Tag Archives: Asia

Betting on a Pair of Deuces, by Jeff Thomas

In competition with Asia, the West has a weak hand. From Jeff Thomas at internationalman.com:

pair of Deuces

I’ve never been much of a gambler. On the rare occasions I’ve played poker, I almost always came out ahead, but I almost never bluffed and, probably more important, I always played with amateurs like myself, never with players who really knew what they were doing.

Of course, the business of governance is far more important than a friendly poker game between friends. All the more reason why, when political leaders are making their assessments as to the national future, they should make sure they have a winning hand, prior to betting heavily.

Every day, we’re reminded that the Asian powerhouse is moving ahead at a pace that’s unheard of in the West. It’s almost as though the clocks stopped in the West ten years ago, but Asia kept on advancing in every way.

This is clear to anyone who has had feet on the ground in Asia in recent years. Yet, every day in the Western media, the illusion is presented that the West is still running the show, and Asia is a lesser player.

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Dinner in Hanoi, by Jeff Thomas

Are Chinese products too cheap or are American products too expensive? From Jeff Thomas at internationalman.com:

“Trump is doing the right thing. Without him, we have no protection against China. China doesn’t only wish to dominate Asia, but the world.”

Here in Hanoi, so said my dinner companion – a major manufacturer and worldwide exporter of steel products.

He, like so many other major Asian producers, sees an opportunity in international trade for all of Asia to capitalize on.

In the Western world, the argument rages as to whether the US tariff war will benefit the US or not.

Of course, those of us who have a libertarian perspective regard all meddling in a free market as counter-productive. Historically, when tariffs are employed, each of the parties involved ultimately becomes a loser. The aggressor suffers as much as the aggressee, as, first, the people of that country must pay more for goods imported, and second, a trade war results in diminished trade overall, hurting both economies.

But there are benefits to be had. The benefits fall to those countries that stayed out of the fray.

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Respecting the Other, by Dmitry Orlov

Perhaps some peoples aren’t meant to live with other peoples. From Dmitry Orlov at cluborlov.blogspot.com:

One of my old friends’ father was at one time something of a Cold Warrior: he did something or other for the US defense establishment—nuclear submarine-related, if I recall correctly. This work activity apparently led him to develop a particularly virulent form of Russophobia; not so much a phobia as a pronounced loathing of all things Russian. According to my friend, her father would compulsively talk about Russia in overly negative terms. He would also sneeze a lot (allergies, perhaps), and she said that it was often difficult for her to distinguish his sneezes from his use of the word “Russia” as an expletive. But perhaps she was trying to draw a distinction without a difference: her father was allergic to Russia, his allergy caused him to sneeze a lot and also to develop a touch of Tourette’s, thus his sneezes came out sounding like “Russia!”

What had caused him to develop such a jaundiced view of Russia? The reason is easy to guess: his work activity on behalf of the government forced him to focus closely on what his superiors labeled as “the Russian threat.” Unfolded a bit, it would no doubt turn out that what Russia threatened was Americans’ self-generated fiction of overwhelming military superiority. Unlike the United States, which had developed any number of plans to destroy the Soviet Union (of which nothing ever came due to said lack of overwhelming military superiority) the Soviet Union had never developed any such plans. And this was utterly infuriating to certain people in the US. Was this truly necessary, or was this an accident?

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Gavekal On The Coming Clash Of Empires: Russia’s Role As A Global Game-Changer, by Charles and Louis-Vincent Gave

This is an excellent survey of the world’s geopolitical landscape SLL has seen; long but worth the read. From Charles and Louis-Vincent Gave at Gavekal via zerohedge.com:

Carthago Est Delenda

Carthage must be destroyed”. Cato the elder would conclude his speeches in the Roman Senate with the admonition that salt should be spread on the ruins of Rome’s rival. Listening to the US media over these summer holidays from Grand Lake, Oklahoma, it is hard to escape the conclusion that most of the American media, and US congress, feels the same way about Russia. Which is odd given that the Cold War supposedly ended almost 30 years ago.

But then again, a quick study of history shows that clashes between land and sea-based empires have been a fairly steady constant of Western civilization. Think of Athens versus Sparta, Greece versus Persia, Rome versus Carthage, England versus Napoleon, and more recently the US versus Germany and Japan (when World War II saw the US transform itself from a land-based empire to a sea-based empire in order to defeat Germany and Japan), and of course the more recent contest between the US and the Soviet Union.

The maritime advantage

Such fights have been staples of history books, from Plutarch to Toynbee. Victory has mostly belonged to the maritime empires as they tend to depend more on trade and typically promote more de-centralized structures; land-based empires by contrast usually repress individual freedoms and centralize power. Of course the maritime power does not always win; Cato the elder did after all get his wish posthumously.

With this in mind, consider a mental map of the productive land masses in the world today. Very roughly put, the world currently has three important zones of production, with each accounting for about a third of world GDP.

  1. North and South America: This is a sort of island and is not reachable by land from the rest of the world. It constitutes the heart of what could be called the current “maritime” empire.
  2. Europe ex-Russia: This is an economic and technological power as large as the US but a military minnow. Its last two wars have been fought between the then dominant maritime power (the US), first against Germany, then the Soviet Union to gain the control of the so called “old continent”.
  3. A resurgent Asia: Here China is playing the role of the “land-based challenger” to the “maritime hegemon.”

To continue reading: Gavekal On The Coming Clash Of Empires: Russia’s Role As A Global Game-Changer

About Resuscitation and Reinstatement, by Doug Nolan

From Doug Nolan at creditbubblebulletin.blogspot.com:

“Shock and awe” is not quite what it used to be. It still carries a punch, especially for traders long the Japanese yen or short EM and stocks. The yen surged 2% against the dollar (more vs. EM) Friday on the Bank of Japan’s (BOJ) surprising move to negative interest rates. BOJ Governor Haruhiko Kuroda has a penchant for startling the markets. Less than two weeks ago he stated that the BOJ would not consider adopting negative rates. It wasn’t all that long ago that central bankers treasured credibility.

For seven years, I’ve viewed global rate policies akin to John Law’s (1720 France) desperate move to hold his faltering paper money and Credit scheme (Mississippi Bubble period) together by devaluing competing hard currencies (zero and now negative rates devalue “money”). It somewhat delayed the devastating day of reckoning. Postponement made it better for a fortunate few and a lot worse for everyone else.

Last week saw dovish crisis management vociferation from the ECB’s Draghi. Now the BOJ adopts a crisis management stance. The week also had talk of some deal to reduce global crude supply. Meanwhile, the Bank of China injected a weekly record $105 billion of new liquidity. Nonetheless, the Shanghai Composite sank 6.1% to a 13-month low. There was desperation in the air – along with a heck of a short squeeze and general market mayhem.

Markets these days have every reason to question the efficacy of global monetary management. It’s certainly reasonable to be skeptical of OPEC – too many producers desperate for liquidity. The Chinese are flailing – conspicuously. As for the BOJ’s move, it does confirm the gravity of global financial instability. It as well supports the view that, even within the central bank community, confidence in the benefits of QE has waned.

After three years of unthinkable BOJ government debt purchases, Japanese inflation expectations have receded and the economy has weakened. Lowering rates slightly to negative 10 bps (for new reserve deposits) passed by a slim five to four vote margin. With the historic global QE experiment having badly strayed from expectations, there is today no consensus as to what to try next.

Kuroda remains keenly focused on the yen. After orchestrating a major currency devaluation, there now seems little tolerance for even a modest rally. The popular consensus view sees BOJ policymaking through the perspective of competitive currency devaluation, with the objectives of bolstering exports and countering deflationary forces. I suspect Kuroda’s (fresh from Davos) current yen fixation is more out of fear that a strengthening Japanese currency risks spurring unwinds of myriad variations of yen “carry trades” (short/borrowing in yen to finance higher-yielding securities globally) – de-leveraging that is in the process of wreaking havoc on global securities markets.

Notable Bloomberg headlines: (Thursday) “S&P 1500 Short Interest Is at Its Highest Level in Three Years.” (Friday): “Hedge Funds Boost Yen Bets to 4-Year High Days Before BOJ Shock.”

Bearish sentiment is elevated. Recent global tumult has spurred significant amounts of hedging across the financial markets. And, clearly, betting on “risk off” has of late proved rewarding (and gaining adherents). Draghi and Kuroda retain the power to incite short squeezes and the reversal of risk hedges. And central bankers can prod short-term traders to cover shorts and return to the long side. Yet the key issue is whether global central banks can propel another rally such as the 12% multi-week gains experienced off of August lows. Can policy measures resuscitate bull market psychology and reestablish the global Credit boom?

Subtly perhaps, yet the world has changed meaningfully in the five short months since the August “flash crash”. After exerting intense pressure and direct threats – not to mention the “national team’s” hundreds of billions of market support – Chinese equities traded this week below August lows. It’s worth noting that Hong Kong’s Hang Seng China Financials Index now trades significantly below August low.

To continue reading: About Resuscitation and Reinstatement

The Party’s Over, by Robert Gore

Since the end of World War II, the US government has deluded itself, but like all delusions, the government’s has run into reality. It has done so before, but this may mark a demarcation. It would be too much to expect the delusion to give way to wisdom, but the delusion cannot persist, as even a few of the deluded are beginning to realize.

Washington’s delusion has been that the anomalous position of supreme, unchallengeable power in which it found itself at the end of the war—leader of the winning alliance, sole possessor of the atomic bomb, keeper of the reserve currency, with the only intact industrial infrastructure—would be permanent. Reality soon intruded. The USSR penetrated the US nuclear weapons program and detonated its first bomb in 1949. The Korean war was a stalemate, not a win. Vietnam was a defeat. The US abandoned the responsibility it had undertaken to maintain the world’s reserve currency, to redeem dollars for gold, when President Nixon closed the gold window in 1971. Islamists overthrew the US puppet Shah of Iran and installed a theocracy hostile to the US. This sparked an upsurge of Islamic militancy in the Middle East that bedevils the US to this day.

US hegemonic triumphalism rallied after the dissolution of the USSR, but it proved to be a dead cat bounce. Welfare state transfer payments, overall spending, and the national debt continued to grow as the we-can-have-it-all fantasies of the populace and its politicians persisted. There was no scaling back of either domestic or global commitments, even as the economy began to demonstrate subtle signs of deterioration. That deterioration was masked by central bank machinations that promoted rising equity, bond, and housing markets, bestowing paper wealth that served as an imperfect and skewed replacement for shrinking opportunities in an increasingly debt-saturated and government-controlled economy.

The tech wreck at the turn of the century should have served as a warning, but 9/11 diverted the nation’s attention towards the Middle East. A series of inconclusive and in some cases disastrous forays there, coupled with the worst financial crisis since the Great Depression, should have been a bracing bucket of cold water and hard slap in the face for both elites and the people: the days of American omnipotence were over. The people came to their senses; their power-drunk elites have not. In 2013, the elites teed up a “red line” Syrian military campaign that the people resoundingly rejected. They had had enough of Middle East interventions, sold as imposing US “order,” which had only made that region more chaotic and dangerous.

The power drunks are trying other fronts in the Middle East—the Islamic State and Iran. If the public doesn’t bite, and the Republican party is placing a big, and probably losing, bet that it will, perhaps Ukraine will do. Here, however, our friends in Europe are like a drunk’s friends in a bar at closing time. While the US has done its best to rattle Russia’s cage and bring Ukraine into the US constellation of power, Europe has shaken its head at the barkeeper: no more drinks and please call him a cab. Germany and France have had enough war the last 100 years. They don’t fancy one with nuclear-armed Russia, on it’s doorstep no less. They sent their power-drunk friend home and they negotiated a cease-fire with Ukraine and Russia. The US pooh-poohed the agreement—how could a party be any good if the life of the party wasn’t there? However, the agreement has, for the most part, been observed. Ukrainian President Petro Poroshenko has acknowledged that the eastern rebels have complied with its terms and moved their armaments.

Like many friends and families of drunks, the Europeans have realized that the US is not just an abusive embarrassment (Victoria Nuland, an assistant secretary of state, was recorded saying “fuck the EU” on a phone call to US Ambassador to Ukraine Geoffrey Pyatt), but a danger to itself and its friends. Over the past two weeks, which may come to be recognized as a historically important watershed, Germany, France, and other important US friends have, in effect, staged an intervention.

China has started a new development bank, the Asian Infrastructure Investment Bank (AIIB) and invited everyone to join. If it runs true to development bank form, it will soon be riddled with back-room politics, cronyism, and corruption. However, that’s besides the point. This bank will be run by the Chinese, in conjunction with Russia and other emerging market nations. Recognizing the threat to its international financial dominance, the US has told its friends not to join, couching it as a matter of concern about the governance and lending procedures of the new bank (the US knows all about cronyism and corruption).

The US’s friends in Europe and Asia have sat the US down on a chair in the center of the room and said: “You’ve got a power problem. You’ve been pushing everyone around for years and it has impaired your judgment, led to all sorts of irrational behavior, and threatens to destroy your soul. You pose a danger not just to yourself, but to us as well. We’re here to help, but you have to recognize your problem, seek treatment, and change your ways. Until you do, we have to take the steps necessary to protect ourselves from you.” Virtually all of them have ignored the US diktat and indicated they will join the AIIB. The few that have not are leaning in that direction.

Interventions don’t always work. The drunk often continues in self-destructive denial until he ends up in a gutter, emergency room, or morgue. Reports this morning suggest that the US, bowing to reality, will try to get the AIIB to work with the existing development banks it dominates. It amounts to a plea for one last drink, which never turns out to be the last drink. The US elite are a deluded, corrupt, self-important lot, addicted to power. The chances that they will sober up after this collective rebuke are minimal. However, by flocking to the AIIB, the rebukers are both recognizing the rising power of a Chinese- and Russian-led Eurasian axis, and edging away from the hubristic and dangerous deterioration of a US that fails to realize that ever less attention is being paid to its inebriated boasts, blandishments, and threats. Someday, there might not even be anyone left to tell the barkeeper to quit pouring and call a cab.


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Buy Asia; Short the US and Europe, by Robert Gore

In finance, a paired trade is buying one asset and short selling another, with the goal of making money from a widening differential in the prices of the two assets. The hope is that the two asset prices move in opposite directions, the long up and the short down, or if they move in the same direction, the long moves up more, or down less, than the short. In life, one wants to be long smart and short stupid. In the same vein, here’s a big-theme, long-term strategy with obvious financial implications: go long Asia, short the US and Europe.

Proper financial analysis begins with the financial statements. What are the assets and liabilities of Asia versus the US and Europe, and which direction are those items heading? One generalization can be made: while both groups of governments often run deficits, on the whole, Asian country governments have far less accumulated debt, as a percentage of GDP, than the western democracies (Japan is an outlier, it has the most debt to GDP in either group). The same generalization can be made about private sector debt; debt finance and culture are more advanced in Europe and the US than Asia, especially in the consumer sector.

For policy and demographic reasons, the public sector debt to GDP gap should continue to widen. The western states are welfare states, while Asian countries offer fewer benefits to their citizens. A number of western nations are on an unsustainable trajectory, including the US, the United Kingdom, France, and southern Europe. Demographics compounds the problem. In general, Asian nations are younger than the west and have higher birthrates (the US is a western outlier on birthrates, and Japan is again an Asian outlier). They have more young people to shoulder a lighter benefits burden for fewer older people, who draw a disproportionate share of benefits. Fewer benefits and younger populations mean that more of Asian GDPs are saved and invested, rather than consumed, consequently Asia has had far higher trend growth rates than the west and that should continue.

While the US and Europe have promoted ever-expanding welfare states and regulation, the trend in Asia has been in the other direction. Communist states have given way to state-directed capitalism in China and southeast Asia, and private sector trade and development flourish in most of the rest of Asia. Even India appears to be shedding its yoke of socialism and moving towards a freer economy (no telling what 1.25 billion smart, ambitious Indians will do in even a semi-free economy). There are no laissez-faire Shangri-las anywhere, but the unmistakeable trend has been more freedom in Asia and less (with the exception of eastern European nations who have been shedding Soviet-era communism) in most of the western nations, including the US.

Welfare states also breed an entitlement mindset that appears to grow more entrenched as populations age. A lack of entitlements often breeds the opposite: an opportunistic, entrepreneurial focus, especially among the young. Poverty can be the best cure for poverty when governments get out of the way and the poor have the freedom to pursue their ambitions. Many Asians go abroad for college and graduate schools studies in science, engineering, and other technical fields, a contrast to western nations where finance, law, and government attract the greatest share of top students. Asian culture has long valued family cohesion, education, hard work, thrift, and self-sufficiency, and those may be Asia’s largest comparative advantage in the economic competition with the west. Two telling indicators: the average Asian work week is longer and the average Asian vacation is shorter than those of their western counterparts. Hundreds of millions of Asians have moved out of poverty the last few decades; it’s an exciting and underreported story. That trend will continue, providing dynamic ferment and growth in Asian economies.

It is ironic that the sick man of Asia is Japan, and much of what ails that country can be attributed to following western economic prescriptions. The US’s adversaries in World War II, Germany and Japan, were the two biggest economic success stories after the war. Both countries kept taxes and regulations tolerably low, worked hard, rebuilt infrastructure, used high domestic savings to fund investment, and emphasized manufacturing and exports. However, Japan artificially suppressed its cost of capital, which led to an unsustainable economic and financial boom that met its inevitable bust at the end of the 1980s. For over two decades the Japanese government has followed the western playbook: it has gone ever deeper into debt; funded countless public works projects, many of which have little or no economic value; increased its participation in the economy; monetized debt; and suppressed interest rates. The government has little to show for it—the highest debt to GDP ratio among developed economies, a lot of white elephant public works, serial recessions punctuated by anemic “recoveries,” and an aging population with a low birthrate.

It would be unwise, however, to count the Japanese out. Perhaps a crisis will be required, but Japan has a smart, hard-working, educated population, many world-class companies, and the Asian competitive hothouse forces it to continuously raise its game or fall by the wayside. It imports most of its raw materials so declining prices have been a substantial benefit. The Japanese stock market has rallied since 2012. Undoubtedly some of that has been fueled by central bank money creation, but the central bank has been doing that for over two decades and it did not stop their long-running bear market. For more on why the Japanese situation may not be as bad as it appears, see ”How Global Interest Rates Deceive Markets” by John Mauldin, at mauldineconomics.com.

Asia has another huge advantage over the US and Europe. Its leading industrialized nations have avoided global military intervention—sidestepping the Middle East—and by all indications will continue to do so. Although they can be quite touchy about developments in their own neighborhoods, they do not have the imperial aspirations of the US.

The US spends more on defense than the next eight nations combined, and only Russia and Saudi Arabia spend more as a percentage of their GDP. The European nations follow the US because it provides their defense shields. Although the US picks up most of the tab for Europe, its governments still run deficits funding their welfare states. Remarkable. Even more remarkable: many Americans, including Obama and his cohorts, think that Europe is the model the US should emulate. We certainly may, all the way into insolvency.

Most US defense and related intelligence and foreign aid expenditures are dead weight economic losses. The US has little to show for its $2 trillion plus, and climbing, that it has spent in the Middle East since 9/11. Its military forces are stationed in over 140 nations, mostly at US expense, and either a Republican or a Clinton ascendancy in 2016 almost guarantees that there will be no rethink of global interventionism.

China has concentrated on developing commercial and trade ties with other Asian nations and in Africa, Australia, South America, and the Middle East. A primary emphasis has been securing raw materials and trade access, and the Chinese have financed necessary infrastructure projects, which has the added benefit that the contracts often go to Chinese companies. China steers clear of military involvement. Thus, while the US government treats the matter of which band of corrupt thugs ends up on top in a backwater like Yemen as a matter of grave national importance, and spends good money trying to influence the outcome, the only Chinese involvement will probably be signing lucrative contracts with whichever band ultimately wins out.

There is one final reason for bullishness on Asia. Leaving aside geopolitical and military considerations, which SLL has discussed extensively, the US’s confrontation stance with Russia is redirecting that nation away from its traditional European orientation and towards Asia. More extensive Russian-Asian interlinkages make sense and will benefit both. Russia will acquire huge markets for its oil and other raw materials, plus access to Asian manufactured goods and technological expertise. In addition to raw materials, the Asian countries gain access to the substantial Russian consumer market, and their capital will find an outlet investing in Russian infrastructure and manufacturing capabilities. Russia has already signed a variety of commercial agreements with India and China (a high-speed rail link between Beijing and Moscow is under consideration) and there will undoubtedly be more. For all the gloating from Washington and in the US press about the damage US sanctions and crashing oil prices have wreaked on the Russian economy, its stock market is up 44 percent since its March 2014 low, recently hitting a three-and-a-half-year high. Some of that is probably due to Russia’s Asian pivot.

Since the turn of the century, the MSCI Emerging Markets Asia equity index is up over 425 percent. In the same span, the MSCI developed markets index is up 184 percent and the US S&P index is up a little over 35 percent. This long-term outperformance is not anomalous; Asia equities have done appreciably better for many decades. All the emerging markets (not just Asia’s) still make up only 13 percent of the world’s equity market capitalization, although they account for roughly 50 percent of world GDP and 80 percent of world population. These figures suggest a numerical case for long-term outperformance for those countries’ economies and equity markets.

Mr. Market has handed potential Asian investors a gift: returns have been positive but lower than many European and US indexes the last two years, and this has left many investors underinvested and many analysts unenthusiastic, often a good contrary indicator. (Drawing straight lines is the primary job skill of 90 percent of Wall Street analysts—what has happened in the past will happen in the future. A secondary job skill is explaining why they do not foresee trend shifts—those straight lines changing direction—although such changes are an inherent feature of financial markets.) Even those who don’t want to make the paired trade—long Asia, short the US and Europe—may want to consider increasing their outright portfolio exposure to Asia. There is not a region in the world that doesn’t have its problems, but the smart money bet is that Asia handles them in more constructive fashion than the west, as its billions of people seize their opportunities and propel economic and financial outperformance for decades to come.

The legal stuff: SLL is not an investment newsletter, the recommendations are thematic only and readers should consult with a qualified financial professional before making investments. Robert Gore has equity and exchange traded fund investments in South Korea, Taiwan, India, and Peru, and may increase or decrease his investments in those markets or invest in other Asian and emerging markets without notice.


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