Door Number Two

[Christoph von Gamm]

Re: Door Number Two

+++ Quote:

If you have traveled must for the past few years then you cannot fail to see what's happening. Go to Europe. Go to Asia. Go to Mexico. Go anywhere. Gold is not rising, gold is priced in dollars and the dollar is falling.

THIS IS JUST ABSOLUTELY WRONG - WRONG AND WRONG AGAIN - PLEASE DO THE MATH. GOLD HAS INCREASED BY ABOUT 30% IN EURO AND SWISS FRANC TERMS.

[jk]

Re: Door Number Two

+++ Quote:


THIS IS JUST ABSOLUTELY WRONG - WRONG AND WRONG AGAIN - PLEASE DO THE MATH. GOLD HAS INCREASED BY ABOUT 30% IN EURO AND SWISS FRANC TERMS.

the euro is falling; the swiss franc is falling. the dollar is falling faster.

[FRED]

Re: Door Number Two

the euro is falling; the swiss franc is falling. the dollar is falling faster.

CORRECT! It's a race to the bottom between the world's two main reserve currencies.

[GRG55]

Re: Door Number Two

the euro is falling; the swiss franc is falling. the dollar is falling faster.

Well if that be the case then one doesn't need to travel very far at all to see that gold has "done nothing". (which is good, because I am getting tired of taking my shoes and belt off at all those damn airport security checkpoints).

Is Gold Expensive Yet?

...How do we know to what extent this impressive rise of gold as compared to dollars is due to an increase in the value of gold? And to what extent it is due to a decrease in the value of dollars? One tactic is to simply change the units in which we express the price of gold to something else. Say, bushels of wheat. Rather than ask how many dollars it takes to buy an ounce of gold, we could ask how many bushels of corn does it take to buy an ounce of gold. Bales of cotton, barrels of oil, pounds of sugar, pounds of copper. Or better yet, we could take a basket of a whole array of such things and ask how much "real stuff" it takes to buy an ounce of gold. Then we can say we have arrived at a reasonable answer to the question posed above:

How do we know to what extent this impressive rise of gold as compared to dollars is due to an increase in the value of gold? And to what extent it is due to a decrease in the value of dollars?

Having been conditioned to equate value with dollar price, we may find the answer shocking: None of the former. All of the latter. Gold has not detectably increased in value for years.

To illustrate this fact, below are two charts of the price of gold. The first chart shows the price of gold in dollars - the ratio between the value of gold and the value of dollars. The second chart shows the price of gold in real stuff - a basket of commodities as represented by the Dow Jones AIG spot commodity price index. In terms of real things, of real value, gold at over $900 an ounce today is no more expensive than it was under $300. The price change reflects only a shrinkage in the denominator of that ratio - the value of the US dollar.

[FRED]

Re: Door Number Two

there are others who think it has value becaue they think there will be deflation. gary shilling, for example, who - irrespective of his analysis- has been consistent and correct about buying bonds for over 20years iirc.

EJ writes in:

Of course. If we zoom out to 1962 we see a very different picture. Ten yr bonds below 5% were the norm until the US abrogated the international gold standard.

Anyone who purchased non-callable 10 year treasury bonds in 1980 was pleased. By 1983 inflation was back down to 3% while those bonds were earning more than 15%. That'll never happen again. All treasury bonds are now callable.

i agree that much of the push on the long end is a flight to quality. but even though you [and i] think that deflation isn't going to happen, there are those who think otherwise, and buy long bonds on that basis.

A domestic purchaser may buy at 4% expecting inflation to fall to 1% and think they're getting a good deal. However, from the standpoint of the People's Bank of China, they buy a 10 year treasury bond yielding 4% and see the purchasing power of the currency in which is it denominated decline more than 4% a year. One is bidding rates up and the other down. This is a paradox of sovereign bond pricing in a debt deflation attended by currency depreciation. If we were Japan, yields on long bonds might already be 1%.

i don't understand how declining us consumer demand for imports results in a decline in the dollar. it would appear that it should have the opposite effect: supporting the dollar. i.e. less demand for imports means less demand for non-dollar currencies on the part of dollar holders, means a stronger dollar.

This is the essence of Ka-Poom Theory. I call it The Deal, as in the US role with respect to its trade partners.

The Deal starts with the US having a strong credit rating, the sum of a track record of repayment, political stability, and ability to readily pull out of economic downturns and thus protect return on investment. US policy is to run a consumption based economy that turns that credit into import demand for trade partners that run economies based on policies that promote high national savings rates. Thus we "solve" Japan's demand deficit "problem" (high national savings rate) by purchasing their goods at a discount to the PPP value of the same goods in Japan; help China's government execute its high national savings rate and growth rate policies to maintain the political legitimacy of the CCP by acting as a primary demand engine (N. America represents more than 30% of China exports); help Saudi Arabia by buying oil and providing military protection; and so on. If we lose our credit rating because we are relying too much on currency depreciation to make debt repayment affordable, lose political stability (relative), and cannot quickly pull ourselves out of this recession, then we get our Poom.

Keep an eye on inflation and unemployment and the duration of the recession. Those are the two critical mertics that will determine interest rates medium term. If the US is still struggling with recession in a year, expect long rates to go up.

[Guest]

Re: Door Number Two

EJ writes in: ... Thus we "solve" Japan's demand deficit "problem" (high national savings rate) by purchasing their goods at a discount to the PPP value of the same goods in Japan; help China's government execute its high national savings rate and growth rate policies to maintain the political legitimacy of the CCP by acting as a primary demand engine (N. America represents more than 30% of China exports. ...

Fred -

I have not been able to find the quote, something I read the other day indicating that percentage of China's exports to the US today is actually considerably smaller than the 30% stat you quote. The article (I believe it was from Fullermoney.com) notes that markets for China and India's GDP growth are actually a great deal more diversified today that they were just five years ago.

The gist of it noted that the observation "US is 30% of China export markets" is now inaccurate in that China alone has aready considerably diminished this percentage of dependence on the US, through internal demand growth and also a large diversification of it's export markets. The conclusion was that this 30% is essentially an old stat. Not my opinion. I'm merely quoting what I read.

Here is another related extract:

<< The India Report - Thanks to Deepak Lalwani for his ever- interesting report, which this week concentrates on decoupling:

If the US economy faces a major slowdown, or worse still a recession, will emerging markets, and in particular India, be considered a safe haven? There is increasing press comment of emerging markets de-coupling from the US as China and India's growing economies could take up the slack created by a slower US economy. We do not think that full de-coupling had occurred, but the journey has started and has some 5-7 years to evolve.

After the unfounded scare in February of a US recession emerging markets have received billions of dollars, which accelerated after the sub-prime woes hit developed markets since August this year. Asian markets are in far better shape today than nearly 10 years ago at the time of the Asian banking crisis. Emerging markets are less dependent on the US now taking 16% of their goods and services vs 25% in 2001.

Their share of the world economy is up to 30% from 20% in 1999 and growth rates are more than twice the average of the developed economies; in the case of BRICs countries average growth is about 8% vs just over 2% for developed economies. Most emerging nations run balanced or surplus budgets and current accounts, in contrast to developed countries.

Trade between emerging nations now exceeds exports to developed countries. Since the last US recession, Asia is now a creditor vs being a debtor then as huge forex reserves have been built as economies have expanded.

So, are emerging markets a safe haven? No. It is too early to win that title as any major slowdown in the mighty US economy will have a ripple effect on other economies; but US influence appears to be waning. Is India a safe haven? No. A better description is that it is not, but it is safer than many of its Asian peers because its exports account for under 15% of GDP and its large domestic economy and huge infrastructure needs will sustain economic growth of about 8% on average for some years to come. Also, India has a very low exposure to western sub-prime woes which has reassured investors.

______________


Can the Fed Stimulate its Way Out of This Credit Crunch?

Soros : there is a big silver lining in this doom and gloom scenario (US consumption demand collapse), according to Soros. A recession in the U.S. and the rest of the developed world may be "inevitable" but Soros believes "China, India and some of the oil-producing countries are in a very strong countertrend."

In fact, Soros sees a significant shift of power and influence away from the U.S. in particular - and the rest of the developed world (Europe, Japan, etc.) in general. Likewise, he's expecting this shift to favor emerging markets in the developing world, particularly China.

Global Decoupling: Economic Reality or Busted Myth?

Asian stocks of course have been plunging the past few months, right along with the U.S. and most other markets around the world. So much for "decoupling" say the critics. But decoupling was never meant to explain short-term investment returns, where manic-depressive investor sentiment always rules over fundamentals.

Instead, decoupling is the notion that emerging markets have grown up, and are now capable of standing (and running) in their own right - perhaps even without the support of the American consumer.

The long-term fundamentals case for emerging markets remains intact, and the long-term growth potential is head-and-shoulders above the United States. There is growing evidence that shows economic decoupling is in fact taking place.

For example, the financial press is abuzz about the apparent collapse in U.S. consumer spending after dismal December retail sales were reported. However, data on U.S. personal consumption expenditures shows a peak way back in 2004. Since then, yearly growth in consumption spending has declined by one-third.

Meanwhile, emerging market capital spending has surged to new highs over this same period. Emerging market exports are booming too, growing about 12% annually last year. Since 2000 in fact, emerging market exports have been growing twice as fast as exports from developed countries: 10.8% a year compared to just 5.1%.

A "Radical Realignment" in Favor of Emerging Markets

So if U.S. consumer spending is still the engine of global growth and has been slowing for several years, how is it that emerging market industrial production and exports are still booming? The answer is increased trade between emerging markets that's taking up the slack for slowing U.S. demand, and this dynamic should only get stronger going forward.

This is one strong piece of evidence that decoupling isn't dead yet. Still, only time will tell for sure. However, I think it's a mistake to so quickly pronounce decoupling dead, until all the evidence is in. Just because stock markets in China, Brazil and other emerging markets sold-off with virtually every other market around the globe - this doesn't disprove decoupling. Instead, this is what happens in the panic of a bear-market - all stocks go down together - the good, the bad, everything gets ugly.

Putting aside recent short-term market volatility, over the long-run, emerging markets are turning the tables on the developed world and have much greater growth potential. As Soros writes...

"The current financial crisis is less likely to cause a global recession than a radical realignment of the global economy, with a relative decline of the U.S. and the rise of China and other countries in the developing world."

[jk]

Re: Door Number Two

Keep an eye on inflation and unemployment and the duration of the recession. Those are the two critical mertics that will determine interest rates medium term. If the US is still struggling with recession in a year, expect long rates to go up.

in the 1970's there was something people called "the misery index," which was equal to the sum of the inflation and unemployment rates. [of course both of those rates were calculated in a more honest and straightforward manner in those innocent days.]

re long rates- they'll go up unless the fed decides to peg them.


lukester, be careful in looking at asian trade statistics. a lot of asian "exports" to other asian countries consist of primary and intermediate goods which then go into finished exports to oecd countries.

[Guest]

Re: Door Number Two

JK -

Actually I'm mostly "agnostic" on the subject at this point (translates as "doesn't personally know squat" about it).

But if I were betting real money here, (which I'm not), I'd keep a wary eye out for "accepted wisdom traps" while betting against any George Soros prediction on this macro event. Some people think his predictions are "all washed up", but I would hesitate to hazard that assumption.

[ P.S. JK, in your own quiet and always impeccably reasoned way, I note you've become one of iTulip's biggest, baddest "total bears". You are now most definitely the high priest of the "all fall down" camp! ]

[rj1]

Re: Door Number Two

Minor critique:

For a nation to experience a hyperinflation, all four of the following conditions need to be met:

1. Politically and economically isolated and irrelevant (Not like the US. Think: Zimbabwe.)
2. No external demand for the currency (Not like the US dollar. Think: Iraqi Dinar.)

Germany in the inter-war period was not politically and economically isolated and irrelevant, and there was an external demand for the currency as the French, British, and Americans needed Deutsch marks.

[Guest]

Re: Door Number Two

Here is another reference to US only accounting for 16% of China's exports. Could we be referencing out-of-date data on China's unmitigated US dependency here? "The US is China's primary demand engine" (in 2008)? Maybe this paradigm is rapidly receding - most particularly going forward to 2010 - 2012, which is very soon!.

_____________


By Wang Xu (China Daily) - Updated: 2008-01-25 07:45 --

Global downturn won't hit China badly

China's economy will experience only a moderate slowdown in 2008 because its diversified exports and strong domestic demand will help it stay resilient amid a weakening world economy, economists said yesterday.

"We expect the Chinese economy to grow by 10 percent this year despite a US-led global economic slowdown," said Liang Hong, an economist with Goldman Sachs in Hong Kong. "Strong domestic demand, especially investment growth, is expected to sustain the overall GDP growth, though the export growth is set to slow down."

China has an average GDP growth of 10.6 percent over the past five years, thanks to its blistering export growth and strong investment. Yet the worsening US subprime crisis is stoking concerns that the world's fourth-largest economy may loose its steam when American consumers tighten their purse strings against Chinese goods.

China's GDP was never that "coupled" with US growth, Bank of America economist Wang Tao said, because its exports have been diversified in destination and products.

A Standard Charted Bank report says the US now accounts for only about 16 percent of China's exports, compared to 25 percent in 2001.

Booming emerging markets, including Latin America and Africa, now buy about 37 percent of the steel, clothes and electronics it exports.

Domestic manufacturers' rising competitiveness may help them expand in the global market, thanks to enhanced technological innovation and rising labor productivity. Machinery now comprises more than half of China's exports, compared to less than one-third in the early 1990s.

"The slowdown in economic growth will reduce overall imports by the US but increase its demand for low-end and inexpensive goods," said Mei Xinyu, a researcher at the Chinese Academy of International Trade and Economic Cooperation, a think tank affiliated to the Ministry of Commerce.

In fact, China's exports to the US are likely to increase, he said, citing the fact that they have increased steadily even though the US economy began slowing from late 2000.

China's overall exports may slow down, but experts say strong domestic demand will continue to play a more important role in propelling the economy. "Strong domestic demand appears to have become a good cushion against slower external demand," said Gong Fangxiong, an economist with Morgan Chase Bank, Hong Kong. "And in 2008, we look to another year of solid economic growth at 10.5 percent.

"A significant external slowdown would reduce the need for more aggressive tightening of China's macroeconomic policies, creating a healthier environment that would foster the needed shift toward more sustainable, domestically-driven growth."

Last year, China's central bank raised the interest rate six times, and ordered local lenders to set aside more cash in deposit on 10 occasions to curb inflation and prevent overheating. The central government implemented a series of administrative measures, too, to cool down the economy. These steps have proved quite effective in reducing investment and production, with the GDP growth starting to decline from a record 11.9 percent in the second quarter of last year to 11.2 percent in the last.

"The government (however) could tolerate slightly faster investment growth by relaxing its macro control slightly because of the US downturn," Citigroup China economist Shen Minggao said.
Surging fiscal revenue will give the government great leeway to increase public spending when necessary, analysts said. And soaring corporate profits over the past years will give a strong incentive to domestic enterprises to build new plants and research facilities. According to the National Statistics Bureau, the government's fiscal revenue was 5 trillion yuan ($691 billion) last year, compared to 1.89 trillion yuan ($261 billion) in 2002.

"The global downturn should help the Chinese economy to cool off without the government having to take aggressive tightening measures by resorting to blunt policy instruments," said Huang Qing, of Morgan Stanley.

Besides, domestic consumption, which the government has tried to boost, is expected to remain robust after the country's retail sales growth hit an eight-year high last year. "At the same time, domestic market-oriented sectors, especially those exposed to capture spending supported by the government, should do relatively well as the government raises its spending to shore up domestic demand, offsetting external demand," Huang said. Rising consumer prices, however, will remain a big concern for the government because food and oil prices, the main drivers of inflation, are not expected to ease this year, analysts said.

Stable and brisk growth:

The country created 51 million employment opportunities. The disposable income of urban residents grew at an annual average of 9.8 percent to reach 13,786 yuan ($1,900) last year. Rural residents' net income rose, too, to 4,140 yuan ($572) in 2007, increasing 6.8 percent a year.

The total installed electricity generating capacity increased 350 million kW, and 28,000 km of highways were built.

[FRED]

Re: Door Number Two

More detailed resonse later (game time coming!) but here's our latest data:

[jk]

Re: Door Number Two

here's the latest wto official data [2006] it would be worth knowing whether exports to hong kong or korea might include intermediate goods for re-export to the u.s. or eu

By main destination
1. United States					21.0
2. European Union (25)					18.8
3. Hong Kong, China					16.0
4. Japan					9.5
5. Korea, Republic of					4.6

[and lukester, you have correctly scoped out my bearish predisposition.]

[Guest]

Re: Door Number Two

Howz about dem New York Giants, eh? Patriots got "bushwhacked". :rolleyes:

[Guest]

Re: Door Number Two

As a final note, and to inject a little humor into the discussion, here's our take on global "decoupling." In the fantasy of global decoupling of Soros the actual level of dependence on the US consumer to counter self-imposed demand deficits in China, Japan and other export countries is generally unappreciated, as is the dependence of the US on foreign borrowing to finance consumption and government spending. With 70% of US GDP produced by consumption, below is our representation of the relationship of the world to the US consumer. As the US consumers goes down, so goes the world economy.

E.J. -

With respect, if twelve months out we note China annualized GDP has "slumped" a mere two to three percent at most, the above theory will need to be reexamined? Your critique of Soros' view is bold, but it also climbs out on a limb. A 2008 - 2009 China GDP growth rate of 8% - 9% will be insufficient decline to validate your portrayal of the extent of China's dependency upon US consumption.

Meanwhile the event will play out and clarify the question, but would not a 9% resulting GDP growth in China thereafter deliver a decidedly ambiguous affirmation to the above statement?

[rabot10]

Re: Door Number Two

E.J. -

With respect, if twelve months out we note China annualized GDP has "slumped" a mere two to three percent at most, the above theory will need to be reexamined? Your critique of Soros' view is bold, but it also climbs out on a limb. A 2008 - 2009 China GDP growth rate of 8% - 9% will be insufficient decline to validate your portrayal of the extent of China's dependency upon US consumption.

Meanwhile the event will play out and clarify the question, but would not a 9% resulting GDP growth in China thereafter deliver a decidedly ambiguous affirmation to the above statement?

Luk do U have a life?