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George Dorgan

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  • Russia And China - A Symbiotic Relationship In 2014 [View article]
    Germany is the natural ally of Russia and China, providing the machines, capital goods and industrial technology those two are still lacking.

    If those three were united combined with somewhat higher German spending, the U.S. would not have a chance.
    Oct 15 02:55 PM | 1 Like Like |Link to Comment
  • Are We Starting To See Why It's Really The Exorbitant 'Burden' [View article]
    @Mike Holt
    See also my new reply above that clearly differentiates 3 cases: Japan, US/Spain/Ireland and China.

    your statement "Chinese companies sell their products below cost but are able to remain cash flow positive because the government provides them with loans and other subsidies"
    I disagree with that statement.
    Money supply in China rises by 12% only slightly above the value for the U.S. As opposed to China 2009/2010 or Japan in the 1990s, it is not the government that keeps companies afloat.
    It is the normal process that people that have money lend to the ones that see investment opportunities but do not possess sufficient funds. And the ones that are not profitable go bankrupt. The PBoC maintains high borrowing rates.
    More data to verify on lending:

    Please look also on the Chinese stock market that has a quite good performance compared to others, possibly thanks to a slower pace of investments and therefore higher profits and dividends.
    Oct 14 02:18 AM | 1 Like Like |Link to Comment
  • Are We Starting To See Why It's Really The Exorbitant 'Burden' [View article]
    @rjroberts @Mike Holt

    Possibly I did not explain well enough, you have to grasp the differences

    Case 1) Japan 1990, overcapacity in both housing and fixed assets
    Problem: Japanese labor too expensive compared to China
    --> result: Wage deflation, Slow growth, export of capital to China etc., zombie banks
    but LOW UNEMPLOYMENT (thanks to debt)

    Case 2) Spain/Ireland/US 2007, overcapacity in housing, strong consumption
    Spanish labor too expensive compared to Eastern Europe, similarly US labor if dollar remains strong
    --> initial effect: inflation and export of capital
    Later: secular stagnation, high UNEMPLOYMENT and weak participation rates

    Case 3) China 2014, overcapacity in housing and fixed assets
    But labor remains cheap in global comparison, capital injection is able to reduce unit labor costs (Cobb-Douglas effect)

    --> result: PPI deflation, falling unit labor costs, but CPI inflation and rising real GDP

    further comment on debt below.
    Oct 14 02:10 AM | Likes Like |Link to Comment
  • Secular Stagnation In... Germany? [View article]
    I believe not at all in your analysis. There is one sole argument in favor of it: Germans want to save because they are typically risk-averse, they live longer than Americans and they believe that social systems and governments are close to bankrupt.

    But the rest is wrong
    1) German salaries are rising quite quickly. Most pay settlements were around 3%.
    This is not Japan!
    If you look at services PMI, they are around 56. This represents consumer spending.

    2) German unemployment is hardly above 4%. Despite ageing, participation rates are rising.

    3) True, Germany is hit hard by tight monetary policy in Emerging Markets, in particular Russia but also China. China has overinvested and excess capacities. Time to reduce investments and the capital goods exporter Germany is the major victim.
    German firms already possess industrial capacity outside of Germany, after years of higher saving than investments (the one you are mentioning).
    If you look on the news release you will see that consumer goods exports rose by 3.5%.
    After the global excessive capacity creation caused by the Fed's easy money and China's desire to invest, this tendency in favor of consumer goods will intensify.

    4) If you look in detail on investments in Germany you will discover that fixed asset investments as part of GDP are relatively strong compared to other developed economies. But as opposed to English-speaken countries, they are not so much "my home is my castle" people, they often rent. Moreover strong German homebuilding happened earlier than in the US, UK or Australia, because rates already in the 1980s were lower.
    Hence investments in private real-estate lowers considerably German investments as compared to US/UK/AUS (I will provide reference later)

    5) Immigration into Germany is strong, as opposed to Japan.

    6) Has the fact that Germany is geographically close to Southern Europe lead to "economic contagion"? Over the short-term yes, but finally trade is global, China is probably the most important German export partner and far away geographically.

    7) The most important reason, however, for being sure that Germany will not be Japan, is that real estate prices are not in a bubble as they were in Japan in 1990.
    On the contrary real home prices were falling for thirty years until 2010.
    Effectively the overinvestment in Germany happened also in the 1990s.

    But not today: Without a real estate bust and without overinvestment, no deflation and no Japan!

    Secular stagnation in Germany maybe, but only if the U.S. remains in secular stagnation, too. The U.S. might be better off and see higher GDP growth than Germany for some years thanks to low oil prices and inflated home prices but this will end after some time and Germany might export more to the U.S. and less to China.

    Let Germans slowly change from an export-oriented country to more consumption. This happened in the late 1970s ( and may slowly happen this time again.
    Oct 11 02:15 PM | 4 Likes Like |Link to Comment
  • Are We Starting To See Why It's Really The Exorbitant 'Burden' [View article]
    Thank you very much Professor Pettis,
    this is a huge article.
    I strongly believe that money and investments will always go where labor is cheapest and yielding the highest return.

    But I do not believe in the essence and the very basis of your arguments.
    I do not believe that over-investment, in particular in plants and fixed asset investments is a real long-term problem!
    This invalids your reasoning completely.

    In the Chinese case there are probably over-investments, in the U.S. and Spanish case there were real estate investments.
    Yes there is the risk that these wrong allocation create recessions, excessive capacity and slow growth.
    Finally, however, the market will clear wrong allocations with even lower prices, with deflation. As it happened in Japan, in Dubai, in the U.S. and currently in China.
    Some people get bankrupt when they bought a home too high and were forced to sell too low.

    But would you bring me an example where wrong allocations combined with low inflation led to years of high unemployment? (I emphasize low inflation)

    The Great Depression was maybe one but trade protection prevented that countries like Germany or the UK could pay down debt with cheaper products. And it followed years of high inflation (see Rothbard).

    Only high inflation and insufficient investment leads to years/decades of high unemployment, but over-investment and resulting deflation does not:
    Infrastructure and plants can be re-used for different or better technology.
    Real estate has still some economic use for owners. This might even apply to Spain, a combination of high inflation and overinvestment in real estate. (if u bought Spanish real estate in the 1990s you are three times richer today)

    What is really the cost of overinvestment in terms of unemployment?

    Please don't give Japan as example. GDP growth may be weak for decades, but this because local savings were invested abroad and not locally. But this hampered by no way quality of life in Japan. The necessary investments and foreign inflows happened before 1990.
    Oct 11 12:42 PM | 2 Likes Like |Link to Comment
  • The Best Contrarian Macro Investment: Russia? [View article]
    Thanks, Here the corrected link

    "Rising costs and shrinking profits are a more fundamental cause of the slowdown in Russia's economy than trade sanctions arising from the dispute over Ukraine, according to Vladimir Bragin, head of research at Alfa Capital in Moscow. He is talking with Mark Barton and Manus Cranny on Bloomberg Television's "Countdown."
    These are exactly the reasons for the slowdown I described above.

    However in my view things are getting better now, thanks to a nearly hard landing.
    Sep 11 12:54 AM | Likes Like |Link to Comment
  • The Swensen 6 Portfolio: How To Reduce Risk And Trounce The Market [View article]
    Bill Gross was the star until summer 2013 with his bond portfolios. The Swenson 6 is also made for a low-inflation environment with 50% interest-rate sensitive instruments.
    So just a historic coincidence that it outpaced the VTSMX. Call it luck or a good macroeconomic insight that the bubble of 2006 could not continue.

    Hence it makes sense to simulate its return in a rising interest rate environment like between 1993 and 1999.

    The idea to throw out non-performing equity ETF and replace them with SHY (notes) turns the portfolio even into a Fixed Income portfolio.

    The question is you are investing for the past or for the future?
    Aug 21 12:16 AM | 1 Like Like |Link to Comment
  • The Best Contrarian Macro Investment: Russia? [View article]
    @smalinovski Thanks, I interpret it as follows:
    Similar to China still today, until 2008 new money to Russia, e.g. via current account surpluses, was directly consumed through new investments.

    Money was a scare good, hence the balance sheets were driven by foreign money. See more on the "money multiplier confusion".
    With slower growth since 2011, this has stopped. As opposed to previously Russian companies and households do not obtain cheap funding in Europe (rates < 2%), but must tap the expensive funding via the CBRU (rates > 8%) or fund themselves with Russian money

    As said above, this changed funding patterns prevents overspending and overinvestment, it is good for the Russian economy over the long-term.
    Aug 18 12:58 AM | Likes Like |Link to Comment
  • The Best Contrarian Macro Investment: Russia? [View article]
    Rates can only rise when countries like Europe, China and other emerging markets do NOT implement austerity.
    Europe does pure austerity, China, other EM and - as we have seen here - Russia do all austerity or near-austerity. EM do this in order to maintain the "Bretton Woods 2" system.

    No wonder that stock markets collapse.

    In the late 1970s and 1980s, at the end of Bretton Woods 1, however, Germany and others were in a consumption boom.

    Austerity in EM and Europe already now exercises pressure on wages in the US and will so in the future.

    And without pay rises, I would forget the idea about higher rates.
    Aug 13 01:33 AM | 1 Like Like |Link to Comment
  • The Best Contrarian Macro Investment: Russia? [View article]
    Transportation is a "quasi-physiological" need.
    What happened in the 1970s when suddenly oil prices jumped?
    Deprieving Americans or others from driving or owning a car, is nearly the same as removing food as physiological need.

    That the second in the hierarchy, "security of body and property" is in danger in Russia was true in the 1990s. And therefore Russians are happy with Putin, because all this is fixed now. Yes, there is some remaining corruption and some limited risks when you do business in Russia (by the way, I did).

    I would call the other point you are making the discrepancy between two regimes:
    1) Russia or China with high corruption, but low taxes and high opportunities.
    2) The Western economies with lower corruption, but high taxes and no opportunities.

    Which form of government confiscation is better for the economy? 1 or 2?
    I say 1)
    Aug 13 01:20 AM | Likes Like |Link to Comment
  • The Best Contrarian Macro Investment: Russia? [View article]
    I know that borrowing is currently expensive in Russia, but you got to elaborate more on why they are "excluded"?

    As I said, Russia is currently investing less. Same as China, Russia has the discrepancy between rich investors and many opportunities that all those investors cannot assume themselves. This often results in lending outside of the banking sectors.

    The current climate gives the possibility to re-evaluate business opportunities incorporating more risk into business calculations than previously. The mean of incorporating more risk is called higher rate costs.

    In particular when the rich Russian prefer to put the money on a bank account for high rates or to export money, instead of lending it.

    The avoidance of over-investment is beneficial for Russia, in the short-term it has bad consequences, in the long-term it is good.
    Aug 13 12:59 AM | 1 Like Like |Link to Comment
  • The Best Contrarian Macro Investment: Russia? [View article]
    Sperbank is part of sanctions, but not state bonds. Would be a pretty escalation if gov. bonds were part of sanctions (with well-known counter-sanctions).

    There is no need for ETFs. You can buy directly from Russian Fed., the min lot size is often low, lying at 50000 RUB, 1000 €.

    A list of bond issues here on German

    or on London stock exchange

    We generally trade ETFs&stocks on Interact.Brokers (on USD basis) and bonds on Austrian (on EUR basis).
    I cannot talk about Fidelity or other US brokers.
    Aug 11 11:40 PM | Likes Like |Link to Comment
  • FX Rates, Contrarian Investment And The Misleading Concept Called GDP [View article]
    As for the question if the purpose of economic activity is consumption or production, I will base my answer on religion and philosophy:

    Puritans were the ones that founded the United States and those were clearly on the side of production and were against consumption.
    With the immigration of British and Northern Europeans with protestant and Calvin-based religions in the 19th century the US became the world leader: Production was favored against consumption. Some of Calvin's principles were eagerness to work and diligence. To become rich meant that God has elected you.

    But for some decades already most US immigrants have Hispanic origins, while many Americans do not practice their religion any more. As opposed to Calvin-based confessions, the catholic view is rather on the consumption side.

    From this point of view, the future for the United States is the consumption side, because the part of Hispanics is rapidly increasing.
    Jul 26 02:20 AM | 1 Like Like |Link to Comment
  • A Little History Of Wages, Inflation, Treasuries And The Fed - And What We Learn From It [View article]
    Hi Paul,
    I would like to point to the gross savings rates of the world bank

    Gross savings is gross national income minus consumption (+ transfers, which is not so important). Accumulated savings over years = wealth.

    Hence wealth contains assets, either in the form of fixed (machines, homes, state investments, infrastructure) or financial investments.

    China has a gross savings rate of 51% of GDP, the U.S. has one of 17%.
    We assume that China GDP = US GDP

    Chinese wealth increases each year by 33% of US GDP more than US wealth. These 33% of GDP are about 40% of US disposable income. Disposable income is typically a bit less than GDP due to depreciation/tax.

    Currently US private wealth is about 400% or 500% of disposable income.
    (This number does not include the wealth in form of state investments and infrastructure, but as Piketty shows the net wealth = (investments,infrastru... minus debt) of Western states is around zero

    Hence it appears that in ten years time, China will have overtaken the US not only as for GDP but also as for wealth.

    Side remark:
    US GDP = China GDP is only as for GDP[PPP], but the depreciation costs of old US investments might be higher the ones in China the US. This depreciation cost is one important difference between gross and net savings rate.
    Jul 8 03:46 PM | Likes Like |Link to Comment
  • The Most Important Questions For The Swiss National Bank Meeting [View article]

    As for U.S. oil consumption, I forgot to mention: gasoline (or aviation fuel) is taxed less in the U.S.
    With lower oil prices, the remaining part for consumption of e.g. US goods rises.
    Jul 6 01:13 PM | Likes Like |Link to Comment