we cannot drill for oil or paint drinking glasses without disastrous consequences, surely we cannot pick stocks either is the market mood. That is probably more a sign of a bottom than a top.
Here is reader DvN's thoughtful response to my rant of yesterday. The other comments were mostly marginal or unprintable in a family newsletter:
I despair of ever seeing a detailed, objective analysis of this problem. By ‘This problem’ I mean what sort of human economic activity should be done by private enterprise, which by government (by government I mean tax-funded), which by various sort of non-profits, not to mention various combinations. I despair because they have been so long such religious issues, between Free Market Capitalist, Marxists, in various denominations, that it seems impossible for anyone to think dispassionately.
Of course I have my opinions, but I am not an economist. And I have my background prejudices, one of which is that it is not OK for some people to be rich and others poor, and another is that people are individualistic and greedy and it is better for the general good to try to harness that than the impossible task of changing it.
So I think in some areas the profit motive is obviously vicious, as in health care delivery, where as in another it is obviously efficacious, as in drug development.
And I think that there are some things that it is clear benefit commerce if the public invests in them, on the analogy of the marketplace where the city builds the square so the vendors can set up their stalls. Things that seem like the marketplace to me are roads, railways, airports (but not airplane companies), cable TV (the medium, not the content) and the Internet. Schools are another; we need an educated society for larger than economic reasons, but this does not determine how teachers are selected and paid.
Another model appeals to me. Once upon a time in the US utilities were closely regulated and allowed to earn 6% or the like, not more not less. Sees a pretty good model to me and maybe one that should be applied to banking.
And there is the matter of culture. Maybe in some societies it is better one way and another in other societies. You often rail against the abuses in France of public private companies, and I believe you, though the governments hardly have a monopoly on corruption. On the other hand one of my good stocks has been Statoil, which I bought when it was first formed.
I spend quite a bit of time in Finland where these things seem pretty well worked out, but maybe that is only for Finland with its homogeneous and obsessively honest population.
More for paid subscribers follows starting with an extraordinary article from Globes Israel yesterday, followed by news of Israeli plans for the US via Australia, more trans-Iberian Peninsula showdowns, and lots of news about British shares, Canadian shares, and Australian shares, mostly with environmental impact, if indirect. You don't only get to read foreign languages when you edit Global Investing. Sometimes it's in English. Read more »
A Rant
There is a need for free markets in the places where deficits are highest. And it's high time this was tried. That is the subject of today's rant by your editor. Comments are welcome.
There is the good side of the crisis for European countries. Too cut their deficit, they will be forced to try privatizations crafted to remove the “acquis” or perquisites that were handed out to workers in the state sector. The same thing applies to US state and local deficits.
The main reason for privatizing is that it will raise money for cutting deficits in the PIIGS and state and local US government. Selling off the railroads, the power company, the telco, the waterworks, the toll bridges, the bus lines, is also a way to increase efficiency via competition.
But privatization without dismantling the network of perqs will be insufficient.
Tenure for teachers who cannot teach is the perq most Americans get exercised about. That is why you need private and charter schools in this country. But the main school system in most places continues to keep teachers who would be better off trying another trade. Competent teachers have no recourse when their union opts to protect the incompetent. Seniority is another black hole. Just because someone has been on the job longer does not mean more is owed him or her. Again, this is part of every union negotiation worldwide Perqs are forced down government throats by the powerful state sector unions, because unions are stronger in the state sector. Private companies usually resist the worst excesses, although not always (as in the auto industry).
Apart from deficits, the single unifying feature of the PIIGS countries, even Ireland, is the odor of sulphur from government corruption. (France has it too; and France is also going to have to cut its free-spending ways, Pres. Sarkozy has announced.)
Euro-perqs include pension overpayments to railroad workers no longer deserving of early retirement because of the hardships of shoveling coal in the heat.. Gross-ups here and there are used by the oldest civil servants -- cops, firemen, prison guards, and LIRR employees – to beef up their retirement pensions by counting overtime. It is a big game in the USA too.
Other perqs include the right of airline workers to fly gratis on their own vacations, the casus belli of the current strike by long-privatized British Airways. (It reminds me of taking out a credit default swap guarantee for your Lehman bonds with Lehman itself.. If BA is driven into bankruptcy by the strikes, the staffers will lose their right to fly on holiday with the airline.)
Even though France Telecom was privatized ages ago, former teleco employees got the right to a full pension after only 25 years of work if they had three children. These gold-plated retirees, among them my buddy Josiane, now in her mid-80s, are still feeding at the France Telecom trough. Early retirement and pension excess are a big source of deficits.
Acquis include other abuses. The “Putain de la République” worked for a nationalized French oil company whoe management control was seized in the first hours of François Mitterrand's presidency. Elf money flowed into the coffers of Paris governments left and right, and only when the stench became overwhelming was the company merged into privatization. The gas and electric utility unions in France, the waterworks in Brazil, the civil servants in Portugal, all get excessive pensions after a career of working to rule ended by an early retirement.
In my view, there is no need for government ownership of oil companies in countries which are net oil consumers; in producer countries perhaps. Should ports be run by governments? Do you want a state-owned electric grid? If there is no budget money for highways or railways needed to move people around, let the private sector build them and collect tolls or fares.
The free-flowing funds cement a nefarious link between politicians and recipients of money like unions and contractors. Running for office is expensive, and it is nice to get donations from civil servants and unions. Privatization would halt that payola, which is why, short of crisis, it is resisted.
Corruption is not confined to financing political campaigns. It runs the regulatory gamut, from those charged with inspecting offshore oil rigs oto those inspecting New York City building cranes. Why are these functions assigned to governments in the first place? The state lacks the necessary expertise. Let's outsource them.
Your editor is a certified liberal Republican, raised in Jack Javitz's congressional district, formerly employed at the Senate Foreign Relations Committee by Clifford P. Case, New Jersey's liberal Republican. I voted for Obama.
Your editor met yesterday with Vijchu Chantatab, the executive vice president of Thai Capital Fund (TF) which we do not currently own, during his trip to New York. We have been getting reports from two Thai-based foreigners married to Thais, my cousin and Paul Renaud of www.thaistocks.com and I wanted a 3rd opinion. Mr. Chantatab's fund is a hybrid large cap fund, 40% aiming at optimization in tracking the SET (Bangkok) index, and 55% aimed at selecting good stocks (AKA “alpha”). However, because of liquidity concerns, TTF is totally concetrating on the top 100 shares of the 450-stock main Thai index. With $1.3 bn under management in TTF, and another $30 bn in equities managed by its parent Siam Commercial Ban;, TTF cannot afford to invest in small and mid-cap shares where Paul Renaud finds winners. The 70-yr-old Thai bank has a total of $500 bn under management.
Mr. Chantatab agrees with Bloomberg (as reported yesterday by Paul) that short-term the Thai large sector shares will underperform, because they have gone up so sharply. He is advising the bank's institutional clients to move money within Thailand into bonds, money market funds, and a bit into real estate. The logic is that the Baht will continue to produce good results, and money should therefore be kept inside the country. “Money markets aand bonds are an alternative to the SET,” he said. And while constrained about talking politics, Mr. Chantatab did cite a lesson: “history shows that political issues should be considered a buying opportunity in Thailand.”
Thailand payoff for foreign investors is usually boosted by forex. The Thai Baht
The situation is not a dire as my reelatives fear, he said. GDP in 2010 will grow 2.9-3.2 percent, he thinks, vs earlier pre-event estimates of 4.2%. In Q1, before the turmoil, Thai GDP rose an impressive 12% according to Mr. Chantatab, and exports rose an even more astonishing 29% in the quarter over the prior year He cited sectors like food and beverates (tunafish and beer) as being likely to flourish despite the political uncertainty. Manufacturing and manufacturing-related services will also do well. However, there will be a negative impact on hotels, restaurants, and other services, a key GNP component, if tourists stay away.
More for paid subscribers from Britain, Israel, Brazil, Australia, and the soft underbelly of Europe anhd Thailand follows.
A New Recommendation
Naomi Sherir's poem is about what Arabs call the Jews’ tree (segerat el-yahud), the eucalyptus, an Australian import:
But on the shore
As if nothing happened,
The same silence and the same décor.
The eucalyptus forest,
The bridge, the boat,
And the salty smell on the water.
The appalling outcome of an effort to bring humanitarian relief to the people of Gaza is not just the result of violence by supporters of Hamas and the Moslem Brotherhood reacting to Israeli efforts to board their ship. It is also a consequence of the counterproductive Israeli blockade of Gaza by Israel and, until today, Egypt. There are better ways to ensure Israel’s security and to prevent weapons smuggling than a complete closure of the Gaza Strip.
A new listing this week is planned for Nabao Renewable Energy Holdings, of Shanghai, maker, retrofitter, and maintainer of heat pumps with $24 mn in sales. UBS is underwriter. It will be listed as NRE. Recent Chinese small cap IPOs have been disastrous.
More for paid subscribers from Spain, Britain, Thailand, Portugal, Israeli and lots of other places follows. Read more »
A Delayed Blog
Today's blog is late because of the unexpected complexities of moving to a new webhost and new web designer over the long weekend. My apologies. To save time I have not inserted accents.
Tom McClellan, recovering from an emergency appendectomy, writes in The McClellan Market Report:
I have been neglectful of mentioning the full moon that happened on Thursday, May 27. Such events often mark turning points or acceleration points for the price of gold, and that seems to be the case again. Thursday also saw gold tag the Price Oscillator Unchanged and stop its rebound, which makes me think gold prices are going to head down to test the most recent low around 1180.”
Although I did not get Tom's view until the weekend, I also lightened up on gold ETFs and gold shares last week. My reason was looking at the price of the yellow metal in euros. I also think the price of gold is less risky than the booming gold-mining sector, where I really did my selling.
Adam Carr, Sr economist at ICAP, Australian brokers, highlights the difficulty pessimists are having. He writes: “it hasn't even been close to the Armageddon they've been forecasting."
“Europe hasn't disintegrated, no-one has defaulted and there has been no restructuring. On the flipside, Greece will be able to cover its debts for the next few years. So while growth may be lower than otherwise due to 'austerity', another recession is unlikely and indeed the recent depreciation of euro will assist. In this age of competitive currency devaluations a weaker euro will only be met with joy. Pessimists will undoubtedly continue to predict the worst on a daily basis, but unless something actually happens near-term, the fear will subside.
“As I've been arguing, the global growth data will eventually assist this process. India's economy grew by 8.6% in Q1 after an upwardly revised 6.5% rate in Q4. Canadian GDP was shown last night to have expanded by 6.1% in Q1 with consumption alone up 4.4%.Now the interesting thing about Canada and India is that they are about 4 to 7 times the size of Greece, Portugal and Ireland and about the same size as Spain - so the economic impact is twice that of Spain's. Throw in the fact that the remaining 60% of the euro zone (Germany, France, Benelux) is fiscally healthy (comparatively) and you can see why I'm not worried about Europe.”
From Michael Kurtz of Macquarie Securities (Hong Kong), a warning about China:
“Consensus EPS downgrades underway. Shanghai A-shares' consensus 2010 EPS have declined 6.2% on a 4-week-change basis, while Shenzhen consensus 2010 EPS is down fully 10%. The momentum of latest revisions suggests risk of further downgrades.
“The People's Bank of China's open-market liquidity drains appear to have been substantial recently -- which, along with broader policy tightening, has contributed to a material flattening of China's yield curve. Yet local depositors' ‘liquidity preference' remains fairly high as inflation pressures persist, suggesting a willingness to return to risk assets if/when the intensity of recent policy intervention eases.”
The Bank of Canada has doubled interest rates to 0.5%. For the reasons, read Mr. Carr's comemnts above.
Poland achieved only a 3% growth rate in Q1, vs estiamtes of 3.1% by analysts polled by Bloomberg, mainly because of bad weather leading to higher unemployment in infrastructure sites. This will be reversed going forward. Tightening is the real risk, rather than floods. The zloty fell against the Euroe. The Polish central bank expects frowth this year to be between 3 and 2.4%.
More from our companies starting with Poland, China, and Canada follows for paid subscribers only.
Asia Dispatches
Because of the Memorial Day holiday, there will be no issue on Monday. We will be honoring US war veterans by sunning ourselves on the beach, a change from my Manhattan childhood when we used to cheer and wave flags at the veterans of both World Wars on parade. Disillusionment with the Vietnam administrations, student deferrals, and the end of the draft mean nobody in my extended family served during any US war after Korea. The same is true of the last three presidents' families. I think our country has lost some of the glue that helped keep us together
Because it is a holiday in Thailand, I have a long dispatch from Paul Renaud in Bangkok, where Paul runs the www.thaistocks.com website:
“Unrest does not dim strong exports and other upbeat economic indicators for Thailand. Investors must balance the advantages and concerns, not ignoring or exaggerating their weight.
“The Thai currency remains firm and hardly moved against the US$ during the May uprising. The Baht is up some 20% on the euro more than 10% on the Swiss Franc this year. The SET stock index is still up 5.26% over the past 3 months despite some minor corrections as much over world trends as local risks. While the local market is shut for a holiday today, I expect it will pick up Monday.
“Thai exports rose for the 6th month in a row now, up 35% YOY. All export sectors showed positive double digit growth while imports showed a 46% rise. Exports of agriculture and processed food rose 27.5%; manufactured goods 37.1% (April). While May (with the uprising) could show a short term dent, Thai exports should continue growing. “The political unrest has not affected the Thai export sector as there were no shutdowns of airports ore seaports”, said Commerce Minister Porntiva Nakasai. She predicted exports would grow 14% this year, to US$ 172 bn, the Euro crisis notwithstanding.
“Concerns exist over 'high political risk'; the impact of the spread of discontent to the northern regions where there was no trouble earlier; and the potential problem of royal succession. I think most of this is already priced/discounted in the local stock market and currency, neither of which moved much during the uprising.
“The new budget, passed last night, addresses many social disparities. This [and the arrest warrant for Thaksin Shinawatra] will divide the red shirts.
“The Thai government expects tax revenues to rise by nearly 9% this year and the economy to expand 3.5%-4.5% in 2010. I think GNP may grow even faster, as the government will now spend for on new stimulus.
“Here are some key factors in favor of Thailand:
1) Ease of doing business: Thailand ranks 12th in the world, according a World Bank study, “Doing Business 2010”.
2) Low taxes: Forbes’s “Tax Misery Index 2009” has Thailand well down the list.
3) Expats: An HSBC survey of more than 3000 expats ranks Thailand the 3rd best place to live, behind only Canada and Australia. Thailand ranks number one or two in making friends, easy of finding a place to live, health care, entertainment and social life.[Paul and my cousin Simon are expats in Thailand.]
4) Modern industrial estates: Thailand has more than 50 industrial estates, zones, and parks, a big attraction. Transport facilities provide infrastructure and corridors and Suvarnabhumi, named the world’s 5th best large airport (by Airports Council International).
5) Liberal investment policy: Thailand has no foreign equity restrictions on manufacturing and allows 100% foreign ownership in most service industries. There are no restrictions on foreign currency remittances, no export requirements. and no local content requirements.
6) Experience: Thailand offers businesses world-class expertise, experience and knowledge. It has strong supply chains. High switching costs keep investors here.
7) Reserves: Thailand’s has US$ 150 bn in foreign reserves, 15 trillion Baht in Bank savings accounts, and among the least leveraged corporate balance sheets anywhere.
“International investing means comparing and balancing country advantages and disadvantages. Of course this country still has some serious political issues ahead. I am surprised at how often Westerners point out problems here, while at the same time completely ignoring their own grave problems.
“I remain excited about the low stock valuations, high dividends, and underleveraged balance sheets of many Thai listed companies which remain on my strong buy list. None of my choices are in the yoyoing tourism sector. Read past the 'if it bleeds it leads headlines.”
In another Asian dispatch, Chris Loew writes from Japan in response to my quick reply to a reader asking my views on Paul Krugman saying that the US is tracking Japan with a 15 year year lag.
Krugman argues against premature tightening. Chris says the source for the New York Times pundit is congressional testimony by Richard C. Koo’s (of Nomura Reseach) (http://www.house.gov/apps/list/hearing/financialsvcs_dem/richardc.koo.pdf), which first developed the tracking theory. Koo looked at the fiscal stimulus, monetary accomodation, and quantitative easing meausres of Japan 1980-1995 and US policies since 2008. There is a startling parallel. Yet Mr. Koo (like Krugman) thinks continued stimulus measure are needed despite their failure in Japan. Writes Chris:
Japan did spend its 'loads of loot', on property speculation, and when that bubble burst, it fell into a balance sheet recession (using cash to pay off debt instead of consume or invest), as is the US.
Koo makes the point that it is very hard politically to maintain peacetime stimulus deficit spending, but allowing a slide back to recession costs more (I assume because without corporate profits and jobs, govt. tax revenue declines and more interventions are required) and extends the recovery period.
Here are some points from the Koo study:
“When someone saves money or pays down debt in a national economy, GDP will shrink unless someone else steps in to borrow and spend those saved or repaid funds. In a normal economy, the task of equating savings and borrowings is performed by interest rates. But in a balance sheet recession, demand for funds can remain far less than the supply even with interest rates at zero because there are so few borrowers.
“As a result, unborrowed funds remain trapped in the financial system, constituting a leakage from the income stream and a deflationary gap in the economy. If left unchecked, this gap will throw the economy into a deflationary spiral as the economy loses demand equivalent to the saved but unborrowed funds each year. And that is exactly what happened during the Great Depression.
“Although the panic has subsided, all the balance sheet problems that existed before the Lehman shock are still with us. These problems are likely to slow down the recovery or smother it altogether unless the government offsets the deflationary pressure from private sector deleveraging. In other words, the recovery so far was the easy part, and the hard part of repairing millions of impaired balance sheets has just begun. This is no time to be complacent and cut fiscal stimulus; that should not happen until it is certain that the private sector deleveraging process is over.
“The dangers are from premature fiscal tightening. The key lesson from the Japanese experience is that fiscal support must be maintained for the entire duration of the private-sector deleveraging process. This is an extremely difficult task for a democracy in peacetime, because when the economy begins to recover, well-meaning citizens who dislike reliance on government will argue that since fiscal pump-priming is clearly working, it is time to reduce (what they see as wasteful) government spending.
“But if the recovery is actually due to government spending and the private sector is still in balance-sheet-repair mode, premature fiscal reform will invariably result in another meltdown, as the Japanese found out in 1997 and the Americans in 1937.
“The Japanese mistake in 1997 not only produced five quarters of negative growth but also increased government debt by nearly 100 trillion yen or 30 percent and prolonged the recession by at least five years. The U.S. mistake in 1937 was so devastating that it took the massive military expenditures of the Second World War to pull the country out of recession.”
Back to Chris: “A point where it may be different is that the US still has positive population growth and thus a need for more housing. However, the idea that the US will spend itself out of a recession because we have a consumption mentality while the Japanese have a saving mentality may not be valid, as Koo points out that the US household savings rate is now higher that of Japan (approx 4% US and 3% Japan in Koo’s chart).”
This information is being provided to enlighten readers on the current debate, but neither Chris nor I will risk making predictions or telling governments what to do.
More for paid subscribers from Australia, Brazil, Poland, Spain, Portugal, Switzerland, and Britain follows in a very long double blog.
Predicting and Uncertainty
“Never predict, especially not about the future” is a wisecrack I attributed to Yogi Berra yesterday. NY reader LM says the remark was made by Sam Goldwyn, a Hollywood mogul. But it has been attrributed to others, from Niels Bohr to Mark Twain.
I like the Bohr story best. He was describing the Heisenberg Uncertainty Principle in quantum mechanics which essentially says you can't predict where a particle will be at a specific time or when it will be at a specific place.
“I never predict anything and never will” is another userful quote, attributed to British footballer Paul (Gazza) Gascoigne. Yesterday despite pre-market froth there was a last minute reversal in stocks near the close, and this time it was on the downside, with the Dow closing below 10,000.
LM used a stop loss which exercised on May 6. A stop loss is an order to sell when a stock has broken through a level you set. You do not necessarily get the stop loss price itself, because you may be stopped out lower. I have been writing for years against these mechanical devices. Often stop losses result in a trade at a lower price than you stipulated.
LM sold a closed-end fund which I recommend for yield. You have no business selling a yield stock with a stop loss in any case, because there is always institutional money going out the day it goes ex dividend. Moreover closed end funds often trade at huge bid-ask spreads and have to be sold with care.
If LM wants to try to bust the trades, I think he should cite the posted net asset value of the closed-end fund to prove that the trading price was absurd, rather than the trading record. I wish him every good luck. If any other readers suffered in the Flash Crash, please let me know.
Another reader, DG asked for comment on Paul Krugman's comparing the US to Japan in the 1990s. I replied:
There is no comparison. Japan as I wrote [yesterday] got loads of loot but had no idea how to spend it on its population, and fell into deflation. We won't because our economists know what happened in Japan and also because our economy is different. We are prone to being inflationary.
Today we will do a major buy and a major sell. Paid subscribers should read on.