The Daily Reckoning - China Syndromes (John Mauldin)

verfasst von Firmian, 31.03.2004, 22:52

-->China Syndromes

The Daily Reckoning

London, England

Wednesday, 31 March 2004

---------------------

*** Bears, bears, everywhere... is WWIII on the horizon?

*** Frantic Frenchmen in a dangerous world... British
police, too... the MoneyWeek roundtable's surprising
consensus...

*** Debt unraveling. When will it begin? No one knows... a
comment from a worldly colleague... and more!

---------------------

Buy? Sell? Slash our wrists?

Last night's MoneyWeek Roundtable discussion left us numb.
Never before had we found so many bears in one place. The
negative energy around #1 Adam Street was so great it must
have opened graves and raised the undead all over town.
Later, we thought we spotted them walking down Oxford
Street.

"Nah... they always look that way," said a companion.

The talk began with laments about the dollar... meandered
over to the deficits... and thence to India, trade deficits
and interest rates. Before the evening was over, it had
made its way from the comic to the tragic:

"A war between China and the U.S. is probably the final
stage of this cycle," remarked fund manager Jim Mellon.
"But that's when we stop caring about asset values."

Jim seemed like a level-headed guy.

"This period seems to me a bit like the period just before
WWI. Then, it was Britain that was the world's super-power.
But it was being challenged militarily by Germany and
economically by America.

Now, it is America's turn to be challenged, Jim
believes... by China and India. Not to mention Europe, we
might add.

"I just visited a factory in China. In this immense
building were thousands of women assembling
batteries... rechargeable batteries... by hand. You could
have done it easily by machine. In fact, they had the
machines there. But at 35 cents an hour, the company found
it cheaper and more efficient to do the work by hand. You
just can't imagine how awful this work was... tedious,
boring... But these women worked six days a week at it.

"The Americans say, well, 'they can have those jobs... we'll
develop new Microsofts and new technologies... ' But there
is no reason why the Asians can't come up with new
technologies of their own. This is not like in the
industrial revolution. Britain and America were protected
from foreign competition because it took so long... cost so
much money... and so much expertise was needed to duplicate
the factory system overseas. You needed the whole chain of
raw materials supply, engineering support, transport and
distribution to make the thing work.

"But these new technologies can be exported in 2 seconds.
Everything they need to exploit them is already in place.
And it's already happening...

"There is just no reason why an American worker should
continue to earn $40 per hour... and a foreign worker just
35 cents an hour. Most likely, the foreigner is better
educated and more disciplined. We're going to see a great
leveling of wage rates around the world..."

In the meantime, here's more news from... er, London:

--------------

Dan Denning, heretofore a denizen of the DR Paris HQ, now
based in the British capital...

- Your London correspondent looks all around him for signs
the financial endgame has begun - that the great blast-off
in precious metals prices and the great sell-off in the
financial economy has started.

- Yet he doesn't seem too see many signs on the Dow. In
fact, the Dow has climbed a nifty little three percent
since flirting with sub 10,000 on March 24th. And in his
favorite proxy for the financial economy, the S&P 100
(OEX), there's been a similar 3.4% gain in the last ten
days.

- The stock market is worried about stocks. But if Mr.
Market looked around, he might notice that we live in a
more dangerous world, where political events exert an
influence on economic events and the price of raw
materials. This is bullish for tangible assets, bearish for
financial ones.

- Back in my old Parisian haunts last week, lunching on
cold lasagna in Napoleon's tomb with my 20-year-old nephew,
we saw at least one sign that we live in a new era - one
where stock prices won't be immune from external events. A
frantic Frenchman with a walkie-talkie came running into
the room, babbling in French faster than I could keep up.
Finally, in English, he said,"You must get out, now." And
so, out we went.

- It turned out to be a false alarm. But it was just a few
days before the French regional elections... and we were
dining near a major symbol of past French imperial glory.
And it WAS not long after the bombings in Madrid.

- Fortunately, nothing happened. But even yesterday, as I
sent my nephew off in a cab to Heathrow in the morning, we
were both contentedly unaware that over 500 British police
were arresting eight suspects that appeared to be building
some kind of fertilizer bomb... either that, or setting off
a green revolution in London.

- While borders tighten, travel bottlenecks, and European
and American politics lurch towards the more authoritative
(left or right, take your pick), the stock market -
seemingly oblivious to these new threats to the world's
economic order - potters along and waits for Friday's jobs
report. The Dow added another 0.5% to 10,381; the S&P and
Nasdaq both put on 0.4%.

- But frankly, all the intrigue in the market right now is
in the oil and precious metals market. As Bill writes
above, the MoneyWeek Roundtable convened last night in the
boardroom of RAB Capital, down on the Strand. We came up
with a surprising consensus: With so much money in the
system, investors who want to be in the market have to be
"tactically bullish" but"strategically bearish."

- What hot tips came out of the meeting, you ask?"Buy
Uranium," one analyst declared."Buy real estate around
Kiev," said another.

- The consensus, however, was to buy energy and precious
metal stocks - especially oil. Despite oil prices nearing
13-year highs, OPEC is considering production cuts. Today,
we learn Saudi Arabia has thrown its support behind the
production cuts, which would almost surely cause American
gas prices to go even higher... all throughout the
Presidential campaign.

- Want to own assets in a country that is not dependant on
the U.S. consumer and is also a great oil/energy proxy?
Russia, says the Roundtable. Yes, Russia, where forex
reserves are large, and energy reserves even larger.

- The most intriguing observation from last night's meeting
- and one which is already showing up in market prices - is
that certain nations of the world (say... China) may be
hoarding commodities. Why? Can the global supply of raw
materials keep up with global demand (especially oil and
energy in Asia?)?

- In a world where all currencies are only relatively
valued, is the best reserve asset of all a tangible asset?
You must know the answer I'm inclined towards... and it's
very good news for gold, which looks as strong as it has in
months. Mother Nature's reserve asset rallied $4.60
yesterday to close at $421.

- If you're looking for gold stocks to buy, the Roundtable
made an interesting point. If tangible assets are rising in
value, then gold companies with a lot of gold STILL IN THE
GROUND are a great investment. In fact, gold companies with
large, un-mined deposits might be even better"call
options" on rising gold prices than a mature gold mining
company in full production. There's hope for South African
miners, after all.

- Or you could look at silver. As one Roundtabler said,
"Silver is the most manipulated metal in the world. It's a
buy. $50 is a reasonable target."

-"Fifty dollars?" another asked."Would you like me to
pick a bigger number? Not a problem."

- Though the hard asset markets may have monopolized the
Roundtable's thoughts last night, we note that the
currencies market received a minor revelation yesterday.
"Japanese export firms had a rotten end to the financial
year," writes Adrian Ash in today's DR UK edition,"as Mr.
Market has apparently decided that the BoJ has ceased and
desisted with its forex intervention - for now, at least.

-"Having bounced between Y105.5 and Y105.9 in European and
U.S. trade yesterday, the Almighty Dollar cracked when
Tokyo opened for business today. It crashed through
Y105... tumbled straight through Y104... and now stands
almost 2% down at Y103.8."

- Does the dollar's sudden fall against the yen herald
disaster? Of course, there's always the chance the Almighty
Dollar and the American financial economy may only
gradually degenerate, like a devoted alcoholic with a
failing liver. This would be the soft, slow-motion
depression your regular editors at the Daily Reckoning have
so often written about.

- On the other hand, it's never too soon to prepare for the
end of the financial economy, whether it arrives tomorrow
or not. That said, the rain clouds have finally broken in
London and the sun is shining. It's the last thing you'd
expect to happen at the beginning of a delightful spring.
Uh oh...

--------------

Bill Bonner, still in London...

*** What about interest rates, stocks, inflation, and real
estate...? we asked our investment Roundtable group.

"The real problem throughout the Anglo-Saxon world -
Australia, America, Britain and the rest of it - is that
people have no fear of debt," said Robert Catto of Williams
de Broe. Not only have they no fear of debt, he explained,
they seem to have no respect for it whatsoever. They take
it on lightly, even frivolously, refinancing their houses
and running up credit card obligations as though they will
never have to pay them back.

Now, almost all financial assets are overpriced - all bid
up by debt-backed buyers. The next big thing will surely be
the shrinking of this debt bubble, with everything that
goes with it - price collapses, mark-downs, write-offs and
workouts.

When will it begin? No one knows...

*** Is there a bubble in the real estate market, Smart
Money magazine asked Sir John Templeton. You bet, said the
old man. Twenty percent of people with mortgages are likely
to lose their homes when the bubble bursts, says Templeton.

*** Oh... and there's Ben Bernanke in the news again. What
joy! What will he say next? In his latest attempt at
comedy, the central banker told an audience that the Fed
had to fight stable prices with all the ink and credit at
its disposal."Very, very low inflation is bad for the
economy," said he. In fairness, he also said that very,
very high inflation was bad, too. Can we count on Bernanke
& Co. to keep the level of inflation just right... not too
high... and not too low? We wouldn't want to bet on it.

***"I think I've figured out what is wrong with English
women," said a worldly colleague yesterday."They all seem
to want to be mums. You know... they put on dowdy
clothes... and look kind of frumpy, comfortable. Like mums.
Or grandmums. They're not like the women you see in France
or Italy who try to keep up appearances even as they get
older. You see older women in Rome, for example, who look
quite sexy and stylish. But here in London, even young
women have a middle-aged look to them... like women in
America."

---------------------

The Daily Reckoning PRESENTS: No one can deny that China's
role in the global economy has grown exponentially in past
years. But for the moment, is it on its way to new
heights... or setting itself up for a fall?


CHINA SYNDROMES
By John Mauldin

China, China... is it a boom getting ready to change the
face of the global economic landscape - or a bubble looking
for a pin?

The answer may be a little bit of both. And as with
everything Chinese, at least seen from our shores, it can
also be confusing. Plus, we must deal with the issue
surrounding the revaluation of the renminbi.

The London Financial Times gives us this bold headline (in
72 point type):"The Chinese boom is bound to end in tears.
But it might not end for another 10 or 20 years yet, with
bumps along the way."

But Stephen Roach of Morgan Stanley wrote last week that
China is on schedule for a slowdown."After five days in
Beijing, I am convinced that a slowdown in the Chinese
economy is at hand. China's leadership is clearly worried
about the risks of overheating. And those worries will
likely translate into actions that should result in a
meaningful deceleration of Chinese GDP growth over the
course of 2004.

"For world financial markets and global commodity markets
that are expecting the China boom to continue, a likely
soft landing could come as quite a surprise. For China's
trading partners who are counting on open-ended support
from the Chinese demand dynamic, a slowdown could come as a
rude awakening."

Who's right? Is the China boom just getting started... or is
it heading for a slump?

There are any number of ways to spin recent Chinese growth
and the prospects for growth in the future. There is no
doubt, however, that China is the source for the recent
rise in commodity prices of all types.

Last year, China consumed 40% of the world's cement, 7% of
the world's total consumption of crude oil (surpassing
Japan as the #1 importer of oil), 31% of global coal, 30%
of iron ore, 27% of steel products, and 25% of aluminum.
The pressure on scrap metal prices, copper, tin and zinc
are clear. This is from an economy that is much less than
10% of the world's GDP.

And as fast as China is building infrastructure, it is
still behind the curve. There is only 60% of the needed
rail network capacity for moving coal from the port areas
into the interior.

Last year, China grew officially at 9.1%. Private estimates
are closer to 12%. Such growth is unsustainable, if for no
other reason than infrastructure cannot keep up with the
growth demand.

At 4.4% of world GDP, China overtook Britain at the end of
the 2003 calendar year, and will pass France by the end of
2004 or early 2005. Sometime on or around 2010, it will
overtake Germany; between 2015-2020, it is expected to
overtake Japan to become the world's second-largest
economy. All other things being equal, China would need to
grow its GDP 3% faster per year than the U.S. for some 65
years to catch the world's number one. An improving
exchange rate against the U.S. dollar would, of course,
shorten this period... and you can count on an improving
exchange rate over the next few decades.

But China is not without its share of obstacles to
growth... some obvious, some less so. For instance, the
Financial Times had this to say about China's increasingly
chronic shortages of water - the life blood for an economy:

"'China faces a serious problem of water shortages. This
has become one of the important factors restraining
economic development this year,' said Wang Jirong, a senior
official at the State Environmental Protection
Administration (Sepa)... The water shortage reduces
industrial production by $28 billion a year, officials
said."

Back-of-the-napkin numbers suggest the Chinese economy is
roughly $2 trillion, so that would mean water problems cost
them over 1% of potential growth. That's no small amount of
rice.

And then there are the many difficulties facing the
leadership of China, only a few of which I'll list here.
60% of the GDP, for instance, is still in the hands of
inefficient state-owned companies. This is changing,
however:"Huang Xiaoxiang, vice-governor of Sichuan
province, says that more than 500 state-owned enterprises
in his province are being put up for acquisition or merger
this year," reports the Financial Times."Shao Qiwei of
Yunnan says that in his province the proportion of industry
in non-state hands is expected to rise to 50% in 2005, up
from 30% today."

Privatization is in theory a very good thing. These
companies require large loans to prop them up... but going
too fast in shutting down inefficient firms could create
employment problems.

As noted above, China also must expand its infrastructure
to deal with the growth, which requires capital and
materials. More and more people are streaming in from the
country looking for jobs, although this trend may slow as
new railroad lines into the interior allow companies to set
up in the lower-wage areas of interior China.

The Chinese government, from the very top, has made it
clear they intend to slow down the growth, which if allowed
to continue at the current pace would certainly end up in a
big bust. If inflation begins to emerge, the Chinese
government would be forced to raise rates, which would
likely increase the pressure to the upside on the renminbi.

The government has to worry about a slowdown in U.S.
demand, which is the main engine for the global economy. A
slowdown would certainly hurt domestic growth, as they do
not yet have a strong enough internal consumer base.

"Ma Kai, Chairman of the National Development and Reform
Commission, worried that China was close to a critical
point when bottlenecks in materials consumption could begin
to constrain economic growth," reports Morgan Stanley.
"[He] was unequivocal over his concerns about the risks
such trends posed to the sustainability of Chinese economic
growth. In his words, 'If such an illogical mode of
economic growth is maintained, it will be difficult to keep
economic growth at 7%.' In China, that's as direct a
message as you'll ever see."

China may well correct, as do all markets. If the Chinese
government does slow the economy down, it should also have
a damping effect on their markets, at least for a time.

But in my view, China still has a lot of boom left in it.
Yes, there will be"bumps" as the Financial Times noted,
but there is going to be a lot of opportunity in that
country, especially for those that do their homework and
find value in the emerging companies. But investors who
blindly buy any stock with a Chinese connection are likely
to end up sadder, but wiser... as my friend Steve Sjuggerud
noted in these pages last week.

China is a country that could double its GDP and double
again in the next 20 years. Japan certainly had its run,
although there were bumps. My bet, however, is that we have
yet to see the top of a Chinese bubble, which will take
decades to develop.

China's bubble may well be the most spectacular of all
bubbles... since the confidence bred from the powerhouse
growth China will experience will feed the emotional
references that make investors see no end to the growth -
the root of all bubbles. Along the way, there will be
recessions and a few odd crises, and some serious
corrections. Why should China be any different than any
other market?

I leave you with a quote from James Kynge in the Financial
Times:"Eventually, either an ill wind or a surfeit of
domestic success will cause China's stellar phase of growth
to abate or crumble - just as it has in every emerging
economy in history. When that day comes, the fall-out may
be spectacular. But as things stand, the vigor of Asia's
emerging powerhouse appears strong enough to carry it
forward for some time."


Regards,

John Mauldin,
for The Daily Reckoning

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gesamter Thread:

• The Daily Reckoning - China Syndromes (John Mauldin) - Firmian, 31.03.2004, 22:52
  • Re: DR - Dt. Fassung - Firmian, 03.04.2004, 09:39
    • Vielen Dank, Firmian, ich freue mich immer auf die dt. Fassung, da ich so... - Clarius, 03.04.2004, 13:46