Ricard's  Instablog

My last article on the US/China dynamic sparked a comment regarding the ill effects of the dollar peg by BrotherMaynard, with two articles by esteemed professors for substantiation. My rebuttal, originally meant to be a comment, became this article.

First, the article by Krugman:

"Many economists, myself included, believe that China’s asset-buying spree helped inflate the housing bubble, setting the stage for the global financial crisis."

I largely agree with this analysis, and will take it one step further. I am working under the decidedly unpopular assumption that Greenspan was smarter than we give him credit for, and that his stewardship of the economy, even considering the aftermath we see today, was prescient on his part - he knew (or so I think) that China, by playing their games and buying our debt, would eventually be caught in the situation it is in today - potentially paying for our egregious debts through our efforts at monetization.

During his tenure at the Fed, Greenspan resisted raising rates more than necessary even though he spotted a 'conundrum' in the long term yield curve, one he correctly speculated was due to foreign buying. By doing so, he assured (perversely perhaps) that the US would remain control of its own destiny. Imagine had he raised rates further just to straighten the curve out; that probably would have ended in China's favor, in that it would have given the initiative to Beijing and made our government's economic policy reactionary in nature.  

Looking at the actual chain of events, by luring the Chinese into holding additional treasuries and springing this inflationary trap (i.e., helicopter Ben), at least we assured that China is the one holding the bag full of s***, and not us.  

Anyone wishing to counter this argument by pointing to current US unemployment figures and the damage Greenspan supposedly wrought, I will re-counter by stating that those figures were going to drop anyway. Our labor force is simply not competitive, especially compared to Asia, in that we expect far more compensation for hours worked than they do.  That will become more and more painfully obvious as time goes by, as we shed more and more bread-and-butter jobs to outsourcing.  

Not 5 years ago I was confronted with the fact that McDonald's workers in South Korea earned barely $2 an hour, with no benefits outside of a free uniform and a free meal once a week - this considering that Big Macs still cost $2-3, cost-of-living standards in that area (about one hour south of Seoul) were comparable to small townships in America, and that a good full-course meal at a decent local restaurant still cost upwards of $15-20.  I'd imagine that workers in smaller restaurants received even less compensation.  At that point in time, South Korea's per capita income was already half ours; they also currently enjoy 'developed nation' status.  Now imagine wages in actual developing nations like China.  Now imagine yourself competing for manufacturing jobs of any sort at that wage level.

Our social policies (such as minimum wage, child labor laws, and unionization), while noble in their efforts to reduce inequality at home and promote stability for the lowest-paid worker, unfortunately also make us grossly uncompetitive in the global labor pool.  Even without any of these social policies, I'd still find it difficult to believe that we would be able to compete with developing countries on the wage front.  If GM alone is not justification enough, I've also provided an article where Prof. Brad de Long pointed out that the past two recessions were also followed by jobless recoveries.  There's no reason to suspect that this 'recovery' will be any different. 



Regarding the FT article, I take issue with this argument:

"The dollar must decline relative to other currencies to make US products more attractive to foreign buyers and to cause Americans to substitute US goods and services for imports. Without that incentive to increase exports and reduce imports, the rise in domestic spending will just lead to US economic weakness and rising unemployment. That is why the recent decline in the dollar relative to the euro, the yen and other currencies is a natural and desirable part of the process of reducing the US trade deficit and shrinking global imbalances."

Krugman states something similar but he connects the dots better. The FT article instead just clumsily points out that the US is essentially jealous of China using techniques that the US would like to use as well - currency manipulation to help out the economy at home.  Let's face it - arguments for dollar devaluation are akin to China's dollar peg, only differing in that they benefit different nations.  

If anything, the euro is the currency that currently needs to drop the most (and Japan's for the past 20 years), given the relative shape of their economies compared to ours in those time frames - luckily for us, we are an occupying power in Europe and Japan, and can force a dollar devaluation upon them.  To think our military presence bears no influence on their economies is naive to say the least.  

Also, it is hubric for us to assume that reducing our own trade deficit is akin to "shrinking global imbalances" - the world is more than just us, the US, although it is painfully evident that our penchant for willingly acquiring tremendous amounts of debt is indeed a huge imbalance.

My point?  No one is taking the high moral ground here. Blatantly selfish stances such as the one outlined in the FT article are hardly justifiable in the international arena, unless backed by force or some other form of persuasion. Are we willing to play this gambit?

Many of us are quite familiar with the consumer electronics brand known as Samsung, the world's largest producers of televisions and second largest cell-phone manufacturer behind Nokia.  This company, despite its enormous size and impact on the Korean economy, is not listed in America, and generally unavailable for trading in the states.

Regardless, what it posted today caught my attention.  Samsung Electronics (only one of many arms of the conglomerate) posted a quarterly revenue of $20.9bn with profits of $3.14bn amid a weak local currency and strong growth across all sectors.

Just for comparison's sake:

1. Samsung Electronics alone is by far the largest listed corporation on the Korean stock exchange, with a 16.27% weighting on the KOSPI 200, (equivalent to our S&P 500), more than twice the size of second-place POSCO and nearly 8 times the size of the state-run utility monopoly KEPCO (both listed as ADRs in America).  
2. It is #40 in the Fortune 500 list of largest corporations in the world (#39 is Citigroup, and #41 is Berkshire Hathaway)
3. Its market cap of 79tr won (around $64bn) makes it nearly three times the size of Sony (a fact that I'm sure would make many Koreans beam with pride).

So what's going on here?  If you read this article from Bloomberg, you'd think the recession was a distant memory for Samsung.  It is not alone:

"Sales at South Korea’s major department stores rose in September for a seventh straight month..."

"South Korea’s exports gained 5.1 percent in the third quarter from the previous three months, when they rose 14.7 percent, today’s report showed. Corporate investment in factories and equipment climbed 8.9 percent, compared with a 10.1 percent in the second quarter."

Here's more:

"Confidence at South Korean manufacturers rose to a seven-year high in October, the central bank said Thursday, the latest in a series of figures that highlight an improving economy."

"The consumer confidence figure for October, announced Tuesday, also came in at the highest in more than seven years."

"Besides the confidence figures, South Korea's unemployment rate fell in September to a nine-month low of 3.4 percent and the current account - the country's broadest measure of trade - is firmly back in surplus after a deficit last year for the first time since 1997."

And you wonder why the smart money is in Asia.

Disclosure - No positions.

Jeremy Grantham has come out with his latest newsletter, and most devotees have by now probably parsed the document and have drunk their fill from the well.  As always, Grantham mixes his grumpy humor with enough facts to tickle the engaged mind.  He's also done us the service of highlighting and underlining his key points.  I for one find it engaging enough to read without skimming.  

My take:

The message is largely the same.  S&P fair value he still labels around 860, Greenspan is still someone favorably compared to Mephisto, and he is still cursed with being a value investor, and has again cursed himself roundly for missing the recent 'junk' rally.

A 'cursory' glance at the performance of the various GMO funds would substantiate his self-deprecation - only the fixed-income category soundly beat benchmarks, and US equity-based funds performed very poorly relatively.  It does seem he largely missed the rally in the US.  A saving grace of course is that he largely missed the decline last year as well (a 10% overall decline I believe)- the 'curse' does work both ways.

I *still* do not know what he deems to be 'quality' US stocks, outside of his general description regarding dividends, low debt, and high, stable returns.  I should know by now that he is simply not going to issue a list.

Some money quotes:


"The lessons, if any, are that low rates and generous liquidity are, if anything, a little more powerful than we thought, which is a high hurdle because we have respected their power for years."

Here's an excellent example of 'spin' deflecting what really should be the story of the moment - how other Asian economies have been given a free ride off the dollar's strength in the face of a global meltdown.



Instead, the focus on the article is how China continually pegs its currency against the dollar.

What I find interesting is that had China instead *devalued* their currency upwards of 20% like South Korea, Thailand, or Malaysia (justifiable given their own meltdown in exports), Congress would have gone bonkers.  Unfortunately, instead of the focus on currency manipulation by other countries, or China spending its own reserves to stimulate its economy amid a weakening Asia, the focus is placed on China's dollar peg.  Can anyone spell 'scapegoat'?

A comment posted on the article says it all:

"This article is a model of incoherence. What are the Koreans complaining about? The chart in the article shows that the won continues to trade at a 20% depreciated level versus the renminbi. The won looks even weaker relative to regional manufacturing rivals like Japan and Taiwan. If anything, it should be the Chinese complaining about the Koreans. Perhaps South Korea can explain why it has bought $50 billion USD in the past 3 months to thwart gains in the won. Strange behavior for a country with the largest current account surplus it has had in a decade, and a surging export sector. Does the Korean language have an idiom for "the pot calling the kettle black"?"

Before we begin, something to get you in the mood.

I’ve taken on a large speculative position on ETFC recently, one that has exponentially grown in size over the course of the week.  I believe this to be one of the last remaining opportunities left from the Oct-Mar meltdown to make a wild profit on ‘risky paper’.  (Hat tip to Jason Schwarz for providing the original impetus for this trade)

Having read some excellent commentary on personal investment picks on SA (especially from Tom Armistead, Alan Brochstein, and Marc Gerstein), I’ve decided to also outline and organize my decision-making:


Quantitative:

ETFC is in a peculiar situation right now.  In addition to a typical focus on fundamentals, its capital structure is also worth noting, due to its dilutive effects. 

More »

Here's an idea:

If the government (minus Timothy Geithner, who is really working for Wall Street) is so serious about getting honest banking back onto the streets, why not just do it? 

Really, I'm serious - would you put your money in an institution called The United States Federal Bank?  Here's what it could offer:

1) Inflation protected savings accounts.  That's right, TIPS for the masses.  No more worrying about the inflation bogeyman.  A no brainer decision for those who want to think about something else - anything else - other than finance.

2) Fannie and Freddie mortgages.  Let's face it, they're doing it anyway, might as well get the middle men out of it (actual banks).  Then, banks can go for all other customers.  This would lower costs for everyone. 

3) Nothing else.  No credit cards, no checking accounts, no exotic products like Alt-A option ARMs, or Market-based CDs where you make money if the market (S&P 500) goes up OR down up to 25% in one year, but otherwise get no interest (true story, Wells Fargo was offering this crap - imagine a CD with a 50 page prospectus).  Basically, it would offer nothing but the pure basics.

4) This would be an easy way to 'tax' the populace.  Set your base mortgage rate to whatever you need it to be, profit off the spread.  No one will undercut you...no one CAN undercut you.  Pay off the deficit the old fashioned way - by paying it off.

Pros:

This is what basic finance should be - boring.  Outside of checkwriting, this is basically everything one would need from a financial institution for your most important needs - a place to save your money, and a place where you could borrow to buy a house.

It takes the government to do something like this, because the returns would probably be so low as to give zero incentive for private institutions to offer anything resembling this.  Not only that, nearly everyone would try to sign up for actual risk-free savings accounts, and for loans that they could trust (or else they'd vote out every Congressperson they could).  Hence, the rejection from Tim Geithner (the mouth of Wall Street) of nearly the same proposal for private banking.

If you want something other than plain vanilla, if you want some WOW with your sugar cone, then all of Wall Street will be at your door in five seconds or less.  More than likely, they've already taken over your mailbox (would YOU like a Chase credit card today?  What about Capital One?  Upgrade to Platinum+$+$+$!  Get some bling-bling today!!)

Rates will most likely be very low - possibly even lower than they are now.

Cons:

Prime banking would probably go out of business.  I'm not sure what you may be thinking, but I personally think this has already happened.  In my opinion, the government is already doing the prime lending as it is - this would merely be a formalization for what was already in effect informal government lending to the majority of America.

The government may get tempted to raise the mortgage rate to unreasonable levels - perhaps some politically motivated logic could get in the way of home ownership.  Of course, just looking at that statement tells me that this more than likely will never happen, except in the case of the demise of our great country.  So, this is actually a sheep in wolf's clothing (unless you do believe we're beginning the end right now).


This is obviously a gross simplification, but something in the back of my mind just can't let this go.  Feedback and comments are welcome.