Tasker: China following in Japan’s footsteps?

China analyst Peter Tasker in the Financial Times:

[In the late 1980s, while] the western world was stuck in the post-crash doldrums, the Japanese economy had got back on track with apparent ease. Japanese corporations were using their high market capitalisations to finance acquisitions of foreign trophy assets. Japanese banks boasted the world’s strongest credit ratings.But what you saw was decidedly not what you got. The crisis, far from leaving Japan unscathed, exacerbated its structural problems and laid the groundwork for a far greater disaster. And it was the weak western economies, not Japan, that produced healthy investment returns over the next decade.

[Japan's] current account surplus and strong fiscal position provided the macro policy leeway to make any slowdown strictly temporary. The Bank of Japan duly put the pedal to the metal and the recently deregulated banks went on a patriotic lending spree. High-end consumption boomed but the real action was in the asset markets and capital investment, which soared as a proportion of gross domestic product.

Sound familiar? It should, because the same dynamic is evident today in China and some other emerging economies.

Tasker then invokes turn-of-the-20th-century economist Wicksell, a favorite of ours:

If the natural interest rate is, as the Swedish economist Knut Wicksell posited, around the level of nominal GDP growth, then China’s interest rates should have been close to 10 per cent for most of this decade. Alan Greenspan, former chief of the US Federal Reserve, has been criticised for holding interest rates too low and setting off a housing and credit bubble in the US. But if US monetary policy was wrong for the US, it was even more wrong for the high-growth countries that “imported” it. The result could only be a massive misallocation of capital.

Tip of the hat to the truly prolific Ed Harrison at the Credit Writedowns blog. On a related note, one of his colleagues, Marshall Auerback, is the first analyst we’ve come across who’s aware of the continuing significance of China’s yuan devaluations in the early/mid 1990s:

…between 1992-94, China devalued the RMB by close to 60% (she was already running a current account surplus when she did it the second time), which created huge competitive pressures for the other [Asian] countries and pushed them rapidly into deficit.  This time, China is devaluing along with the US dollar and reflating a credit bubble — not to encourage domestic demand, but to create a renewed export juggernaut, at a time of weak external demand.  This could really be problematic for the rest of the world.

I wonder how long before the protectionist pressures emerge?

All fair points, though Chinese authorities seem to be aware of the multiple risks they’re facing (whether they can manage them effectively is another question). But there’s another factor that might be just as important, and that’s demographics. The age composition of China’s population is trending in a direction that is not conducive to sustained 10%+ GDP growth.  Other BRIC  members should see more favorable demographic trends, with Russia the true standout. Russian markets also happen to sport the highest risk premia compared to Brazil, India, and China.  

URLs:

http://www.ft.com/cms/s/0/39f61cb6-c818-11de-8ba8-00144feab49a.html

http://www.creditwritedowns.com/2009/11/china-is-now-on-the-same-bubble-path-as-japan-post-1987-crash.html

http://www.creditwritedowns.com/2009/11/china-reflation-play-spells-trouble-for-rest-of-the-world.html

http://www.miraeasset.com/ourmarket/outlookView.do?board_id=1125&group_id=1&pageNo=1

DISCLAIMER and IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC is a state registered investment advisor. The foregoing information is for informational, educational, or entertainment purposes only. It does not constitute an offer to buy nor a solicitation to sell any security, or to engage in any investment strategy. At the time of writing, the firm, its principals, and its clients did not own any securities mentioned, or any securities issued by corporations mentioned. Symmetry Capital Management, LLC is an Amazon.com associate, and may earn a percentage of any sales generated by clicking through to the Amazon.com website from links on our website.

Monkey Economics

I love this kind of stuff, but (because??) it’s terrible news for homo economicus; not kind to ‘Cartesian dualism’ either:

…when [researchers] trained a low-ranking monkey to open the container [of apples], just as any technical college advertisement will tell you, the new skills translated into a higher income. Roughly an hour after she’d open the container for everyone, she was getting groomed a lot more, as much as a high-ranking monkey, and she no longer had to do hardly any grooming herself. But that was not the most spectacular finding.Dr. NOE: So what then did, is we got a second low-ranking female, trained her to open a second container with apples in it, and then we saw that the value of the first provider dropped, more or less, to the half of what she had before. So now we had a competition between two animals. Both of them could provide this good, these apples, and so the value of the first one dropped down again. And of the second one who was very low at the beginning of the experiment, she went up. And they ended up both in the middle, so to speak.

BLUMBERG: So when there was a monkey monopoly on the skill, the monkeys paid one price. But when it became a duopoly, the price fell to an equilibrium point, about half of what it had been. And this all happened despite the fact that we’re talking about monkeys here. Monkeys can’t do math.

Dr. NOE: Animals that cannot form binding contracts, animals that cannot talk about what they want to do or cannot offer verbally or anything – they nevertheless are quite accurate in adapting their behavior to what the market gives them.

BLUMBERG: Dr. Noe says that monkeys arrive at these economic outcomes not through sitting down and negotiation, but through feeling and emotion. Monkeys develop positive associations toward a container-opening member of the society, and they just want to groom her. But once another monkey can open the container, the skill isn’t as unique, the positive feelings diminish, and grooming goes down. It’s the law of supply and demand played out along the neurohormonal pathways that deal with emotion in the monkey brain.

Dr. Noe wonders how much of human economics operates along similar lines. As he puts it, even on the stock market, people might play more with their bellies than with their brains.

Ya think???

URLs:

http://www.npr.org/templates/story/story.php?storyId=114068638

http://en.wikipedia.org/wiki/Homo_economicus

http://en.wikipedia.org/wiki/Dualism_(philosophy_of_mind)

Our New Favorite Webpage

Attention behavioral economists — not all monopolists are rent seekers, and squatting is sometimes for sentimental reasons only:

From www.gail.com:

Hello and welcome to the gail.com FAQ.

Q1: Why isn’t there any content here?
A1: All web content is hidden to conserve network bandwidth.

Q2: Interested in selling gail.com?
A2: Sorry, no.

Q3: I think you’re infringing on my trademark…
A3: You can’t have an exclusive trademark on a common word or name. We’ve been down that road before. See WIPO Case D2006-0655 for more information.

Q4: How did you manage to get gail.com?
A4: My husband registered it as a birthday gift back in 1996.

Q5: Okay, seriously, how much do you want for gail.com?
A5: See Q2 above.

-Gail

If you’re wondering how I found it, I thought I had typed “gmail.com”.

A Gold Bear’s Comments

Interesting comments on gold from Kitco’s Jon Nadler in an interview with Hard Assets Investor. Nadler argues that gold is not, as so many believe, in a bull market. His thesis:

• A true bull market in gold is driven by four factors – demand greater than supply, poor performance in financial assets like equities, stronger inflation readings, and an increasing gold price in all major currencies.
• The current rally in gold has only one leg, a falling USD, against which gold is an imperfect hedge. Gold is also an imperfect hedge against inflation, especially the stubborn, single digit kind. It’s much more effective against hyperinflation.
• Gold mine and scrap production continues to run at a historically healthy rate, with large supplies coming into the pipeline. On the financial side, industry re-hedging is likely to occur at some point, given the high historically high nominal price of gold.
• Gold has a very uncertain demand picture, with notable declines in industrial and jewelry fabrication, and India becoming a net exporter for the first time since 1980. “Wishful thinking” is embodied in expectations that demand in China will push gold substantially higher.
• The current gold price rally is “pure froth” driven by investment funds. If fundamentals don’t support investment price targets, a nasty correction could ensue.

Nadler believes that gold could go as high as $1,200, but that on fundamentals, its fair value is between $680 and $880 per ounce. His essential argument was that “gold has a place in the portfolio, and it absolutely deserves respect—but don’t get carried away.”

We largely agree with his view, but our take on gold is more macro/finance oriented. We believe that the interplay between the USD and hard assets tends to reflect interactions between interest rates (the Fed and credit markets), financial markets (hedgers and speculators),  and the real economy. While the Fed may look easy on a historical basis, this is only part of the picture – you have to look at balance sheets and expectations in the financial and non-financial economies to assess whether a central bank is easy, neutral, or tight. To us, the Fed appears to be easy relative to certain areas of the financial markets, which could help to explain the crowded short-USD, long-gold trade (Nadler’s “froth”). And as we’ve pointed out many times, the Fed is probably too easy relative to some parts of the real global economy, which foreign exchange rate management can’t completely overcome (in fact, it can often exacerbate global inflationary pressures). But…

• Relative to the U.S. and many other developed economies, the Fed is not terribly easy.
• The fallout from the credit crunch should actually support demand for the USD, at least domestically, as debtors should have a higher marginal demand for units of currency than ounces of gold. This and many other factors should take USD hyperinflation fears off the table. As Warren Mosler and Matthew Forstater have defined it, “hyperinflation is the condition in which the private sector no longer desires the currency unit.” This doesn’t even remotely describe the condition of the U.S. private sector today.
• Credit facilities from Fed and Treasury, and quantitative easing by the Fed and other central banks, are not necessarily inflationary. Put simply, if injections of new banking reserves fall short of the capital losses incurred during the crisis, they do not constitute ‘inflation of the money supply’. Yes, the numbers on the Fed’s balance sheet are eye popping. But so were (are) the credit losses during this crisis!
• Demographics, policy uncertainty, risk aversion, public deficit phobias, etc,  should all tend to lower normalized U.S. economic growth over the coming decade. Demographics and policies have been a problem since the beginning of this decade, and probably won’t change until the end of the next one (in fact, policies that might have been seen as problematic in the 1980s or 1990s could be more optimal in the 2000’s and 2010’s, which would require that deficit hawks pull their claws in a bit; otherwise, it will mean less room for the Fed to raise interest rates; we hope to write more on this topic soon).

Not one of these factors argues for a parabolic move in the gold price (though it certainly could happen, at least temporarily - again, think Nadler’s “froth”). That said, there are smarter people than us who are still hugely bullish on precious metals and catastrophically bearish on the USD. But the trade’s a bit too crowded for us (our clients do have some exposure to ‘less crowded’ assets that should perform well if gold does).

URLs:

http://www.hardassetsinvestor.com/features-and-interviews/1836.html?tmpl=component&print=1&page=

http://www.hardassetsinvestor.com/

http://www.epicoalition.org/docs/general2.htm

http://www.marketwatch.com/story/gold-bears-gathering-but-gold-bulls-defiant-2009-10-19

http://news.goldseek.com/SpeculativeInvestor/1242109080.php

DISCLAIMER and IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC is a state registered investment advisor. The foregoing information is for informational, educational, or entertainment purposes only. It does not constitute an offer to buy nor a solicitation to sell any security, or to engage in any investment strategy. At the time of writing, the firm, its principals, and its clients did not own any securities mentioned, or any securities issued by entities mentioned. Symmetry Capital Management, LLC is an Amazon.com associate, and may earn a percentage of any sales generated by clicking through to the Amazon.com website from links on our website.

Policy Risks of Cap and Trade

By way of Cumberland Advisors, we came across this paper on the risks of a cap and trade approach to regulating carbon emissions by LSU economist Joseph Mason. We’ve written about this previously, arguing that a cap and trade system is less efficient and more prone to corruption that a direct carbon tax. As Mason puts it:

…there is nothing wrong with financial firms profiting from making markets for stocks, bonds, and other valuable commodities. However, when a market is created and operated according to government fiat, it is all but certain that vested interests, financial firms that operate and make markets in this case, will lobby for socially inefficient provisions that increase their profits to the detriment of society as a whole… 

As far as cap and trade proposals are concerned, both Wall Street investment firms and environmentalists have similar goals — to restrict the number of carbon permits such that marginal cost to society of pollution abatement exceeds its social benefit…financial firms that make markets for tradable pollution permits will be able to make higher commissions the scarcer the permits are. An alliance between environmentalists and Wall Street presents a particularly intractable problem as far as public choice theory is concerned.

This argument comes from an econ professor, and apparently there are at least two financial services firms (ours and, I assume, Cumberland) that agree with it. This highlights a glaring logical inconsistency among some proponents of cap and trade: many of the same interest groups, pundits, and policymakers who rail against the failures of markets in the recent financial crisis endorse cap and trade markets wholeheartedly! That can probably be best understood by politicians’ reluctance to utter the word “tax”, and by following the money. Some privileged few are going to become quite wealthy administering a cap and trade system for the rest of us. Ah well, perhaps it will mean a few more corporate benefactors for public broadcasting…

URLs:

http://www.cumber.com/special_reports_archive.aspx

http://www.cumber.com/content/Special/mason100109.pdf