China’s economy grew at a 9 % rate in 2008. It is one of the best growth figures in that year. This is despite the mortgage crisis hitting the US and by contagion, the rest of the world. Also, this has come after a decade long of double digit growth.
All this growth has increased China’s demand for commodities. In 2008, China consumed about 7.8 million barrels of oil per day. In the same year, the country consumed 3 billion short tons of coal, representing about 40 % of the world total. As for steel, it produced 37 % of the world total and used 35.5 %. In copper, China accounts for 29 % of the global usage in 2008.
To ensure a steady supply, China is embarking on a worldwide acquisition of natural resource based companies. In February this year, Chinalco agreed to invest US$19.5 bil in Anglo-Australian mining giant Rio Tinto Group. However, the investment was rejected by Rio Tinto. In June, Minmetals did successfully acquired OZ Minerals for US$1.4 bil. The prizes are a copper and gold mine in Laos and two zinc mines in Australia.
Sinopec had, in June, acquired Addax Petroleum Corp for US$7.3 bil. The buy gave Sinopec oil reserves in Iraq’s Kurdistan and West Africa. Two months later, Yanzhou Coal announced that it would buy Australian coal miner Felix Resources for US$2.9 bil. The following month, PetroChina said that it would buy 60 % of Athabasca Oil Sands Corp’s oil sands projects in Canada for US$1.7 bil.
Sunday, December 27, 2009
US$ carry trade
It used to be the Japanese Yen that was fuelling the carry trades in the 1990s. Now, the US dollar is doing just that. Ever since the mortgage crisis in 2008, the Federal Reserve has lowered the Fed Funds Rate to near zero. This has caused an exodus of US money looking for better returns. The US dollar has flooded emerging markets causing a rise in asset prices.
The inflow of funds to emerging markets has also caused their currencies to appreciate. This is causing economic disruptions there. To counter this, some countries like Brazil and Taiwan have resorted to capital controls.
The big question is what happens when the carry trades are unwound. Will the emerging economies experience a sharp drop in asset prices? What about recession and deflation? Are the economies prepared for this? Who knows?
The inflow of funds to emerging markets has also caused their currencies to appreciate. This is causing economic disruptions there. To counter this, some countries like Brazil and Taiwan have resorted to capital controls.
The big question is what happens when the carry trades are unwound. Will the emerging economies experience a sharp drop in asset prices? What about recession and deflation? Are the economies prepared for this? Who knows?
Wednesday, November 18, 2009
Not So Mighty Anymore
Japan’s economy has been in the doldrums since 1990 when its stock bubble burst. The first decade after the market collapse has been characterized by recession, deflation, near- zero interest rate and massive fiscal pump-priming. The second decade was more of the same thing. Only now is the US$ 4.5 trillion economy showing some life. The GDP grew at an annual rate of 2.7 % & 4.8 % for the last two quarters respectively.
A direct result of the fiscal stimulus is the accumulation of the biggest public debt of the development world which amounts to almost twice the size of its economy. To help boost the economy, the government has deliberately depressed the value of its currency. The hope was the undervalued currency, near-zero interest rates and fiscal stimulus would create a self-reinforcing growth dynamic that would raise consumption, GDP and wages.
But the growth could very well be ephemeral. If the extravagant spending on public works projects is taken away, the growth could just fizzle away. Also, the revaluation of the Yen this year has stymied exports and this has helped cause one third of Japan’s factories to sit idle.
Another problem Japan has to content with is its shrinking population. The nation of 126 million people is aging fast. Twenty three percent of its people are over the age of 65 while less than 13 % are younger than 15. Coupled with a policy of strict immigration control, it would be hard for the nation to increase its production. The nation also has to compete with fast emerging economies like South Korea, China and India.
A direct result of the fiscal stimulus is the accumulation of the biggest public debt of the development world which amounts to almost twice the size of its economy. To help boost the economy, the government has deliberately depressed the value of its currency. The hope was the undervalued currency, near-zero interest rates and fiscal stimulus would create a self-reinforcing growth dynamic that would raise consumption, GDP and wages.
But the growth could very well be ephemeral. If the extravagant spending on public works projects is taken away, the growth could just fizzle away. Also, the revaluation of the Yen this year has stymied exports and this has helped cause one third of Japan’s factories to sit idle.
Another problem Japan has to content with is its shrinking population. The nation of 126 million people is aging fast. Twenty three percent of its people are over the age of 65 while less than 13 % are younger than 15. Coupled with a policy of strict immigration control, it would be hard for the nation to increase its production. The nation also has to compete with fast emerging economies like South Korea, China and India.
Monday, November 16, 2009
The Yuan Dilemma
China, the world’s third largest economy, is leading the world in emerging from the recession caused by the credit crisis. Its economy grew at a rate of 8.9 % in the third quarter of this year. Next year, it is expected to surpass Japan to become the second largest economy in the world. It has chalked up a foreign reserve of nearly US$ 2 trillion. Such is its strength of growth.
Its economic expansion is based on the mode of too much investment, too high saving and too little consumption. Its utmost priority domestically is job creation and social stability. It already has surplus manufacturing capacity. So, the only way to increase employment is to sell more. They do this by deliberately holding down the value of the Yuan. This action is generating a lot of disgruntlement from the rest of the world, in particular the USA. They are all suffering from a trade deficit with China.
The other way for them to increase production is to step up domestic consumption. This method is more desirable to the westerners as it would not add to their trade deficit with China.
But the holding down of the Yuan has its adverse consequences too. The government has to sell Yuan to keep its exchange rate low. This has resulted in a 29 % increase in the money supply in the last six months. Also, expectation of the revaluation of the Yuan has attracted a US$150 billion inflow of speculative funds in the same period. All this extra liquidity is causing asset price inflation. Apartment prices are reaching record levels and the stock market has risen 74 % this year.
Its economic expansion is based on the mode of too much investment, too high saving and too little consumption. Its utmost priority domestically is job creation and social stability. It already has surplus manufacturing capacity. So, the only way to increase employment is to sell more. They do this by deliberately holding down the value of the Yuan. This action is generating a lot of disgruntlement from the rest of the world, in particular the USA. They are all suffering from a trade deficit with China.
The other way for them to increase production is to step up domestic consumption. This method is more desirable to the westerners as it would not add to their trade deficit with China.
But the holding down of the Yuan has its adverse consequences too. The government has to sell Yuan to keep its exchange rate low. This has resulted in a 29 % increase in the money supply in the last six months. Also, expectation of the revaluation of the Yuan has attracted a US$150 billion inflow of speculative funds in the same period. All this extra liquidity is causing asset price inflation. Apartment prices are reaching record levels and the stock market has risen 74 % this year.
Tuesday, November 10, 2009
Gold Fever
Gold was at about US$ 300 an ounce in the early nineties. At an exchange rate of about RM 2.50 to US$ 1, an ounce would have cost about RM 750 then. Today, the price of gold is at a record high of about US$ 1,100 per ounce. With a current exchange rate of RM 3.40 to one US$, an ounce of gold would cost RM 3,740. This is a 400 % increase or a four bagger.
Over a period of 18 years, the price has increased four folds. This represents an annual compounded rate of increase of 8 %. Not bad for an asset that does not generate any income. All the increase is a result of capital appreciation. This rate is also higher than the inflation figure. Hence, the metal is a good hedge against inflation.
So, why is the price of gold so high? The reason is gold is priced in US$ and the dollar is an overvalued currency. There is fear of a sudden currency depreciation. When that happens, the economy will experience mega-inflation. People are buying gold to hedge against this possibility.
Over a period of 18 years, the price has increased four folds. This represents an annual compounded rate of increase of 8 %. Not bad for an asset that does not generate any income. All the increase is a result of capital appreciation. This rate is also higher than the inflation figure. Hence, the metal is a good hedge against inflation.
So, why is the price of gold so high? The reason is gold is priced in US$ and the dollar is an overvalued currency. There is fear of a sudden currency depreciation. When that happens, the economy will experience mega-inflation. People are buying gold to hedge against this possibility.
The US Dollar
The US economy is terribly out of whack. It is projected to run a trade deficit of $1.4 trillion for the fiscal year starting 1 October 2009. This will be about 10% of its GDP. The total US debt at the end of 2008 was $10.7 trillion. Half of this was incurred in the last 10 years. This huge deficit has resulted in the accumulation of vast amounts of dollars in foreign bank accounts. To keep the liquidity level at home, they have to print more dollars.
The financial crisis has retarded the economic growth. To stimulate the economy and at the same time to forestall severe deflation, the government resorted to massive spending. To finance that, they embark on the printing of new dollars.
With all the new notes printed, the assets backing backing each dollar is diluted. Economic theory tells us that the US dollars should be weaker. Indeed, it has weakened slightly this year. However, because of the safe haven status of the US, foreign nations are still buying US Treasuries. This gives the dollar support and help props up its value.
The problem of the dollar will start when the Japanese and the Chinese loose faith of the currency. When they start selling their treasuries holding, the dollar is expected to decline inexorably. The dollar will then be no more mighty.
The financial crisis has retarded the economic growth. To stimulate the economy and at the same time to forestall severe deflation, the government resorted to massive spending. To finance that, they embark on the printing of new dollars.
With all the new notes printed, the assets backing backing each dollar is diluted. Economic theory tells us that the US dollars should be weaker. Indeed, it has weakened slightly this year. However, because of the safe haven status of the US, foreign nations are still buying US Treasuries. This gives the dollar support and help props up its value.
The problem of the dollar will start when the Japanese and the Chinese loose faith of the currency. When they start selling their treasuries holding, the dollar is expected to decline inexorably. The dollar will then be no more mighty.
Wednesday, October 28, 2009
Power crazy people
OTK is a man of no principles. He has said that he will resign as MCA head if the vote of no confidence against him is upheld. The delegates have done that. Now, he is reneging on his promise. He is trying very hard to cling on to power. He was even gone ahead and made a pack with his nemesis, CSL. He couldn’t stand the deputy from the day he was elected President. Now, he says that he can work with him to rebuild the party. What a hypocrite.
He has no more credibility. The people (voters) will not trust him anymore. They will not respect him as a leader of the Chinese community. Comes the next general election, they will again cast a vote of no confidence on him.
He is a lame duck President. UMNO will not respect him either. So, he will have no bargaining power with the government. In essence, he is a power crazy leader with no integrity and little respect. He might as well retire and go fly a kite.
He has no more credibility. The people (voters) will not trust him anymore. They will not respect him as a leader of the Chinese community. Comes the next general election, they will again cast a vote of no confidence on him.
He is a lame duck President. UMNO will not respect him either. So, he will have no bargaining power with the government. In essence, he is a power crazy leader with no integrity and little respect. He might as well retire and go fly a kite.
Tuesday, October 13, 2009
From hero to zero
OTK is an arrogant man. From the start, he has decided not to work with his deputy. He tried to sideline his assistant. The critical mistake was when the CC decided to expel CSL. Then OTK tried to be a hero by allowing for a show of no confidence against him. Now, he has to go. He has learned his lessons the hard way.
So, the moral of the events is that when you are in power, do be nice to the people under you. Show some humility. People will be more willing and sincere in serving you. If you show arrogance and superiority, the best that you get is an uncommitted service. And when you fall, you will be standing all alone.
He may have done some good in the PKFZ case. But, in the process, he may have stepped on many people’s toes. He has done what is considered as unconventional by exposing the dealings of his predecessors. The former ministers are from the same party. Thus, he may have indirectly caused the washing of the community’s dirty linen in public. This may have angered many elders in the community.
So, the moral of the events is that when you are in power, do be nice to the people under you. Show some humility. People will be more willing and sincere in serving you. If you show arrogance and superiority, the best that you get is an uncommitted service. And when you fall, you will be standing all alone.
He may have done some good in the PKFZ case. But, in the process, he may have stepped on many people’s toes. He has done what is considered as unconventional by exposing the dealings of his predecessors. The former ministers are from the same party. Thus, he may have indirectly caused the washing of the community’s dirty linen in public. This may have angered many elders in the community.
Monday, October 5, 2009
What high income
Malaysia wants to be a high income nation. Jolly good. But at what currency exchange level are we talking about? It is good if the income is high and the denomination is in USD. What is the point if it is denominated in Indonesian Rupee or the Vietnamese Dong.
High income can only be sustained if the productivity is improved or we have advanced to a higher technological level. This would result in higher growth and increased GDP. But, we are not going along this line. We are trying to be competitive by manipulating the exchange rate. We lowered our exchange rate so that our products are cheaper to importers. Workers may get a raise on the take home pay, but their purchasing power is not better off.
Malaysia has not done well in terms of its currency exchange rate. It used to be 1 RM to 10 Baht in the 80s. In the Asian Financial Crisis of the 90s, Thailand’s currency was badly battered. They have recovered. Even with their political instability and turmoil, they have done better than us. Today, the exchange rate is less than 10 Baht to 1 RM.
High income can only be sustained if the productivity is improved or we have advanced to a higher technological level. This would result in higher growth and increased GDP. But, we are not going along this line. We are trying to be competitive by manipulating the exchange rate. We lowered our exchange rate so that our products are cheaper to importers. Workers may get a raise on the take home pay, but their purchasing power is not better off.
Malaysia has not done well in terms of its currency exchange rate. It used to be 1 RM to 10 Baht in the 80s. In the Asian Financial Crisis of the 90s, Thailand’s currency was badly battered. They have recovered. Even with their political instability and turmoil, they have done better than us. Today, the exchange rate is less than 10 Baht to 1 RM.
Thursday, June 4, 2009
Contrasting Forecasts
CIMB is very bullish on the Malaysian market. It is projecting a target of 1220 for the KLCI at year end. It cites the gradual reinvestment of institutional funds' spare cash and the "better than expected" 1Q results for the local companies as the reasons for its good feelings. Very well.
At about the same time, Maybank came out with a very bearish report. It is targeting the KLCI at 990 at year end. It cites the worse than expected 1Q GDP growth of -6.2% and the poor 1Q earnings (62% of its stock coverage of 72 companies reported lower profits) of the local companies as its reasons for the lousy feeling.
What a big contrast in the forecasts. I think I can be a stock market forcaster too. I bet that the KLCI will end the year at 1105 - the middle of the two forecasts. I am confident that I can beat at least one of the above investment banks. Just wait and see.
At about the same time, Maybank came out with a very bearish report. It is targeting the KLCI at 990 at year end. It cites the worse than expected 1Q GDP growth of -6.2% and the poor 1Q earnings (62% of its stock coverage of 72 companies reported lower profits) of the local companies as its reasons for the lousy feeling.
What a big contrast in the forecasts. I think I can be a stock market forcaster too. I bet that the KLCI will end the year at 1105 - the middle of the two forecasts. I am confident that I can beat at least one of the above investment banks. Just wait and see.
Tuesday, May 19, 2009
Talking Bull
The world's leading airlines are all buffeted by the double whammy of the economic recession and the influnza A flu. Singapore Airlines just reported a 92% plunge in its profit for the quarter ending March 2009. Cathay Pacific recorded a loss of more than a billion USD in 2008 and its revenue for the 1st quarter is down 22%. Japan Airlines reported a loss of 63.2 billion Yen for the year ended March 09 and is predicting negative results this year too. Qantas is forecasting its results for the year to June 09 will be less than half of that of last year.
Amidst all this gloom, there is one nascent airline that is very bullish. Air Asia X is talking about acquiring more planes and connecting to new destinations. It wants to increase its fleet from 4 to 8 planes and its destinations from 4 to 10. It is wishing for a revenue of 1 billion RM in 2010 and with a margin of 10 to 20% (very optimistic), is projecting itself to be among the top 100 companies on Bursa Malaysia. Its CEO is definitely very gung-ho and bullish. He is already counting the chickens even before the eggs are laid.
Amidst all this gloom, there is one nascent airline that is very bullish. Air Asia X is talking about acquiring more planes and connecting to new destinations. It wants to increase its fleet from 4 to 8 planes and its destinations from 4 to 10. It is wishing for a revenue of 1 billion RM in 2010 and with a margin of 10 to 20% (very optimistic), is projecting itself to be among the top 100 companies on Bursa Malaysia. Its CEO is definitely very gung-ho and bullish. He is already counting the chickens even before the eggs are laid.
Thursday, April 16, 2009
YTL Corp
This company is known for being very savvy with its funds. It builds up its war chest during good times. It and its CEO always claim that, in crisis times, they will emerge to buy up cut-price assets. They proclaim that to be the company's forte or signature.
Lets look at some of their recent investments in Singapore. First, they bought the Lake Front Collection in Sentosa Island for S$150 million. This consists of 18 bungalow lots and is done with a joint venture partner. Then, they bought the Sandy Island residential development consisting of 19 bungalow lots for S$135 million. The price for these purchases does not look dirt cheap.
Their foray into Singapore includes the en bloc purchase of Westwood Apartments for a record price of S$435 million. The land area is 62179 sq ft and at a plot ratio of 2.8, the land cost per gross development area is $2500/ft2. This price does not look cheap and with today's market condition, profits will hard to find.
They got a good deal in Macquarie Prime Reit. They paid S$285 for 26% of the reit company and also 50% of Prime Reit Management Holdings.
The big one came when its subsidiary, YTL Power, got hold of Power Seraya for S$3.8 billion. This was bought through and unsolicited bid after Temasek has called off its tender excercise. The offer price can, at best, only be described as fair. Temasak wouldn't have left off the power generator at a steal to YTL Power.
YTL Corp is purported to have a war chest of RM11 billlion. The above purchases more or less used up its available funds. They have little left for further acquisitions. So, did they moved too fast or has its CEO loss some of his Midas touch.
Wonder why they suddenly poured so much funds into Singapore. They did not really get fire sale prices. Safe haven?
Lets look at some of their recent investments in Singapore. First, they bought the Lake Front Collection in Sentosa Island for S$150 million. This consists of 18 bungalow lots and is done with a joint venture partner. Then, they bought the Sandy Island residential development consisting of 19 bungalow lots for S$135 million. The price for these purchases does not look dirt cheap.
Their foray into Singapore includes the en bloc purchase of Westwood Apartments for a record price of S$435 million. The land area is 62179 sq ft and at a plot ratio of 2.8, the land cost per gross development area is $2500/ft2. This price does not look cheap and with today's market condition, profits will hard to find.
They got a good deal in Macquarie Prime Reit. They paid S$285 for 26% of the reit company and also 50% of Prime Reit Management Holdings.
The big one came when its subsidiary, YTL Power, got hold of Power Seraya for S$3.8 billion. This was bought through and unsolicited bid after Temasek has called off its tender excercise. The offer price can, at best, only be described as fair. Temasak wouldn't have left off the power generator at a steal to YTL Power.
YTL Corp is purported to have a war chest of RM11 billlion. The above purchases more or less used up its available funds. They have little left for further acquisitions. So, did they moved too fast or has its CEO loss some of his Midas touch.
Wonder why they suddenly poured so much funds into Singapore. They did not really get fire sale prices. Safe haven?
Thursday, April 2, 2009
Why inflation now is good
Keynesian economics recommend that in an economic depression, the correct course of action should be to encourage spending and discourage saving. Governments should borrow money and boost demand by pushing the money into the economy. That's why countries like the US, UK, Japan, China, Malaysia and others are lauching huge stimulus packages for their conomies. Their aim is to stall any recessionary tendencies and hopefully set the economies on a growth path.
But what if the stimulus spendings don't work? Then, the country would go into recession, or worse, depression. The economy will slow down and jobs will be lost. In such a scenario, deflation may come into play. This means that price of goods and services will be lowered. Salaries too may drop.
However, debts such as home mortgages and business loans are in nominal trems (not adjusted for inflation). By this, it means that in a deflationary situation, your loans become more difficult to service. The instalment payment is a larger portion of your decreased salary. More people may default on their payments. This leads to more gloom in the economy.
But, if the extra injection of funds makes the economy sputter along and results in a modest inflation, then prices will move up. So too will your salary. Luckily, your loan remains the same. So, your instalment payment becomes slightly easier. This leaves you with more cash to spend which hopefully will boost the economy a bit. That's why it is important and good to have inflation in bad economic times.
But what if the stimulus spendings don't work? Then, the country would go into recession, or worse, depression. The economy will slow down and jobs will be lost. In such a scenario, deflation may come into play. This means that price of goods and services will be lowered. Salaries too may drop.
However, debts such as home mortgages and business loans are in nominal trems (not adjusted for inflation). By this, it means that in a deflationary situation, your loans become more difficult to service. The instalment payment is a larger portion of your decreased salary. More people may default on their payments. This leads to more gloom in the economy.
But, if the extra injection of funds makes the economy sputter along and results in a modest inflation, then prices will move up. So too will your salary. Luckily, your loan remains the same. So, your instalment payment becomes slightly easier. This leaves you with more cash to spend which hopefully will boost the economy a bit. That's why it is important and good to have inflation in bad economic times.
Monday, March 9, 2009
Temasek
She may have a 1st class honours from NUS and a Masters from Stanford both in Electrical Engineering, but she is no financial pundit. She worked as a civil servant and later as a corporate head in Singapore. She has no experience in international finance and has no foreign exposure. Yet, she is made head of an investment firm with a fund size of more than S$100 billion.
Worst still, she is not too risk-averse. So, what do you expect the results to be? She bought Shin Corp in 2006 and loss big. She has no experience in US dealing and wheeling and yet she spent billions buying Merrill Lynch. The firm has been absorbed by Bank of America and the price of BoA shares is in the dumps.
Temasek lost S$58 billions in the eight months from March to November 2008. The value of its portfolio declined by 31% from S$185 billion to S$127 billion. But the investment in Merril Lynch is close to being wipe off. Can you attribute this all to poor market timing? What about incompetency?
Worst still, she is not too risk-averse. So, what do you expect the results to be? She bought Shin Corp in 2006 and loss big. She has no experience in US dealing and wheeling and yet she spent billions buying Merrill Lynch. The firm has been absorbed by Bank of America and the price of BoA shares is in the dumps.
Temasek lost S$58 billions in the eight months from March to November 2008. The value of its portfolio declined by 31% from S$185 billion to S$127 billion. But the investment in Merril Lynch is close to being wipe off. Can you attribute this all to poor market timing? What about incompetency?
Monday, January 12, 2009
A disgruntled old man
This is an elderly statesman, who has relinquished power and who has biased and prejudiced views. But, he seems to be unable to accept the fact that he is no longer the ruling leader or the spokesman of the country. He still likes to make statements and comments on all sort of things. However, he lacks objectivity and fairness. As a result, his views are not taken seriously.
An example is his call for the boycott of US goods because of Isreal's invasion of the Palestinian controlled Gaza Strip. True, the Isreal aggression is cruel and brutal. But, he made no mention of the rockets fired at Isreal from the Gaza Strip. Also, his economic deliberations are no very sound. Hence, a lot of people, including the ruling leaders, don't agree with him.
Over the years, he has rattled a lot of biased and prejudiced views. Internationally, he is recognized more as a loose cannon than a credible statesman. As such, not much is taken for what he says.
An example is his call for the boycott of US goods because of Isreal's invasion of the Palestinian controlled Gaza Strip. True, the Isreal aggression is cruel and brutal. But, he made no mention of the rockets fired at Isreal from the Gaza Strip. Also, his economic deliberations are no very sound. Hence, a lot of people, including the ruling leaders, don't agree with him.
Over the years, he has rattled a lot of biased and prejudiced views. Internationally, he is recognized more as a loose cannon than a credible statesman. As such, not much is taken for what he says.
Subscribe to:
Posts (Atom)