Saturday, January 9, 2010

Chinese Investors Seek to Double Their Bets on Dubai 'Crisis'

Investors in Zhejian Province, a region in China known for the sharp business acumen, are eyeing Burj Dubai, the tallest building on earth, to double down their bets. According to Yomiuri Shinbun (in Japanese) on 1/10/2010:

"According to Zhejian Daily, a tour is planned during the Chinese New Year holidays (starting February 14) to shop for investment properties within the building.

"'Merchants of Wenzhou [city located in southern Zhejian]' are known as shrewd merchants in China from ancient times, and they are known for investing in high-priced assets as a group. They have reportedly lost a huge amount of money (2 billion yuan, or about $292 million) because of the Dubai crisis. [Other reports put the figure near $440 million, on top of $2 billion loss on their investment in coal mines in China.]

"However, as the average property value of Burj Dubai has dropped 50% from the level seen in the first half of 2008, the 'merchants of Wenzhou' are eager to double down on their bets that the bottom has been hit."

United Arab Emirates already has the Wenzhou Chamber of Commerce. There are currently 150,000 Chinese citizens living in Dubai, and 20,000 of them are merchants from Wenzhou. (For more, here is an English article from People's Daily.)

They may be doubling down on Burj Dubai, but at the same time they seem to be selling their investment properties in Beijing in a hurry. Rumor is that they are sensing the imminent burst of real estate bubble in China.

Friday, January 8, 2010

Government Is Ready to Raid Your 401K and IRA

Another chance for equality (i.e. making everybody poor) coming our way via the Obama government. They've been quietly at it since after the election in 2008, and now finally they are coming out and asking for public comment. That means it may become a bleak reality pretty soon.

What is it? Well, your government wants to stuff your 401K and IRA with what they call safe "annuities". Who would provide those "annuities"? Probably none other than the Treasury Department, in the form of special Treasury bonds. For your own good, so that your money is "secure".

Americans Oppose Proposals to Limit 401(k)s, ICI Says (Update1)
(Jeff Plungis, 1/8/2010 Bloomberg)

If you simply look at the title of this article, you wouldn't know what is really about. But here it is:

"Seven in 10 U.S. households object to the idea of the government requiring retirees to convert part of their savings into annuities guaranteeing lifetime payments, according to an institute-funded report today. The Washington-based institute represents the mutual-fund industry. "

"Lawmakers have proposed changes, and the Obama administration will seek ways to promote conversion of 401(k) accounts after their average value fell in the past three years alongside a 46 percent drop in the Standard & Poor’s 500 Index."

"The U.S. Treasury and Labor Departments will ask for public comment as soon as next week on ways to promote the conversion of 401(k) savings and Individual Retirement Accounts into annuities or other steady payment streams, according to Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Secretary Mark Iwry, who are leading the effort."

Mark Iwry is from Brookings Institute who has been quietly working on the Obama administration's scheme of stuffing 401K and IRA with special Treasury bonds, and of mandating a national IRA for all employers. This blog has reported on this effective government takeover (albeit partially) of 401K and IRA in here and here.

Do not, for a moment, believe this is about the financial security for Americans. This is just another scam to siphon off wealth from the public. Remember the Treasury Department is fast running out of buyers for the government debt, willing or not. Therefore the government is turning to the least tapped source of buyers who have least say in just about everything: American public.

Chinese Firm Sticks It to Morgan Stanley

Taste of things to come, probably.

China Haisheng Juice Holdings, a Chinese company that makes and exports apple juice concentrate, settled out of court with Morgan Stanley over the currency derivatives contracts.

Instead of $27 million that Morgan Stanley had insisted the company pay, China Haisheng Juice holdings got away with paying only $7 million, 26 cents on a dollar.

Morgan Stanley settles derivatives lawsuit with Chinese company
(1/7/2010 Financial Times)

"Morgan Stanley has ended a confrontation with a Chinese company over disputed hedging contracts in an out-of-court settlement that may be a model for ending similar disputes involving mainland enterprises.

"The Morgan Stanley dispute with China Haisheng Juice Holdings was the most public of many between foreign investment banks and dozens of mainland Chinese companies over lossmaking derivatives deals

"Under the settlement, Haisheng will pay Morgan Stanley $7m, far less than the $26m the investment bank had been fighting for in London's High Court after the Chinese company ceased payments on the hedges.

"Haisheng will dismiss its legal proceedings in Xian, Shaanxi province, where it was counter-suing Morgan Stanley for allegedly mis-selling the contracts.

"A legal battle in China would have subjected Morgan Stanley to financial and political risks, lawyers said, making the settlement the most attractive option.

"But the agreement could encourage other Chinese companies to take legal action against foreign banks at home as a tactic to escape lossmaking contracts, lawyers warned."

So they give up on pursuing the full payment on the derivatives that they sold, if the counterparty is Chinese. A stark contrast to what they did to AIG, with the help from then-Federal Reserve New York president.

By the way, a sublime irony in this Morgan Stanley case is the fact that this juice company is 20% owned by Goldman Sachs, as this article mentions. Vampire Squid is everywhere, and on the winning side. Well, almost always.

Thursday, January 7, 2010

Homebuyer Tax Credit Outperformed Cash for Clunkers

a huge negative bang for the money...

$8,000 homebuyer tax credit offered by the Obama administration is "exceptionally inefficient", costing taxpayers $80,000 per every additional house sold, according to an analyst at Stifel Nicolaus & Co.

That's quite a negative bang for the money. If you recall, $4,000 cash for clunkers cost taxpayers $24,000 per every additional car sold. This homeowner tax credit program is vastly outdoing the cash for clunkers in terms of loss for the U.S. taxpayers.

Homebuyer Tax Credits ‘Exceptionally Inefficient’: Chart of Day
(David Wilson, 1/7/2010 Bloomberg)

"Tax credits designed to revive the U.S. housing industry are costing taxpayers as much as $80,000 for every additional home sold, according to Michael R. Widner, a Stifel Nicolaus & Co. analyst.

"The federal program is “an exceptionally inefficient use of tax dollars,” Widner wrote yesterday in a report. He estimated the total cost through last November at $17 billion, “a high price to us for relatively little benefit.”

"The CHART OF THE DAY shows existing-home sales would have fallen at a 2 percent annual rate in the three months ended in November without the credits, based on his estimates. Instead, the pace rose 28 percent, according to data from the National Association of Realtors. Resales accounted for 92 percent of homes sold during the past 12 months.

"Widner estimated that 1.83 million new and existing homes were sold to first-time buyers last year through November, and only 303,000 of them changed hands because of the tax benefit. The $80,000 figure reflects his assumption that 30 percent of the added sales would have been made this year, not in 2009."

In other words, 70% of 303,000 houses changed hands in 2009, for $17 billion tax credit. That is indeed $80,000 per additional house.

Talk about taking the money from the poor and give it to the rich. In this case, take the money from the taxpayers who have little to no political clout, give it to the housing industries with huge lobby and political connections.

That's the way the (government) money goes, pop goes the weasel...

Wednesday, January 6, 2010

M3 Contraction and Japanese Sovereign Bond Crisis?

I don't think so.

Amrose Evans-Pritchard of Telegraph UK is known for writing cheerful topics like global depression and deflation (he is a deflationist) and coming fiscal, economic, and social crises if not downright catastrophe. In this article from January 4, 2010, probably intended as his New Year prediction, he argues that the sovereign debt crisis will be triggered by Japan, and that will finally stop the bear market rally of the global stock markets.

I regularly follow and read his writings (as you see the box to the left that has the feeds). But I have some problems with this one.

Global bear rally will deflate as Japan leads world in sovereign bond crisis (Ambrose Evans-Pritchard, 1/4/2010 Telegraph)

"The contraction of M3 money in the US and Europe over the last six months will slowly puncture economic recovery as 2010 unfolds, with the time-honoured lag of a year or so. Ben Bernanke will be caught off guard, just as he was in mid-2008 when the Fed drove straight through a red warning light with talk of imminent rate rises – the final error that triggered the implosion of Lehman, AIG, and the Western banking system. "

Right off the bat, I have a problem. He talks about M3 contraction in US and Europe. As you may know, the Federal Reserve stop publishing M3. But that's not my problem. Is M3 really contracting, as he says?

ECB (European Central Bank)'s definition of M3 is slightly different from the U.S. counterpart. It includes:

  • Currency in circulation (M1, 2, 3)
  • Overnight deposits (M1, 2, 3)
  • Deposits with an agreed maturity up to 2 years (M2, 3)
  • Deposits redeemable at a period of notice up to 3 months (M2, 3)
  • Repurchase agreements (M3)
  • Money market fund (MMF) shares/units (M3)
  • Debt securities up to 2 years (M3)
    (Source: ECB's definition of Euro area monetary aggregate)

And here's the latest Euro area M3 numbers compiled by ECB. Do you see "contraction"? It was pretty much flat all year, but to call that a "contraction" is like calling a flat day in the stock market a rally because it didn't go down.

How about M3 in the U.S.? M3 is M2 plus large time deposits, institutional money market mutual fund balances, deposits of eurodollars and repurchase agreements ( Let's take a look at M2 chart at St. Louis Fed:

In both Europe and the U.S., monetary aggregates didn't contract in the last six months at all. The rate of change may have been decreased or gone slightly negative (in case of EU), but to call that a contraction is really stretching it.

My next problem is this:

"Weak sovereigns will buckle. The shocker will be Japan, our Weimar-in-waiting. This is the year when Tokyo finds it can no longer borrow at 1pc from a captive bond market, and when it must foot the bill for all those fiscal packages that seemed such a good idea at the time. Every auction of JGBs will be a news event as the public debt punches above 225pc of GDP. Finance Minister Hirohisa Fujii will become as familiar as a rock star.

"Once the dam breaks, debt service costs will tear the budget to pieces. The Bank of Japan will pull the emergency lever on QE. The country will flip from deflation to incipient hyperinflation. The yen will fall out of bed, outdoing China's yuan in the beggar-thy-neighbour race to the bottom..."

Too bad Fujii just resigned, and the post has gone to probably the worst possible person (in my opinion) in the administration: Naoto Kan. While Mr. Kan may be just the right person for Evans-Pritchard (extremely temperamental Mr. Kan wants weaker yen, more deficit spending), again that's not my problem. It's about Evans-Pritchard's contention that Japanese government cannot sell bonds at 1%.

Who buys Japanese sovereign bonds?

Unlike US Treasury notes and bonds, almost all Japanese sovereign bonds are purchased in Japan by Japanese financial institutions (banks, postal banks, insurance companies, pension funds). Overseas buyers make up less than 4%, compared to over 30% for the U.S. Treasuries. The Japanese government has been trying to push "Kokusai" (sovereign bonds) to the general public, but the reception has been cool mostly due to the super-low interest rate. The issuance of the bonds more than doubled in the past 10 years, but the rates hardly budged.

If indeed the government has to raise rates to attract more buyers, then the general public may finally start to buy. It may finally drive up the rates for bank CDs, and people may be able to save again. Inflation? What inflation? Japan's population is decreasing, and the rate of decrease will accelerate. I don't think much inflation can happen without population pressure.

In the past 20 years, much household wealth was destroyed in Japan not from ongoing recession and deflation but from super-low interest rates. In their effort to preserve and increase their wealth as best they could, ordinary people were forced to chase the high-yielding investments such as CDs in US dollar. That carry trade by numerous households has spectacularly backfired. They were also driven into mutual funds that invested in U.S. commercial real estate, as these funds were sold by neighborhood banks as "safe and high yielding".

They would welcome bonds and CDs that would yield 5%. That would absorb money in circulation, therefore non-inflationary.

For Japan to flip from deflation to hyperinflation, it would need some other disaster than the government issuing more debt or Mr. Kan becoming the finance minister.

Monday, January 4, 2010

Basis for 'Barbarous Relic' Won, over Dow and Dollar

Gold that is, and silver is not far behind.

Over the past 10 years, Dow Jones Industrial Average is pretty much flat to slightly down, U.S. dollar has lost about 25%. Gold is up almost 300%, silver is up about 230%.

To be sure, John Maynard Keynes called the gold standard 'barbarous relic', not gold itself.

James Turk, founder of GoldMoney, writing more than 5 years ago in this article, says the real 'barbarous relic' is central banking. I tend to agree.

Sunday, January 3, 2010

To Deflationists: Don't Cite Japan as America's Future

Japan may have no choice, with dwindling population.

There is a battle going on, increasingly on the blogsphere, between so-called deflationists and so-called inflationists. Most of them talk about price inflation/deflation, while others talk strictly about monetary inflation/deflation. Some switch between the two to fit their argument of the moment.

One of the arguments by so-called deflationists is Japan. Look at Japan, they've been doing for two full decades what the U.S. has started to do (QE, near-zero interest rate to help big banks repair their battered balance sheet, etc.) and what have they got? Price deflation!

It doesn't quite matter to them that price deflation in Japan (called "price destruction" in Japan) has never been more than 2% on the annual basis.

The new Japanese administration, just like the old one and just like the new one in the U.S., is frantically trying to re-inflate, calling deflation "unacceptable". But Japan, compared to the U.S., has one fatal (I think) disadvantage in their misguided effort to re-inflate: Population decline.

Population in Japan decreased for the 3rd straight year
(1/1/2010 Yomiuri Shinbun; original is in Japanese)

"According to the estimate by the Ministry of Health, Labor and Welfare, the number of deaths in Japan in 2009 exceeded the number of births by 75,000, making it a third straight year of population decline.

"The difference of 75,000 is the largest since the end of World War II.

"In 2009, there were 1,144,000 deaths (increase of 2,000 from previous year) and 1,069,000 births (decrease of 22,000 from previous year). Japan's population started to decrease in 2005 for the first time since the end of World War II.

"The Ministry officials believe the pace of population decline will accelerate further."

With ever-decreasing population, demands for goods and services naturally decline. What could the providers of goods and services do, other than to lower the prices to entice the dwindling number of buyers?

I wouldn't be surprised if Prime Minister Hatoyama tried to spin this population decline as a "wave of the future" for a sustainable, greener world.

More on Diplomatic Immunity to INTERPOL

More on the amendment of Executive Order 12425, done very very quietly by President Obama on December 16, 2009, as this blog mentioned in this post on December 31, 2009. The amendment, if you recall, will give full diplomatic immunity to INTERPOL.

Executive Order Amended to Immunize INTERPOL In America - Is The ICC Next? (Steve Schippert, Clyde Middleton, 12/23/09

The article, in its "Conclusion" section, has this to say:

"....... In light of what we know and can observe, it is our logical conclusion that President Obama's Executive Order amending President Ronald Reagans' 1983 EO 12425 and placing INTERPOL above the United States Constitution and beyond the legal reach of our own top law enforcement is a precursor to more damaging moves.

"The pre-requisite conditions regarding the Iraq withdrawal and the Guantanamo Bay terrorist detention facility closure will continue their course. meanwhile, the next move from President Obama is likely an attempt to dissolve the agreements made between President Bush and other states preventing them from turning over American military forces to the ICC (via INTERPOL) for war crimes or any other prosecutions.

"When the paths on the road map converge - Iraq withdrawal, Guantánamo closure, perceived American image improved internationally, and an empowered INTERPOL in the United States - it is probable that President Barack Obama will once again make America a signatory to the International Criminal Court. It will be a move that surrenders American sovereignty to an international body whose INTERPOL enforcement arm has already been elevated above the Constitution and American domestic law enforcement.

"For an added and disturbing wrinkle, INTERPOL's central operations office in the United States is within our own Justice Department offices. They are American law enforcement officers working under the aegis of INTERPOL within our own Justice Department. That they now operate with full diplomatic immunity and with "inviolable archives" from within our own buildings should send red flags soaring into the clouds." [emphasis is mine]

American law enforcement officers working within the U.S. Justice Department? That I had to check.

It turns out that the article is correct. Within the U.S. Justice Department, there is indeed the U.S. National Central Bureau of INTERPOL (USNCB). On its "Who We Are" page, they say:

"The USNCB is a component of the U.S. Department of Justice, and is co-managed by the Departments of Justice and Homeland Security pursuant to a memorandum of understanding between the Departments.

"The USNCB is comprised of permanent employees of the Department of Justice and staff detailed from other agencies. Agents, including the USNCB Director and Deputy Director, are detailed to the USNCB from federal and state law enforcement agencies for specified terms. Agents at USNCB are assigned to work in divisions dedicated to specific investigative areas." [emphasis is mine]

The law enforcement agencies detailed to the USNBC are also listed, and they are:

  • Bureau of Alcohol, Tobacco Firearms, and Explosives (ATF)
  • Bureau of Customs and Border Protection (CBP)
  • U.S. Immigration and Customs Enforcement (ICE)
  • Drug Enforcement Administration (DEA)
  • Environmental Protection Agency (EPA)
  • Federal Bureau of Investigation (FBI)
  • Transportation Security Administration (TSA)
  • U.S. Coast Guard (USCG)
  • U.S. Department of State (DOS)
  • U.S. Food and Drug Administration (FDA)
  • U.S. Marshals Service (USMS)
  • U.S. Postal Inspection Service
  • U.S. Secret Service
(EPA and FDA?? Why not throwing in the rest of the executive branch? )

These American agents working for INTERPOL will now have full diplomatic immunity and won't be accountable under the U.S. Constitution.

(And since USNCB is conveniently located within the Justice Department, it would be very easy to move data/documents from the Justice Department to INTERPOL, thus making such data/documents protected by full diplomatic immunity. Oh but they wouldn't do such a thing, would they?)