Seeing The Heap Of Rubble From More Angles

Mr. Koon Yew Yin has sent me this insightful, simple yet clear article by an Indian economist (I think, or a potential American bank CEO anyway). Much of what he has written is true but there are a few things we should add. My comments in bold and parentheses.

The Japanese save a lot. They do not spend much. Also Japan exports far more than it imports. Has an annual trade surplus of over $100 billion, yet  Japanese economy is considered weak, even collapsing.

Americans spend, save little. Also US import  more than it exports. Has an annual trade deficit of over $400 billion. Yet, the American economy is considered strong and trusted to get stronger.

 (Well, the US economy is not strong at all. While we have been fixated at the federal budget deficit, there are much larger holes to think of. One is total obligations over the coming 10-20 years, much of it in interest and paying for medicare and pensions. Two, that is at the federal level, almost every single state in the US is already way deep in deficit, i.e. tax revenues cannot cover normal budget requirements and committments / liabilities / claims from their residents.


What are strong: US corporations that have invested well overseas; US education system that still attracts the best and hence having cherry pickings of the top brains; US lead in research, development and innovation, you can't buy that culture of innovation; all that may have a lot to do with having critical mass in population and transparency in rewarding efforts and innovation; and the immense movement, raising and deployment of capital for investing - more than adequate capital searching for great ideas, and good businesses finding critical mass for their products and services with immediacy.)



 But where from do Americans get money to spend?

 

They borrow from Japan, China and even India. Virtually others save for the US to spend. Global savings are mostly invested in US, in dollars. India itself keeps its foreign currency assets of over $50 billions in US securities. China has sunk over $160 billion in US securities. Japan's stakes in US securities is in trillions.

Result:

The US has taken over $5 trillion from the world. So, as the world saves for the US, Americans spend freely.

Today, to keep the US consumption going, that is for the US economy to work, the countries have to remit $180 billion every quarter that is $2 billion a day to the US! Otherwise the US economy would go sick.So will the global economy.

The result will be no different if US consumers begin consuming less. A Chinese economist asked a neat question.

Who has invested more, US in China or China in US?

The US has invested in China less than half of what China has invested in US. The same is the case with India. We have invested in US over $50 billion. But the US has invested less than $20 billion in India.

(To be entirely fair, much of why the US have accumulated so much debt and trade deficit is because of the deliberate and purposeful under-valuation of emerging markets currencies. You make your own currency weak to boost your competitiveness and export marketability, and then you fucking turn around and scold the very people that bought your highly competitive goods? All the while, enjoying higher employment and growth for your own domestic economy. If the US had taken a much stringer line on currency valuation disparity, growth in China, India and other emerging markets may not have been as solid - then we fuckers would have been scolding the US for suppressing the emerging markets from joining the global economy!

But of course the US has to shoulder some of the blame as well. Is it the lack of savings or over consumption? Its neither really, the root of the problem is the existence of substantive safety nets - subsidised medical care; good pension schemes; the separation of parents-children support network when the latter reaches adulthood; etc. When a society has strong safety nets, there will be a direct causation to less savings. Emerging markets population naturally save more as we have to take care of ourselves all the way, plus your immediate family's lifelong welfare.)

 
Why the world is after US?

The secret lies in the American spending, that they hardly save. In fact they use their credit cards to spend their future income. That the US spends is what makes it attractive to export to the US. So US imports more than what it exports year after year.

The Result:

The world is dependent on US consumption for its growth. By its deepening culture of consumption, the US has habituated the world to feed on US consumption. But as the US needs money to finance its consumption, the world provides the money.

It's like a shopkeeper providing the money to a customer so that the customer keeps buying from his shop. The customer will not buy; the shop won't have business, unless the shopkeeper funds him.

The US is like the lucky customer. And the world is like the helpless shopkeeper financier.

Who is America 's biggest shopkeeper financer? Japan of course.

Yet it's Japan which is regarded as weak. Modern economists complain that Japanese do not spend, so they do not Grow. To force the Japanese to spend, the Japanese government exerted itself. Reduced the savings rates, even charged the savers Even then the Japanese did not spend (habits don't change, even with taxes, do they?).

Their traditional postal savings alone is over $1.2 trillions, about three times the Indian GDP. Thus, savings, far from being the strength of Japan , has become its pain.

Hence, what is the lesson?

A nation cannot grow unless the people spend, not save. Not just spend, but borrow and spend.

Dr. Jagdish Bhagwati, the famous Indian-born economist in the US , told that don't wastefully save.

Start spending, on imported cars and, seriously, even on cosmetics! This will put all nations on a growth curve.

'Saving is sin, and spending is virtue.'

Before you follow this neo economics, get some fools to save so that you can borrow from them and spend.

This is what US has successfully done in last few decades.

Written by Dr Jagdish Bhagwati, an economist.

(While much has been written about the US flagrancy for financial discipline and excessive addiction to debt, we need to look at the issues from more angles. We have to remember that a substantial portion of their debt stems from funding their military strength. Is that for the US alone? As the policeman and guardian of the virtues of democracy and sanctity of human rights in down-trodden countries with cruel regimes, we have no one else to do that. Yes, the US may not be doing that for pure altruistic reasons, but what if the US just cuts back 90% of their military spending to manage their long term deficits better - can you imagine the pockets of anarchy and the trampling on human rights all over the world.

To think of it in another way, if the US were to farm out their military spending as a "cost subsidy to all emerging markets", do you think the emerging markets can afford to pay for that "protection". Don't even think of saying you don't need protection, we are all enjoying the protection already in some major way or form. Think of China extending their might towards the rest of Asia, or inflict greater incursions into Taiwan. Think of the havoc propagated by the Islamic fanatics left unchecked. Think of Indonesia deciding to capture Malaysia and Singapore, just because they can. ) 

Goldman Sachs' View Of The World

Goldman's latest Global Opportunity Asset Locator report gives a nice summary of the global state of play from the perspective of its analysts.  The basic gist: Growth prospects have clearly weakened, but thanks to fears of specific crises, markets have overshot to the downside. Thus, risky assets are now cheap, safe-havens are expensive. Growth will ultimately resume, and the policy outlook is now tilted towards loosening, with a greater than 50% chance the Fed embarks on a new round of QE. 

Further underlining the firm's point about the cheapness of risk assets: Charts like this showing the gap between dividend yields and inflation-adjusted government bond yields to be near record wide levels, evidence of an abnormally high equity risk premium.

Here's the big-picture outlook from Goldman:

Last Friday we revised down our global growth outlook and adjusted our return forecasts across asset classes. Our new forecasts reflect rising challenges for growth on four fronts: (1) a softer private demand trend than we expected in the US; (2) the broadening and persistency of the European sovereign issues; (3) the ability of policy to respond to this being more restricted than last year, with the debt ceiling debate in the US and the consolidation in European government budgets limiting room for fiscal stimulus, and higher inflation leaving less room for monetary policy; and (4) the energy constraint on growth having proved in the first half of 2011 to be more binding than we thought. 

Despite these challenges, our central outlook is still for 4.0% global growth in 2011 and 4.4% in 2012 as we expect EM growth to remain resilient. Many EMs are currently tightening and we believe the weaker external environment will to a large extent be offset by less policy tightening than would otherwise have been the case.

The risks around our central forecast have risen substantially since our last GOAL: (1) we now see a one in three chance of a recession in the US; (2) the sovereign situation in Europe could escalate further; (3) the necessary fiscal adjustments are a challenging balancing act between tightening too slowly and tightening too quickly; and (4) additional risks are also introduced by the lack of balance in the recovery. The output gaps in EM economies are largely closed, at the same time as large output gaps remain in most DM economies. The divergence of growth rates and policy needs within the Euro-zone is largeas well. Further, the impact of current high market volatility on sentiment increases the already elevated risk of more severe and hard to quantify tail events.

While risks have risen, the price adjustment for risky assets has also been very substantial, leaving valuations at levels that are discounting significantly worse outcomes than our central scenario. Over the next few months, our central scenario is for growth to pick up somewhat in the US, inflationary pressures in EM economies to moderate and the latest European package to be approved by parliaments. Admittedly, we forecast growth momentum to slow in the Euro-zone in the third quarter, but we then expect it to reaccelerate in the fourth quarter and into 2012. At the micro level we expect earnings to remain healthy with earnings growth next year ranging between 6% in the US and 18% in Japan. These expected developments combined with current valuations give very high  expected returns for risky assets in our central scenario. 

On a slightly longer horizon, the risk-reward is being further supported by the greater-than- even chance we now see for the FED to resume quantitative easing later this year or in the beginning of next year.

The Economist's Article On Penang

Malaysia’s Penang state

Getting back its mojo

After a slump, an early engine of globalisation is thriving again

Aug 13th 2011 | PENANG | from the print edition

 

IF YOU are going to have a heart attack, have it in Penang. So one might think, to the see the hospitals in George Town, the capital of this north-western Malaysian state. Patients are flocking in. Ted Mohr, the head of the venerable Penang Adventist Hospital says that he will admit 70,000 medical tourists this year. The hospital specialises in heart procedures and it will perform roughly 23,000 of them this year, including 550 open-heart operations. Such is the demand that the hospital is doubling its number of beds.

Mr Mohr gives two main reasons for Penang’s success with the coronary crowd. First, it is relatively cheap. Open-heart surgery that would set you back $100,000 in America costs only about $10,000 in Penang. Second, Penang’s hospitals are as well-equipped as many in the West.

The combination of low cost and high technology is the main reason why industries across the state of Penang, made up of the original island and a larger bit of the mainland, are prospering again after more than a decade of decline. Their revival is important to Malaysia’s economy—Penang and the surrounding region account for 21% of the country’s GDP. But the renaissance could also have important political consequences for the country.

Since 2008 Penang has been one of only four states (out of 13) run by an opposition party. If its politicians can claim the credit for the recent success, that should greatly help the opposition in the next general election, expected within the year.

Penang was founded as a free port by the British in 1786. Occupying a position between India and East Asia, the island drew merchants and middlemen keen to make their fortunes. Chinese, Indians, Armenians, Arabs and more all traded alongside each other. With its racial and religious mix, and dedication to the pursuit of free trade, Penang was in many ways the first custom-made city of globalisation.

The island’s fortunes sank as it lost business to its arch-rival, Singapore. In the post-colonial period Penang fell victim to the rise of nationalism. The region’s freshly minted republics chose to develop their own ports. Penang enjoyed a revival during the 1970s with the setting-up of Malaysia’s first free-trade zone (a “free port” by another name); this attracted big names in electronics, like Intel and Bosch, which built some of the first offshore assembly lines. But this boom was founded on cheap labour, and as Malaysia became richer other emerging economies, such as China and Vietnam, drew the assembly work away.

To recover its prosperity, Penang has sought to reinvent itself. With the rise of India and China, Penang’s location again looks very handy to foreign companies as a place to invest, as in the 18th century. It is relatively close to both big markets—yet offers advantages that trump Asia’s giants’.

Penang’s own “Silicon Valley” companies know that the rule of law in Malaysia gives them the sort of protection for patents and intellectual property they would not enjoy in China, and an ease of doing business that they could not find in India. Wages are higher than they were, but no more so nowadays than on the Chinese seaboard. The federal government has also spent liberally on bridges and the airport, making Penang better connected to the rest of Asia. And old George Town has been smartened up, which helps to bring in foreigners to live, work—and have surgery.

The result is another boom. Last year more investment poured into the state than any other in Malaysia. Scores of new electronics firms have swooped in to join the pioneers, along with an expanding cluster of 20 or so medical-device manufacturers. Crucially, most of the new jobs are in research and development rather than assembly. An American chip-designer, Altera, has a new facility with 1,100 workers in Penang, 800 of them engineers. Its head says that almost all the engineers are locals—which is good for Malaysia.

Whom to thank?

When the Democratic Action Party won the state’s legislative assembly three years ago, it became the first opposition party to triumph in Penang in more than 40 years. The victory presented a direct challenge to the Barisan Nasional (BN) coalition that has ruled the country continuously since independence in 1957. Penang’s new leader, Lim Guan Eng, says that the federal government has an “ambivalent” attitude towards him, cutting off some funding but not undermining his authority. “They don’t want us to get any credit, but they can’t afford to see us fail”.

The revival of Penang was already under way in 2008, but Mr Eng’s new policies have helped it along. He has become the first governor in Malaysia to open up all state tenders to competition. This has entailed dismantling the special preferences for ethnic Malays that have underpinned the BN’s rule since the early 1970s. That was when the Malay majority institutionalised affirmative action for themselves, to the disadvantage of ethnic Chinese (a majority in Penang), who were perceived to have got unduly rich. Mr Eng claims that by reforming the system he has ended the cronyism and corruption that wasted money under previous regimes.

Adapted to the national stage, such policies could transform the way that the Malaysian federal government conducts business. Mr Eng says that the savings he has made by ending the “old systems of patronage” allow him to spend money on new social programmes instead, such as modest handouts for the elderly. These policies are popular, and the assault on corruption pleases foreign investors. Little wonder, then, that Penang has become a political weathervane as much as a lesson in economic development.

Risk Appetite Lowest Ever Since 1982

Typically, the relief rally from such “deep panics” (4^th time since 1981) ~ 10 - 15% from the lowest point. Research note from Credit Suisse.
 

 
 
Yesterday our Global Risk Appetite Index hit an all time low of -5.77. The previous deep panics were in August 1982, October 2002 and November 2008.

Indonesian Nostalgia, The Inimitable Anneke Gronloh

This may be a posting about the wonderful songs, melodies from the one and only Anneke Gronloh from Indonesia (born in Menagassar, Northern Celebes, Indonesia and raised in the Netherlands though) in the 60s and 70s. However, I am sure you will be able to read between the lines, or rather the songs ....

Thai Insurance Commercials

I guess we shouldn't call them commercials when they show us exactly what's most important to us. Though they be an insurance firm, I guess to show the values they embody is something to be lauded. Of course, we will always be the pessimist and question every single motive of a company. Have we been so cynical and hardened our hearts that we will never let some light of decency shine through? I don't know about you, but they remind me of Yasmin so much.

Roses Are Red, Violets Are ....

One of my good friend's son wrote in his Facebook, a wonderfully perceptive rambling about nothingness. Its remarkably poignant, perceptive, sarcastic, poetic and funny. Could turn out to be another me... lol... or better. Amazing considering he's barely into his teens.

"Roses are red, violets are blue. That’s what they say, but it just isn’t true. Roses are red, and apples are too. But violets are violet. Violets aren’t blue! An orange is orange, but Greenland’s not green. A pinkie’s not pink, So what does it mean? To call something’s blue when it’s not, we defile it. But ah, what the heck, it’s hard to rhyme with violet."

Yes it is hard to rhyme with violet ... what about toilet ...