...with basing your economy (which is, inter alia, the bulwark for social order) on exports that compete chiefly on price is margin pressure. This would not be as much of an issue if China had a reputation as a vibrant, highly adaptable economy where price signals commanded markets.
Western Profits Wilt On China's Surging Wages
Earnings per share would fall 72pc for Jones Apparel, 50pc for
Maidenform Brands and Dollar Tree, 42pc for Macy's, 39pc for Target,
and 20pc for Polo Ralph Lauren. Reliance on Chinese plants is suddenly
proving double-edged. "We conclude that labour and transportation cost
pressures are a major concern for executives that may be
under-appreciated by investors," it said.
The US industrial giant General Electric raised eyebrows in May with
plans to shift production of its hybrid water heater from China back
to Kentucky next year after securing lower wages from US workers. The
company cited the narrowing pay gap, lower transport costs, and
shorter delivery times.
China's manufacturing wages have vaulted from around $1,000 annually
10 years ago, to $3,900 last year. Pay in the industrial hubs of the
Pearl River and Yangtze River deltas are much higher and likely to
rise further after a wave of industrial disputes at Foxconn, Honda,
Toyota, and Omron.
Bruce Rockowitz, head of the pan-Asian logistics group Li & Fung, said
cost pressures are rippling through the region. "It's not just China
going up: its everywhere," he said.
It is unclear whether this will drive up inflation for imported goods
in the West, reversing the benign phase of globalisation seen over the
last fifteen years, or whether multinationals will adjust to
constrained demand in the US, Europe, and Japan by slashing margins,
or a mixture of the two.
Credit Suisse's survey of executives found that 55pc of foreign firms
in China could relocate plant to Bangladesh, Vietnam, Indonesia or
other low-cost regions relatively easily, though it would be costly.
There are winners too, such as Yum Brands poised to reap the harvest
from rising Chinese consumption.
The changing landscape has major implications for Chinese exporters,
with an average profit margin of just 3pc. High-tech companies in wind
power, solar, and transmission equipment that have recently broken
into world markets will face stiffer headwinds. The Shanghai Composite
Index of Chinese equities has been lagging all year on fears of a
profit squeeze. The bourse is down 20pc since last November.
The erosion of export margins may explain why Beijing is still
dragging its feet on a revaluation of the yuan, despite ever louder
calls for retaliatory sanctions in Washington. China's currency has
fallen slightly on a trade weighted-basis since the dollar-peg was
replaced in May by a crawling band, a clear sign that the authorities
are worried that the economy is cooling too fast. Beijing has tried
cool the property boom with credit curbs but it is hard to use such
tools in a surgical fashion without collateral damage. The growth of
factory output ground to a halt in July, on a month-on-month basis.
Thursday, August 19, 2010
QE2
...a continuing saga.
The claims print this a.m. coupled with the above chart is leading players to believe more Quantitative Easing is imminent.
Unfortunately, the effects they think QE will have will not come to fruition. Again, these are asset swaps between instruments of varying maturities and will not have the desired effect on Aggregate Demand.
The Fed has much less power than mainstream economists believe.
Only Fiscal policy will achieve the desired effects, but with the constant clamour from Deficit Hawks, the Goverment's role as "spender of last resort" appears weak.
The market of opinion
Both the professor in the below article and the leader of the Men of Newport Beach continue to battle over the hearts and minds of investors. The outcomes (wether stocks or bonds outperform) inure to their benefit.
By JEREMY SIEGEL AND JEREMY SCHWARTZ
Ten years ago we experienced the biggest bubble in U.S. stock market history—the Internet and technology mania that saw high-flying tech stocks selling at an excess of 100 times earnings. The aftermath was predictable: Most of these highfliers declined 80% or more, and the Nasdaq today sells at less than half the peak it reached a decade ago.
A similar bubble is expanding today that may have far more serious consequences for investors. It is in bonds, particularly U.S. Treasury bonds. Investors, disenchanted with the stock market, have been pouring money into bond funds, and Treasury bonds have been among their favorites. The Investment Company Institute reports that from January 2008 through June 2010, outflows from equity funds totaled $232 billion while bond funds have seen a massive $559 billion of inflows.
We believe what is happening today is the flip side of what happened in 2000. Just as investors were too enthusiastic then about the growth prospects in the economy, many investors today are far too pessimistic.
The rush into bonds has been so strong that last week the yield on 10-year Treasury Inflation-Protected Securities (TIPS) fell below 1%, where it remains today. This means that this bond, like its tech counterparts a decade ago, is currently selling at more than 100 times its projected payout.
Shorter-term Treasury bonds are yielding even less. The interest rate on standard noninflation-adjusted Treasury bonds due in four years has fallen to 1%, or 100 times its payout. Inflation-adjusted bonds for the next four years have a negative real yield. This means that the purchasing power of this investment will fall, even if all coupons paid on the bond are reinvested. To boot, investors must pay taxes at the highest marginal tax rate every year on the inflationary increase in the principal on inflation-protected bonds—even though that increase is not received as cash and will not be paid until the bond reaches maturity.
Today the purveyors of pessimism speak of the fierce headwinds against any economic recovery, particularly the slow deleveraging of the household sector. But the leveraging data they use is the face value of the debt, particularly the mortgage debt, while the market has already devalued much of that debt to pennies on the dollar.
This suggests that if the household sector owes what the market believes that debt is worth, then effective debt ratios are much lower. On the other hand, if households do repay most of that debt, then the financial sector will be able to write-up hundreds of billions of dollars in loans and mortgages that were marked down, resulting in extraordinary returns. In either scenario, we believe U.S. economic growth is likely to accelerate.
Furthermore, economists generally agree that the most important determinant for long-term economic growth is productivity, not consumer demand. Despite the subpar productivity growth reported for the last quarter, the latest year-over-year productivity growth of 3.9% is almost twice the long-term average. For the first two quarters of this year productivity growth, at over 6%, was the highest since the 1960s.
From our perspective, the safest bet for investors looking for income and inflation protection may not be bonds. Rather, stocks, particularly stocks paying high dividends, may offer investors a more attractive income and inflation protection than bonds over the coming decade.
By JEREMY SIEGEL AND JEREMY SCHWARTZ
Ten years ago we experienced the biggest bubble in U.S. stock market history—the Internet and technology mania that saw high-flying tech stocks selling at an excess of 100 times earnings. The aftermath was predictable: Most of these highfliers declined 80% or more, and the Nasdaq today sells at less than half the peak it reached a decade ago.
A similar bubble is expanding today that may have far more serious consequences for investors. It is in bonds, particularly U.S. Treasury bonds. Investors, disenchanted with the stock market, have been pouring money into bond funds, and Treasury bonds have been among their favorites. The Investment Company Institute reports that from January 2008 through June 2010, outflows from equity funds totaled $232 billion while bond funds have seen a massive $559 billion of inflows.
We believe what is happening today is the flip side of what happened in 2000. Just as investors were too enthusiastic then about the growth prospects in the economy, many investors today are far too pessimistic.
The rush into bonds has been so strong that last week the yield on 10-year Treasury Inflation-Protected Securities (TIPS) fell below 1%, where it remains today. This means that this bond, like its tech counterparts a decade ago, is currently selling at more than 100 times its projected payout.
Shorter-term Treasury bonds are yielding even less. The interest rate on standard noninflation-adjusted Treasury bonds due in four years has fallen to 1%, or 100 times its payout. Inflation-adjusted bonds for the next four years have a negative real yield. This means that the purchasing power of this investment will fall, even if all coupons paid on the bond are reinvested. To boot, investors must pay taxes at the highest marginal tax rate every year on the inflationary increase in the principal on inflation-protected bonds—even though that increase is not received as cash and will not be paid until the bond reaches maturity.
Today the purveyors of pessimism speak of the fierce headwinds against any economic recovery, particularly the slow deleveraging of the household sector. But the leveraging data they use is the face value of the debt, particularly the mortgage debt, while the market has already devalued much of that debt to pennies on the dollar.
This suggests that if the household sector owes what the market believes that debt is worth, then effective debt ratios are much lower. On the other hand, if households do repay most of that debt, then the financial sector will be able to write-up hundreds of billions of dollars in loans and mortgages that were marked down, resulting in extraordinary returns. In either scenario, we believe U.S. economic growth is likely to accelerate.
Furthermore, economists generally agree that the most important determinant for long-term economic growth is productivity, not consumer demand. Despite the subpar productivity growth reported for the last quarter, the latest year-over-year productivity growth of 3.9% is almost twice the long-term average. For the first two quarters of this year productivity growth, at over 6%, was the highest since the 1960s.
From our perspective, the safest bet for investors looking for income and inflation protection may not be bonds. Rather, stocks, particularly stocks paying high dividends, may offer investors a more attractive income and inflation protection than bonds over the coming decade.
Tuesday, August 17, 2010
Concentration of Power
"What do I care about law? Hain't I got the power?"
-Cornelius "Commodore" Vanderbilt
It is axiomatic that the fewer people who wield power (either coercive), the greater the liklihood violence (typically "legal" in the strict sense of the word) will be used as a tool of diplomacy.
I have been incessently studying the relationships between Church, State, society, and public order for some time now, and while I completely disagree with Niall Ferguson's delusions that the U.S. is headed for disaster, I certainly cannot be as sanguine about Europe, specifically Eastern Europe.
Democracy has had a very good run in that part of the world, and the mechanisms that should auto-correct the problem (such as the pendulum like swing of the U.S. election cycle) are showing signs of fracture.
If Nature "abhors" a vacuum, Power seeks it. Vanderbilt himself conducted a war in Nicaragua to protect his financial interests. There will be a new Holy Roman empire before there is the United Secular Europe envisioned my Monnet and his ilk.
-Cornelius "Commodore" Vanderbilt
It is axiomatic that the fewer people who wield power (either coercive), the greater the liklihood violence (typically "legal" in the strict sense of the word) will be used as a tool of diplomacy.
I have been incessently studying the relationships between Church, State, society, and public order for some time now, and while I completely disagree with Niall Ferguson's delusions that the U.S. is headed for disaster, I certainly cannot be as sanguine about Europe, specifically Eastern Europe.
Democracy has had a very good run in that part of the world, and the mechanisms that should auto-correct the problem (such as the pendulum like swing of the U.S. election cycle) are showing signs of fracture.
If Nature "abhors" a vacuum, Power seeks it. Vanderbilt himself conducted a war in Nicaragua to protect his financial interests. There will be a new Holy Roman empire before there is the United Secular Europe envisioned my Monnet and his ilk.
A wonderful example...
...of the misguided reasoning using false analogy (household debt on the micro level has NO applicability to Sovereign Currency Issuers such as the U.S.)
It seem every decline in the Stock Market and/or every increase in the price of gold causes a massive inflow of opinion regarding the iminent demise of the U.S. Hogwash. The real dangers are in Europe and Asia.
My comments in Italics.
"Ah, but we will tax the rich. The rich have enough money. They will simply stop earning.
Let’s get real. Here is what the government is likely to do. Once Washington realize that the dollar is at risk and that they can no longer finance their wars by borrowing abroad, the government will either levy a tax on private pensions on the grounds that the pensions have accumulated tax-deferred, or the government will require pension fund managers to purchase Treasury debt with our pensions. This will buy the government a bit more time while pension accounts are loaded up with worthless paper.
The U.S. does not "finance" anything by "borrowing" abroad. It has no need to "get" dollars from anywhere in order to spend them. Notice the assumptions required for this string of events and the associated timing. The dollar is "at risk" and immediately thereafter Treasuries are "worthless"?
The last Bush budget deficit (2008) was in the $400-500 billion range, about the size of the Chinese, Japanese, and OPEC trade surpluses with the US. Traditionally, these trade surpluses have been recycled to the US and finance the federal budget deficit. In 2009 and 2010 the federal deficit jumped to $1,400 billion, a back-to-back trillion dollar increase. There are not sufficient trade surpluses to finance a deficit this large. From where comes the money?
As above. There is no "financing" of the deficit. From where comes the money? What is "money" and who owns, creates, and spends the "money"?.
The answer is from individuals fleeing the stock market into “safe” Treasury bonds and from the bankster bailout, not so much the TARP money as the Federal Reserve’s exchange of bank reserves for questionable financial paper such as subprime derivatives. The banks used their excess reserves to purchase Treasury debt.
Marginal purchasers of Treasuries in the secondary market now "finance" operations of the Government? I have no idea what the author is talking about regarding bank reserves and subprime derivatives.These financing maneuvers are one-time tricks. Once people have fled stocks, that movement into Treasuries is over. The opposition to the bankster bailout likely precludes another. So where does the money come from the next time?
Money for what? Spending the Government's budget? It simply debits and credits accounts for that. The Government does not need to go to an ATM and "get" cash in order to spend it. It simply re-arrange numbers on spreadsheets. That's all.
The Treasury was able to unload a lot of debt thanks to “the Greek crisis,” which the New York banksters and hedge funds multiplied into “the euro crisis.” The financial press served as a financing arm for the US Treasury by creating panic about European debt and the euro. Central banks and individuals who had taken refuge from the dollar in euros were panicked out of their euros, and they rushed into dollars by purchasing US Treasury debt."
There were/are no problems in Europe? Is the Treasury "unloading" debt when marginal purchasers buy Treasuries in the secondary market? This article truly misapplies economic relationships and conflates time to horrible effect.
It seem every decline in the Stock Market and/or every increase in the price of gold causes a massive inflow of opinion regarding the iminent demise of the U.S. Hogwash. The real dangers are in Europe and Asia.
My comments in Italics.
"Ah, but we will tax the rich. The rich have enough money. They will simply stop earning.
Let’s get real. Here is what the government is likely to do. Once Washington realize that the dollar is at risk and that they can no longer finance their wars by borrowing abroad, the government will either levy a tax on private pensions on the grounds that the pensions have accumulated tax-deferred, or the government will require pension fund managers to purchase Treasury debt with our pensions. This will buy the government a bit more time while pension accounts are loaded up with worthless paper.
The U.S. does not "finance" anything by "borrowing" abroad. It has no need to "get" dollars from anywhere in order to spend them. Notice the assumptions required for this string of events and the associated timing. The dollar is "at risk" and immediately thereafter Treasuries are "worthless"?
The last Bush budget deficit (2008) was in the $400-500 billion range, about the size of the Chinese, Japanese, and OPEC trade surpluses with the US. Traditionally, these trade surpluses have been recycled to the US and finance the federal budget deficit. In 2009 and 2010 the federal deficit jumped to $1,400 billion, a back-to-back trillion dollar increase. There are not sufficient trade surpluses to finance a deficit this large. From where comes the money?
As above. There is no "financing" of the deficit. From where comes the money? What is "money" and who owns, creates, and spends the "money"?.
The answer is from individuals fleeing the stock market into “safe” Treasury bonds and from the bankster bailout, not so much the TARP money as the Federal Reserve’s exchange of bank reserves for questionable financial paper such as subprime derivatives. The banks used their excess reserves to purchase Treasury debt.
Marginal purchasers of Treasuries in the secondary market now "finance" operations of the Government? I have no idea what the author is talking about regarding bank reserves and subprime derivatives.These financing maneuvers are one-time tricks. Once people have fled stocks, that movement into Treasuries is over. The opposition to the bankster bailout likely precludes another. So where does the money come from the next time?
Money for what? Spending the Government's budget? It simply debits and credits accounts for that. The Government does not need to go to an ATM and "get" cash in order to spend it. It simply re-arrange numbers on spreadsheets. That's all.
The Treasury was able to unload a lot of debt thanks to “the Greek crisis,” which the New York banksters and hedge funds multiplied into “the euro crisis.” The financial press served as a financing arm for the US Treasury by creating panic about European debt and the euro. Central banks and individuals who had taken refuge from the dollar in euros were panicked out of their euros, and they rushed into dollars by purchasing US Treasury debt."
There were/are no problems in Europe? Is the Treasury "unloading" debt when marginal purchasers buy Treasuries in the secondary market? This article truly misapplies economic relationships and conflates time to horrible effect.
The Paper Dragon has confidence in the EU...
...and supporting export markets it deems to have good growth prospects.
The nation has been buying "quite a lot" of European bonds, said Yu Yongding, a former adviser to the People's Bank of China who was part of a foreign-policy advisory committee that visited France, Spain and Germany from June 20 to July 2. Japan's Ministry of Finance said Aug. 9 that China bought 1.73 trillion yen ($US20.3 billion) more Japanese debt than it sold in the first half of 2010, the fastest pace of purchases in at least five years.
"Diversification should be a basic principle," Yu, president of the China Society of World Economy, said in an interview last week, adding a "top-level Chinese central banker" told him to convey to European policy makers China's confidence in the region's economy and currency. "We didn't sell any European bonds or assets, instead we bought quite a lot."
The nation has been buying "quite a lot" of European bonds, said Yu Yongding, a former adviser to the People's Bank of China who was part of a foreign-policy advisory committee that visited France, Spain and Germany from June 20 to July 2. Japan's Ministry of Finance said Aug. 9 that China bought 1.73 trillion yen ($US20.3 billion) more Japanese debt than it sold in the first half of 2010, the fastest pace of purchases in at least five years.
"Diversification should be a basic principle," Yu, president of the China Society of World Economy, said in an interview last week, adding a "top-level Chinese central banker" told him to convey to European policy makers China's confidence in the region's economy and currency. "We didn't sell any European bonds or assets, instead we bought quite a lot."
Saturday, August 14, 2010
The loss of power...
...is simply unbearable to those who wield it. This reasoning is so shoddy (e.g. private accounts are not necessarily tied to stocks or any other paper asset) that there can be no other explanation other than a defacto leader of a historically government-enlargin party lashing out at the loss of power this measure would bring.
President Barack Obama said Republican proposals to have people invest Social Security benefits in private accounts would increase the U.S. budget deficit and put retirement money at risk to “the whims of Wall Street traders.”
In his weekly address on the radio and Internet, Obama marked the 75th anniversary of President Franklin Roosevelt’s signing of the Social Security Act, and said he would fight if Republicans try to convert the entitlement program to private investment accounts.
“I’d have thought, after being reminded how quickly the stock market can tumble, after seeing the wealth people worked a lifetime to earn wiped out in a matter of days, that no one would want to place bets with Social Security on Wall Street -- that everyone would understand why we need to be prudent about investing the retirement money of tens of millions of Americans,” he said.
President Barack Obama said Republican proposals to have people invest Social Security benefits in private accounts would increase the U.S. budget deficit and put retirement money at risk to “the whims of Wall Street traders.”
In his weekly address on the radio and Internet, Obama marked the 75th anniversary of President Franklin Roosevelt’s signing of the Social Security Act, and said he would fight if Republicans try to convert the entitlement program to private investment accounts.
“I’d have thought, after being reminded how quickly the stock market can tumble, after seeing the wealth people worked a lifetime to earn wiped out in a matter of days, that no one would want to place bets with Social Security on Wall Street -- that everyone would understand why we need to be prudent about investing the retirement money of tens of millions of Americans,” he said.
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