US Recession, China Depression - Your View!

Hello All,


Those of us who live in Asia and for some reason or another rely on the future of China for our livelihood, I was hoping would read Ed's recommended article in Business Week and provide a viewpoint.


http://www.businessweek.com/the_thread/economicsunbound/archives/2009/01/american_recess.html?chan=top+news_top+news+index+-+temp_news+%2B+analysis


Please also read the interesting comments posted below the article as it may help you script your view.


Thanks in advance and hope AsiaXPAT users from all Asian locations would provide one as well.

I might as well Weigh-In first! As a HKer with products and brands building in the consumer markets pre-mess with a factory in China, I have definitely felt the pain.


However, in sourcing partner factories for scalable strategies I did come across numerous factories which were already supplying 50% or more of their production to domestic customers. Further, these were not Taiwan or HK owned factories but Mainland owned fty's which had some special joint program underway with the provincial - local level government officials.


For the most part, I have this strong feeling based on what I have physically witnessed, that a majority of the same items being build in factories for the US at prices driven so low was good for the China consumer as well.


Moving quickly to the big picture, I cant help but wonder what China has up their sleeves further to almost 600B of stimulus, sticking with the rise in USD (since they have about 2B in US treasuries) and lowering of the RMB to keep some level of low cost exports still on tap for when some degree of consumer spending will take place.


I think China will not go into depression and be the first out of recession given they might pull the plug on their US treasuries and repatriate to their own or anything but the USD. May I suggest other countries will do the same.


I will defend my always certain view that China knows exactly what is going on and will in fact fuel themselves whenever it makes sense to do so and protect and change the rules overnight if needed to the adverse of the US taking forever (which they dont have) to vote on some of the most obvious changes they need right now while further erosion takes place.

Video today CNBC from HSBC Senior Asian Economist on China recovery!

http://www.cnbc.com/id/15840232?video=997144680&play=1

I don't think they have any clue what is going on, any more than you or I , Ben Bernanke or anyone else for that matter.


If there is one thing that the last quarter of 08 has taught everyone is no one has any idea WTF is going on at any level.

Digital is correct on this one i feel. China used some of their surpluses in 2008 to make some, in hindsight, extremely dubious investments and lost a lot of money.


They seemed to pick to top of the market to make their play and got burnt. They have now resorted in the short term atleast to make no further investment 'plays' and thus will be keeping their surpluses in US treasuries and the like for now.


They also don't seem to understand, yet, that they just need to let their currency appreciate in value to unleash their domestic consumer demand. I know it sounds easier than it actually is to do this but thats what they NEED to do. Eventually though they will figure this out !


AND when they do the 'decoupling' will be complete.

I agree they should let their currency appreciate, and they did do some atrocious deals right at the top of the market, but i dont see decoupling happening in my life time. Our economies are becoming more interdependent not less. You cant have a trading partner the size of America see a recession and not feel the implications regardless of who you are and how large your economy eventually becomes. If anything going forward the reverse to decoupling is going to be true.


Currently if China catches a cold the US could probably turn the aircon up and still not feel very much leave alone sneeze, some one will always buy the debt as has always been since the seventies. In the next decade we will start seeing a larger impact of China on the economic growth prospects of America, in the sense that as their domestic economy grows larger and in absolute terms dwarfs every other country in terms of being a buyer of US exports America's growth rates will start to depend on China's as much as China's currently depends on America.


Decoupling seems a little fantastic. If anything economies are doing quite the opposite. If they were to decouple there would be less international trade going forward not more of it, and I cant see how anyone could argue that growth rates in the future would be independent of one another, when everything going on suggests the opposite will be true and they become more dependant on each other.

China's economy is based on subsidies and cronyism (read: corruption) and the resulting non-performing loans. Apart from cheap labour they have nothing to offer to the world (economically). China is toast... back to the roots: agriculture.

Wow, quite bearish on China. I would suspect China will continue to sell cheap goods globally for some time (2010+) but its the bridge from breakneck speed to hitting the wall that they need to shore up quickly. I believe china can react quicker then any other major player right now. This can be good or bad but we'll never hear about the bad will we.


And are we not in the business of perception these days? Even the mostly recognized transparent countries are full of skeletons.

Globalisation will come to an end as we know it. America and Europe will need all the factory jobs to return home, and soon there will be plenty of cheap labour available in the West.


China cannot compete with that.

I agree with you the globalization front for sure. It has all taught us a valuable lesson and balancing in our own backyards first. There is no way the labour will be cheap enough quick enough in the short term so I believe China will have time to get their balance in order. Remember, it was long ago that they were all farmers and relying on themselves domestically.


And btw, China only has less than 1% of the population under water on mortgages whereas in the US, it's about 30% and climbing. UK same and EURO soon to be.

Yes just by a hair but I would like to see these revised number next quarter or end of year. Should be interesting.


I wonder when the US Treasury Bubble will find a pin?

DaHKGKid> Perhaps only 1% of the population in China is under water, but the other 99% owns nothing and just lost their jobs as well. Coincidentally I read this article today (please ignore the political aspects of the article): http://www.timesonline.co.uk/tol/comment/columnists/guest_contributors/article5512157.ece?openComment=true - Wealth distribution will destabilise China's economy!


howdy doody> That just illustrates why the West will stop importing from China, with a susbsequent collapse. Actually according to this article it is already happening: http://www.telegraph.co.uk/finance/4229198/Shipping-rates-hit-zero-as-trade-sinks.html - Container rates at zero from SE-Asia to Europe!

This article is very good. As true as his opinion and history may be, I see China as having no use but to get it right or at least have the rest of the world and their people believe it is.


I have read the second article. We know foreign demand is down, it will be for at least 2009. It will be brutal. It is not a case for stoppage of imports after the dust settles.

Ironically the States have gone the direction of China with the highest polarization of wealth since 1929 and the decimation of the spending power of the middle class - which of course they tried to compensate for with easy credit.


A strong middle class = a strong economy. Obama said 'we shouldn't measure our country by the number of billionaires we have' - I'll take that a step further 'because if we use that to measure success then the Philippines would have to be considered a fairly successful country'


The shipping article is shocking.

"Globalisation will come to an end as we know it. America and Europe will need all the factory jobs to return home, and soon there will be plenty of cheap labour available in the West.


China cannot compete with that."


That is simply ridiculous. Factory Jobs will never be returning to Western Europe or North America, even with migration from Eastern Europe and Mexico.

I agree - its about supply and demand and supply of ships has grown with demand for goods made in China and other places - and now that demand has crashed and will likely remain low for years because it was fueled by easy money put into consumers hands - however the ships are built and they won't disappear... hate to be in that biz.


But then one could say the same thing about shopping malls, homes and on and on - there is now a massive abnormal glut across the board. And there needs to be a correction - but instead of correcting we are denying reality and propping up dead horses.


Reminds me of the undersea broadband net glut after the dcom bust - companies like Global Crossing going for a song... that took about 5 years to work itself out in an economy that was fueled by cheap credit.


What's going to fuel an uptake of all the things built in the last 8 years or so?


I am afraid that we are going to be left with an oversupply of everything for years - and deflation + bankruptcies to go with it.

Ed> The US does not allow bankruptcies... they rescue every failing, redundant, incompetent bank, car company and whatever "special interest industry". They are setting themselves up for economic disaster!


YLM> Very good points! Btw, ships are currently used for oil storage, which is actually an efficient way of utilising overcapacity in shipping.


DB> There are other reasons why factories will return to the West. Protectionist laws will make it attractive. And environmental considerations will reward low carbon-footprint production and punish high ones. Any product that needs to travel 4000 miles around the world is going to be taxed in name of environmentalism.

The shipping story is a little imprecise - it is the lowest marginal price, i.e. some consumers are charged zero rates. It's not free shipping for all, which is the impression the popular press seems to want to create. The zero rate tends also to be for frequent clients and bulk clients. No doubt average prices have fallen as the industry restructures, and we may see the start of a price war of sorts.


"I wonder when the US Treasury Bubble will find a pin?" - not yet. The biggest stick China has over the US is the trillions of US gov debt it holds. If China decides to call it in, interest rates in the US will rocket and US can kiss goodbye to any monetary policy or bailouts. This stick is China's most effective weapon against any attempted China-bashing or excessive US trade protectionism. "Put up the barriers to Chinese goods and people? Well, we won't lend you money for your fiscal stimulus, your green programs, and your war on terror."

The US Treasury and the Fed are already testing the waters by increasing the Treasury supply and buying up Agency bonds. If the market let's it happen unpunished, the US may be tempted to believe they have neutralised China's "secret" weapon.

HKhereIcome - Now that is something I can agree too! But what if the USA defaults on their debt when called in? Does China foreclose on California? I am waiting for this bubble to pop where both the USD will tank and inflation will rise at an alarming rate.


I have a feeling China may call on some of the debt sooner than later to bridge some of their domestic challenges if US CONSUMER SAVING is the new TREND over strong dollar, weaker RMB right now.

the US may be tempted to believe they have neutralised China's "secret" weapon.


- the Chinese are still buying up treasuries, whether they (and the rest of the marke) will be willing/able to keep doing so when the Obama $775b-$1t package needs funding is another thing. Right now a US stimulus can help China, as a large part will be leaked as imports. If one wants a fiscal package to work, one has to minimize leakages - so fiscal measures will be coupled to pressures to protect. I can't read Obama on trade - he's all over the place, sounding protectionist but appointing centrists. But come mid-term elections in 2010, when the jobs market in the US is still bad and the honeymoon is truly over, and when the fiscal pack has done all it's being trumpeted to do, I believe he will protect. Don't know how much self-restraint China will have at that point - maybe alot if it is out of the doldrums by then - and there won't be retaliation.


Like any seller, I don't think China will sell US debt at one go. US told de Gaulle to go to hell when he tried to convert dollars for gold in early 1970s, so the US will probably tell China, politely, to do the same.


I agree China may start to call it in, esp when its $600b stimulus is found wanting. It will shift its money to commodities and possibly euro. That's why I'm rooting for gold, oil, the yuan, euro.


I know I'm just painting scenarios, and DG will say no one knows what TF will happen. But like the simulations in the White House, scenarios let us work out the likely trend of actions and hence where best to place our money. Not scientific, but hey, the physics PHds and their fancy financial instruments got us into this mess to begin with :)

There will never be low margin low valued added manufacturing in Western Europe or North America ever again. Not on any scale anyway. That is over, it is finished the deal is done, regardless of carbon taxes.


If there are factory jobs in North America or Western Europe in the future they will be for high value not necessarily high margin items for which high margin service contracts can be bundled or bid for very competitively.


http://www.economist.com/opinion/displaystory.cfm?story_id=12887368

This is just a stoppage in play due to rain, okay a financial tsunami, but Walmart will continue to issue PO's. Low cost goods will be the only thing the Western world will be buying for the next few years. Even the perception of buying western made product will sound expensive to them. Other than food, many sundries are consumables to a point.


I'll have to agree with DB, especially with the US not producing anything for decades worth buying. Oh sorry, they have been great at manufacturing the right policies which have produced DEBT!

Be terrified :)

Seriously, due to the peg, the main adjustment in HK will be through asset prices primarily property. Prices will fall some more, but as with all things, there will be losers and winners. If you are a first-time buyer, with a secure job, say civil service, and have been squirrelling away money and can afford a sizable downpayment, this is your moment.

It is telling me that person paid too much last year. I am quite excited about the prospect of cheap(er) housing. I am more worried about the central banks printing money like mad.

Bottom of HK-SING markets likely 1Q10 easy. Take 50% off of last transactions from Nov 07 - Feb 08. Offer of $3.3 should be likely under $3.0M final, $2.5 mid year $2.1 End.


All Asian real-estate will suffer but most in inflated established regions, Shanghai, Beijing, Sing, HK, Tiawan, Korea ex-Japan. Some steps down in Malaysia, Thailand and Vietnam.


If you subscribe that Asia will come out of the downturn ahead of all Western US-UK-EUROPE and that is Mid 2010 to late 2010 then we would think end of this year would be good for HK.


The scary thing, these dates keep moving out every quarter of reporting as things just keep getting worse. I would be patient as with multi multi year lows come multi multi year recoveries. There wont be enough money on the street to spark a fast turnaround.

Will the Obama Administration Change Its Approach on China?


Tomorrow’s Treasury International Capital flow report will shed more light on whether the low yield in the US has driven sovereign wealth funds out of the US dollar. According to a recent report by China, they have continued to buy US dollars despite doubt that they would be unwilling to fund the growing US deficit.


With the Bush Administration leaving office on Tuesday, it is interesting to consider if the Obama Administration will change its approach on China. As Treasury Secretary, Paulson has favored the buddy versus bully approach to China. Although the Chinese Yuan has appreciated 15 percent over the past 2 years, it is still considered undervalued. If Obama labels China as a currency manipulator or takes more active measures to get the Asian giant to strengthen the Yuan, it could lead to further USD/JPY weakness as it would give the Bank of Japan less reason to intervene and sell the Yen.

The western world and in particular America is in for quite an attitude and standard of living adjustment, because they have been living miles beyond their means.


- So true. There is something to be said about chickens coming home. But I do sympathize with those Americans etc. who have not been profligate (and there are many of them), and whose 401Ks have been diminished. For these, deflation may help, but gov action has only been to inflate (so China being the world's biggest saver may actually be the savers' hero).

Well said, but I have no sympathy for anyone who lived outside of their means including those who invested in high risk 401K vehicles if self directed.


However, there are many companies who did the above for their employees and burned them. Everyone will go back to asking questions again about the viability of how their investments are being handled along with reading the fine print. Every cent they invest is on the line.


Remember, the US government was one of the only countries in the world that let you write off the interest on your mortgage so incentive to pay it off was nil.


Plus you could revalue your home at anytime literally and based on the impressive growth (last 15+ years) take out LOC's for home improvements (can you see Home Depot and Lowe's going bust - surely!), take nice "we owe it too ourselves" lavish vacations, send Billy & Suzie to top Colleges (with a car each and monthly allowance). put money down on that vacation property, new Benz Lease or 40' sailboat.


Those very few, and it has to be less than 3% of middle class baby boomers MIGHT survive this mess if they purchased homes in the 70's 80's paid 70% less than their highest level in 2007, didnt live outside their means, drove a car for 7-10 years not every 3, vacationed at KOA campgrounds and took road trips with the kids and made those kids earn there way to college. They also self directed their Pensions or 401K's into safe long term investments.


They will be the winners, but VERY LONELY ONES!


Now compare the above with the Chinese Culture and you tell me who is to come out of this first! When the wealth is sucked out of the US, the Chinese will be able to purchase anything at below cost prices.

Are Uncle Sam's Creditors heading for the exits?


* Jan. 8th, 2009 at 6:54 PM



In 2008 the credit crisis spread around the world like a virus. We saw individuals, companies and small countries go to the wall. Will 2009 be the year when U.S. creditors refuse to expose themselves to an ever increasing risk of default in order to protect their own economies ? There are growing signs of hesitation and fear on behalf of those who would lend Uncle Sam the funds to finance yet another "stimulus" plan. No small wonder as the U.S. is flat broke and up to it's eyes in unpaid debt as it is. With inflationary fears added to the mix as trillions of dollars emerge in to the U.S. economy over 2009 and trillions already thrown in to the bottomless pit of the financial sector, China and Japan are getting nervous.


Japan's utter panic was summed up by Akio Mikuni, President of the ratings company Mikuni & Co. when he suggested that "Japan should write-off its holdings of Treasuries because the U.S. government will struggle to finance increasing debt levels needed to dig the economy out of recession". For good measure.."The dollar may lose as much as 40 percent of its value to 50 yen or 60 yen from the current spot rate of 90.40 today in Tokyo unless Japan takes drastic measures to help bail out the U.S. economy"


China's Central bank governor Zhou Xiaochuan announced that it will allow the yuan to be used for settlement between Guangdong Province and the Yangtze River Delta and exporters in the Guangxi Zhuang Autonomous Region and Yunnan Province in southwestern China will be allowed to use the yuan to settle trade payments with members of the Association of Southeast Asian Nations. His tongue in cheek explanation?


"The US dollar is unlikely to be stable next year and later. And the likelihood of the United States issuing more money in the near future adds to the depreciation risk in US-dollar-denominated assets and trade settlements." Source


A previous report describing China's proposed 7 fold increase in Gold reserves is also indicative of its gradual pullback from the doomed dollar.Gold has been slowly rising as investors, previously struck rigid with fear, are now taking a breath and looking at real value. The old adage of Gold being a safe haven is coming back in to play and no amount of gold price manipulation on the exchange is going to change that. With China's announcement of its intention to build up it's reserves to 4000 Tons, we can expect other Treasury Note holders to be thinking along the same lines. This can only lead to a bullish gold market and a collapsing market for Treasuries. Treasury Note doomsayers are a growing community amongst which we can count former Bank of England policymaker, Willem Buiter, who summed up his position thus


"Even the most hard-nosed, Guantanomo Bay-indifferent potential foreign investor in the US must recognise that its financial system has collapsed"


And Barrons is announcing a coming Treasury Bubble Pop..


"Treasuries offer little or no margin of safety if the economy unexpectedly strengthens in 2009, or the dollar weakens significantly, or inflation shows signs of reaccelerating."


Forbes is predicting China's future diversification of it's reserves as Treasury Bills become more of a liability..


"Washington's issuance of mountains of debt to bail out the U.S. economy will only make T-bills less rewarding, putting the dollar's future strength in question. Various economists are saying it will be in China's interest to diversify in the near future."


We can discount the unexpected strengthening of the economy in 2009, but inflation has to rise once those trillions are in the playing field and the dollar will be toast. Bonds, yielding next to nothing, don't exactly present an attractive investment opportunity. The only reason Treasuries have been so attractive up to now was that they were presumed to be a safer harbor than equities, commodities or cash. No amount of "stimulus" plans can fool all the people all the time. After the initial massacre, investors are taking a moment of reflection and taking a more long term approach. We are now in an era of survival and protectionism rules the day.

How do these predictions look based the following known cycles?


Demographic & Commodity Cycles:


Demographic every 40 years,


1925-1935 Demographic & Commodity:

1925 US Home prices peaked

1928 Stock Market Peak/Crash

1928 Bonds Peak

1929 Small rebound in stock

1932 Bond Market Crashes

1930-33 Depression


1965-75 Demographic:


1965 US Home prices peak

1968 Stock Market Peak

1970 Recession

1970 Government stimulus

1971-2 Rebound

1973-1975 Recesssion


1980s Commodity Cycle:


1980 Oil Peaks

1980 Recession

1981 Economic recovery, stock market rebounds

1982-84 Worst recession since great depression


2008-2014 Commodity Bubble & Demographic:


2005 US Home prices peak

2008 Stock Market peak/crash

2009-10 Bond market collapse

2009 Stimulus kicks in

2010 Small economic recovery

2011-2014 Depression


OR


2008-2014 Commodity Bubble & Demographic:


2008 Stock Market peak/crash

2009-10 Bond market collapse

2009 Stimulus kicks in

2010 Small economic recovery

2011-2014 Depression

——

Dates are correct, but it leads to 2015 when zillions of BB’s take Reg. Pensions, Old Age Pension and / or GIS (Guaranteed Income Supp).


With the way both levels of govts. are spending into deficits, the three just mentioned may not exist, at least in their present form.


Pity those boomers; once they figured they had it all and took on more and more debt, figuring the good times would never end.


When the time comes, they will have nothing.

Pity those boomers; once they figured they had it all and took on more and more debt, figuring the good times would never end.

When the time comes, they will have nothing.


- I don't think this will be the case. The babyboomers will rewrite rules to suit themselves, either by insisting on bailouts, and/or keeping their benefits (medical benefits of retirees are one reason the Big 3 are sinking). It is their children and grandchildren (us) who will have nothing, and must nevertheless support the babyboomers. Those of us with parents who have been prudent, let's kiss and thank them. If our parents have been profligate, well... But as the younger generation, we are the ones who have to carry the can.

One could hope so but do you see any administration throwing money at the middle class? The avg. BB has lost over 50% of their 401K's and 30-40% of their house values and more of both to drop in 09. Here are the scenarios for 1945-1965 BB:


1945-50 - Retired or planned to retire but cannot. Doesnt matter, no jobs to be had.

51-65 - Bigger spenders, jobs being slashed. Double incomes to one, pay cuts shorter hours (now 33 per week to be 25 per week by end of 2009)


You would be hard pressed to meet a BB who hasnt taken a beating already and will be worse off 2009-2010. The ones which are will be more well off are those pre 1945 born who remembered the recession, or lived through it and are alive today to support their BB sons and daughters.


The GenXessors have no money to support the BB's either.


The double up effect (generations of families under one roof) will be massive and another oversupply in housing that will force a lengthy bottom to 2012.


This is another reason why I see the Chinese way ahead of Western recovery, they GET IT! Western world enters years of denile while the holes get larger, wealth gets destroyed.

Can anyone comment on what China will or can do if they start pulling treasuries out and the US tries to stop it, or the money just isn't there?

You would be hard pressed to meet a BB who hasnt taken a beating already and will be worse off 2009-2010. The ones which are will be more well off are those pre 1945 born who remembered the recession, or lived through it and are alive today to support their BB sons and daughters.


- actually, BBs who bought and paid off their houses before 2000 in the US are still ahead and if the house price dip reverses, they may still make capital gains. Those that are in trouble are younger ones who bought their houses after 2002 and are still paying them off, then if they lose their jobs, disaster.


BBs will rewrite rules. Look at Singapore, normally hard-nosed and practical - they are now compensating seniors who bought Lehman bonds, on grounds that they didn't understand the product. Huh? Were they sharing the interest Lehman paid them when things were swell? And these were folks who still had capital gains from their properties.


In the US, there BBs returning to work or staying on longer - since they have covered their mortgage and can work for less, guess who's undercut?

Can anyone comment on what China will or can do if they start pulling treasuries out and the US tries to stop it, or the money just isn't there?


- I don't think China will sell large chunks of US debt overnight. It will first stop buying treasuries (which is not inconceivable, since bond prices will plummet over the next few months as major govs try to raise money, which devalues what China already holds). China benefits from a growing US, so if it'd want to capital to move there. But it will do so by buying assets - remember the late 80s when Japanese bought Rockerfeller building and other US icons? China will go on a shopping trip.

And as a Londoner, I think Gordon Brown has pushed the UK economy so hard into the ground that the only way up is to sell national assets. Crown jewels on ebay!

US UK will be nationalizing all banks. End of Thatcher Regime! Market is judging Obama's plan! Things got too big and out of hand I believe to allow the toxic banks to fail as the risk of immediate implosion is something the US could not take!


China will become more powerful as they buy chunks of global matured markets for 50% below current market values.

I thought Thatcher went into retirement in 1990?


I am surprised the market has not punished the Swiss Franc yet. Switzerland has a much bigger banking problem relative to the size of its economy than the UK. Although personal debt is probably significantly higher in the UK, and it seems like the UK government is willing to monetise it.

Thatcher was behind the de-nationalization of banks in support of capitalism which did occur before 1990 yes! It's now moving back it seems!


I hope the Franc does okay, Ive used it as a hedge currency a little bit!


Let's hope all the repatriation of wealth back to Switzerland holds it up!

Swiss National Bank came out last night, threatening to weaken the franc if they had to! It weakened 2% against the euro.

ouch! looks like I'll have to ride it out until the USD goes south mid year.

I kindly disagree. The franc is vulnerable for many reasons, most importantly the UBS and CS overhang, but currency intervention usually does not work. I remember how the EU leaders tried to talk up de euro at the start of the millenium, only to see it go down lower-and-lower. Even the one time that the ECB intervened it had no lasting effect.

so you think CHF will follow it downward? will the JPY be the only safe currency?

Obama’s New Strategy on China is USD Negative


According to Geithner, the Obama Adminstration will be saying goodbye to the buddy versus bully approach to China. He believes that Obama will "aggressively try to change Yuan policy" and that China will no longer get a free pass in trade violations. Geithner even went one step further by saying that Obama believes that China is "manipulating" its currency. Many people fear that this is rookie rookie mistake. China does not readily succumb to political pressure. That is why former Treasury Secretary Paulson allowed China to appreciate the Yuan on their own terms. To a large degree this strategy has worked because over the past 3 years, the Yuan has risen more than 15 percent. This is a bad time to ask for Yuan strength because growth in China has slowed materially. To force China to appreciate its currency means less demand for US Treasuries and US dollars and unfortunately that is not something the US can afford right now when the government needs to spend its way out of recession. Furthermore, turning up the heat on China could lead to an economic war. Geithner also reiterated that the US has a strong dollar policy which interestingly enough runs completely counter to his calls for a stronger Chinese Yuan. Like his predecessors, Geithner is doing nothing more than paying lip service to the strong dollar policy because in reality he is advocating a weaker dollar against one of the country’s largest trading partners. In addition everything that the US government has done so far to address the economic crisis leads to a weaker dollar. So there is no real meat to Geithner’s comments on the greenback; the Yuan on the other hand is completely different story.

DaHKGKid> I meant that intervention will not stop the CHF from appreciating against EUR. Ultimately I question the health of CHF though. I think JPY has had its best days. Japan exports collapsed 35% in December. The Japanese economy is in for a very rough and long ride (or slide).

thanks onemorething, other than USD, I feel the JPY may be the lowest common denominator in flight to safety. I see the worsening of the Japan economy as potentially bringing all that Yen home, just like the USA.


I need to get CHF and AUD to somewhere safe in my portfolio. Any thoughts?

I agree that 'The Voice' view described above should be moved to THINK as it has nothing to do with the immediate issues being discussed on this thread.


Please move your THINK topic over please for a meaningful debate elsewhere!

DaHKGKid> Gold is the only thing that comes to my mind, but spreading your risks is probably the best advice. One may argue that includes seemingly bad bets such as USD, just because there are too many unknowns out there right now!

Agree - Voice - please bring that topic to Think.


Carry on with the recession-depression discussion

China monthly auto sales overtake U.S. for 1st time

Last Updated: Tuesday, February 10, 2009 | 8:06 AM ET The Associated Press



http://www.cbc.ca/money/story/2009/02/10/china-autos.html

Do you have data on how they are financing those cars?

Not sure but you can bet they are under the 1.5L engine size and locally built! I wouldnt be surprised if the government offered the same deal to avg. Joe in China for cars that they did with white goods last month. Think Global, Buy Local!

Actually the recent job loss prediction in US have been pretty bad:


http://www.wealthalchemist.com/Blog/2009-job-loss-predictions/


Also, according to Bill Gates' prediction, the recession is going to last for at least 4 years

The newspapers make it sound like the Chinese buying cars somehow reflects poorly on US/Japanese car makers - but Ford and Toyota are in Chinese joint ventures. If they can't sell in US/Japan, they may benefit from the Chinese. But these things are fragile and subject to a backlash. If the "Buy American" clauses are shown to hurt China, then Chinese consumers will desert US goods.

GOOD PIECE ON THE CRISIS AND HOW HE SEES IT IN THE FT BY LLOYD BLANKFEIN CEO GOLDMAN SACHS



Do not destroy the essential catalyst of risk


By Lloyd Blankfein


Published: February 8 2009 16:53 | Last updated: February 8 2009 16:53


Since the spring, and most acutely this autumn, a global contagion of fear and panic has choked off the arteries of finance, compounding a broader deterioration in the global economy.


Much of the past year has been deeply humbling for our industry. People are understandably angry and our industry has to account for its role in what has transpired.


Financial institutions have an obligation to the broader financial system. We depend on a healthy, well-functioning system but we failed to raise enough questions about whether some of the trends and practices that had become commonplace really served the public’s long-term interests.


As policymakers and regulators begin to consider the regulatory actions to be taken to address the failings, I believe it is useful to reflect on some of the lessons from this crisis.


The first is that risk management should not be entirely predicated on historical data. In the past several months, we have heard the phrase “multiple standard deviation events” more than a few times. If events that were calculated to occur once in 20 years in fact occurred much more regularly, it does not take a mathematician to figure out that risk management assumptions did not reflect the distribution of the actual outcomes. Our industry must do more to enhance and improve scenario analysis and stress testing.


Second, too many financial institutions and investors simply outsourced their risk management. Rather than undertake their own analysis, they relied on the rating agencies to do the essential work of risk analysis for them. This was true at the inception and over the period of the investment, during which time they did not heed other indicators of financial deterioration.


This over-dependence on credit ratings coincided with the dilution of the coveted triple A rating. In January 2008, there were 12 triple A-rated companies in the world. At the same time, there were 64,000 structured finance instruments, such as collateralised debt obligations, rated triple A. It is easy and appropriate to blame the rating agencies for lapses in their credit judgments. But the blame for the result is not theirs alone. Every financial institution that participated in the process has to accept its share of the responsibility.


Third, size matters. For example, whether you owned $5bn or $50bn of (supposedly) low-risk super senior debt in a CDO, the likelihood of losses was, proportionally, the same. But the consequences of a miscalculation were obviously much bigger if you had a $50bn exposure.


Fourth, many risk models incorrectly assumed that positions could be fully hedged. After the collapse of Long-Term Capital Management and the crisis in emerging markets in 1998, new products such as various basket indices and credit default swaps were created to help offset a number of risks. However, we did not, as an industry, consider carefully enough the possibility that liquidity would dry up, making it difficult to apply effective hedges.


Fifth, risk models failed to capture the risk inherent in off-balance sheet activities, such as structured investment vehicles. It seems clear now that managers of companies with large off-balance sheet exposure did not appreciate the full magnitude of the economic risks they were exposed to; equally worrying, their counterparties were unaware of the full extent of these vehicles and, therefore, could not accurately assess the risk of doing business.


Sixth, complexity got the better of us. The industry let the growth in new instruments outstrip the operational capacity to manage them. As a result, operational risk increased dramatically and this had a direct effect on the overall stability of the financial system.


Last, and perhaps most important, financial institutions did not account for asset values accurately enough. I have heard some argue that fair value accounting – which assigns current values to financial assets and liabilities – is one of the main factors exacerbating the credit crisis. I see it differently. If more institutions had properly valued their positions and commitments at the outset, they would have been in a much better position to reduce their exposures.


For Goldman Sachs, the daily marking of positions to current market prices was a key contributor to our decision to reduce risk relatively early in markets and in instruments that were deteriorating. This process can be difficult, and sometimes painful, but I believe it is a discipline that should define financial institutions.


As a result of these lessons and others that will emerge from this financial crisis, we should consider important principles for our industry, for policymakers and for regulators. For the industry, we cannot let our ability to innovate exceed our capacity to manage. Given the size and interconnected nature of markets, the growth in volumes, the global nature of trades and their cross-asset characteristics, managing operational risk will only become more important.


Risk and control functions need to be completely independent from the business units. And clarity as to whom risk and control managers report to is crucial to maintaining that independence. Equally important, risk managers need to have at least equal stature with their counterparts on the trading desks: if there is a question about the value of a position or a disagreement about a risk limit, the risk manager’s view should always prevail.


Understandably, compensation continues to generate a lot of anger and controversy. We recognise that having troubled asset relief programme money creates an important context for compensation. That is why, in part, our executive management team elected not to receive a bonus in 2008, even though the firm produced a profit.


More generally, we should apply basic standards to how we compensate people in our industry. The percentage of the discretionary bonus awarded in equity should increase significantly as an employee’s total compensation increases. An individual’s performance should be evaluated over time so as to avoid excessive risk-taking. To ensure this, all equity awards need to be subject to future delivery and/or deferred exercise. Senior executive officers should be required to retain most of the equity they receive at least until they retire, while equity delivery schedules should continue to apply after the individual has left the firm.


For policymakers and regulators, it should be clear that self-regulation has its limits. We rationalised and justified the downward pricing of risk on the grounds that it was different. We did so because our self-interest in preserving and expanding our market share, as competitors, sometimes blinds us – especially when exuberance is at its peak. At the very least, fixing a system-wide problem, elevating standards or driving the industry to a collective response requires effective central regulation and the convening power of regulators.


Capital, credit and underwriting standards should be subject to more “dynamic regulation”. Regulators should consider the regulatory inputs and outputs needed to ensure a regime that is nimble and strong enough to identify and appropriately constrain market excesses, particularly in a sustained period of economic growth. Just as the Federal Reserve adjusts interest rates up to curb economic frenzy, various benchmarks and ratios could be appropriately calibrated. To increase overall transparency and help ensure that book value really means book value, regulators should require that all assets across financial institutions be similarly valued. Fair value accounting gives investors more clarity with respect to balance sheet risk.


The level of global supervisory co-ordination and communication should reflect the global inter-connectedness of markets. Regulators should implement more robust information sharing and harmonised disclosure, coupled with a more systemic, effective reporting regime for institutions and main market participants. Without this, regulators will lack essential tools to help them understand levels of systemic vulnerability in the banking sector and in financial markets more broadly.


In this vein, all pools of capital that depend on the smooth functioning of the financial system and are large enough to be a burden on it in a crisis should be subject to some degree of regulation.


After the shocks of recent months and the associated economic pain, there is a natural and appropriate desire for wholesale reform of our regulatory regime. We should resist a response, however, that is solely designed around protecting us from the 100-year storm. Taking risk completely out of the system will be at the cost of economic growth. Similarly, if we abandon, as opposed to regulate, market mechanisms created decades ago, such as securitisation and derivatives, we may end up constraining access to capital and the efficient hedging and distribution of risk, when we ultimately do come through this crisis.


Most of the past century was defined by markets and instruments that fund innovation, reward entrepreneurial risk-taking and act as an important catalyst for economic growth. History has shown that a vibrant, dynamic financial system is at the heart of a vibrant, dynamic economy.


We collectively have a lot to do to regain the public’s trust and help mend our financial system to restore stability and vitality. Goldman Sachs is committed to doing so.


The writer is chief executive of Goldman Sachs

I agree with his view... but I can't help thinking he is writing this out of self-interest. Mark-to-market accounting allows Goldman's to mark all its bonds and loans down. Which currently stand at $194 billion with an average maturity of five years.

Yes and tabling this publicly will help him get in the back of the line of nationalization.


We have to get rid of all the ZOMBIE banks before the good can be valued and mark-to-market can occur.

Interesting Thought!


富不过三代 (fu bu guo san dai)


The Chinese have an expression Here is the expression and the translation: 富不过三代 (fu bu guo san dai) Literally: Wealth does not pass three generations


Meaning: It's rare the wealth of a family can last for three generations (the 2nd may see the value of hard work, the 3rd, forget it).


[Mish Note: The following example is based in the South African currency of the Rand, but that does not detract from the message.]


Year zero: First generation: Wealth creation


Starting capital: Zero. The family income generators (2 parents) are hard-working and manage to invest 10% of their after-tax income equating to R30/month into the South African stock market. (Yes, this was pre-Union, but we did say "equating to"). Remember this is the sixties and an income of R300 is a very decent monthly wage.


Year 45: Second generation: Wealth preservation


The parents ensured that their three children didn't have to experience hard times. The children attended decent enough schools and were fortunate enough to mix with similarly privileged friends. There is general unease in the family however, as the second generation gain independence.


The pressures of wanting to keep up with the lifestyles of their wealthier friends, coupled with an unfortunate down-turn in the economy, results in a halt in savings and as a result the R10.5m family wealth no longer enjoys any debit order increases. In addition, the capital base is required to maintain an income for the folks who have now retired.


Year 75: Third generation: Wealth destruction


The second generation finally inherit the family wealth and it is split three ways. By this time the R45,000/month comfortable family living has ballooned to R600,000/month as a result of inflation. Each family now only enjoys income from a capital base of R110m and, because they themselves are approaching retirement they opt to de-risk their portfolios, which results in the capital invested unfortunately realising a more sedate 3% real rate of return.


After a torturous revelation later on in life, one of the 3rd generation children decided to carve out a career as a financial advisor. She made the following insightful observations:


1. Her grandparents did a fantastic job of consistently placing 10% of their monthly income into an equity investment over a 45 year period.


2. As they had generated sufficient capital to live off the dividend income there from, her grandparents had stuck with their equity investment throughout their retirement.


3. Unfortunately, her parents had failed to adopt a savings ethic and they had relied optimistically on their inheritances to generate their own retirement income.


4. The 3rd generation children (herself included) failed to comprehend the importance of generating an income and as a result were unable to adopt a savings plan or meet their own costs.


Time to start again.

China Inc. On Huge Foreign Buying Spree


Thursday, March 19, 2009 9:05 AM


By: Dan Weil Article Font Size


China’s companies are fast finding ways to spend, snapping up raw materials across the globe while those assets are cheap.


Chinese companies have been have been gulping down tens of billions of dollars worth of key assets in countries as varied as Iran, Brazil, Russia, Venezuela, Australia and France, the Washington Post reports.


Chinese companies poured $16.3 billion into foreign assets during January and February. If that pace continues, total overseas acquisitions could almost double last year’s total of $52 billion.


The assets are available at bargain-basement prices thanks to the financial crisis. As a result, China has garnered oil, minerals, metals, and other strategic natural resources necessary to sustain its economic expansion.


“That China started investing or acquiring some overseas mineral resources companies with relatively low prices during the global economic crisis is quite a normal practice,” Xu Xiangchun, consulting director for research firm Mysteel.com, tells The Post.


“Japan did the same thing in its prime development period too.”


It’s an early sign that China Inc. is gearing up for the next big surge of growth. Chinese demand for iron ore, food, and oil drove up the costs of those commodities at the tail end of the last boom.


As the U.S. and Europe continue to slide commodities should fall, but Chinese buying is buoying commodities instead, creating global stagflation. Western consumers have less money, but prices rise anyway.


The massive size of China’s purchases has swayed energy markets. It also has sparked concern that China will hoard commodities, lifting their prices and making them unavailable to other countries, including the United States.


Investment guru Marc Faber says China’s strength makes its stock market a buy, despite its economic slowdown.


“I would use weakness in Chinese equities to buy,” he told Bloomberg TV.