The global equity markets have been dinged over the past couple of days over the interpretation of the signals coming out of China that their growth will drop from 8% to 7.5%I came across this:http://www.wantchinatimes.com/news-subclass-cnt.aspx?id=2011...China's economy has been playing a greater role in global economy as the outlook for the US and European markets continues to deteriorate. Leading international bank Citigroup predicted on Thursday that 30% of global GDP would be generated by China in 2012, despite its prediction that China's GDP growth will slip (from 9%) to 8.7% next year. Jeff's note:Assuming the 9% number is accurate, a drop to 7.5% is a decrease of 17% or a reduction of world total growth (based on China accounting for 30% of total world growth) down by a nominal total of 5%. Well, that's assuming (I think far from a valid assumption) that a drop of this magnitude will not impact other country's growth.China is properly paying attention to its own interests. It is modulating the value of the RMB to keep its export markets alive, while continuing to maintain the ability to purchase raw materials. It is accelerating internal consumption. While there is an implication that this is a positive outcome for the US and Europe, it will tend to increase costs and inflation outside of China, while allowing them to address their own.China was taught an important lesson in 2008-2009. They were able to hold their head above water despite our upsetting of the apple cart, but they were still blamed for somehow being responsible (as one of our major creditors). They are working to isolate themselves from future European and US financial difficulties. This, in turn, will possibly play havoc with many of the emerging market countries which depend on China to buy their output.The world is changing before our eyes. It changes slowly and frequently without such obvious telegraphing as China is doing this week. It is not the world of today which should concern us in our investment plans, but what the world will look like in 2015 which should be in our sights.What are your goat entrails and tea leaves showing?Jeff
Here is perhaps a small piece of the mosaic. Many of China's cities have severe air pollution. The government recently announced a program to significantly reduce particulate pollution.http://www.google.com/hostednews/ap/article/ALeqM5hsxT52e9kS...BEIJING (AP) — Two-thirds of China's cities currently fail to meet stricter air quality standards that the government wants to phase in over four years to combat notoriously smoggy skies, a senior Chinese environmental official said Friday.The State Council, China's Cabinet, on Wednesday issued new limits on pollutants to go into effect nationwide by 2016. It also said major cities must launch programs this year to regularly monitor additional kinds of pollutants for the first time, including fine particles associated with health problems.Vice Minister of Environmental Protection Wu Xiaoqing said Friday that the government estimates that two-thirds of Chinese cities currently do not meet the new standards, saying efforts to improve urban air quality will be "very hard work."---------------------------------------------------It is important for China to be able to generate enough electricity to supply to the growing manufacturing industries. Adding pollution control equipment onto the many coal-fired power plants will have some cost associated with it. This will be beneficial in the long run since not as many people will succumb to respiratory diseases. But the short term costs, depending on the scope, could impact GDP to some extent.- Pete
Let's suppose that China has parallel oil shale deposits to those in the US. Let's further suppose that they begin to deploy fracking technology and pass laws requiring automobiles, buses and trucks to use natural gas. This is in the context of Russia being the world's largest natural gas exporter and China being one of its largest customers. It is also important to note that the Russian economy is VERY dependent on their energy exports. The loss of China as a customer will not cause Russia to go to war against them, but it will cause a great deal of stress and trauma and may force Russia's attentions either westward or southward into their former empire.Anyhow, while we look at today's China, given the incentive, China has the ability to change awful quickly. I was there cruising along the Yangtze shortly before they closed the Three Gorges Dam. In order to build this structure (over the period of a handful of years), they moved over a million people, evacuating numerous cities and towns and relocated them into over 100 cities that were freshly built for the purpose. They killed off four endangered species and flooded hundreds of square miles. They will accomplish anything they set their minds to in a lot less time than we, in the west, would take to move from point A to point B.The three Gorges Dam is an indication of how they are moving away from coal fired electrical generation. We are watching (if we care to look closely) changes which are going to be very important down the road. The Chinese are transforming their military from a massive infantry force to a modern force capable of projecting naval power worldwide.Our ally Taiwan now has stronger economic ties to China than to the US. China is buying influence with loans and other assistance world-wide.That said, China will no longer carry the world on its shoulders, but will dole out its blessings where they will gain benefit and withhold them from those with whom they compete.Looking back at this in a year might not make much apparent difference. Looking back from the perspective of five years from now will be a revelation to many.Jeff
China will no longer carry the world on its shouldersSomeone thinks China's been carrying the world?They've run a determined and persistent current account deficit. That means actually the world's been forced to carry China's economy. I'd agree this is unlikely to carry on. China is losing export markets at the same time as they find they've got a massive overpriced property glut. I'm very long AUS bonds, waiting quietly for the demand implosion. Not long now.
Sorry, Mr. P. I used the phrase from the Chinese point of view. AUS bonds should do well in the way US ones did, but there is a currency risk which may attenuate the benefits.Jeff
<<The world is changing before our eyes. It changes slowly and frequently without such obvious telegraphing as China is doing this week. It is not the world of today which should concern us in our investment plans, but what the world will look like in 2015 which should be in our sights.What are your goat entrails and tea leaves showing?>>Here is what my entrails show for a ten year forecast. The signs are unusually clear. DEVELOPED WORLD: EUROPE, JAPAN, UK AND USA. Economic problems in the developed world will just grow worse for years. This is because of the unserviceable level of government debts and unfunded obligations combined with the fast-growing maturity rate of those obligations as the baby boomers retire and/or collapse from overwork. Since individual and corporate debt levels in these countries are both near all-time records, opportunities to raise govt. revenues or grow economies are slim. Developed-world bond prices will crater as multiple national defaults/hyperinflations/devaluations occur. Developed-world stocks will perform very badly except for the new growth stars that always show up (natural gas, mobile data etc.), and the cash-loaded multinational companies with strong brands and worldwide exposure that are selling at low valuations right now. Also precious metal miners will do very well in the countries that have currency crises. REST OF WORLD: EMERGING MARKETS. These countries typically have far less debt, whether it be personal, corporate, or government, because the banksters have not yet gotten control of these countries. Their economies all have plenty of room to grow. All the ructions of the next decade throughout the developed world, probably including wars and certainly including falling imports, will put obstacles in the path of the developing world, but many countries will still be able to grow economically. Emerging market sovereign bonds will outperform because the best governments will all stay solvent and their coupons will look excellent in European and US and Japanese currency. Emerging market stocks will generally give you a wild ride, but continue trending upwards. At some point within the next 5 years at most I expect worldwide stock (and maybe bond) prices to fall to very cheap valuations as the financial "authorities" fail to stem the tide and get ignominiously swamped and disgraced like King Knut. I have no predictions about commodities, which no longer excite me because I do not see big increases in world commodity consumption coming up, except perhaps in the agricultural sector. Good luck, Ed. (Long all the above recommendations, with lots of cash equivalents too.)
- For one company, iphone and ipad factories ;)- Hohum currently has- not two, ... not one, but zero Dry bulk positions.
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