台灣買兵制度 February 16, 2014Posted by hslu in China, Cold War, Military, Taiwan.
Tags: 台灣募兵, 台灣征兵
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Fees, Taxes and Surcharges February 15, 2014Posted by hslu in Taxes.
Tags: Rental car, taxes
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Governments exist for one big reason: collect taxes. And they are very good at it.
Here is a proof when you rent a car in Texas:
Rental car for a week: $185.62
Fees, Taxes and Charges: $104.93
This is imply ridiculous!
$17,211,558,177,668.77 February 14, 2014Posted by hslu in Congress, Economics.
Tags: $17, 177, 211, 558, 668.77
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How do you like this new debt ceiling agreed upon by U.S. Congress yesterday?
$17.2 trillion but accurate to two digits after the decimal point.
Yeah, this is the American way! That’s the only way accountants can live with.
山中无老虎，猴子称霸王 February 14, 2014Posted by hslu in China, Cold War, Economics, Energy, Euro, Global Affair, Islam, Muslim, Oil.
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The world is full of unknowns and the world economy is still struggling to overcome the Great Recession caused by America’s sub-prime crisis and liquidity created by Alan Greenspan, the former Federal Reserve Chairman.
American government has provided enormous stimulus to keep a safety net for those who lost their jobs at the expense of trillion dollar deficits and $17 trillion national debt. The Federal Reserve has done everything it could to pop up risky assets hoping for a trickle down wealth effect. It will have unintended consequences. ECB and Royal Bank of England have pumped billions of dollar to support European economies while several European peripheral countries suffered deep and prolonged recessions. Euro has survived its worst crisis less than 20 years since its creation. Japan, in its bid to revive its sagging economic and return the country to its old glory, has embarked on massive QE program the like of which the world has never seen before. China has decided to transform its economy from an investment-led economy to a consumer driven economy. The financial and political impacts will be felt inside and outside of China for decades. Emerging markets have suffered significant decline in 2013 because of tapering by American’s Federal Reserve Bank. The 30 year long bull market has officially ended. The world has entered a new era where rising interest rates will dictate how capital flows in the next twenty or thirty years.
Arab Spring, decline of America’s standing in the world, the rise of China and its transformation, the resurgence of Japan’s far right, the conflict between China and its neighboring countries, the re-emerging of Russia on the world stage, the precarious situation of Israel, the resurgence of Al Qaeda in Lybia, Syria, Afghanistan, Iraq and many regions in Africa, Iran’s continuing influence in the Middle East, the new found importance of sub-Sahara Africa and the shale oil revolution happening in the US and other parts of the world have thrust the world into a new era where confrontations may be norm from now. Either by design, financial strains at home or Obama’s lack of ability, America has withdrawn from the leadership role of the world. The vacuum left behind is a prelude to a more chaotic world to come.
A Chinese proverb probably describe the condition of the world the best: “山中无老虎，猴子称霸王。”
The world economy has just licked its wound from the Great Recession. The central banks around the world have done as much as they could to repair the banks and financial institutions. Stock markets of major countries around the world are near or at all time highs. Housing market in the US has recovered and American’s wealth has, to a major degree, been restored. Many European countries have become more competitive because they have shed many of their unfavorable social programs.
With favorable economic developments began to take hold, the warning signs are just as prevalent as before with usual suspects stronger than ever notwithstanding the new conflict between Japan and China which could be very explosive on its own. It seems that the world has entered into a very precarious phase. A new world order is taking shape but it is not stable and could be dangerous to the economy and financial markets of the world. The outcome is by no means clear.
Like I said in the beginning, my crystal ball is decidedly murky.
Isolate Isreal is Obama‘s new Middle East Foreign Policy February 14, 2014Posted by hslu in Global Affair, Islam, Military, Muslim, Obama, Oil, Politics, Religion.
Tags: Arab Spring, Benjamin Netanyahu, Egypt, Iran, Iran Nuclear ambition, Israel, Middle East, Obama, Syria
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It appears that the Middle East has entered into a no-man’s land with social unrest, protests on the street, none-stop suicide bombings, ethnic attacks, regional conflicts, killings of innocent civilians and alleged militants by American drones, isolation of Israel and a nuclear Iran.
Lybia continue to be in the headline since the death of Gaddafi, a Sunni. Al Qaeda has emerged as strong as ever with a carefully planned attack on US consulate in Benghazi on 9-11-2012 where American ambassador and three others were killed. The country has fallen into the hands of Muslim Fundamentalists and fighting between tribes sank the nation into civil war and chaos. One thing is clear: the nation is not a friend of the United States and by taking out Gaddafi, America has created an enemy and possible an ally to Iran. To complicate the matter more, much of Lybia’s oil resources in South and East Lybia is controlled by a self-declared autonomous government of Cyrenaica. The separatist group announced that it is in discussion with a number of prospective customers to export crude. However, the central government doesn’t recognize the separatist government and has forbid any oil shipment to foreign buyers. It is unclear whether the group has the capacity to protect oil transportation and shipments if a deal is stuck because government naval ship has blocked a tanker from loading any crude oil at an oil terminal controlled by the group.
Egypt, a Sunni country strong enough to withstand the power of Iran, a Shiite nation, has changed from a trusted ally for the US over the last 30 years under President Hosni Mubarak to a region of continuing unrest. It all started with the arrest of Mubarak which was followed by a democratic election when Mohamed Morsi supported by the anti-Semitic and anti-US group: Muslim Brotherhood, was elected president of the nation. After a year in office, President Morsi was removed by the military because he faced massive protest from the opposition. A new government was then installed by the military and a new president, General Abdel Fattah Sisi, was put in the office. The latest development was that a new constitution was overwhelmingly approved by Egyptian people and General Sisi is expected to be the new president under the new constitution. In the mean time, American foreign aids in the form of fighter jets and other weapons have been scaled back but I expect that the aids will continue once dust is settled. As of now, America simply does not know what to say about the Sisi government because it doesn’t know the true nature of the new government.
Syria, a Shiite nation and an ally of Iran, is a mess by any calculation and the two-year old civil war has no sign to stop anytime soon. Many Al Qaeda sympathy groups and foreign fighters have entered the war against the Assad government which is backed by Iran. It will be anyone’s guess what will turn out from the military conflict. Obama has vowed to support the opposition but it is likely that the opposition may be linked to groups sympathetic to Al Qaeda’s cause. Obama has drawn a red line in the sand warning Assad not to use chemical weapons on the opposition. The line has clearly been crossed, possible multiple times, but Obama has failed to carry out his promise and has totally lost credibility among Muslim countries. Obama kicked the political hot potato to the US Congress while he hid behind his supporters. Fortunately Russia’s Putin entered the picture by broker a deal to dismantling Syria’s chemical weapons which saved Obama from total humiliation. It appears that the civil war will in time play out on its own. As of now, the military conflict will remain inside Syria’s border and since the civil war poses threat to America’s national interest and Syria has no oil production to speak of, America is taking a hand off approach for the near future. The fall out of Syria conflict is the rise of Putin’s standing on the international scene and the loss of influence of the United States among Arab countries.
Saudi Arabia (Sunni) is not without political risk. The Saud family has ruled the country for decades. It has spent country’s petro wealth generously on its people so that they will keep the Saud monarchy in power. The Arab Spring is a threat to the House of Saud and political unrest is not out of question inside the Saudi nation either. One thing that works to Al Saud’s favor is that the country of 23 million people, including 5 million from foreign countries, is controlled by about 7,000 princes of the royal family. Of course, any sign of political unrest against the monarchy of Saudi Arabia will upset the equilibrium existed in the energy market. If it happens, a catastrophe on the world economy will happen quickly and decisively. Crude oil price will shot up to $200 and higher and recession will happen if it stays at an elevated level for any long period of time. As of now, it is not likely that anything bad will happen. In these day and age, a monarchy can’t stay in power for an extended period of time.
Even Obama attacked the family of Saud as early as October 2, 2002 in his first foreign policy speech dubbed “Iraq War Speech”: “You want a fight, President Bush? Let’s fight to make sure our so-called allies in the Middle East, the Saudis and the Egyptians, stop oppressing their own people, and suppressing dissent, and tolerating corruption and inequality. . . .” In May 2011, Obama uttered these words on the monarchy of Saudi Arabia: “Prosperity also requires tearing down walls that stand in the way of progress -– the corruption of elites who steal from their people; the red tape that stops an idea from becoming a business; the patronage that distributes wealth based on tribe or sect.” It is clear that things are different under Obama and something unexpected will happen in that region. We just don’t know when.
Saudi’s neighboring country, Bahrain, a Shiite nation, of course, is a very small but important country in the region’s geopolitical scene. America has its 6th Air Carrier Fleet there and it is a small oil producing country in the Middle East. It is also a troubling time bomb waiting to explode. In the early days of March 2011, political protest by the Shiite majority (about 70% of its population) against the Sunni monarchy has been going on for more than a week or two. Saudi, being a Sunni state, was worried because the unrest may spread to its own soil. On March 14, 2011, 2,000 soldiers, 1,200 from Saudi Arabia and 800 from UAE, entered the small country and crushed the protests. Iran, a Shiite dominated country, rejected the military action and called it an invasion.
Iraq and Afghanistan are two countries invaded by the America in their wars against terror. President Bush started the war against Taliban in Afghanistan after 9-11, forced Osama into hiding, created a pro-America government in Kabul, rebuilt the war torn country with US tax money and left a not too small contingent there to prevent the resurgence of Taliban. President Bush then initiated the 2nd Iraq War in 2003, captured Saddam Hussein, created a government under Al Maliki (a pro-Iran Shiite), rebuilt the war-torn country with more US tax money and left a significant number of US soldiers behind to train the Iraqi Army. After Obama got into the WH, he, being a liberal, decided that America should leave Iraq for Iraqi people. Iraq also decided that the country didn’t want any US presence there. The withdraw of US military force began in 2009 and completed in December 2011. Since then, the world has witnessed the country mired in constant suicide bombings and armed attacks. America has no say on the country it helped to rebuild from the ground up and most of Iraqi oil is out of American oil companies’ control. The key for Iraq now is whether it can defend itself against rebels who want to overturn the government. The government is by no means friendly to the US and America has little to say about this country. It seemed to me that all the sacrifices American soldiers made with their lives, sweat and blood and those by other countries’ soldiers, have been in vain. Hundreds of billions, or as much as $6 trillion for Iraq and Afghanistan wars combined, of American tax dollars spent on this country has not gained the US a friend but a less hostile foe. Recent developments inside Iraq painted a worrisome picture because Al Qaeda has captured two cities in Southern Iraq: Fallujah and Ramadi while the capital city of Baghdad has seen bloodshed almost on a daily basis. Even though the problem is Iraqi’s, the implication could be felt worldwide as unrest continues.
American’s war in Afghanistan was less successful because, unlike Iraq where Iraqi tanks and soldiers had little place to hide, Afghanistan is a region best suited for defense. Bush recognized this from analyzing Russia’s defeat in the hands of Mujahedeen in late 1970’s and early 1980’s. As a result, Bush decided to leave some 10,000 soldiers to maintain the security around the site of the new government, the city of Kabul. After Obama got into the WH, he decided that a resurgence of military attack in Afghanistan was necessary. He increased the number of US soldiers there from around 10,000 to as many as 100,000 while Afghanistan posed no apparent threat to America’s national security. At the same time Obama also decided that the war in Afghanistan will end in 2014 and American forces will leave the country by 12/31/2104. In the interim 5 years, billions of US tax dollar have been spent to rebuild the country and thousands of American soldiers have lost their lives for no just cause at all.
As the deadline for withdraw fast approaching, US has requested a small number of American soldiers, 9,000 to 12,000, to be stationed in the country. Afghanistan’s president Kazai has refuse to sign the security treaty with the US and the decision will be pushed back into this year with the new government. More recently, Biden has floated the idea of leaving only 2,000 to 3,000 soldiers behind but a complete withdraw, the so-called “zero-option, is not out of the question either. In the mean time, the Afghanistan government’s control is only limited to the capital region and the majority of the country is really in no-man’s land. The situation there is not promising but I think American will be glad that the US is out of that country. The Obama Afghanistan war has achieved nothing and the only thing it has done is to give the new government some breathing room to build its own security forces. I don’t think it is enough. A total co9llapse is possible and in the end Al Qaeda may have to final say on this country. America’s war on terro will never end and it will be a drag on US resources for decades if not centuries to come. It will end when fundamentalist Muslims decide to stop attack America. It is not a very good picture if you are an American.
Iran has been a headache for America because Iran has reportedly been working on a nuclear weapon for years and sanctions against the rogue nation have been less effective over the years. Since being the US president, Obama has repeatedly claimed that he will not allow Iran to acquire nuclear weapons. But after Kerry was appointed secretary of state, America’s policy towards Iran has made an 180o turn probably because Obama and Kerry came to the realization that a nuclear Iran may be inevitable. The recent P5+1 and Iran talks (also called E3+EU+3 – Iran Talks) at Geneva have yielded significant benefits to Iran’s nuclear ambition. In essence, the international community has
- Recognized Iran’s “right” to enrich uranium for “peaceful” energy purpose.
- Iran has to “freeze” its nuclear program for 6 months and cease the work of a plutonium reprocessing facility at its Arak nuclear reactor.
- Iran also agreed to stop enrich uranium at 5% level and accept IEAE cameras and inspections.
- Iran will be allowed to access $4.2 billion fund previously frozen as part of the financial sanction against Iran by Western countries.
- In addition, Iran will be allowed to produce its oil resources. It appeared that Iran has achieved the “greatest diplomatic triumph” over the objection of Israel and Saudi Arabia. Of course, Israel was quick to brand the deal as a “historical mistake” and said the world has changed to a more “dangerous” place. Saudi Arabia be I wouldn’t be surprised that one day we may witness a nuclear Iran which could threaten the entire region.
When we discuss the situation in the Middle East, we have to deal with Israel. To say that the situation there is complicated is a gross understatement because Obama, after his occupation of the WH, has completely turned the American foreign policy on Israel upside down. The assault on Israel began at home with Obama’s choices for the Secretary of State, Clinton and later Kerry, Secretary of Defense, Hagel and CIA chief, Brennan. All these four influential people are more or less against Israel’s policy and thing got worse from there.
Obama since 2009 has decided that it was necessary to adopt a new approach toward Israel; arguably the most trusted ally US has in the region since the late 1940’s. Obama reportedly has decided that Israel is the source of the unrest in Middle East and American policy on Israel has prevented the US having a normal relationship with 57 Muslim countries in the world. He chose to turn his back against Israel, specifically towards Netanyahu.
During his time in the WH, Obama made friendly offers to Palestine people and the Muslim world but changed his attitude towards Israel. At the same time, he continued to tell lies to American Jews, who overwhelmingly (80%) helped to vote him into the WH in 2009:
“I try not to pat myself too much on the back, but this administration has done more in terms of the security of the state of Israel than any previous administration.”
But his actions and words said something quite different. In fact, Obama could be the most hostile president against Israel since Jimmy Carter. Consider the following from Obama:
- Obama, in his Cairo speech, demanded unprecedented concessions from Israel while asking nothing from the Palestinians.
- In the same speech, Obama accentuate the controversy that Israel exists only because of European nations’ guilt over the Holocaust and compared Palestinian’s “suffering” to genocide.
- · In his 2010 UN speech, Obama talked about “coming back next year with a new member of the United Nations; an independent and sovereign state of Palestine.
- The United States under Obama does not accept the legitimacy of continued Israeli settlements into West Bank and East Jerusalem and consider “settlement” as the source of what is wrong about the Israel-Arab conflict.
- In May 2010, Obama demanded that Israel must come to the negotiating table with the precondition of returning to the “1967 borders.”
- All the while, Obama has never condemned Palestinians to stop their anti-Semitic propaganda against Israel; such as publicly proclaiming that they will never recognize a Jewish State and calling for Israel’s destruction.
- In May 2011, he pressed forward the theory of “linkage” which links the Arab-Israeli conflict to the root of all geopolitical problems in the Mideast and called on Israel to retreat to the so-called 1949 armistice lines. He also insisted on Arabs’ right of return.
- Obama has withdrawn the landing rights for Israel airplanes to US airbases in the Middle East, Turkey, Iraq, and Saudi Arabia. Israel had these rights under the Bush, Clinton and Bush Jr. administrations. Now Israeli airplanes has no place to re-fuel anywhere in the Middle East except its own soil.
- According to an unconfirmed report from a Wall Street insider, Obama has sent messages to Iran through back channels in Europe that America will not support an Israeli military attack of Iran’s nuclear facilities. It was said that there are 30 military facilities in Iran and four of them have underground bunkers.
- Among the most egregious act by Obama was humiliating Netanyahu by forcing him to enter the WH through a service entrance for a meeting with Obama. It was reported that Obama deliberately served non-kosher food to Netanyahu and refused to dine with him.
- During the same meeting, Obama lectured Netanyahu that he is not permitted to attack Iran, he has to withdraw all forces from the West Bank and he may not build any more settlements in East Jerusalem.
- After insulting Netanyahu, Obama hosted Abbas at the WH and increased American assistance to the PA by $70 million.
Well, this is not the end of it. According to source linked to Chinese’s Xinhua news service that Kerry, US Secretary of State, proposed to Abbas to “return” 80, 000 Palestinian “refugees” to Israel. He also proposed to offer U.S. troops to help secure borders of the “New State of Palestine” and be stationed at Jordan Valley where Israeli forces are. There is also unconfirmed report that Kerry will support boycotting against Israeli products in Europe and against Israeli companies operating in Judea, Samaria, eastern Jerusalem and the Golan Heights if talk between Israel and PA fail to gain any traction.
Wow, we are really at an unprecedented moment in the Middle East conflict where Israel was humiliated, coerced and bullied by a seating US president who has convinced himself that Israel is the source of all Middle East problems while giving Muslims a big pass. He believed that American’s interests are at odds with those of Israel. Obama may actually sees Israel as the biggest threat against the United States and if Israel is gone, Muslims’ hatred against the US will be minimized.
In my humble opinion, I think that Obama, being a closet Muslim himself, believed that being unfriendly or even hostile to Israel would appease to Muslims in the region. He allegedly told Netanyahu that Israel needs the US but US doesn’t need Israel. Obama believed that hostility against Israel would in turn make Arab countries friendlier to Obama and the US. However, this one-sided policy has only one possible outcome: It will drive Israel away from the United States, solidify Israelis to stand up for their country’s survival and force Israel to take the matter in its own hands, reads military action, when it is necessary to do so.
Sure enough, Israel announced that it will continue its expansion project into West Bank and East Jerusalem with yet more new housing developments. As of now, there are as many as 700,000 settlers in these regions. Regarding Iran, Netanyahu has more than once said that they will bomb Iran’s nuclear facilities when it determines that the military is necessary.
What may also happen before Iran is about to gain an up-hand on nuclear weapons is a nuclear arm race where Saudi Arabia, Emirates, Turkey and Egypt may want to have the same capabilities in order to neutralize the threat from Iran.
Wow, what has this world finally come down to with one man’s anti-Israel policy? Was he trying to bring down the Netanyahu government? Was he trying to establishing a better relationship with Muslim countries by bashing Israel in public? Was he trying to hide his no-so-effective sanction policy against Iran’s nuclear ambition? Was he trying to withdraw America from the Middle East conflict because the US is financially incapable of doing so? And most important of them all, did Obama actually think his anti-Israel foreign policy has a chance of achieving lasting peace in the Middle East any time soon? I don’t have an answer but I think that Obama actually has a personal grudge against Netanyahu.
I am afraid to think what could be next in that region when the world thinks the danger of a nuclear Iran is over after the P5+1 and Iran Talk. I can say this unequivocally that there will be no world peace so long as new foreign policy experiments are being conducted by Obama with Israel on one side against Muslims on the other.
We may have to settle for a post Israel era in the Middle East!
Emerging Markets – Capital Flights may Continue February 14, 2014Posted by hslu in Economics, Euro, Global Affair.
Tags: Bernanke, Capital flight, EM
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It is estimated that as much as $4 trillion has entered the emerging markets since QE began in 2008. The so-called “hot money” has gone into real estates, currency (carry trade,) stock market and local projects in these countries and has seen their investment handsomely rewarded.
Ever since the hint of tapering in Mid May by Bernanke and the fact that tapering has actually begun, these “hot money” has been stepping over each other to get out of these countries. The results are disappointing stock market returns for many of these countries in 2013. Their currencies also suffered significant loss especially those with current account deficit, trade deficit and minimum foreign currency reserves. Hot money also left high inflation behind, e.g., India, because excessive demands over the years.
Government Bonds and income instruments from these countries also suffered because hot money has left these markets due to currency risks. It is unfortunate for these countries but they have little recourse unless they adopt some kind of capital control to keep funds stay inside their borders. About the only thing they could do to intervene in the currency market and to raise short term interest rates. But these type of actions is futile and damage to their economy was done in the process.
Unfortunately, very few of these countries have taken the advantage of the explosive economic growth over the past five years to embark on necessary structural and government reforms. As hot money left the country, these countries have few resources to deal with the aftermath. India and Indonesia are prime examples.
Europe is slowly coming out of Recession February 14, 2014Posted by hslu in Computer, Economics, Global Affair.
Tags: ECB, Europe, IMF
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A January 9, 2014 headline on yahoo website reads: “Successful Portugal bond auction heralds eurozone turnaround.” In short, the message suggests that Europe has emerged out of recession and I dare to say that the worst is over for peripheral countries in Europe: Spain, Italy, Greece, Portugal and Ireland. Even France was teetering on the brink, it appeared. German was of course still very strong and has saw its export increased over the years.
There is no doubt that Europe as a whole is recovering after taking a heavy blow to its economy since 2008. As we entering 2014, GDP in many countries has stopped going down and unemployment rate has topped. Euro, the single currency, almost ceased to exist and many peripheral countries had to rely on EU central bank’s bailout packages, called European Financial Stability Facility to remain sovereign. Austerity measures insisted by the Troika; German, IMF and ECB, pushed those countries into multi-year recessions while their economies shrank, sometimes by double-digits, for many years. But the worst is over because the sovereign Bonds of these countries have seen their prices rising for many quarters. In other words, commercial banks are turning more positive about these countries and these governments can access the private capital markets for their loan needs. If the demand for government bonds of these countries is healthy, interest rates will be pushed down further which will allow these countries to grown and be on their own feet going forward.
Many of these countries have gotten rid of their fats in the government, laid off many public workers, reduced their budget deficits, reformed the ridiculously generous pension system for their public servants. Wages were cut. Retirement age got pushed back. With anguish and pain suffered by millions of their citizens slowly receding, these countries become more competitive and Europe become more productive even though Euro has appreciated against the US dollar in the past. Additionally, the restructure of government loans forced all parties took a haircut of their loan portfolios which benefited these peripheral countries.
Because of these positive developments, many European stock markets are at or near all time high thanks to unprecedented QE by the US Fed, ECB, BoJ and the British central bank. Other than Germany, many European countries are in the very early recovery phase and it will take a different investment strategy to succeed there.
Countries such as Greece, Italy, Ireland, Portugal and Spain were like dead men walking in the daylight since 2009, but they have come back from the dead. Barring any unforeseen events, a slow yet sometimes painful recovery will continue. Short term interest rate will remain low by ECB and will be at this level for a long time. ECB will “do whatever is necessary’ to keep the liquidity available whenever they are needed. Inflation is in check and economic recovery in the US will definitely help Europe.
Of course, the double digit unemployment rate, as high as 25% in Spain, will take a while to come down, but the seed for growth has been sowed. Even though the road to recovery will be bumpy, many smart money has already entered these markets but it probably is not too late to get in yet.
Of course, suffering by the citizens of these countries may get worse before it gets better as these countries struggled to right the wrongs they have done for so long, the financial market has the tendency to look beyond human suffering. The smart money has already been put their capital in use there. The follow charts tell this story well.
China’s Transformation just got Started February 14, 2014Posted by hslu in China, Cold War, Economics, Energy, Global Affair, Taiwan.
Tags: “one child” policy, China, 薄熙来, Renminbi, Shadow Banking, Third Plenum, Xi Jinping, 周永康, 官商勾结, 官官相护, 习近平, 争权夺利
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China – Transformation to a New Economy
Third Plenum, November 2013
To get a grip of China’s economic condition, one has to start with the reforms detailed in a report, “A Decision on Major Issues Concerning Comprehensive and Far-Reaching Reforms,” which was officially announced by Xi Jinping after China’s Third Plenum in November 2013; 35 years after Deng Xiao Ping’s historical economic reform for China. It sets the stage for China’s economic transformations which will influence China and the rest of the world for many decades to come. It appeared that Chinese government under Xi and Lee has shown determination and resolve to change its economy from a 1) “nation-building phase” with massive infrastructural investments and 2) an “export-led economy” with manufacturing of low margin goods for export to a modestly growing economy led by consumer spending. The Xi and Lee government seemed to realize that the earlier growth model has stalled and a new growth model is necessary for China to escape from the much talked about pending “Middle Income Trap.” There are plenty of evidences in our everyday lives: more and more low end products at Wal-Mart and IKEA have been manufactured by such countries as Vietnam and Malaysia while China struggled to find enough workers to keep their energy intensive plants going due to distortion in its demography. This has to change and I am glad that Chinese leadership recognized it and has chosen to do something about it. Of course, the devil is in the details and the most difficult part is its implementation which is by no mean easy.
That being said, the nation building phase of the past decade or more in China; railroads, high speed railroad networks, subway system, airports, super highway networks and three-gorge dam, just to name a few, is not dissimilar to the “nation-building” phase for the US in the 1920’s when railroads and canals revolutionized America’s infrastructural and manufacturing base. These and the development of super highway network in the mid-1950’s after WWII significantly lowered American’s transportation cost which made American companies that much more competitive in the world. The abundant supply of cheap crude oil from West Texas, Louisiana and Oklahoma over the past century also provided strong tailwind to US economy as many nations rebuilt their economies after WWII. The gold rush in California also created great wealth to American people and the country. The fact that America has never seen a war on its soil made US the strongest nation in the world that much easier and faster. It took America more than half a century to make what it is today. China is trying to do it in a decade or two.
China is paving the road for the decades of economic expansion to come and I expect the leadership will continue to invest in this important area because China will eventually over take America as the largest economy entity in the world. It needs a strong infrastructure to support its growth. And the time to invest is now. Corruption is a side effect and it can be dealt with. Take a look of World Journal and you will see that happening by the tens if not hundreds on a regular basis. The process started from the lower level and escalated with the arrest of 薄熙来。We will see what takes place on 周永康 which will show what Xi and Li are really made of. It is an exciting time in China indeed.
They have to do this if they have the best interests of Chinese people in their collective hearts. In these day and age of Internet and instant news, they have no choice because 1.3 billion Chinese are watching them. People talked about waste and corruptions. In my mind, this is more or less a given for China which experienced nothing but corruption in the past millenniums: 争权夺利，官商勾结，官官相护 were a norm for most of China’s history. It will not be easily changed but there are signs that the Xi and Li government is addressing this situation with the help of millions of people on the Internet. It is a good sign.
Now, let’s go back to investment in infrastructural. It seemed to me that this phase is necessary because without these investments, China’s economic development will be held back just like what India is facing right now.
The Third Plenum also mentioned the following important reforms: financial market reform, SOE reform, fiscal reform, anti-corruption and social media and internet management. Massive urbanization projects (land reform) are on government’s reform agenda. It is important to recognize that the reform plan serves as a blueprint and it will be a continual, multi-decade long process. Short-term, the implementation of the reforms, assuming that they are successful, will be disruptive to China’s economy and its growth rate. China’s stock market will suffers as well.
For now, let’s take a somewhat cursory look of the key points of the reforms and their impacts to Chinese economy:
- China’s “one child” policy will be loosened somewhat. It will in a decade or two soften the distortion in China’s demographic trend. Short-term, this will stimulate consumer spending as more babies are born in China. Housing demand will continue. Consumptions of diapers, toys, baby food, milk products and other baby related items will rise. Percentage of GDP from personal consumption will rise as a result which will offset the decline stemming from lower infrastructural investments. Overall GDP will grow as population increases.
- With economy’s growth slowing down, commodity demand will drop and natural resource rich countries such as Brazil, Russia, S. Africa, Canada and Australia will be negatively affected. The drop on commodity prices has already reflected this change. On the other hand, demands on meat, vegetables, corn, soy beans and other food items will rise as China’s population increases. Overall, this will improve situation of China’s massive trade surplus because China relies on other countries for many of the raw material it needs. Inflation pressure will ease as growth slows down which, along with less demand on new plots of land, will likely reduce social unrest.
- China will encourage more private investments in state-owned enterprises (SOE) which, in time, will make them more efficient and competitive. This however, will take time to play out and there is no guarantee that we will see any material change soon.
- China will push more rural land reforms and will try to change the country into a more urbanized society. The government has announced that it will move as many as 250 million people into cities, some of them newly created, which will increase personal consumption but will add pressure to government debt, pollution, water usage, food supply and jobless rates. Urbanization rate in China is around 51% according to Xihua News while more than 75% of the US population live in cities. For Japan, that rate is around 80%. Reform on Hukou system, along with the creation of social safety net, will likely be addressed too as reforms and urbanization are phased in in the next decade or two.
- The government will tackle financial reform in the form of interest rate and capital account liberalization. It will in essence let the market determine the interest rate (mortgage and CD rate for instance) and allow the market to determine what the best capital allocation is. After reform of the financial markets, Renminbi and currency exchange rate will be on the table later.
In short, Chinese government has realized that government isn’t the best option to direct the next phase of China’s economic growth. I see this as a positive first step to make China a more competitive nation in the world with more transparency and openness. This will be necessary if China wants Renminbi to be accepted freely by the world financial markets.
Renminbi’s gradual rise into prominence is a trend worth noting. It also has huge implication to the value of US dollar and other currencies in the world. China’s Renminbi has risen against the US dollar under the watchful eyes of the People’s Bank of China. It is by design and is a prelude to free trade of Renminbi on the currency markets in the world. It appears that Chinese government allowed Renminbi to appreciate by about 3% annually so that China’s export industries have time to make necessary adjustments. This trend will likely continue in the future. China has done this (chart) to avoid hot money crossing the board to take advantage of a rising currency.
As of the end of 2103, Renminbi has taken over Euro as the second most used currency for international trades. Of course, it is still pale in comparison to the overwhelming percentage of international trades settled in US dollar, now standing at 81.08%. There is no doubt that this trend will continue because the rate of adaptation increased by 8.66% in October 2013, up from just 1.89% in January 2012. As of now, nearly 20% of Chinese trades are settled in Renminbi, up from 12% in 2012.
Furthermore, China has taken over US as the largest global goods traders according to a recent article on FT. It was reported that the total value of imports and exports for China has reached a staggering $4.16 trillion vs. US’s $3.5 trillion for the first 11 months of 2013.
China has gradually set up bi-lateral currency swaps with most of its major trade partners which allowed their trades to be settled in Renminbi instead of the customary US dollar. This practice will continue and the dollar amount and scope will be expanded further.
Even though it is still way too early to sing the demise of the US dollar, the strengthening of the Renminbi is worth watching because of its potential implication to financial markets in the world. As more bi-lateral trades are settled in Renminbi, China and its trading partners will benefit from direct currency exchange set up and they will no longer need as much US dollar for international trades as before. As such, these countries, along with China, will recycle fewer US dollars back to the US Treasuries. The net results will be a rise of interest rates of US Treasuries. In the meantime, demand on Renminbi will rise as more countries realize the benefits of direct settlement without converting their currencies into US dollar first. The implication of a holding strong currency, i.e., Renminbi, has not lost its lure to those countries either. In essence, it will be a choice among the Euro, the SU dollar and Renminbi. Japanese yen will become the currency to avoid because of the radical monetary policies of the BoJ.
Another interesting development is that China has signed agreements with Russia and a few other countries, like Iran, to settle their crude oil trades in Renminbi instead of US dollar. I don’t expect countries such as Saudi Arabia or Kuwait will use Renminbi to settle their crude oil trades any time soon but this bears watching too.
As swap programs gaining momentum in the future, interest rate in the US will rise, albeit slowly, as demand of US Treasuries decreases. As more countries accumulate Renminbi for trade settlements, more Renminbi will be made available to international Renminbi hubs such as London, Hong Kong and Singapore, reducing the need of US dollar further.
Of course, helping Renminbi’s ascension came from America’s own doing in the form of QEs by the Fed, near-zero Federal Funds rate, trillion dollar annual deficit and $17+ trillion (and rising) national debt incurred by the US government. Slowly but, I think, surely, Renminbi, Euro, other major currencies or some form of a pseudo currency, such as IMF’s SDR, will someday challenge the world reserve currency status enjoyed by the US dollar for the past several decades. Even though its timing is at least five, ten or fifteen years into the future, it is a time bomb waiting to explode if you hold too much assets in US dollar in your portfolio.
According to some reports, China’s banks may have as much as $4 trillion dollars off balance sheet loans which are hidden from bank regulators. Recent comprehensive government audits put that figure at $3.6 trillion but some private estimates were as high as $6 trillion. This is referred to as shadow banking in China.
Loans made through shadow banking network could be very toxic and may have the potential of becoming the sub-prime mortgage loan crisis of the United States according to many analysts and western government officials. Chinese government also realized its potential negative impact on its economy and is doing something about it. The comprehensive review of all banks in China (6000+) was the first small step forward so that the central government knew how big a problem it really is. Cracking down on illegal loans has begun and to me shadow banking in China has not reached crisis level yet simply because un-performing loan is still at manageable level according to many analysts. Besides, many loans were made by private companies and individuals; default on these loans will not affect major banks controlled by the government.
It appears that Chinese leadership has accepted the fact that China should grow at a more manageable pace; like annual GDP growth rate around 7.5% instead of double-digit paces a few year back. With China’s GDP growth rate target taken out of the local government’s performance metrics, loan growth on the local level will be less important in the future. Furthermore, PBoC’s manipulation of overnight lending rates may be one of the ways for China’s central bank to control the activities of shadow banking in China. Nonetheless, we needs to pay attention to.
Environmental Crisis, Social Issues and Ethic Unrests
There is no doubt that air and water pollutions have reached dangerous levels in many cities in China. Coal consumption has to come down and other forms of energy such as natural gas, solar and nuclear will have to ramp up to take its place. China is doing something about it but these projects take time to implement with some taking as long as a decade or so. More natural gas is coming into China and as many as 32 new nuclear power plants within the next five years are under construction. The combined capacity is a staggering 32,580 MW. Currently China has 16 nuclear power plants in operation, China is aimed to increase its electricity produced by nuclear power from the current 2% to 6% by 2020 (20% in the US and 74% in France). Please note that 1 MW is 1 million watts which will supply enough electricity to 1,000 typical homes in the US. However, even this kind of intensive capital investment, any significant relief to air quality will be at least five years out. One thing seems certain though and that is China will continue to invest in nuclear energy and the air quality problems in China will likely get worse before it get any better. Water pollution problems seem to be less urgent at this moment.
Social issues can be very volatile if they are not handled carefully by the government. Hopefully, with the announced reforms, China will see fewer civil unrest incidences in the future. Of course, the way the reform is carried out needs to be sensitive to the needs of the affected citizens. A heavy-handed approach will certainly have negative implications.
Ethnic unrests, especially in the provinces of Xinjiang and Tibet, could get very ugly as anti-government sentiments got stirred up by small but vocal and influential groups either inside China or in foreign countries. Many of such groups are calling the US home and may get funding from interest groups. These types of issues require Chinese government’s patient and persistence to get them resolved, if possible, peacefully.
Japan – Struggle to Escape Deflation Contines February 14, 2014Posted by hslu in China, Cold War, Economics, Global Affair.
Tags: Abenomics, deflation, Japan
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The radical policy adopted by the new Japanese government is important because it will upset the balance of power in Asia politically and economically. It will also escalate an arm races among major Asian countries. As I allured before, the US dollar has seen significant upside against Japanese yen because of a pro-growth policy adopted by Japanese government in November 2012, dubbed Abenomics:
1) Massive QE by Bank of Japan the like of which has never seen in the history of the world,
2) Fiscal stimulus from Japanese government, and
3) Structural reforms by the government.
The target of this new policy is aimed at popping up Japan’s inflation to 2% in 2015 from more than two decades of deflation. BoJ also want inflation to stay below 2.5%.
With the approval of the United States, BoJ has done its part and is taking a “wait and see” attitude. However, the value of yen has dropped by 20+% against the US dollar. However, since Japan already has 35% of its products manufactured in foreign countries; a lower Japanese yen may not have the anticipated results of stimulating Japanese exports. Besides, when push comes to shove, other Asian countries, e.g., Korea, Singapore, Taiwan and Vietnam, will devalue their currencies to compete for market shares. In any case, a lower Japanese yen is a given in the near future because BoJ will see to it that it will become a reality. This risky “monetary experiment” will take time to play out and no one knows how it will end. In addition, Japanese stock market, in anticipating a booming economy, higher exports and more consumer spending, has reached the level unseen for many years.
Government stimulus (i.e., more national debts) has been adopted but its effect on the economy will be minimized by the upcoming sales tax rise from 5 to 8% in April 2014. It is scheduled to go up to 10% in 2015. Japan has deemed the higher sales tax necessary in order to pay for its mountain high national debt and massive deficit. However, the immediate impact on the economy is very negative because consumption will drop due to higher taxes. It looks to me that Japan is really caught between a rock and a hard place and Japan has no one to thank for other than the US dating back to the Plaza Accord enacted in 1985.
Recently, the structural reforms, which will take time to play out, have taken a back seat because Abe went to the controversial Yasukuni war shrine where “Class A” war criminals charged by the Tokyo tribunal after Japan’s defeat after WWII were commemorated. He basically took his eyes off the economy and focused instead on his or his party’s right wing agenda. His actions have even taken America by surprise according to publish accounts and has caused anti-Japanese sentiments in China and Korea. I believe that America wants thing stirred up in Asia but it don’t want a war between China and Japan. That being said, I do not rule out that America was in it in the beginning in order to find out where China’s bottom line is. China’s opposition and its subsequent declaration of new flight zone in the East China Sea might escalate the already volatile situation into something much more explosive. I expect small confrontation will happen but major event is not likely. I also expect that America will not send its soldiers to fight the war for Japan either. America can’t afford it because it is broken.
I surmise that Abe probably wanted to:
1) Increase his personal popularity in case his economic reform doesn’t produce anticipated results.
2) Strengthen his party’s control on Japan’s political landscape in order to push for more structural reform.
3) Move Japan to pre-WWII status in the world with an army and advanced weapons. The US has agreed to sell some F-35s to Japan and Abe has vowed to build several new was ship in the near future.
4) Stimulate Japanese economy by waking up nationalism of the younger generation, or
4) Fulfill his personal traditionalist ambition and Japan’s right wing agenda.
I of course don’t know where this hostility will lead to but it could morph into a “Black Swan” event when no one was paying any attention to or when everyone is expecting the best. If it happens, it will be very destructive to the economies and financial markets in the world.
Personally, I think, judging from lack of development in recent months, structural reforms in Japan will face strong oppositions from lobbyist groups and the highly hyped reforms will have minimum impact to the economy. If and when the 2% inflation target is reached, BoJ will lose control of the long rate which will significantly increase Japan’s interest expense. The sales tax hike will act as a drag on Japan’s economy and Japanese economy will eventually crumble under its crushing debt of 220% (and rising) of GDP and a totally unsustainable 50+% annual deficit.
It was said that Japan owes majority, ~95%, of its debt to its citizens. As such, Japan government has no urgency to pay the principles back to its creditors and the level of enormous indebtedness can continue into the indefinite future. I seriously doubt it but who am I to say about that? When this source of funding is reduced as more seniors stop putting money into Japanese Bonds and start redeem their savings to live on, Japanese government has no option but to look for commercial sector to keep the government running. If and when it happens, interest rate on Japanese government bonds will rise and if the BoJ can’t keep the situation under control, a financial crisis on the order we have never seen before will explode right in front of our eye.
Japan’s current account deficit, the broadest measure of Japan’s trade balance in goods, services and investments with the rest of the world, is worrisome too. Because of the nuclear disaster in Fukushima on 3/11/2011, Japan was forced to shut down all of its 50 nuclear power plants (By comparison, the US has about 100. Giving how small Japan is, the density of nuclear power plants in Japan is alarming!) According to a friend of mine who has been in the nuclear industry for 30 years, Japan’s nuclear power plants, which generated 30% of Japan’s electricity needs and was the third largest nuclear power producer, were woefully un-prepared for any nuclear disaster because none of Japan’s nuclear power plants were complied with the world nuclear operational standards. This forced Japan to import crude oils, condensate, and LNG from foreign countries, primarily Middle East countries, at a level around 4.6 million barrels per day; the third largest oil importer in the world after US and China. The net result is the historical current account surplus has changed to deficits and its implication is huge if the condition continues. In essence, Japan has changed from a net exporter of cars, machinery tools and high-end products to a net importer despite a 25% drop of Japanese yen’s value. It is not a good combination because a weakening yen will eventually affect the living standard of Japanese people as import prices rise. If export can take advantage of a weakening yen, the trouble to Japan’s economy has just turned to a more alarming stage. That being said, the higher importer may be cause by Japanese consumers hoarding goods before sales tax rise in April of 2014. We will address this in a later section.
My Crystal Ball for 2014 February 14, 2014Posted by hslu in China, Economics, Euro, Global Affair, Health Insurance, jobs, Liberal Media, Military, Muslim, Obama, Obamacare, Oil, Politics.
Tags: jobs, US Economy
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Crystal Ball for 2014
Part I – Economic Development
The title of my report to you in these early trading days of 2014 is totally misleading because my crystal ball, if there is ever one, is decisively cloudy. This is the first year I am actually sitting down and “THINK” about what has happened and what will likely happen in the coming months and quarters. Nonetheless, I am going to take a peek inside and pick out the threads which I can rely on to guide me through the new trading year and beyond.
The primary purpose of my report is to force me to think through and figure out causes and consequences relating to economic developments in the world and policies changes adapted by central banks and major nations in the world.
My reason for spending time to write this summary report is simply: I think it is important for me to get a big picture, top-down view of the world economy so that we can detect what the big, dominating trends are and, with that in mind, know how and what to invest.
Once the summary is done, I can use it to guide me through the treacherous path of investing in stock, bond and currency markets. Commodities such as crude oil, natural gas and gold are also influenced by the same major forces in the world. They will be looked at too.
My first task is to take a look of the US economy, actions taken by the Fed, likely fiscal policies and my prospective of the 2013 stock market. It makes sense to start with the US because its economy accounts for about 18% of the world GDP (used to be 25% before the rise of China and other emerging countries) and actions taken by the Fed set the tone for the entire world to watch, follow and react to.
I will then take a regional look starting from China, Japan, Europe, Middle East and other emerging markets. Frontier countries are also worth a cursory look because there could be outsized opportunities there.
United States – Economy, Taper, Bond, USD and the Equity Markets
The most important economy-related development last year was the beginning of taper which will lead to the eventual conclusion of QE. Of course, QE will be data dependent because the Fed has tirelessly told us so. That being said, the end of QE is coming and the timing of its exact termination date isn’t very important. What’s important is what the smart moneys, the hedge funds and big money managers, will do to position themselves ahead of the curve in the mean time.
Let’s examine this game changing development a bit. It is important in light of the Great Recession since 2008 which was caused none other than by the greed and fear of American’s capitalism, a system heavily preached to the world.
Interest Rate and Treasury Bonds
We know that the federal funds rate will remain at 0.25% until sometime 2015 because it is controlled by the Fed. It will remain at that level until the unemployment rate drops to 6.5% as long as the inflation rate is below 2.5%. That’s a given and that will take a while.
Long Bond and MBS purchases, dubbed QE, by the fed will decrease by $10 billion every month starting in January 2014 and the long rates will continue to rise. Case in point, the 10-year rate has hovered around 2.95% in recent months after making a record low of 1.43% in 2012. The long rate started to rise drastically after Fed’s announcement of an imminent tapering in May 2013. However, there is still room for the 10-year rate to rise and it is not unlikely that we’ll see it rise to a range of 3.5 or 4.0% by 2015. It is likely that Bond investors will see their principles drop and they will lose 3 to 5 years’ worth of interest income if they keep their Bond portfolio’s duration low.
The fact that Bernanke started tapering before his term expires on January 31, 2014 suggested that US economy, in the minds of the Fed’s FOMC voting members, begins to mend. GDP will rise and the economy will slowly generate more jobs in coming months.
With the Fed on the defensive, the US economy is arguably entering into a more promising phase on a generic economical cycle chart. Take a look of the following illustration and I suspect that the US economy is somewhere between the early recovery and upswing stages.
The Fed, using traditional and other monetary tools at its disposal, has done a good job stimulating a portion of the US economy: risk assets, auto and housing markets. However, it is not without risks and un-intended consequences. This will be addressed later in a separate section. Extremely low interest rates since 2008 popped up the housing and auto markets; traditionally interest rate sensitive industries. Low interest rates also helped corporates’ balance sheet because massive amount of corporate debt was refinanced at low interest rates which helped their bottom line. That’s was part of the reasons why corporate top lines remained at low single digit level while earnings growth reached to about 4%. This incentive will be gone when rate rises. Risk assets such as stocks and commodities also went up because the Fed has forced everyone’s hand.
If everything goes according to plan, long term rates will creep up; yield curve will steepen while inflation remains in check. Bonds will face headwind going forward and capital rotation out of bond funds will, if not already, begin in earnest. Moderate GDP growth in the US is widely anticipated which will help corporates’ top line. As consumers become more confident on the economy, spending will increase and hiring will follow. Unemployment rate will drop.
US consumers, like American corporations, are in better shape now than before after massive de-leveraging since 2009. Housing market and home prices have returned and the equity market is at all time high. Both have made consumers, the ones with jobs at least, wealthier, more confident and more willing to spend. Given it some time for this process to work through the economy, it will grow the GDP and help reduce the unemployment rate. The following chart gives another look of the economy cycle and characteristics of each phase of a typical economic cycle.
Jobs, Jobs, Jobs
With a somewhat rosy prediction of the US economy, the job picture in the US however remains worrisome. New job creation for December 2013 was a disappointing 74,000 new jobs; well below the consensus of around 200,000, right after the Fed decided to taper. Jobless rate dipped to 6.7% from 7%; not because the economy is strong enough to generate new jobs at a brisk rate but because record amount of job seekers left the job market. Labor participation rate dropped to 62.8% matching that from the stagflation period of the early 1970’s. In reality, the real jobless rate, the U6 data, suggested that the true jobless rate is 13.1%, including the part-timer workers who wanted to work full time and those left the job market. An alarmingly high level for the richest nation in the world, don’t you think so?
The reasons for the low participation rates are many:
- Old workers; for instance, baby boomers who got laid off since 2008 Great Recession, are retiring early while some younger workers; couldn’t find a decent job because of skill mis-match, are going back to school to make them marketable in this day and age.
- Technology replacing low wage jobs. We have seen this everywhere: Home Depot, Supermarkets, Costco and others places. In these day and age, even cars don’t need drivers to drive. In a decade or two, all taxi driver jobs may disappear for good if this technology is widely accepted by auto makers and the public.
- Outsourcing and off-shoring jobs will continue as long as its benefits out-weight costs. Call centers, help-desks and other low paying jobs are disappearing fast in the US.
- Growth of foreign countries absorbed a healthy amount of high-paying jobs because these growing economies offer better prospects.
For a long time, the news media reported that 250,000 new jobs were needed to absorb the new job seekers entering the economy. That narrative has long been gone and anything close to 200,000 new jobs was greeted by excitements by the WH and liberal media. All told, there are around 20 million people who are out of work. It will require a long period of 350,000 new jobs per month just to bring jobless rate back down to 5.5% level. This will no doubt be a drag to the recovery of US economy.
The US dollar has depreciated against other major currencies in the world: Euro, British pound and Japanese yen, while QE was in progress. Yen began to weaken starting about a year ago when Japan’s new administration vowed to de-value Japanese yen through massive QE of their own, much more aggressive than the program adopted by Bernanke, in order to rescue Japanese economy from 20+ years of deflation. Now that Bernanke’s QE will come to an end, interest rate in the US will rise and the US dollar will slowly appreciate over time way before QE actually ends sometime in late 2014.
This was a major event for emerging countries ever since Bernanke hinted that tapering was about to begin on that fateful day in May, 2013. Massive amount of capitals was rushed out of the emerging markets’ bond and stock markets. Their currencies tanked. Many emerging markets did poorly because of Fed’s tapering and I believe the trend will continue albeit at a slower level because the so called smart money has already gone. Some die-hard individual investors will stay for the yield but will lose out on the currency devaluation and drop in stock values.
US Government and Fiscal Conditions
After ramming the not-so-affordable Obamacare over Republicans’ objection and shoveling it down Americans’ throats, US Congress is slowly returning back to a more compromising mood because 2014 mid-term election is coming. Obamacare did a lot of damage to Democrats and Republicans took blame for government shutdown whether it deserved to be blamed or not. 2014 mid-term election is only 11 months away and a new landscape will take shape starting in January 2015. Of course, the White House is still occupied by a Democrat until 2016 election. Unless, Republican can take over the Senate or Tea Party gains a commanding majority in the Congress, it will mostly be business as usual with token Republican oppositions from the lower house.
All along, the stock market took the legislature interruption in stride and 2013 saw 50 new records for the DOW despite the dysfunction of the US federal government.
In the mean time, another fiscal fight looming large is the pending debt ceiling fight next month. This remains to be one of a few tools conservative Republicans has to fight the Democrats with. Unfortunately for the country and for the 53% Americans who pay any federal taxes; especially the tax-paying, deduction-diminishing and no tax loophole to hide middle class, it may be too little too late. They will be squeezed while the real rich people will not even notice the higher tax bill. America under Obama, Pelosi and Reid has moved decisively to the left and has become a socialist and a more liberal country. Republican Party has lost the fight and it is slowly being marginalized by the much bigger Democrat Party. The Tax and spend government will continue for the foreseeable future. Eventually, the deficit and the debt will crush US economy and it will not be a pretty picture if we ever come to that unpleasant ending.
The Democrat-sponsored immigration bill, or the de facto Amnesty bill, has already passed the Senate and is being considered by the Congress. Even without the pending immigration bill, Blacks, Latinos and Asians have been overwhelmingly Democrat leaning over the years and this alarming and disturbing socialist trend will not be reversed for generations. Consider this: the 11 million un-documented foreigners, the real number is probably much bigger, will, under the law, eventually become American citizens. They each will bring four or five relatives to the US. These people will then bring another four or five into this country legally in due time. Do the math, you will find out the demography in the US will be altered in a quarter of a century or less by the addition of new Latinos in this country. According to a 2012 study, Latinos account for 17.2% of US population, or 55 million at last count. Pretty soon with Latino the fast growing ethnic group in the US, the America we used to know will be gone forever. These new citizens are usually less educated and will most likely rely on America’s generous social programs; SSI, food stamp, disability benefits, you name it, to support them, especially in the beginning. There is no question that the “Browning” or “Off-white” of the US population is fast happening, a potent backdrop of the America population landscape where American whites will lose their majority around 2043.
If you want more proof I’ll give you one: more off-white babies than white babies were born in the US last year. The trend will not be reversed. Don’t get me wrong, the whites, at 197.8 million still commands a super majority, but it will peak at 2040 and will enter a steady decline from that point. The reason is simple: baby boomers began to die in big numbers way before that time.
The Tea Party, typified by mostly conservative and middle-aged whites from the South, is alarmed but they are powerless to fight the unavoidable trend. They will only be marginalized in the end. Their influences on new legislatures and the reduction of the booming national debt will be minimal at best.
There is no doubt that the proverbial can of national debt got kicked once again down the road while Obamacare will add untold billions to the deficit and national debt in years to come. For some reason unknown to me, the financial market is in partial to the looming fiscal crisis. Someday someone will suffer the consequence but the debt will probably never be paid. The cause has been sowed and American’s next generations will suffer the inevitable consequence in due time. Because of this, many countries in the world are alarmed and some have started doing something about it. This will be addressed later.
The State of the US Economy
There is no question that the once mighty United States has changed to a serviced oriented country. It has buckled under the weight of globalization. Public education in the secondary level has lagged behind and skill gap is increasing at an alarming rate. Meanwhile, welfare costs will skyrocket to unthinkable level in coming years. The only bright spots seem to be in the technology space and renovations in medicine and medical instruments where America remains in the leadership positions. Defense industry; the killing weapons, fighter jets, air carriers and long range missiles, is still dominated by the US though.
Energy, especially crude oil and natural gas spaces, is another area where America is gaining compared to the sorry state it was just a few years ago. Domestic crude oil production from fracking of the shale reservoirs in many parts of the US has increases by about 1.8 million barrels per day. It of course reduces America’s dependence on foreign oil and reduces trade deficits. Some study put American’s oil production higher than Saudi’s by 2018 but I think the surge of domestic oil production will be short lived because the rapid decline, as high 40%, of oil production rate from this type of reservoirs. In short, America will not be able to achieve crude oil independence; not in the foreseeable future. A report by me on shale oil production was distributed to you sometime earlier. I have not changed my position yet and there are recent reports that supported my contention.
America has about 200 years of natural gas supply because of abundance of natural gas resources in shale reservoirs. A year or two ago, American companies were spending vast amount of capital to import LNG or NGL from foreign countries. All these projects have now been stopped. Current developments are aimed at eventually exporting American’s LNG to Asian countries where LNG or NGL sells for two or three times that in the US. The process will be slow because of risks involved in these capital intensive projects and likely competitions from other gas producing countries. There is also talk of bringing manufacture industries back to the US because of energy cost advantage from abundance of natural gas domestically. This may happen but it will take time because labor cost in the US is still too high and supporting industries are not available. Using natural gas for transportation purpose has been discussed but it remained to be a project on the drawing board simply because the necessary infrastructural is not and will not be ready for years if not decades. Since the prerequisite of a capital intensive project in a capitalist country, e.g., the US, is that it has to make money, this will stay in the planning stage for now. Any adoption by the private sector will be marginal at best which will not have major impact on natural gas demand or its price. Some coal-fired power plants will switch to natural gas but the increased demand will be marginal at best.
In summary, US economy is poised to recover for the following reasons:
- US Congress showed a tendency of compromise.
- Fiscal drag, e.g., sequester and 2% payroll tax hike in 2013, is gone.
- Consumers are wealthier with stock market near or at all time high and housing market has recovered at the expense of income and wealth inequality. Stock market, like it or not, is one of the early indicators of the economy.
- US companies will likely deployed cash reserves on their books; estimated at $1.5 trillion, as they become confident that things have turned around for the better.
- Banks may be in favor to lend now that yield curve has steepened. They will make more money as rates on the long end rise.
- Prices of crude oil and natural gas are coming down thanks to increasing domestic supplies, lower demands from China and India, and ease of geopolitical tension in the Middle East even though the world may someday find out that Iran has developed a formidable nuclear weapon capability. North Korea did it to the US and the same thing may happen at Iran too.
- Steady but modest job creation by the private sectors.
- Europe is mostly out of the danger zone and Japan may recover from its prolonged deflation state.
- Interest rates still remain at historically low level.
America’s Standing in the World
The leadership position of the United States has been eroded and challenged by other countries in the world: notably Iran, China and Russia. America’s handling of the Middle East situation, including Lybia, Egypt, Syria and Iran, has been criticized by such countries as Israel and Saudi Arabia; two unlikely allies. US’s foreign policy under Obama seems to revolve around a marginalized Israel while appealing to Muslim countries, I think this is a deliberated act by Obama who is much more liberal and less committed to Israel than any recent US President in recent decades. It seemed that Obama wanted to remove US from the Middle East and leave the problem for countries in that region to resolve themselves. The simple conclusion is that America has no workable solution to the mess there.
Unfortunately, Obama’s foreign policy is not working and the US is losing respect among the same Muslim countries Obama is trying to appease. The US invaded Iraq, rightly or wrongly, but got nothing in return; not even its vast crude oil resources. Ten years after the Iraq War, all US presence has been removed from Iraqi soil because Obama was eager to please the anti-war crowds in the liberal camp. But take a look at Iraq now: the country is mired in deadly suicide bombing on a regular basis. Al-Qaeda has regained two major cities in Iraq and the government is hard pressed to take them back. A request from America to keep some US soldiers in Afghanistan is pending in Kazai’s government but Kazai is delaying its approval even though its “congress” has approved the deal.
Iran is another matter by itself. The recent P5+1 meeting with Iran on its nuclear program could only be viewed as a total failure because Iran got to keep its nuclear purification capabilities, up to 25% purity, while some UN monitoring is agreed upon. In essence, the US has lost the sanction war and was forced to realize that a nuclear Iran is unstoppable.
Syria is where Obama’s foreign policy took a serious beating in public. The red line in the sand of “no chemical weapons” drawn by Obama was crossed many times by Syrian Army in its 2-year long civil war. Obama flipped and flopped but was powerless to do anything about it. British didn’t want to deal with it. NATO had no say in this matter. Obama didn’t know what to do so he passed the hot potato to the Congress but American people were overwhelmingly against the potential war. Fortunately Russian premier Putin came to the rescue and Obama was off the hook with two black eyes and an egg on his face. The presidency of the mighty America was tarnished in the eyes of the world and many Muslims. I would dare to say that something like this had never happened to any American president. Obama took it and he seems at ease with that outcome. I have to say “saving face” in the eyes of the world isn’t very high on Obama’s agenda. Nonetheless, the thorny issue disappeared and Obama was glad it was off the headline from evening news and Sunday talk shows.
What was the fall out of all these fiascos by the most powerful country in the world in the eyes of Muslims in the3 Middle East? Let’s take a look of what one influential Saudi Arabian princes, Turki al-Faisal, former Saudi intelligence chief, has to say. Prince Turki recently criticized Obama for weakness in the Middle East. Here are some of his recent comments:
“We’ve seen several red lines put forward by the President, which went along and became pinkish as time grew, and eventually ended up completely white. When that kind of assurance comes from a leader of a country like the United States, we expect him to stand by it. There is an issue of confidence.”
He added that when a country has strong allies, “you should be able to give them the assurance that what you say is going to be what you do.” These are rather strong words against a seating American president, aren’t they?
Other incidents, such as Snowden debacle which Putin played his hand well against American opposition and the hijack of Bolivian president’s airplane in Europe expose what America really was: 欺软怕硬.
Simply put, America under Obama has lost creditability and moral authority in the eyes of majority of American people and many countries in the world. American standing in the world has been damaged and it may not be able repaired for decades. It seems to me that a new world order is slowly evolving and America is no longer at the top. The political vacuum created by America’s deliberated exit from the leadership position on the world stage will stay empty for now.
Inside America, the picture isn’t much prettier either. NSA’s monitoring of electronic communications of US citizens, known terrorists and world leaders, such as German Chancellor Merkel, has raised doubts about American government’s intentions, invasion of citizen’s privacy, abuse of human rights and the legality of this massive surveillance program. IRS’s targeting of conservative groups in the US before the 2012 election also raise questions about a run-away WH abusing its power for political gains. The initial denial of Benghazi’s disaster as a terrorist attack by al Qaeda linked group and the stonewalling after the tragedy showed a WH cared more about hiding the fact that Al Qaeda was as strong as ever than letting the truth be known to the American people. The complete failure of Obamacare’s rollout and the lies Obama said before it became the law, such as insurance premium will be lower by $2,500 for a family, people can keep their insurance plan if they like it and people don’t have change doctors under the new law, showed an utterly incompetent federal government and how political leaders lie to their constituents. Americans have lost confidence on its government because of dysfunction of the Congress, Snowden, NSA, IRS’s targeting of selected groups for special investigations, cover-up on the organized attack on Benghazi where American ambassador and three others lost their lives, high unemployment rates, rising income gap and the disaster of Obamacare. Millions of people are still out of jobs and more than 40+ million people are on food stamps. Is It the beginning of a new chapter in America, a declining America?
Yet none of these had any material impact on the equity and housing markets because the Fed has provided a big and bottomless punchbowl to reward the riches who own most of the stocks and houses in the US. In short, the rich get richer and the poor get poorer. The wealth gap in the US is as wide as it has even been.