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Mike Holt

Mike Holt
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  • Capital Use And Measuring GDP In China [View article]
    Chris, I wonder if you'd be able to help determine the macro significance of a micro issue that seems to be widespread throughout China -- hence my concern regarding its macro significance.

    Many Chinese companies receive loans from the government if they achieve certain targeted levels of employment and/or scales of operation. I'm told that these companies often generate little or no profits because they are willing to engage in these operations merely for the purpose of qualifying for these loans, the proceeds of which they direct into entirely unrelated speculative investments such as residential real estate--and that's where they hope to ultimately derive profits. I imagine that successfully growing "a business" that provides jobs for a lot of people might also enhance their chances of rising within the ranks of the CCP where wealth and power in China truly resides.

    How widespread is this?

    And, how long can the Chinese government afford to keep making loans to sustain activity for the sake of keeping people occupied?

    It does seem possible that demand for jobs could push up the prices for residential real estate, and that higher real estate prices could create a wealth effect that business owners would consider to be an acceptable substitute for business profits. But, this growth model seems to rely upon ever increasing prices for assets such as real estate, unless these companies intend to start focusing on profits after they have driven all of their competitors out of the market. That may work for awhile here and there, but overall this doesn't seem to be a sustainable economic development model. Any thoughts?
    Apr 17 03:27 PM | Likes Like |Link to Comment
  • Real Estate And The Federal Reserve Effect [View article]
    I'm sure there are a number of people who can't obtain home financing, but some people have been buying. If they're not relying upon their homes to help fund their retirement nest eggs, they may not be overly concerned whether the value of their homes may decline if interest rates return to normal levels.

    If they're like most, they will remain in their homes for an average of seven years. If interest rates are higher then, a decline in the value of their homes should be offset by a decline in the value of the new replacement home--and they will have enjoyed the benefit of low interest rate financing while it lasted.

    But, if the value of their current home falls below the mortgage on that home, and they can't obtain the same size mortgage on a less expensive replacement home, they could find themselves trapped in their current home.
    Apr 16 03:33 PM | Likes Like |Link to Comment
  • Real Estate And The Federal Reserve Effect [View article]
    After millions of people lost their jobs due to the economic collapse following the bursting of the housing bubble and the ensuing financial crisis, the lesson to be learned from the Fed's perspective should have been that the markets for money and credit are at the core of our supposedly free market capitalist system so the Fed should stick to its role of regulating banks rather than distorting these markets to encourage excess debt and creating asset bubbles in the process. If Ben Bernanke had been a student of the Fed's actions in the 1920's rather than the 1930's, he may have recognized this.

    But, he never seemed to be as interested in regulating bad behavior as in pursuing a more grandiose role for himself: When my wife's uncle was coaching his kids on the school basketball team, some kids got in a fight and her uncle needed someone to keep an eye on the other kids while he stepped away to break up the fight. Ben Bernanke was sitting in the bleachers so her uncle asked if he could just watch them for a few minutes while he disciplined the other kids. Startled, Ben Bernanke briefly looked up from the materials he had brought with him and then nonchalantly responded "I don't that." before re-immersing himself in his research. Crisis? What Crisis?
    Apr 13 09:02 AM | 2 Likes Like |Link to Comment
  • Real Estate And The Federal Reserve Effect [View article]
    Historically, the Federal Reserve's efforts to manipulate our supposedly free market economy through what we now politely refer to as monetary policy has relied heavily upon their ability to influence home financing costs and thus home prices.

    This can be understood simply by recalling that consumer spending makes up over 60% of US GDP, home financing creates the largest need for consumer debt, and consumer spending is greatly influenced by both how much income remains available to spend after individuals have covered their home ownership costs and their perception of how much they can afford to spend based upon their level of equity in their homes.

    But when the Fed, government, private lenders, and speculators, aided by others, all acted in tandem to create a housing bubble that inevitably burst, demand for both homes and packaged home loan investment products dried up, as did the supply of credit that weakened banks were willing to extend to weakened consumers relying upon weakened assets as collateral. As such, the Fed could no longer rely upon a functioning mortgage loan market as the transmission mechanism for its monetary policy. And without the ability to implement monetary policy, the Fed would be relegated to serve only the three roles that it was intended to serve, namely:

    (1) to act as a lender of last resort that private banks (that really were banks) could turn to in response to fluctuations in natural market forces of supply and demand in the real economy (rather than to fluctuations in the Fed's manipulated supply of government securities);

    (2) to regulate banks; and

    (3) to issue a single currency widely recognized to be sound and reliable as a means of exchange and as a store of value.

    Largely stripped of its ability to manipulate the economy, the Fed had to do something to preserve its unintended power, and inflating housing prices so the mortgage loan market, or a reasonable facsimile thereof, could again be relied upon as the transmission mechanism for their "monetary policy" objectives must have seemed to be best way for them to re-establish this power. Fortunately, embarrassed politicians, crippled banks, investors holding worthless MBS and weakened agency debt, potential retirees needing government assistance if the "values" of their retirement nest eggs weren't at least temporarily restored, local governments relying upon higher property taxes to balance their budgets, and many others trapped in homes with underwater loans were on board with the Fed's efforts to reflate home prices even if it meant that markets would become even more distorted and fragile.

    So, now we have a not so independent central bank that has effectively become a commercial lender by buying up tens of billions of dollars of mortgage loans issued at artificially low interest rates every month with no clear long-term strategy beyond deferring the imposition of market discipline that must ultimately prevail due to the immutable law of economy gravity. Central banks may have the ability to keep their victims alive for longer than many expected, but they're not very good at restoring patients' health.
    Apr 12 11:17 AM | 1 Like Like |Link to Comment
  • Real Estate And The Federal Reserve Effect [View article]
    Getting Long, I agree with your assessment. However, I think most people make the mistake of rushing to buy a home before interest rates increase further. They are more focused on how much house they can occupy today for a given monthly payment without giving consideration to what impact higher interest rates will have on the value of their home when its time to sell.

    Maybe they are assuming that the government will bail them out somehow, based on the moral hazard inducing policy precedents established after the previous housing bubble that they helped create.
    Apr 12 09:37 AM | 1 Like Like |Link to Comment
  • Chanos pitches shorts on CNBC [View news story]
    "One has to keep in mind, if you're a Western investor in stocks and bonds in China, you are investing in a scheme, not a market," Chanos said.

    The country still houses massive stretches of unoccupied residential complexes, with three to six years of unsold supply left over outside of Beijing and Shanghai, Chanos said. Chinese growth figures don't account for sales, so the country's enviable growth rate includes construction projects left empty, Chanos said. China fueled its construction boom largely on credit.

    "Anybody who thinks that can't collapse because of too much lending has not looked at economic history," Chanos said.
    Apr 10 07:56 AM | Likes Like |Link to Comment
  • Chinese PMI data paints mixed picture [View news story]
    The WSJ reported today that sales of Zoomlion fell 20% in 2013. Zoomlion is a large manufacturerer of construction equipment central to China's Fixed Asset Investment spending that accounts for almost 50% of their GDP.

    The article also reports that accounts receivable have soared to120% of revenues, and even though these receivable are typically sold to banks without recourse, some banks have held Zoomlion responsible for these account receivables and warned them to act more responsibly when selling equipment and then selling uncollectable account receivables to banks.

    So, an increase in manufacturing activity may reveal that China's debt problems are not being addressed, while a decrease in manufacturing activity may reveal that market forces are beginning to play a more decisive role in the credit markets that represent the real foundation for China's investment-led economic growth model. But, slowing manufacturing activity can also lead to slower economic growth, both in China and in many emerging market countries reliant upon exports to China.

    So, the real issue to watch is China's credit markets and banking system. Although their accounting and financial reporting procedures are hidden by smoke and mirrors that can mask irregularities, cracks in this foundation have still become apparent. And, eliminating the smoke and mirrors is another issue that needs to be adressed. Until then, even though we have become so desperate for economic growth, the addage "Don't Fight the Fed" may be synonymous with "Ignore that the Emperor Has No Clothes."
    Apr 2 08:19 AM | Likes Like |Link to Comment
  • WTO backs U.S. over China in rare earths dispute [View news story]
    Journey57 [Nicolas Tavenner] , a few years ago, when many finally became aware of the implications of our reliance upon China for rare earths and rare-earths based components manufactured in downstream industries, representatives of various government agencies expressed surprise that this could be possible because they supposedly believed that if these industries were so important, market forces would have led private enterprises to seek opportunities to generate profits in these industries.

    In effect, they attempted to deflect some of the criticism being directed against them by arguing that they were just going along with all those who claim that government should play less of a role in the economy and simply rely upon competition among private sector enterprises under free market conditions to naturally achieve an inevitable state of market equilibrium.

    Those in the private sector argued that excessive government regulations made it nearly impossible to establish mining operations within the US, and that the government shouldn't rely upon markets to work as they should even after the government has largely crippled these markets. For example, the American Mining Association claims that it can take 7 to 10 years just to obtain a permit to open a mine as a result of a long list of archaic procedures involving sequential approvals by fourteen government agencies each of which takes months or years to complete rather than only days or weeks. And if, for example, the sixth such agency in year 5 determines that the permit request was submitted using the wrong font size and style, this could result not only in their refusal to process the request, but a requirement that the permit must be resubmitted to the first agency, and then makes its way through a second series of reviews by the four succeeding agencies before it can again be submitted to the sixth agency--which hopefully has not changed its protocol regarding font sizes and styles in the meantime!

    According to the CEO of a rare earths mining company attending a conference that I attended three years ago that was intended to bring together private and public sector interests in an effort to dig the US out of the wrong type of rare-earths hole that we now find ourselves in, "If the government would just get the heck out of the way, they could take care of this problem right away."

    To be fair, another government agency representative pointed to a number of mining projects that were not cleaned up properly when they were closed and I could understand his frustration with what appeared to be a pattern of irresponsible behavior on the part of many mine operators. But, when the keynote speaker from the Dept. of Energy distributed the DOE's latest report outlining their Critical Materials Strategy, which essentially defines criticality in terms of the degree of importance that rare earths may play in achieving the DOE's clean energy goals, it quickly became apparent that the DOE is so preoccupied with environmental issues that it can hardly even recognize the broader national security concerns and geopolitical implications associated with China's near-monopoly over rare earths and their 15-year lead [according to Karl Gschneidner of Ames National Labs] in the development of downstream industries. And, as the conference progressed, I was increasingly left with the impression that our various government agencies, of which there are many, are permeated with like-minded individuals with a myopic focus on environmental issues and what they describe as clean energy.

    Major General Robert Latiff and General Gregory S. Martin, the former [retired] commander of the USAF Material Command seem to have a more balanced, pragmatic view that properly encompasses the broader range of issues posed China's grand strategies centered around their monopoly over rare-earths and dominance over high-tech industries reliant upon rare-earths. According to General Martin, the government can't just leave these issues to the markets since markets have been so distorted by [U.S. and non-U.S.] government interventions, policies, etc. I agree with this assessment, and believe too many of us have become so blinded by ideology that we are willing to allow ourselves to be harmed by others who don't play by the same rules. Indeed, to some, economic competition is a form of warfare not a game to be "played."

    But, until we listen to the voices of pragmatists who recognize what's at stake, the government is more likely to impede efforts to jump start the development of domestic sources of rare-earths and downstream manufacturing operations. The recent WTO ruling was a step in the right direction, but we can't rely only upon sanctions against China. We have to become more competitive ourselves, and that is going to be a long, hard road. Alaskan Senator Lisa Murkowski seems to get this, and this may contribute to the development of Ucore's (OTCQX:UURAF) heavy rare-earth resource in Alaska, but that is still at least two years away, and we still lack people with the knowledge and skills to develop this vital industry.

    In that regard, Dr. Corby Anderson of the Colorado School of Mines and Karl Gschneidner of Ames National Laboratories can play vital roles, but until there are jobs in these industries [within the US], there will be little incentive for qualified candidates to pursue studies in this area after decades of neglect.

    Lower US energy costs due to new sources of natural gas [which should merely serve as a bridge to thorium-based nuclear energy, in my view] may attract chemical and manufacturing companies to the US, and I believe it would make sense for companies in both industries to acquire stakes in rare earth mining companies [in my view, they wouldn't survive otherwise]. If that plays out, jobs created by companies in these industries doing business in the US could also play a vital role [BASF and DuPont come to mind, for example].
    Mar 28 12:10 AM | 2 Likes Like |Link to Comment
  • WTO backs U.S. over China in rare earths dispute [View news story]
    In order to rebalance its economy, China must increase its domestic consumer spending.

    This can be achieved in various ways, but one strategically important avenue that they have targeted is to orient their economy away from low-margin industries toward high-tech industries that offer higher wages.

    Implementing this strategy requires access to technological know-how that can't be obtained solely through cyber-theft and non-enforcement of intellectual property rights.

    Many believe that China also intended to use their near-monopoly over rare earths and their 15-year lead in the development of downstream industries to coerce high-tech companies to locate their most advanced manufacturing facilities within China [not just assembly or manufacturing operations for third-generation products] where these companies would also be subject to local content requirements that would further facilitate efforts to "transfer" this technology to Chinese companies.

    Theoretically, this ruling by the somewhat toothless WTO will make it easier for high tech companies to access rare earths based components at competitive prices without having to locate their most advanced operations in China where it would be more difficult for them to guard their most valuable and sensitive technologies.

    But, falling REE prices could instead set-back efforts to develop rare earth mining companies outside China, which would serve as a valuable building block at the foundation of a decades long effort needed to catch up with China's huge lead in downstream industries that the rest of the world largely ignored because, despite their tremendous importance to industries with revenues in the trillions, the size of the market for these rare-earths based components in and of itself is tiny. [Like BASF, they don't make the mobile phones, computers, navigation systems, or self-guided missiles; they make the ingredients used in the displays, hard drives, speakers, motors, etc. that make these devices smaller, lighter, brighter, louder, and more advanced than those of their competitors.]

    Alternatively, to the extent that China is unable to limit access to rare earths based components as effectively as they may have hoped, this could limit their ability to achieve their economic growth and economic rebalancing efforts which are also vital to global economic growth.

    OPEC has oil, and China has rare earths, so you might say that we now find ourselves caught between Iraq and a hard place. Solutions anyone? [Hint: we all know the name of the chairman of the Federal Reserve and might even be able to define a "considerable time period," but can anyone even identify the US Trade Representative?]
    Mar 26 01:54 PM | 1 Like Like |Link to Comment
  • WTO backs U.S. over China in rare earths dispute [View news story]
    This is good news for companies that rely upon rare earths, but bad news for non-Chinese rare earth mining companies since a loosening of quotas on Chinese exports of rare earths is likely to put downward pressure on rare earth prices.

    Companies such as Molycorp (MCP) and Lynas ( are having a hard enough time competing as it is. If prices fall further, they will have a difficult time achieving profitability. If cash flows for these rare earth mining companies are squeezed, this could also impede their efforts to organically fund their longer-term business plans including their "mines to magnets" strategies.

    If new capital is required to finance their business plans, equity interests of existing investors could be diluted.

    If these non-Chinese rare earth mining companies don't make progress in developing their business plans, they will remain largely irrelevant--and, ironically, the military and many high tech industries critical to economic growth in more developed, knowledge-based economies will find themselves even more reliant upon China than ever.
    Mar 26 01:10 PM | 3 Likes Like |Link to Comment
  • Small Chinese bank suffers run [View news story]
    Hundreds of people taking money out of a small bank in a remote rural area seems relevant only to those looking for signs that cracks in the foundation of China's economy built on debt-fueled investment spending are finally beginning to surface.

    Although these concerns are justified, I don't think this isolated event is representative of the higher magnitude developments that more and more investors are beginning to worry about. If it was, the market would rally on the bad news since it would indicate that even more "simulus" on the part of governments and central banks is "required."
    Mar 26 07:45 AM | Likes Like |Link to Comment
  • Chinese factory activity contracts for fifth straight month [View news story]
    Not so fast june 1234: I think it would be a mistake to focus so myopically on potential actions to be taken by the Fed. Many other central banks around the world have also been implementing lax monetary policies, and the amount of money printed by the PBoC alone dwarfs the amount that the Fed has attempted to print.

    And, the Japanese Yen has fallen relative to the US dollar because their QE program was just as large as, and more effective than, the Fed's QE3 program. In fact, this may have caused Japanese exports to become more competitive relative to Chinese exports, and that, in turn, may help to explain why Chinese exports, and manufacturing activity, seems to have been under pressure lately -- if you can sift through all the distorted economic data.
    Mar 24 12:40 PM | Likes Like |Link to Comment
  • Chinese factory activity contracts for fifth straight month [View news story]
    Sam, the first thing to note is that, theoretically at least, China's trade surplus results from sales by businesses, not from sales by the government or the PBoC. The businesses may want to repatriate their sales proceeds denominated in a foreign currency. To do so, it would be necessary for the PBoC to print renminbi that they could issue to the businesses in exchange for their foreign currency.

    Chinese businesses would also import goods from other countries that may be denominated in foreign currencies. The foreign currency received from exports could be used to pay for those imports denominated in foreign currency.

    If China runs a trade surplus, the PBoC may need to maintain some foreign currency reserves that can be drawn upon to cover the mismatch. Foreign currency reserves in excess of this amount are largely unnecessary. I don't believe China has ever had a $3.7 trillion trade surplus.

    But, in order to prevent its currency from appreciating against foreign currencies which could make its exports less competitive, the PBoC has not only allowed Fx reserves accumulated from trade surpluses to accumulate, it has also printed large amounts of renminbi that it then uses to buy low-yielding US Treasuries.

    The US Treasuries purchased appear as an asset of the PBoC, but to tap those Fx reserves the PBoC would have to offer renminbi in exchange. The requirement to exchange renminbi for the Fx reserves therefore represents an offsetting liability.

    There is an opportunity cost associated with allocating so much capital to low-yielding Treasuries. The PBoC has attempted to reduce this somewhat through the creation of SAFE, a sovereign wealth fund authorized to invest in riskier assets that may generate higher returns, but this is a relatively small amount compared to China's $3.7 trillion Fx Reserves.

    This opportunity cost is also minimized by the fact that banks can obtain funds at low, government-regulated interest rates on deposits from individuals who, until recently, directed 80% of their savings into bank accounts because:

    - they don't trust the Chinese stock markets;

    - they're unable or unwilling to finance speculative investments in already high priced real estate in urban areas where real estate ownership is allowed; and

    - opportunities for those without connections to sufficiently high-ranking members of the CCP ["guanxi"] to start businesses is limited.

    The advent of high-yield wealth management products, as well as mobile banking offered by cash-rich internet companies who then lend funds to liquidity starved banks at much higher inter-bank interest rates, has temporarily diverted trillions of renminbi away from these bank deposits. And, 10% to 20% interest rates on high-yield money market accounts used to finance long-term investments by local government officials and real estate developers with few other alternative sources of funds also seems to have attracted hot money from outside the country, despite China's strict capital controls. One way of sneaking this money into the country is to "pad" invoices for exports.

    The fact that China's longer-term objective is for the Fx value of the renminbi to gradually rise also made some speculators confident that the low interest rates at which they are able to borrow elsewhere would effectively be reduced by appreciation in the value of the renminbi. Concerned that the availability of these portfolio investment inflows will limit their ability to rein in out of control Fixed Asset Investment spending that has contributed to heightened concerns about asset bubbles and their impact on the health of China's banking system, the PBoC has attempted to curtail these hot money inflows by widening the trading band for the renminbi. But, this may be short lived since the PBoC is confronted with many competing challenges, some of which require more liquidity and some less, and the PBoC has few other available tools at its disposal to address these conflicting concerns. This may explain why the PBoC has chosen to widen the trading band, rather than seeking a more consistent direction for Fx rates.
    Mar 24 12:28 PM | 2 Likes Like |Link to Comment
  • Chinese factory activity contracts for fifth straight month [View news story]
    China's central bank has printed far more money than the Federal Reserve, the Bank of Japan, and the Bank of England, combined. They have converted much of the renminbi into low-yielding US Treasuries to be held as foreign currency reserves far in excess of their needs. Some fail to realize that this asset is offset by a liability on the PBOCs balance sheet.

    This is just another example of the capital misallocations that the Chinese government [the PBoC is not independent] has become known for.
    Mar 24 10:07 AM | 2 Likes Like |Link to Comment
  • China to accelerate projects in order to support growth [View news story]
    A few days ago, I had an opportunity to attend a presentation by Robert Hormats, former vice-Chairman of Goldman Sachs and Under Secretary of State for Economic Growth, Energy, and the Environment, regarding global economic trends.

    He made an interesting comment that, despite China's one-party system and the lack of citizens' right to vote or to own land [in rural areas], local government officials must still win the satisfaction of the people in the villages, cities, or provinces they represent if they hope to be promoted within the Chinese Communist Party. You can hear his comments at the 40:00 minute mark in this recorded video of his presentation sponsored by the Foreign Policy Association.

    If local government officials were truly concerned about satisfaction ratings among the people in their districts, including those without guanxi, this would argue that these local government officials would think twice about seizing land for sale to real estate developers, since that would disenfranchise those who were forced off that land.

    And if members of the CCP were likewise concerned about the ability of local government officials to achieve such satisfaction ratings, this would also suggest that these local government officials would be reluctant to defy the central government's wishes to rein in spending on white elephant projects despite the fact that "the mountains are high and the government is far away."

    However, we know that local government officials have managed to incur over $2 trillion in debt in just the past few years alone, supposedly against the wishes of the central government. So, what went wrong?

    In some cases, the answer may be that corrupt local government officials simply decided to "take the money and run." There is no shortage of money making its way out of China to fund all cash purchases of foreign real estate, often in places where many successful Chinese have already relocated their families.

    But, it may also be the case that the CCP doesn't place as much importance on the satisfaction of "the people" as it does upon taking care of its own, i.e., well-connected members of the CCP, and maximizing opportunities to collect what might otherwise be reported as profits.

    And, the current CCP leaders may also be growing less concerned about the development of the inland areas, as evidenced by their recent decision to move an additional 100 million peasants from the already decimated inland areas to the coastal areas as part of their urbanization "simulation plan." Apparently they have already forgotten that the founder of their communist party, former Chairman Mao Tse-tung, was able to rise to power by going inland to amass an army of disenfranchised peasants that he then relied upon to successfully overthrow the vested interests in the wealthy coastal areas.
    Mar 23 03:28 PM | Likes Like |Link to Comment