-- Posted Wednesday, 23 May 2007 | Digg This Article
London, England
Wednesday, May 23, 2007
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*** The red hot lava of cash and credit…Mauritania up there with Shenzhen and Shanghai…
*** Emerging market investors having the time of their lives…the petrified money of the proletariat…
*** A quick rebuttal…the press and the lonely candidate…and more!
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The volcano of hot, easy, fast money belches on.
As you recall, dear reader, there are two major and contradictory trends underway.
At the top, red-hot money spews out of central banks like sparks out of a volcano. From the Vesuvius at the central bank of China, the money supply continues to rise twice as fast as GDP. In India, M-3, the usual measure of money supply, grows at 20% per year. And from the Krakatoa of Japan (as well as its alpine peers in Switzerland) borrowers can take out as much of the hot rocks as they want - at practically zero interest rates. And in the United States…Americans have their own molten Mt. St. Helens…spewing approximately $850 billion of current account deficit each year into the world financial system.
The hot ash and smoke goes up into the air…is caught by the winds and airstreams…and floats down in often curious and remarkable places. We see, for example, that the Dow and the S&P rise steadily. But at the art houses, the rise is spectacular; as recounted here just yesterday…some artists' works have gone up 300% in the last seven months. Private jets are getting a lift too…they're in such demand that it takes two years to get delivery of a popular model - even when you pay in cash. And who would have believed it, but houses in Latvia have gone up 67% in the last 12 months.
All this white-hot money…the red hot lava of cash and credit…warms hearts and hands all over the planet. House prices doubled in Moscow last year. Even the price of skimmed-milk powder has gone up 60% so far this year. And the Kuala Lumpur stock index has gained 24%.
"No surprise to see Shenzhen and Shanghai kicking butt," writes colleague Dan Denning from Australia. "But who would have guessed Mauritanian bonds would do so well?
"Also, I was trying to do a little back-of-the-envelope math on the kind of percentage rise in global markets that may be in store. There are a couple of sources of new supply. You have official forex reserves. You have continued petro dollar surpluses from OPEC and Russia. And you have government surpluses (mostly in commodity producing countries).
"So let's be conservative and say in a global melt-up scenario you could see, say $5 trillion in additional money invested into the equity markets. Total global market cap, according to WFE, is just over $50 trillion. Well that would mean just a modest 10% rise in total world equity market cap if sovereign wealth funds and forex reserves make it into the equity market. But I think it will probably be much larger than that…."
(For more from Dan Denning, see The Daily Reckoning Australia
Everywhere we look, we see happy faces. Emerging market investors are having the time of their lives. In the last three years they've put $1.5 trillion into these treacherous markets - twice as much as the previous three years. Now, they congratulate themselves. Prices have gone up, they note, apparently not realizing that it's their own money that has pushed them up.
But while the world's moneyed classes celebrate their own good sense and good fortune, down below all is not so well. By the time the lava filters down to the American and British proletariat it has grown cold and hard.
"Consumers pinched by rising gas prices," says a CBSMarketwatch headline. Analysts are predicting gas prices of $4 a gallon. Consumers are wondering where they will get the money.
"Governors want action," comes another headline. Hahaha…what sort of action do the governors expect? Investigate the oil companies? Subsidize the refineries? Control gas prices?
But don't worry, dear reader; there is no problem that politicians can't make worse. Just look at what they do to the deficit numbers, foreign investments, consumer price index, trade imbalances, and many other numbers that they think the average American has no intention of closely examining:
No-So Funny Numbers
Stay tuned…
More news:
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Addison Wiggin, reporting from the land of blue crabs and Natty Boh…
"'I fully expect the pound sterling to get back to the lofty $2 level and beyond,' commented Chuck Butler this morning from the EverBank trading desk.
"Yesterday, the Bank of England quietly released minutes from its meeting. It revealed a unanimous decision to up interest rates, leaving most speculators to believe that another hike is imminent.
"The bank convenes again in June… be ready for the $2 pound… and more."
For more insights into today's markets, see
The 5 Min. Forecast
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And more thoughts…
*** A Dear Reader complains:
"Bill Bonner's comments concerning the Chinese people, cited in the May 11th 5 Minute Forecast, are nothing short of disgusting. People coming out of a decades-long famine only to find themselves merely dirt-poor tend to be just a bit under-educated, through absolutely no fault of their own (not to mention the lives of millions of them torn apart by Japan's rape of Manchuria and elsewhere; nothing held against present-day Japan - that was then). Such people tend to grasp at straws and desperately seek even a particle of hope, and they tend to be easily brainwashed THROUGH NO FAULT OF THEIR OWN.
"At least at Mao's death (finally) there began an - altogether too slow - turning away from dumb political theory.
"So can you hear that I am certainly no China apologist? Supercilious and repulsive - that's what your words were, Mr. Bonner. 'Attaway to give your fellow man a break. Eating dirt and so literally dirt-poor, that's what millions and millions of "these people" were. Do you get it? Mr. Bonner, I have always given attention to your words, and I am hoping that you will return the favor."
*** Allow us a rebuttal: The Chinese are idiots.
But, just to show you that we are equal opportunity bigots - Americans are even bigger idiots.
When it comes to capitalism, the Chinese are poor babes in the woods - making the usual dumb mistakes. But Americans make a more sophisticated, and more damaging error. The Chinese speculate wildly…and over-build. But beneath the mistakes is a very dynamic economy based on savings and production. Americans, meanwhile, run themselves into debt…and lose their ability to compete.
"They sweat, we think." Remember that self-serving vanity? The idea behind it was that the modern economy now rewards financing and innovation much more than actual manufacturing. So let the Chinese make things; we'll use our brains on Wall Street.
Well, today's news brings word that this year marks a milestone. The core requirement for a financial analyst, worldwide, is the Chartered Financial Analyst exam. This year, 45,400 Americans signed up to take the test. But, for the first time ever, more Asians took the test than Americans - 52,900 of them. Soon, Asians will dominate the financial industry too.
Americans can start sweating that one.
*** Does the possibility of an overheating Asian economy mean that you shouldn't invest in the Far East? Not by a long shot - it's just a matter of knowing where to look. Join us at this year's Agora Financial Investment Symposium in Vancouver to hear from some of the world's leading experts in global investing. Click here for all the details - and the sooner you secure your spot, the better. This event is sure to sell out:
AF Investment Symposium, July 24-27, Vancouver, B.C.
And if a more hand's on approach to learning about the ins and outs of global investing appeals to you, join a select group of readers on a trip to one of the most promising countries in the region: India.
The Asian Tiger Discovery Tour to India, led by our own Addison Wiggin and Mt. Vernon Research's Karim Rahemtulla, takes a close look at India's role in the new Asian era and at the specific investments you should make. This unique journey will take you through the major business hubs in India - Mumbai, Hyderabad, Bangalore, Delhi…and more.
If you are interested, act now - there are only 20 spots left on this not-to-miss 16-day tour of India. Find out more here:
The Asian Tiger Discovery Tour - October 9-25
*** We are resolutely uninterested in politics, here at The Daily Reckoning. But that doesn't mean that politics isn't interested in us. Politicians want to tax every dollar we earn or spend…and control everything we do - including our whereabouts.
So, the new Immigration Bill caught our eye - partly because we are immigrants (to Europe)…and partly because the new bill threatens to cost over $2 trillion, according to the Heritage Foundation.
Writes colleague Lila Rajiva (also an immigrant - to the United States):
"The 380-page bill, fruit of three months of high-sounding wrangling, gives the immediate right to work (the four year renewable Z visa), to some 12-20 million illegal workers who got into the United States before January 1, 2007. Heads of household would have to return to their home countries within eight years, and they would be guaranteed the right to return. Applicants would also have to cough up a $5,000 penalty.
"Confirmed. This administration's math is delusional, its laws are contradictory, and now we also know its alphabet is backward: 'Z visa' is followed by 'Y', a guest worker program which has some merit to it, in so far as it discounts family ties in favor of merit - good education and good skill sets.
"Does anyone think migrant workers paid less than minimum wage are going to be able to cough up $5000? And even if they could, would it matter? Because, we already know where this will end - with corrupt border patrolmen hand-in-glove with criminals who will run a racket built on it; with a whole industry of racketeers built on that…as there already is on fake documentation; with the innocent in trouble and the guilty off the hook.
"And then, finally, when the abuse stinks to heaven, there will be even more high-sounding wrangling in government (all at taxpayer expense), and everyone will decide the simplest thing is to cancel the whole thing and go home…until they come back with the next way to drive a nail into the coffin of the U.S. economy."
*** Our old friend Ron Paul is the only person with any backbone or brains in the race for President of the United States. He alone among the candidates voted against giving George Bush a free hand to go to war in Iraq. He alone among the candidates got it right about why we are having an ongoing problem with terrorism; we've been meddling with the governments of their countries for decades. And Ron Paul is the only one who seems to have read the Constitution. The press will bury him quickly.
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The Daily Reckoning PRESENTS: Asia's ancient Silk Road was the dominant trade route for a thousand years, embracing almost every national and ethnic group from Arabia to Japan, before it died out in the 16th century. Now, this fabled Silk Road is back - at least metaphorically. Chris Mayer explores…
ASIA'S NEW SILK ROAD
by Chris Mayer
"To follow the Silk Road is to follow a ghost. It flows through the heart of Asia, but it has officially vanished…"
- Colin Thubron, Shadow of the Silk Road
In importance and influence, the new Silk Road may stand to rival its namesake. As with the old Silk Road, the new one will make some investors rich.
The old Silk Road was not even a road in the normal sense of that term. It was, as travel writer Colin Thubron describes it, "a shifting fretwork of arteries and veins, laid to the Mediterranean." Thubron recently covered 7,000 miles in eight months following the old trails of this fabled trade route.
The Silk Road ended, or began, in Antioch, Turkey. It stretched all the way to old Changan, or what is today known as Xian, in China. For a long time, it had no name. A German geographer coined the term "Silk Road" only in the 19th century.
Yet traffic along the Silk Road goes way back into the slipstream of humanity's past. Thubron writes: "Chinese silk from 1500 B.C. has turned up in tombs in north Afghanistan, and strands were discovered twisted into the hair of a 10th-century B.C. Egyptian mummy." Archeologists found silk dating from 1100 B.C. lying in the grave of a prince in Germany. The stuff got around.
The Silk Road carried much more than just silk across its rugged landscape. From China, the West got jade, lacquer, ceramics, the first roses, azaleas. Also, oranges, peaches, mulberries, apricots and rhubarb. Coming from the West to the East came glass, gold, silver, Indian spices, gems and linen. Also, fig trees, flax, pomegranates, jasmine, dates and olives.
Back and forth went vegetables, fruits, furniture, artifacts of all kinds, musical instruments - even slaves. Even weapons. The crossbow, a Chinese invention, made its way across the old Silk Road to arm the Norman and Capetian kings in their battle with the dreaded English longbow at Crecy (in which they were famously defeated).
The old Silk Road seemed to embrace almost every national and ethnic group from Arabia to Japan - Persians, Turks, Sogdians, Syrians, Indians and many others. (Often called the greatest traders of the Silk Road, the Sogdians were an Iranian people. The Chinese believed them born traders. Myth held that "their mothers fed them sugar to honey their voices, and their baby palms were daubed with paste to attract profitable things," writes Thubron.)
None of them made the journey the whole way through. No Roman ever walked the streets of Xian or visited the tomb of the Yellow Emperor. No Chinese trader ever gazed upon the pillars of imperial Rome or dipped his toes in the Mediterranean Sea. Or perhaps it would be safer to say such journeys must have been extremely rare.
Instead, the Silk Road was more like a long relay race. Only luxury items could generally make the whole journey - the jade and the silk, for example - or perhaps incidental items people carried with them, like a flute or an old trader's pipe. It was simply too expensive to ship most things the whole distance, except those things people were willing to pay a heavy price for.
Still, the old Silk Road was the dominant trade route in human history for over a thousand years. Its importance only diminished sometime in the 16th century, when ships replaced the harrowing journey overland and transported goods much cheaper and faster.
There is a Silk Road revival, though, at least metaphorically. The old trading posts worked in storied cities such as Samarkand, Kashgar and Meshed. The new Silk Road weaves through Dubai, Riyadh, through Mumbai and Chennai in India, to Kuala Lumpur, Singapore, Hong Kong - even as far as Tokyo.
Like the old Silk Road, the new one is not a road either. But it is a useful metaphor to describe the surge in trade between the Middle East and Asia. Between 1995-2005, trade between these two regions increased fourfold, according to McKinsey & Co. Projections call for trade between the six members of the Gulf Cooperation Council (GCC) - Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates - and East Asia to explode from $59 billion to $300-500 billion by 2020.
Why is this happening? Short answer: The GCC has cash and Asia has huge investment needs.
Rapidly growing Asian economies have, at least in part, driven demand for oil. Higher oil prices in recent years mean overflowing coffers in the GCC. They need to put that treasure to work. More and more, it is winding up in Asia. McKinsey reports: "Recent interviews with more than a dozen Gulf investors who collectively control more than $300 billion in assets revealed that they are set to shift their portfolio asset allocation toward Asia by 10-30%."
It's a feedback loop. More growth in Asia means more demand for oil - with more and more coming from the Middle East. By 2030, estimates put half of China's oil imports coming from the Middle East. Asia - including India - could account for half the increase in the world's demand for oil. That means more cash for the GCC and more investment in Asia - in real estate development, in banking, in communications, in infrastructure. And on it goes.
In the meantime, Chinese, Indian and other Asian companies are active in the Middle East. They bring low-cost consumer goods (Dubai is already home to Chinamexmart, which McKinsey describes as a "mini-city of Chinese companies distributing their products throughout the region"). Asian companies also bid on major construction projects in the Middle East.
Another interesting barometer of economic activity: As late as 2000, there were only seven daily flights between the Gulf states and China. Today, there are more than 48.
Thubron notes on his trip how the influence of the old Silk Road flowed into even remote hamlets. "The nervous system of the Silk Road radiated into the poorest extremities," he writes. "It traversed minor ecological divides, as well as empires." Likewise, this new surging trade between these regions will have ripple effects in the patterns of world trade and in financial markets everywhere.
Owning the assets the new Silk Road demands and investing in businesses with ties to the region should prove profitable. Our own Nabors Industries (NYSE:NBR) is active in the Middle East and also has a joint venture with a Chinese rig manufacturer. We also own several companies with valuable oil and gas properties - such as Canadian Natural Resources (NYSE:CNQ), an indirect beneficiary of Asian consumption. Finally, ABB (NYSE:ABB) is another way we've invested in the global boom in infrastructure.
Such feverish growth in trade will have its pauses. Even the hummingbird must sleep. But remember, the old Silk Road dominated trade for a thousand years and made many a fortune. Perhaps the new Silk Road will do the same.
Regards,
Chris Mayer
for The Daily Reckoning
P.S. In July, I'll be speaking at the Agora Financial Investment Symposium, where the theme is centered on crisis and opportunity in the Far East. You won't want to miss out on this event, which is sure to sell out. Click here for all the details:
AF Investment Symposium - July 24-27, Vancouver B.C.
Editor's Note: Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer's essays have appeared in a wide variety of publications, from the Mises.org Daily Article series to here in The Daily Reckoning. He is the editor of Mayer's Special Situations and Capital and Crisis - formerly the Fleet Street Letter.
Read Chris' latest Capital & Crisis report here:
Don't Depend on Popular Stocks
-- Posted Wednesday, 23 May 2007 | Digg This Article
