Category Archives: China

Markets irrational longer than you remain solvent, exhibit #274

2013.12.Irrational markets

Source: Russell Investments

There’s an article out on Seeking Alpha yesterday, called “Manufacturing Growth and Capital are Moving from China to Mexico“, nominally about the Mexico-China relationship to the US, but also more broadly (in my interpretation) about how we react to and measure growth in developing economies.

The key thesis here has to do with the spillover effects of China’s decelerating growth and who will pick up the slack. This may not necessarily be an exact zero-sum game, but it is to a certain extent, at least as long as Americans are still gaming, eating, drinking, driving and whatever else they demand to do, and as long as China and Mexico remain the second and third biggest trading partners of the US.

That Mexico will pick up some of this slack is a foregone conclusion. But just how much it benefits is what remains to be seen, and at least among its boosters, is what drives all this excitement we’ve been seeing about Mexico ever since the current administration was elected. Specific to this article, which was written by an equity analyst out of California called Erik Gholtoghian, the currency deficit between Mexico and China is particularly telling:

“…the Mexican peso has weakened dramatically against the dollar since 1990, almost 80%, and the peso is down 2.44% against the dollar over the past year. In other words, the Chinese yuan has strengthened 34% against the dollar since the revaluation began in 2006, but over the same time, the peso has weakened 20% against the dollar. This means the yuan is 54% stronger against the peso just over the past seven years. The result will be greatly decreasing exports from China to Mexico and increased exports from Mexico to China.”

All fine and good, but there’s something missing here and after discussing this with some folks I know around Mexico City, it strikes me that this is partly about Mexico but also about how to approach investment prospects for many emerging and frontier market countries.

I’ll begin with a basic metaphor to illustrate what I’m thinking of here. When you jump up in the air, how can you remain airborne as long as you do? Gravity should theoretically pull you back to earth, and in fact it eventually does. But there is a brief moment when you can defy the theory of gravity, due to the relationship between your body’s mass, your muscle strength and the actual gravitational force of the earth.

In the case of Mexico, economic reality has been suspended in this theory-defying space for a few years now and it’s a matter of time before indicators on the ground (no pun intended) reflect a closing of this gap. Think of it as the reverse situation of the dotcom bubble or the real estate bubble. This is the basis for value investing (as opposed to speculative investing) and at a bird’s eye level is no different from the approach Warren Buffet uses in evaluating stocks. Company ABC has low costs, stable contracts with a diversified customer base, competitive quality products and whatever, they should be making X profits per year but they’re only making a fraction of that…therefore, buy.

Here’s another comparable situation: Billy Beane, he of Moneyball fame, used the same approach when he was managing the Oakland A’s baseball team in the early 2000s. He saw underpaid players who may not hit home runs and may even have crappy batting averages, but also never seem to strike out and wind up finding their way across home plate one way or another. He exploited this for as long as he could, until the rest of baseball caught on, copied it, and eliminated his advantage. By this metaphor, Mexico’s economy is slowly being recognized by the Billy Beanes of the investing world. The difference is that Billy Beane kept his mouth shut because he knew he was on to something. Meanwhile, these investing gurus can’t stop praising Mexico as the next big thing, partly because everyone else jumping on the bandwagon makes it a self-fulfilling prophecy (which is where the baseball comparison stops) and partly because the nature of today’s evolving media universe sort of demands everyone to stake his claim as an “expert” in something.

Another difference with the Mexico situation is that there are a lot more variables that could prevent the benefits of this growth from reaching ordinary Mexicans (corruption, red tape, narco, etc) and the persistent failure of commentators on Mexico to recognize the unpredictability and range of these other variables can appear very misleading. Sometimes this failure seems to be because the commentator in question is clueless/stupid/ignorant/etc. Sometimes it’s because they have a vested interest in a positive outcome and are therefore disinclined to (publicly) focus on downside risks (here’s one recent example of this).

There is also the perennial issue of timing, which is the great bugbear of economics and investing in general. Going back to the gravity metaphor, we can predict with decent accuracy how long you can stay airborne as a result of the very specific estimate of Earth’s gravitational force being 9.81 meters per second squared. One of the main reasons for this specificity is that Earth’s gravitational force is independent of human behavior. Mexico’s economy does not enjoy the same luxury for all of the previously mentioned reasons and more.

As John Keynes is supposed to have said, “Markets can remain irrational longer than you and I can remain solvent.”

Personally, I don’t believe anything – good or bad – until I see it.

More evidence of a Bitcoin bubble

If this isn’t proof enough of a Bitcoin bubble, I don’t know what is:

2013 December Bitcoin

Actually you know what? I think there is better proof: THIS.

Chart of the Day: China Mobile Users Surpass US

From Mary Meeker’s recent presentation on the state of the web (slide 67):

Chinese mobile users surpass Americans

Plain English: China’s Cash Stash

2013.04.11.China FX ReservesThis little quip from the FT about China’s rising FX reserves made me stop in my tracks:

“Reserves jumped $130bn to $3.44tn – roughly equivalent to the size of the German economy…”

Really?

Yes. Really. You can look it up here.

This now raises some other basic questions: what else is worth $3.4 trillion? Or: what could China buy with that kind of money? How else can we even conceptualize this number?

In the spirit of my previous conceptualization of Facebook’s $100 billion IPO, here are some other ways to conceptualize $3.4 trillion:

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A Diplomatic Way Of Saying A BRICS Development Bank Is A Stupid Idea

Dani Rodrik has this in Project Syndicate today:

It can be cause only for celebration that the world’s largest developing economies are regularly talking to each other and establishing common initiatives. Nonetheless, it is disappointing that they have chosen to focus on infrastructure finance as their first major area of collaboration.

This approach represents a 1950’s view of economic development, which has long been superseded by a more variegated perspective that recognizes a multiplicity of constraints – everything from poor governance to market failures – of varying importance in different countries. One might even say that today’s global economy suffers from too much, rather than too little, cross-border finance.

What the world needs from the BRICS is not another development bank, but greater leadership on today’s great global issues. The BRICS countries are home to around half of the world’s population and the bulk of unexploited economic potential. If the international community fails to confront its most serious challenges – from the need for a sound global economic architecture to addressing climate change – they are the ones that will pay the highest price.

Yet these countries have so far played a rather unimaginative and timid role in international forums such as the G-20 or the World Trade Organization. When they have asserted themselves, it has been largely in pursuit of narrow national interests. Do they really have nothing new to offer?

Read the rest here.

Chart Of The Day: Food & Agriculture Demand And Supply

What this screams is the urgency of leveraging Africa’s arable land potential. I wonder how Africa would stack up against the righthand chart:

2013.04.03.Food-Agriculture demand supply

From @CamboRobert.

What The BRICS Really Have In Common

2013.03.28.BRICS as The_Breakfast_ClubSometimes news editors exercise such brain-dead judgment that it’s a wonder journalism as a practice even survives.

That sentence was one of a few I conjured up as a possible lead-off thought. Well, technically, it was the only sentence, since the rest are thoughts posed as questions. Here they are:

Is the BRICS Durban conference officially the acronym’s 14th minute of fame?

When will the country grouping of France, Uganda, Chad, Kenya, Oman, Fiji and Finland finally supplant the BRICS as the political economy cadre du jour? What about Bulgaria, Uganda, Lithuania, Latvia, Spain, Haiti, Italy and Thailand?

2013.03.28.bric_summit_durbanDoes anyone honestly still believe in the BRICS as an investment theme?

Am I the only one seeing that Brazil, Russia, India, China and South Africa may actually have less in common than a brain, an athlete, a basket case, a princess and a criminal?

What drives this apparently human need to shrink everything down into bite-sized archetypal infonuggets?

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InfoGraph of the Day: Chinese Companies and Risk in Africa

This is really impressive and makes me really rethink my previous notions of a political risk framework, particularly in the context of Africa. No more preface necessary:

2013.03.14.China risk in Africa

Sourced from Africa-Asia Confidential.

China Latin America Trade: Who’s Dependent On Whom?

Yes, I am obsessed with charts. And if you’re still reading this blog with any regularity, you are too. Especially if they’re about China Latin America trade.

I finally had a chance to dig through a BBVA report from last month entitled, “How dependent is Latin America’s Economy on China?” Following are the essential takeaways.

  • Commodities have always taken a significant share of Latin American exports; the level of commodity exports concentration had been declining until the start of this century, which coincides with the further involvement of China in global markets.
  • The shift of China’s economic model makes it the biggest contributor to world commodity demand and the top importer of Latin America’s natural resources.
  • There is a positive China effect on commodity exports concentration; the dependency on Chinese demand for sample commodities has indeed increased during the last decade.
  • However, Latin American countries’ economic growth is far less dependent on China than the commodity exports figures might imply.

Now with those overview bullets out of the way, the first chart that strikes me is shown a few different ways but all with the same conclusion. This is one of the versions, demonstrating the proportion of each country’s exports that are commodities:

2013.03.12.Latam-China commodity exports percent share total

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Basic Strategy For Hyping An Investment Trend

2013.03.11.PlanetHypeI’ve seen this happen so many times, I could teach a class on it:

  1. Take a small data sample of something that confirms the view you’re determined to promote;
  2. Regardless of how rigorous the methodology or how representative the sample size, declare that this is indicative of a broader trend–forest for the trees or some such thing;
  3. Willfully ignore any aspects of this declaration that remotely contradict your view;
  4. Deny/insult/discredit/lash out at anyone who tries to take an even-handed view on it;
  5. Begrudgingly concede that nothing is perfect but that a positive attitude is what counts;
  6. Neglect to make clear the very pertinent fact that you have a vested interest–financially, politically, reputationally–in a positive outcome which therefore inhibits your own objectivity;
  7. If your lawyers insist, loosely outline the caveats to your opinion and bury them somewhere where they are least likely to be noticed (“past performance is not indicative of future results” is the boilerplate here);
  8. Debunk the caveats by paraphrasing points 1 and 2 and emphasize the probability your forecast will prevail;
  9. Lather;
  10. Rinse;
  11. Repeat.

Now, let’s consider a brief list of where we’ve seen this template applied in the recent past:

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Chart of the Day: World Gold Production in 2012

World gold production last year, sourced from here. Kind of speaks for itself I think.

2013.02.26.world-gold-production

Know Your Audience, China-Africa Edition

2013.03.07.Fitch-net-FDI-inflows-sub-Sarahan-AfricaThis has been building for a long time. The latest is this CNN interview with Dambisa Moyo, she of “Dead Aid” fame, entitled, “China Can Transform Africa“. A couple of comments caught my eye:

“Ultimately, the responsibility of how China engages in Africa is really at the domain of the African governments. We would not be worried about the risks of neo-colonialism or abuse, environmental abuse and labor issues, if we trusted the African governments to do the right thing.”

“I’m an eternal optimist. I’m probably the wrong person to ask, because I do believe that the structural and fundamental structures of Africa right now are poised for a very good few decades. If you look at an economy through the lens of capital, which is basically money; labor, which is basically how many people do you have and what skills do they have; and productivity, which is just, how efficiently they use capital and labor, the trend is very clearly in favor of Africa.”

I don’t disagree with anything in this statement or really anything else Moyo says in the interview. What occurs to me though is the big “IF” that is buried in there: “…if we trusted the African governments to do the right thing.” Moyo objects to the broad characterization of Africa as a giant war zone replete with disease and hopelessness and corrupt dictators, and I object to that too. But the bottom line remains that so much of forward development, not just in Africa, but Latin America too, hinges on trusting governments to do the right thing. Maybe this is a glass half-empty/half-full debate, but I personally don’t think we need any more evidence of governments being unable to do the right thing, whether in Africa, Latin America, the US, Europe or really anywhere.

Actually, elsewhere on the CNN website, this is a pretty realistic breakdown of the continent.

Related to this, Bill Clinton was apparently in Nigeria recently to give a speech about the challenges Nigeria faces. Some quotes from that story:

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Chart Of The Day: Emerging Markets Currency Wars Landscape

This is interesting:

2013.03.06.Swan FX Diagram

2013.03.06.Swan FX Table

And here’s an explanation of what we’re looking at:

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TRANSCRIPT: Nomad Capitalist Report Radio Show Interview

terraqueous-globeI was interviewed for the weekly Nomad Capitalist radio show over the weekend, hosted by Andrew Henderson. On the agenda: the Africa-China relationship, putting the hot-or-not test to Frontier Markets and the nuances of investing in Mexico. Here’s the link and here’s the mp3:

http://www.buzzsprout.com/8222/78536-nomad-capitalist-report-feb-23-2013.mp3

And here’s the transcript:

Andrew Henderson:   I want to start with a piece that you touched on recently, commodities, and emerging markets’ domination of reserves of commodities, explain that a little bit and let’s get into what exactly that can tell us.

Ulysses de la Torre:     Thanks for having me. If it’s the graph I think you’re talking about, it’s not a graph, it’s actually a map, which I pulled from Glencore, which, given Glencore’s footprint in this universe, shouldn’t be surprising that they should come up with something like this. And what it basically shows is a map of the world and how all of the key commodities are dominated in one form or another by underdeveloped markets. When I look at it, the first thing I see is that one of the big obstacles here is nothing more than logistics and infrastructure. And this is something that’s frequently lost on foreign investors trying to research this from afar because these are elements of an economy that you cannot fully understand without experiencing it. It’s one thing to be stuck in a traffic jam that takes you two hours to make a trip that normally takes one hour, but it’s entirely another thing for a truckload of raw materials to take three days to drive a couple hundred miles because of anything from bad roads, military checkpoints, bandits, local territorial disputes, on top of your basic traffic problems. This adds significantly to transport costs and who ultimately foots the bill for this added cost is often a point of dispute that can manifest in a lot of ways that North America and Europe haven’t really had to think about in decades, since before most of us were even alive.

AH:                             You talk a lot about Africa and I want to get into some of the specifics that are going on there. There’s a big media play that China is recolonizing Africa and so many of the resources plays, even the financial sector plays, let’s talk about Africa, because that’s one area to hone in on for these resources, it’s very resource rich, it’s fast growing, but it’s more than just China, let’s talk about who the players are in Africa and what’s going on there, give us the introductory sketch to Africa.

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Global Remittances Zig, Mexico Zags

First came a report from BBVA that remittances to Mexico have decreased for five consecutive months, with the $1.695 billion recorded in November apparently 5.1% lower than in November 2011. Furthermore:

“Among the factors explaining the fall in remittances to Mexico over recent months are: the weak employment situation of Mexican migrants in the U.S., associated with the uncertainty regarding the future of the US economy, with alternatives being sought to adjust the major fiscal deficit. There is also a comparison effect with November 2011, when annual growth in remittances was 9.4%.”

But let’s let the pictures to the talking:

2013.01.10.Mexico remittances

Then comes this article from This Day in Nigeria:

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Top 10 Market Themes for 2013 from Goldman Sachs

Before I get into this, let me first say that I am a believer in full transparency. So while I would love to source this top 10 list to an actual Goldman Sachs report, I can find no such report but have simply ripped this from other sources easily found by doing a simple google search for this topic. I am not a believer in link-baiting and regular readers of this blog know that it is my habit to include the original report in my comments, but since nobody citing this report has done this, I am sorry to say I can offer nothing more than this list, which I am taking on faith is an accurate representation of some supposed Goldman Sachs report since none of the other media outlets covering this trust their readers enough to offer the original source report:

1. Global growth: A ‘hump’ to get over, then a clear road ahead

  • Weak growth in early 2013 but a sustained recovery if that period is navigated
  • Increased fiscal restraint going into 2013, moderating in 2013H2 and beyond
  • Spanish economic and Italian political risks most intense in early 2013
  • ‘Room to grow’ globally given output gaps, particularly in advanced economies
  • Relaxation of the global energy supply constraint

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Rapid Growth Markets: Behold THE FUTURE

I’ve just spent way too much time playing with Ernst & Young’s interactive spider graph thingy that allows you to compare their 25 “rapid-growth” markets across a range of macroeconomic indicators. According to E&Y, these 25 countries possess the most promising “long-term potential to generate strong business opportunities.”

So since a picture is worth a thousand words, here’s how all 25 of these economies will change from 2011 to 2016 from the meta-macro view, compared against each other:

Okay! Is everybody ready to go out and make some money?
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Competing views on China’s Yuan Renminbi overtaking the US dollar

Last week, the Economist went to press first:

“…a number of countries, including India, Malaysia, the Philippines and Russia, appear to have slipped anchor since the financial crisis. Comparing the past two years with the pre-crisis years (from July 2005 to July 2008), they show that the dollar’s influence has declined in 38 cases.

The greenback has in the past played a dominant role in East Asia. But if anything, the region is now on a yuan standard. Seven currencies in the region now follow the yuan, or redback, more closely than the green (see chart). When the dollar moves by 1%, East Asia’s currencies move in the same direction by 0.38% on average. When the yuan moves, they shift by 0.53%.”

Four days later, we heard from Franklin Templeton’s Mark Mobius:

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China’s economic weakness is a bigger problem than economic growth

Tsinghua University’s Patrick Chovanec on CNN and NPR talking about China’s economic slowdown:

“Everybody in principle says that China needs to move from export and investment-led growth to domestic consumption-led growth. The problem is the entire Chinese economy is geared toward channeling resources away from household sector to fund and boost investment and production. And shifting those resources back to the household sector means first of all some significant structural changes to the Chinese banking system, the Chinese tax system, exchange rates, but it also means cutting the legs out from under the investment boom and the growth that China has in the interest of long term growth. And that has been something very difficult for Chinese leaders to swallow when push comes to shove.”

And then the most telling comment from the NPR interview: Continue reading

Hype vs. growth: China’s Yuan Renminbi in international payments

I’m VERY skeptical about the race to declare dollar extinction/renminbi dominance, but two items have been brought to my attention in the past few days that I thought would look rather nice when mashed up together. The first is this chart, from SWIFT:

How alarmed you are as a result looking at this chart I suppose depends on some combination of what your biases are, how unplugged you are and how alarmed you tend to become at things that contradict your expectations. Let’s consider the observations to make from this chart and some other things and then we’ll come back to what our response should be.
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