How China Sees the World

Thursday, March 11th, 2010

Source: The Economist, May 19, 2010 (hat tip: Atlantic Asset Management).

Tags: Asset Management, China, Economist, Hat Tip, World Source
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China PMI - canary in a coal mine?

Tuesday, March 2nd, 2010

China’s PMI numbers for February were released yesterday and received surprisingly little media attention. Although I am usually not keen to slice and dice single-month statistics too intensely, the latest suite of manufacturing indices does seem to warrant more than cursory attention.

Firstly, a summary of the numbers as provided by the China Federation of Logistics & Purchasing (CFLP) and reported by the Li & Fung Group.

PMI Report on China Manufacturing: February 2010

The rate of expansion of China’s manufacturing sector that accounts for more than 50% of the economy has moderated sharply, with the overall PMI falling to 52. Just on its own (excluding the non-manufacturing sector) it seems as if China’s year-on-year economic growth in the second quarter could slow to 10% and even less.

The following graph provides the same information, but over the longer term.

The manufacturing industry has started to shed excess inventories as stocks of major inputs indicate contraction. This does not bode well for metal prices in at least the short term.

New orders are still expanding but at a significantly reduced pace. However, new export orders fell sharply from 53,2 to 50,3, indicating only marginal expansion. New orders and new export orders lead the Economist Metals Index by approximately one month. The drop in especially new export orders does not augur well for metal prices and downside pressure can be expected.

The roll-over in new export orders is particularly evident and the question is whether this could indicate a trend change.

The drop in both new orders and stocks of major inputs perhaps explains the weakness in the Baltic Dry Index. Imports of raw materials such as ores and metals have probably dropped significantly.

A major question is how the slowdown in China is going to affect the rest of the global economy. The contraction in China’s PMI for imports indicates that the US GDP-weighted PMI for exports could be negatively influenced in especially the second quarter of this year.

Likewise the US GDP-weighted PMI for imports could be under pressure …

The further austerity measures put in place recently by the Chinese authorities still need to rub off on China’s economy. As such the outlook for commodities, the US and global economy has possibly darkened somewhat.

Elsewhere, the PMIs of India and South Korea were also published, with both economies expanding at the fastest pace in nearly two years. There are already calls for India to suspend the stimulatory measures in order to cool the economy.

One swallow does not make a summer, but I will be monitoring the Chinese situation closely to try to gauge the possible impact of any cooling on the developed economies.

Note: The graphs in this post were provided by Plexus Asset Management (based on data from CFLP, ISM, I-Net Bridge and Dismal Scientist.

Tags: Baltic Dry Index, BRIC, Canary In A Coal Mine, China, China Manufacturing, Contraction, Cursory Attention, Downside, Economic Growth, Economist, Economy China, Emerging Markets, Excess Inventories, Export Orders, Global Economy, Manufacturing Industry, Manufacturing Sector, Media Attention, Metals Index, Raw Materials, Second Quarter, Slowdown, Us Gdp
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GDP - What it Really Looks Like

Wednesday, February 3rd, 2010

By now we all know that a swing in inventories flattered the growth in U.S. Q4 GDP. The chart below, courtesy of Goldman’s chief US economist Jan Hatzius (via Clusterstock - Chart of the Day), shows the “real” story. It illustrates that the growth in real final demand - basically GDP excluding inventory restocking - is flat and doesn’t live up to past recoveries at all.

“There will be lingering headwinds to growth from the financial meltdown, such as ongoing credit restraint and an upward drift in the personal savings rate. The U.S. economic recovery should be sustained, but it will fall far short of what would normally occur in the wake of a very deep recession,” said BCA Research.

Without stronger demand growth, a V-shaped recovery is not on the cards and the unemployment rate will not start heading south.

Tags: Cards, Drift, Economic Recovery, Economist, Financial Meltdown, GDP, Gold, Goldman, Heading South, Inventories, Personal Savings Rate, Q4 Gdp, Recession, Swing, Unemployment Rate
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Jeff Rubin: Riding Hard and Fast on Energy

Tuesday, January 19th, 2010

An excellent talk by Jeff Rubin (h/t Paul Kedrosky).

Rooster Cogburn: Well, sister, the time has come for me to ride hard and fast.
- True Grit (1969)

Economist Jeff Rubin talking entertainingly and tough about energy in his inimitable presentation style combining Foster Brooks and John Wayne.

Hat Tip: Paul Kedrosky, January 17, 2009

Tags: Advertisement, Economist, Foster Brooks, Hat Tip, Jeff Rubin, John Paul, John Wayne, Paul Kedrosky, Presentation Style, Rooster Cogburn, T Paul, True Grit
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Emerging Markets in 2010

Sunday, January 10th, 2010

This article is a guest contribution by Frank Holmes, CEO, US Global Investors (www.usfunds.com).

January 05, 2010

A recent story in The Economist summarizes the resilient opportunity in global emerging markets, which is part of the reason why we believe so strongly in the long-term potential of this sector.

2009 was expected to be a very rough year for emerging markets, due to the reliance on exports to developed markets. And while some countries and regions did take it on the chin, the overall outcome was not nearly as bad as anticipated. The disaster of 1997-98 did not repeat itself.

And this year, GDP in developing countries as a whole is forecast by the International Monetary Fund to grow about 5 percent (see chart) and developed countries at less than 2 percent.

A few of the key points from The Economist:

• Goldman Sachs estimates that the BRIC countries have been responsible for nearly half of global economic growth since 2007.
• In 2009 the stock markets in the largest emerging-market countries made up for all of their 2008 losses.
• The Institute for International Finance sees a doubling of capital inflows into emerging markets in 2010 to $672 billion.
• Belief in capitalism endured despite the weaker conditions. Nearly 90 percent of Chinese were “satisfied with national conditions” in 2009, compared to less than 40 percent of Americans, according to the Pew Global Attitude Project.

Here’s a link to the full story in The Economist.

Investments in natural resources, emerging markets and infrastructure are subject to distinct risks as described in the funds’ prospectus. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Tags: Belief, BRIC, Bric Countries, Capital Inflows, capitalism, Developed Countries, Developing Countries, Economist, Emerging Market Countries, Emerging Markets, Frank Holmes, GDP, Global Economic Growth, Gold, Goldman Sachs, International Finance, International Monetary Fund, Losses, Natural Resources, Pew Global Attitude, Prospectus, Reliance, Stock Markets, Us Global Investors
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Steve Keen: How do we pay for all this debt?

Friday, January 8th, 2010

Speaking at the Per Capita annual conference, Policy Exchange 09, in Canberra, Australian economist Steve Keen looks at the rising national debts in Australia and the United States, paying particular attention to their historical relationship with recessions, growth and unemployment. He suggests that the levels of debt in both countries have reached a point which virtually guarantees a very difficult economic road ahead in the long term.

The presentation runs for 31 minutes, but makes for excellent viewing.

Source: The Monthly, November 2009 (hat tip: The Big Picture).

Tags: Australia, Big Picture, Canberra, Countries, Economist, Hat Tip, National Debts, Policy Exchange, Presentation, Recessions, Relationship, Steve Keen, Unemployment, United States
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Ed Hyman and Francois Trahan: Outlook/Forecast 2010

Thursday, January 7th, 2010

The transcript of Consuelo Mack’s recent interview with Ed Hyman, Wall Street’s number one ranked economist for an unprecedented thirty years running, and Francois Trahan, top ranked portfolio strategist, has just been published. Click here for the text. This is must-read material.

In case you missed the video clip, click here for the original post.

Tags: Consuelo Mack, Economist, Ed Hyman, Francois Trahan, Outlook, Portfolio Strategist, Running, Thirty Years, Video Clip, Wall Street
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Ed Hyman & Francois Trahan – forecasts for 2010 (WealthTrack)

Sunday, December 20th, 2009

This week Consuelo Mack is joined on WealthTrack by two investment champions from independent research firm, ISI Group. Ed Hyman, Wall Street’s number one ranked economist for an unprecedented thirty years running, and top ranked portfolio strategist, Francois Trahan, share their 2010 forecasts.

ISI believes the economy is going to surprise on the upside next year. Hyman tells us why, where and how much. Trahan hit the bull’s-eye with his forecasts of a very strong and enduring rally this year. He has much more modest expectations for 2010 and shares his predictions and strategy to make money regardless.

Note: The transcript of this interview is not available yet, but will be posted here as soon as it arrives.

Source: Wealthtrack, December 18, 2009.

Tags: Advertisement, Economist, Economy, Ed Hyman, Francois Trahan, Independent Research Firm, Investment, Investment Firm, Investment Research, Isi Group, Mack, Money, Portfolio Strategist, Rally, Shares, Thirty Years, Wall Street, Wealthtrack
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Ian Shepherdson: Deleveraging will be painful

Thursday, December 3rd, 2009

Ian Shepherdson, of High Frequency Economics, says that deleveraging the US economy will be rather onerous and take quite some time to accomplish. Bad assets on personal and institutional balance sheets are like a ball and chain on the economy’s ankles. The Fed is not likely to touch interest rates until 2011, he estimates, writes New York Times columnist, Gretchen Morgensen.

The fallout from deleveraging has put small businesses in jeopardy. This is a revealing look at what continues to be a largely untold story, because Wall Street tends to focus on large companies. In the shadows of the economy, small businesses, important engines of growth, are suffering from the chokehold on bank credit which places them “squarely on the brink.”

The message amid this gloom, he says, is that the Fed isn’t likely to raise interest rates anytime soon. In fact, he doesn’t anticipate an increase in rates until the spring of 2011.

“I WOULD be astonished if they raised rates in the heart of the credit contraction storm,” Mr. Shepherdson says. “The credit contraction will last for a couple of years and if the Fed is interested in offsetting it, they will have to buy assets through next year.”

Deflating an asset bubble is never fun, and this particular specimen is one for the record books. The binge may have been a blast, but the purge, alas, sure is painful.

This is without doubt a deflationary outlook for the economy, from Shepherdson, an economist whose forecasts have been right more than wrong. He calls for 2% GDP growth through next year, roughly half of the market’s expectation of 4-5%.

Get Ready for Half a Recovery, New York Times, November 28, 2009.

Tags: Ankles, Balance Sheets, Binge, Brink, Contraction, Economist, Fallout, GDP Growth, Gloom, Gretchen, High Frequency Economics, Ian Shepherdson, interest rates, Jeopardy, New York Times, New York Times Columnist, Purge, Quite Some Time, Record Books, Small Businesses, Specimen, Untold Story, Wall Street, York Times Columnist
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Will Emerging Market Outperformance Last?

Tuesday, November 24th, 2009

The MSCI Emerging Markets Index has notched up a massive 72.3% gain for the year to date, and an even more impressive 101.4% since the March 9 lows. Although emerging markets were the clear leaders during the initial months of the recovery, the MSCI World Index has subsequently done some catching up but still lags with gains of 26.7% and 69.3% for the two measurement periods.

The chart below shows the performance of the MSCI Emerging Markets Index relative to the Dow Jones World Index. Needless to say, an upwardly sloping line means outperformance by developing stock markets.

Source: StockCharts.com

Should emerging markets be renamed “emerged” markets? Let’s consider two graphs to gain a better understanding of one of the key drivers of emerging stock markets.

As shown below, the Emerging Markets Index is primarily driven by commodity prices and in particular by metal prices as measured by the Economist Metals Price Index. Considering the historical relationship, emerging-market equities seem to be fairly priced given the level of metal prices.

Source: Plexus Asset Management (based on data from I-Net Bridge).

All other things being equal, the outlook for emerging markets, or at least the resource-related ones, appears positive given the favorable prospects for metal prices on the back of improving global industrial production and stronger global economic growth.

What is important is that the ratio of the Emerging Markets Index and World Index is also driven by commodity prices and specifically metal prices. As shown below, the relative risk of investing in emerging-market equities has increased as the ratio has outrun metal prices.

Source: Plexus Asset Management (based on data from I-Net Bridge).

Longer term I have little doubt that emerging markets will outperform their mature peers. However, over the next few months metal prices would need to rise quite substantially to ensure further outperformance by the Emerging Markets Index. At best, I would expect emerging markets to maintain the current relative levels against the MSCI Global Index should metal prices move sideways.

Tags: Commodities, Commodity Prices, Dow Jones, Economist, Emerging Market, Emerging Markets, Emerging Stock Markets, Favorable Prospects, Global Economic Growth, Graphs, Lows, Measurement, Metals, Msci Emerging Markets, Msci Emerging Markets Index, Msci World Index, Peers, Plexus Asset Management, Price Index, Relative Risk, Stockcharts, Year To Date
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Joseph Stiglitz Interview (New Yorker Magazine)

Thursday, October 1st, 2009

James Surowiecki spoke with Professor Joseph Stiglitz, the Nobel Prize-winning economist, about the mishandling of the financial crisis, the relationship between government and markets, and the future of capitalism around the world. They met last month at Stiglitz’s office at Columbia University.

Source: James Surowiecki, The NewYorker, September 28, 2009.

Tags: capitalism, Columbia University, Economist, Financial Crisis, Interview Magazine, James Surowiecki, Joseph Stiglitz, New Yorker Magazine, Newyorker, Nobel Prize, Professor Joseph, Relationship, University Source
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Jan Hatzius on US Growth, Rates, and Economists

Monday, September 14th, 2009

This post features a three-part video interview with Jan Hatzius, chief US economist for Goldman Sachs, by Aline van Duyn, FT’s US Markets Editor. Whether you like Goldman or not, Hatzius is worthwhile viewing material.

Part 1: Hatzius on US growth
Hatzius expects “the second half of 2009 … to be quite strong” but “in 2010 we’ll probably see some renewed deceleration in growth”. He sees temporary measures including the inventory cycle and the fiscal stimulus as being responsible for “growth in the second half of 2009, but … by late 2010 that number is going to be somewhere around zero”.

Click here or on the image below to view Part 1 of the video clip.

Part 2: Hatzius on US rates
Hatzius sees “no rate hikes … through the end of 2010″. He points to high unemployment and low core inflation as “a strong statement … from the Fed’s perspective that low interest rates are going to be warranted”.

Click here or on the image below to view Part 2.

Part 3: Hatzius on economists
Hatzuis points to humility and being “realistic in one’s ability to predict the future … as an important part” of his job. He says “the biggest problems have been seen by people who rely on more mechanical models” including “large scale econometric models of the business cycle, because it’s harder to adjust those types of forecasting models for judgment”. “More electric forecasters have had perhaps a somewhat easier time …. Using a judicious mix of estimating models, looking at numbers and relying, at least to some extent, on more anecdotal indicators that are a little harder to… download in a time series form.”

Click here or on the image below to view Part 3.

Source: Financial Times, September 11, 2009.

Tags: Aline, Business Cycle, Core Inflation, Deceleration, Econometric Models, Economist, Economists, Financial Times, Fiscal Stimulus, Forecasters, Gold, Goldman Sachs, Humility, Inventory Cycle, Low Interest Rates, Mechanical Models, Rate Hikes, Source Financial, Time Series, Van Duyn, Video Interview
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