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Summary of the Economy and Financial Markets October 5, 2013

Posted by hslu in China, Economics, Energy, Euro, Global Affair, Gold, jobs, Oil, stocks.
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I wrote this short report for my friends in Dallas yesterday; October 4, 2013. It helps me to get a grip of what’s going on in the financial market. It is a very simple and brief summary of what’s important over the last month on Bonds, stocks, crude oil and gold. I am learning to spot investment opportunities and I thought understanding the macro economics is essential.

  • The Fed delayed tapering due to deteriorating economy and pending gov. shutdown.

    • Unemployment rate @ 7.3%; Labor participation rate @ 63.2%; lowest since 1970.
    • U6 remains at ~14%; 90,473,000 not in Labor Force – BLS data.
    • Stock market popped due to QE but gave back gains 3 days after- A concern!
    • Treasuries rallied: 10-year Bond yield to decline from ~3% (record low: ~1.40%.) Watch TBT.
    • Government shut down and pending debt ceiling fight (2 weeks) will impede rally
    • Emerging markets had relief rallies.
    • Countries with current account deficits continue to see market/currency decline.
    • India and Indonesia in trouble.
  • Crude oil and metals continue to trade lower;
    • China slow down weighs and Inflation absent.
    • Bull market in gold ran out of steam.
    • Economy needs to pick up steam to see crude oil and gold moving higher.
  • European economic conditions improved but recoveries slow to come.
    • Merkel stayed on for 3rd term. Steady as she goes. No major policy change.
    • Recession may be over.
    • Sovereign debt yields declining: Spain and Italy 10-year Treasury yield. LT buy?
  • Japan
    • Business confidence improves: capital investment up 5.1%
    • GDP up 3.8% in Q2 2013; revised up from 2.6%. 4.1% in Q1 2013.
    • Sales tax increased to 8% (4/2014) from 5%. Up to 10% in 2015.
    • Government: ¥10 trillion (~$100 B) stimulus: lower than expected. GDP = $5.96 trillion.
    • BOJ on target to increase currency float. Deflation may be over.
    • Debt: ¥1,000+ trillion. Deficit: 40+% spending borrowed. Structural reform from Abe not enough.
    • DXJ and YCS are still in play. US government shutdown affected Nikkei’s decline and yen’s strength.
  • Chin Economy expanded at ~7.5%
    • 12-5 is in progress (2011 – 2015): sustainable growth of 7%, industrial upgrading and the promotion of domestic consumption. 11-5 expected 7.5%. Actual 11%.
    • 10 new cities to accommodate 250 million people from farms: urbanization
    • 户口制度to relax?
    • Shanghai Free-Trade Zone: testing for 2-3 years. To expand to other areas.
    • Preparation for a floating 人民币?
    • More countries signed up for direct exchange with人民币: by-pass US dollar.
    • China ADRs could be good investments.

 

IMF, Taiwan and China September 27, 2013

Posted by hslu in China, Global Affair, Politics, Taiwan.
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I was searching for some data on Taiwan‘s GDP growth rate and found this table in a paper by IMF. The reason for the search is because “台湾的经济实在很差“ was all I heard when I was in Taiwan a week or so ago.

Look at the last entry at the bottom of the table.

Hint: Don’t pay attention to the numbers.

Energy Consumption - coal to gas project

Source: http://www.imf.org/external/pubs/ft/weo/2013/01/pdf/text.pdf; page 168.

Bond Market: 1 Bernanke: 0 August 17, 2013

Posted by hslu in Economics, Global Affair.
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Bernanke lost the first run. He was out-gunned by the Bond traders. In the end, Bernanke will lose the war too.

Haruhiko Kuroda (黒田 東彦) will follow Bernanke’s steps into sunset but Kuroda, along with Shinzō Abe (安倍 晋三,) will be even worse off because of Japan’s national debt currently running at ~215% of Japan’s GDP.

US Interest rates and Yield Curve

US Interest rates and Yield Curve

Are Stocks cheap? August 3, 2013

Posted by hslu in Congress, Economics, jobs, Obama, Obamacare.
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You decide. Here is just one of its metrics.

P/E ratio of S&P 500; 1960 to August 2013

P/E ratio of S&P 500; 1960 to August 2013

Keep in mind that stocks do not have to be justified by what’s going on in the economy right now.

We also have QE3 by the Fed which has been manipulating the economy, the equity market and the Bond market. It also artificially lowered the savings rate at banks. of course, you already knew this when you opened your bank statements years ago. Bernanke justified his action by saying that inflation is low and people are more than compensated by the growth in the stock market and the equities of their houses. Besides Bernanke can hide behind his dual mandates from the Congress. But we have no where to hide but to chase yields at our own risk though.

The Fed has forced everyone to riskier assets. By doing so Bernanke has popped up the bubbles in equity market and the real estate market. By keeping the rate low, the biggest bubble is in the long bonds and not m=very many people knew it.

What if these bubbles are eventually popped by Fed’s own action? Will we get a bailout like the too-big-to-fail and too-big-to-jail banks? 

It appears that Fed’s money printing action will continue but September is a critical time. The stock market is probably betting on tapering starting in September.

Why? Isn’t the economy lousy?

Yes, the economy is very lousy. But:

About 69% of Fed’s money is not in the economy. Velocity of money is declining and the Fed knew it. The question you want to ask yourselves is this:

“Where is the growth in GDP?” and

“Where are the jobs?”

The trend doesn't lie

The trend doesn’t lie

All the Fed has managed to accomplish is a GDP growth rate of 1.7% in Q2 which is saying that the GDP has grown by the amount that roughly matches inflation. In other word, the economy didn’t grow at all in real terms. Despite all the QEs the Fed has done in the past.

And 162K new jobs created in July were not even enough to accommodate new entrants in the job market. The White House and liberal media hailed the new jobless number but they have stopped mentioning the fact that US economy has about 250K people entering the job market every month. In other words, the United States is falling behind very seriously.

Pretty amazing, isn’t it.

It is also very sad too.

In case you don’t know or you have been fooled by the 7.4% jobless rate headline number:

There are currently 90 million people who are not working in the richest nation in the world: The all mighty United States.

About 47 million of that 90 million people are on food stamps. No question that more than 47 million of that 90 million people are on other forms of government hand outs too.

That is about all Bernanke has been able to do.

Yeah, 7.4% unemployment rate! Great achievement by the Fed, Obama, and the Congress.

I have no doubt that Obamacare has something to do with the fact that part time worker has grown in the past several quarters.

More part time jobs created due to Obamacare

More part time jobs created due to Obamacare

Every where you see, you see the foot print by Obama’s failed policy which hinder job growth and business investments. The so-called middle class in the United States is disappearing and the United States has become a nation of hamburger flippers, hotel maids and night time stock persons at local Wal-Mart and maybe K-Mart as well.

This is the hallmark of the Democrat Party and the hall market of one of the most liberal president of the United  States: Obama.

Well, in conclusion, the Fed is very nervous of the unintended consequences of all the QEs they did in the past but they also knew  that they have no control of the Bond market.

To put it in simple terms:

The Fed has put itself between a rock and a hard place. Bernanke will probably do everything he can to taper. The economy may not let him to though.

We’ll have to watch the drama but we are actually one of the players in the drama as well whether we like it or not. Bernanke will retire and the “烂摊子” will be someone else’s problem by February, 2014.

He has had enough. I can tell.

But not to be too harsh on Bernanke on the eve of his retirement, he has to learn a lesson from Mario Draghi because Draghi has single-handedly calmed the European sovereign market without printing a single Euro.

History will be the judge on Bernanke. Not me. But his action will no doubt affecting my and your lives. We have no choices.

Well, I had enough QEs too.

But heck, no one listens to me. Not even my wife. LOL.

A $116 billion hole for Portugal May 4, 2011

Posted by hslu in China, Economics, Global Affair, Politics.
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In the midst of euphoria of Osama’s death “possibly” in the hand of  US navy seals, a story about Portugal $116 billion bailout didn’t get any attention on the main street media.

Countries like Portugal, Greece, Ireland and Italy, they owed so much money that they have no way of paying it back. And the solution to the problem: lend them more money.

Yes, they get more money from many sources with the knowledge that they may never be able to pay the original debt back , let alone the new lending they just got.

They had to borrow money from other EU countries simply because they can’t print Euro themselves.

Well, The United States isn’t doing any better but the United States has something these other countries didn’t have: America has four or five mints with printing presses operating at full speed: every day, every evening and every night.

You know that you know what will hit the fan when US dollar loses its reserve currency status.

Well, that won’t happen for a while but IMF is doing something in the background and one of these days it will happen.

In the mean time, let the good time roll and enjoy.

The hole which America is digging for itself is bigger than all the other holes combine.

The structural change in US economy and the prolonged depressing state of the housing market will make the situation even worse.

Do not believe Bernanke and his public statement because he has let the cat out of the bag and has stubbornly ignored the increasingly worsening inflation problem in the US and all over the world.He has consistently denied that inflation is happening until his first public news conference.

He was trying to set up America people for his mistakes, i.e., the extremely loose monetary policy.

The inflation cycle has just begun and it will not end easily. Bernanke has more than $2 trillion on his balance sheet and more than $2 trillion-dollar in the economy. He is waiting for a chance to sell what he has on his book but it will increase interest rate and hurt the economy that is still trying to find its footing.  When he finally starts to sell them, look for interest rate to pick up which will need more of our tax money to pay for the interests on the national debt.

In the mean time, China, India, Singapore, Australia, South Korea, Vietnam, Thailand, EU, England, Switzerland, and Brazil have raised their key interest rates in order to fight inflation caused by the loose monetary policy of the US Fed, i.e., Bernanke.

Even Nigeria, a country which relies oil export for almost 90% of its GDP, has raised its interest rate because of economic forces beyond its border..

It is no secret that Bill Gross, the $1.2 trillion PIMCO Bond fund had dumped all his US treasury holdings because he is very negative on US dollar. He went one step further and has shorted US treasuries because he sees the US dollar will be less valuable in the near future.

When Bill Gross stops buying US treasuries in the tune of a couple of hundred of billions, investors will demand higher interest rates.

Buckle up, Americans, the road of inflation will be very bumpy. We are going downhill fast!

And the view isn’t going to be pretty at all.

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