There are political sides in America ... and then there are political sides in the communist state of China. Here, it's a matter of the right and the left. In China, it's a matter of private enterprise and strong foreign investment versus highly centralized and debt-heavy state enterprise.
According to the geopolitical analysis company Stratfor, the left may be losing ground in China, and Beijing may be headed down an economic path that focuses on private enterprise. If the trend becomes the national strategy in the long term, this could mean greater room for private business in China. You can read Stratfor’s complete analysis in the article below.
You can see why it's important to follow events like this. For those of you who don’t know Stratfor yet, it is a company, founded by my friend George Friedman, that provides daily reports and analysis on global affairs. I read them daily and have arranged a special discount on Stratfor subscriptions for OTB readers. <<Check out the offer here>> – it includes a new book on the geopolitics of the BRICS nations.
Your right hand always knows what the left hand is doing analyst,
My friends at GaveKal are uniquely positioned to help us think about where we have been in the past decade and where we are going in the next one. Their perch in Hong Kong lets them keep their fingers on China's pulse, but they also have profound roots in Europe – the Gave family is French – as well as a thorough grasp of the US economy and culture. (Louis Gave, the author of today's Outside the Box, is a Duke grad.)
We can all second Louis when he notes "the discomfort and uncertainty we find in most meetings with clients" – we're treading on uncertain turf here and moving into unexplored territory. We sense that the potential, in the next few years, for both creation and destruction (so yes, creative destruction) is greater than at any time in our lives – and greater perhaps than at any time in the history of the human race.
How do we get our heads around something that big and dynamic? Where do we find the confidence that our next steps will take us forward rather than back? How do we allocate and husband our resources, wisely and profitably? In the following piece, Louis Gave takes an approach that is genuinely helpful: he looks back to the crucial year of 2001 and identifies three big events that largely determined global economic and investment trends in the '00s.
And then he does something that is rather scary but very necessary. He says, don't look now, gang, but those trends have stalled; and so we had better come to grips with the great trends that are now forming (lest we be like the British guns of Singapore at the outbreak of WWII: facing the wrong way).
And then – GaveKal to the rescue! – he tells us what those trends are. So, without stealing any of Louis's thunder, I will deliver you into his capable hands. But first, this note –
I did get my iPad 3 on time. No line, in stock at the local Apple store. I decided to try when I got a few emails from analyst types who actually go to stores to check on lines and inventory instead of just looking at numbers. Lines were down, for whatever reason. And inexplicably to me, there is absolutely no visual difference between the iPad 3 and the 2. None. And there is nothing on the box to reassure you that you actually got the 3, if you don't get the 4G. Now, the 4G speed is cool, and I can see the increased processor speed, and the display is in fact nicer. Not sure, unless you are an early adopter or hooked on speed (as I am) that the need will be there to buy up. And if you don't get the 4G? There is no difference in connection speed. And Apple stock is priced for perfection. Just saying…
Finally, I rarely ever provide a link that is simply for fun, but my friend Cliff Draughn of Excelsia sent me the funniest 5-minute clip I have seen in years. I laughed out loud for some time. Do not listen unless you are where you can laugh. This may be something of an inside investment-world joke, but I think most people will appreciate it. http://www.xtranormal.com/watch/12032078/a-day-in-the-life-of-a-financial-advisor. I think even Suze will get a kick out of this!
Have a great week. I am finishing this up in the airport, and am off in a few minutes to Stockholm and Paris. I intend to take some time and see the Vasa, a 68-gun warship built in 1628 and pulled up from the bay in 1987, where it had been perfectly preserved. Stunning history and something I have long wanted to see. (en.wikipedia.org/wiki/Vasa_(ship)) Plus a lot more of Stockholm and a few spots in Paris before the GIC conference. And I am also going to spend some time with people who went through the banking/sovereign crisis in Sweden in the '90s and see what I can learn. And now let's turn you over to Louis.
Your up on my board, surfing the inevitable analyst,
Companies issue state of the enterprise addresses, and presidents issue state of the union addresses ... but you've got to be pretty confident to address the state of the world. Luckily for us, Stratfor founder and CEO George Friedman is just that confident – and it's well-deserved.
George is the expert in geopolitics, and his company is the best source out there for geopolitical analysis. Thus, his recent article, "The State of the World: A Framework," is well worth a thorough read. It identifies three distinct phenomena the world is facing: the European financial crisis, the Chinese export crisis, and Iran's rise to power in the Middle East.
One of his most interesting points, and one that I'm inclined to agree with, is that the most powerful country in the world – the United States – is currently unprepared to deal with this new reality. Something to keep in mind as we enter election season ...
Some of you may know that Stratfor was hacked several weeks ago. While they rebuild some infrastructure, they've got an open-house website – you can access the content that's usually only available to subscribers. You may want to take advantage of this opportunity by visiting www.stratfor.com before they lock up the house again. I particularly recommend their 2012 Annual Forecast.
Your wondering whether I'll have Greek, Chinese, or Iranian food tonight analyst,
I have been reading and talking with Simon Hunt for a long time. He is a very thoughtful Brit who spends a lot of time in China and thinks about copper and commodities and cycles. He has enough seasoning to have seen a few cycles himself. This piece summarizes rather well the view that he has expressed for some time. And while I am generally skeptical of relying too much on cycles for specifics (they work until they don't), I think Simon has some very powerful conclusions. From his summary:
"The world is in a balance sheet depression which will make a second and perhaps more dangerous credit crisis almost inevitable. That should break out next year or in 2013.
"The three global pillars of the world economy, the USA, Europe and China, each have their own problems, but their impact is global because of the feedback loops from the financial sector to the economy.
"The USA has a debt and deficit profile which is unsustainable; the Euro Zone has to decide whether it can forge a fully fiscal union or whether the costs are too great, in which event membership will be restructured; and China is trying to put its economy on a more sustainable growth path at a time of leadership change.
"Debt and demographics will be the determining forces to global growth. Markets will no longer countenance indecision and pushing debt problems under the table by lending more funds to indebted governments. Politicians want to postpone what they know is inevitable: debts must be repaid."
This is a very interesting Outside the Box and one I suggest you put some thought into, as to how its conclusions may affect you.
I write this from Dr. Mike Roizen's office in Cleveland, where I will be at the Wellness Clinic tomorrow to do a general physical and to find out specifically what is wrong with my right arm. Nothing life-threatening here, as I told my daughters last night. Just life-annoying.
I get back to Dallas in time to go shopping for Thanksgiving dinner and start the cooking. Some things just have to be done overnight. I love this week! 40-plus people coming to dinner. And I hope you have a great holiday as well. And if you are not in the US and don't celebrate Thanksgiving, then make up an excuse and get your family and friends together and have a great meal, emphasis on together. We should do things like this more often!
Your enjoying life more and more (even with the damn arm) analyst,
This week's Outside the Box will be unusual. Rather than one essay, I give you a number of short ones, and links that are representative of the confusion that is Europe, along with a little history. As I noted this weekend, last week's Eurozone announcement was short of details, and very little of the real work had been done. Merkel has to get her own country on board, keep the other nations that are in trouble from demanding haircuts, and keep the markets from trashing Italian and Spanish debt. Berlusconi has to figure out how to get the Italian budget balanced while staying out of jail and "balancing" his social calendar. Maybe he can dollar-cost average with a 70-year-old date? (Sorry, that was snarky, but it is so easy.)
Europe's problems will visit shores all over the world. China will not come to the rescue, at least not cheaply. It is becoming increasingly unclear where they will get the money without ECB participation, but that is VERY euro bearish.
I don't want to seem like I am piling on Euroland, but they are the crisis du jour. And it's just a matter of time until it's the US. Sigh.
And lest I forget again, let me say a special thanks to Joan McCullough for pointing me last week to Mike Masters, who was very helpful in understanding the intricacies ofcredit default swaps and their implications.
Another busy week and lots of airplanes. It will be my first time ever on Aer Lingus, as I fly to Ireland. This weekend will be fun, and even though I will do a few speeches, it will b a very different crowd than I normally speak to. No PowerPoints, just explanations of how the world works to average people – while professional stand-up comedians try and keep me honest! We shall see how that works.
Your keeping it simple analyst,
Today’s Outside the Box is the latest chapter in my ongoing discussion with Dr. Woody Brock on the rationale of the politics of economics. In this essay, Woody explains how political science has taken a back seat to economics, and how to redress the imbalance we find today between what he terms "Res Politica" (the rule of politics) and "Res Economica" (the rule of economics or money). Where the rubber meets the road here is that our important economic decisions are increasingly being made by politicians (who are not particularly well-schooled in either economics or political science), with consequences that are likely to be dangerous. You will have to put on your thinking cap, but this will provide you with some real insights and food for thought.
Woody is one of the best “big-picture” economic theoreticians of our time, and that’s why I treasure the times we get to talk (or rather I get to “sit in "school” and learn), and have invited him to speak at our annual conference. He has already committed for next year, so save the dates: May 2-4 in La Jolla. In the meantime, you can find more of Woody’s thinking at his company’s site, Strategic Economic Decisions. (For the record, this is the first OTB I have sent from my iPad.)
Your hoping the politicians are listening analyst,
The saying goes that you can learn something new every day. If you're paying attention that is – and more importantly if you know where to look. Today I was getting my morning fill of geopolitical intel from my friends over at STRATFOR (on everything from personal security to country economic profiles) and stumbled onto their weekly China Security Memo, this particular edition on "Looking into Reverse Mergers on Wall Street." Is this another head-scratcher in the less-than-conventional foreign policy coming from China, or a regulatory end-around by some enterprising Chinese companies? Take a few minutes to read this report, which also goes through everything that happened in China this week that matters.
This article discusses the SEC's ongoing investigation of the "reverse mergers," where questionable Chinese auditing allowed companies to list on U.S. stock exchanges despite their fraudulent accounts. The report is a superb example of the detail and insight STRATFOR gives its customers. If you're into the idea of learning something new on a daily basis (the desire grows with age, I believe) you'll enjoy learning about the current state of Chinese regulations (or lack thereof) for companies that list on US stock markets, state-owned enterprises (SOEs) that compete with American businesses, recent bank robberies, tensions with the Catholic Church, and bottled water contaminated with E. coli. In other words, you'll definitely meet your novel-knowledge quota for the day, all while getting the deepest insight on the security situation in China.
And if you're interested in getting more than just an occasional note and article from me every now and then, I've procured a nice discount of 63% on a STRATFOR subscription. It's one of the smartest sources I read every morning – a great investment, in my humble opinion.
For those of you keeping up with the much-discussed energy deal between China and Russia, you know the many reasons, both geographic and political, why it's unlikely to pan out. The geopolitically savvy folks over at STRATFOR told us about it a couple of weeks ago, and have moved their forecasting on to an existing energy relationship, between China and Venezuela—now potentially uncertain due to Hugo Chavez's precarious position in a Cuban hospital.
Whether Chavez gets better or not, a political transition is down the line somewhere, and China could lose its current preferential treatment as primary investor in Venezuelan oil. This is the kind of thing we have to know about as investors. Yes, we all know that Chavez is ill. But what, if anything, does that mean for the South American energy sector? What about the future of oil, China, the U.S., and so on? This is the kind of forward-looking analysis you get from a news publication like STRATFOR. It doesn't get any better than these guys.
Enjoy this complimentary piece from them. If you're interested in more, watch their video on the <<Venezuelan oil industry here>>, and then take advantage of their special discount for OTB readers. I read them every day, and highly recommend you check out their subscription offer.
This week’s Outside the Box is from one of the more interesting thinkers and observers of the markets I know, Simon Hunt. When we get together in London, conversations are lively, as we don’t always see eye to eye; but we can always discuss, in a very civil manner, the affairs of the world. This particular piece is wide-ranging and thought-provoking. Simon is always ready to apply actual times to his predictions, and he has held steady on them for years.
It is late here in Geneva and I have to get up early for a speech. A big thanks to Hervig von Hove of Notz Stucki for hosting one of the more stimulating dinners with 16 people I have enjoyed in a long time, at his home out in the country, on a perfect night. I will probably make the discussion there the topic of this week’s letter. Charles Gave was in rare form. The Swiss gnomes were so very fascinating, and we had such an international table. These are the nights I wish my 1 million closest friends (a few of whom were there) could listen in on. More to come on Friday!
Your living for these moments analyst,
They say that natural gas is a more dynamic study in geopolitics than oil. Yes, petroleum is what makes the world go 'round. But, once you get it to a super-tanker, you can ship it anywhere. Natural gas, of which the world consumes 3,000 billion cubic meters per year, is much harder (and more expensive) to transport. You have to build miles and miles of expensive pipeline to get it to your buyer. So whatever countries your pipeline runs through, or to, you'd better stay friends.
Today I'm sending you a video by STRATFOR on the much-discussed potential energy deal between Russia and China. Ideology aside, the two countries would seem like a compatible couple (Russia is the world's largest exporter of raw commodities, China the world's largest importer). But are they ready to tie the knot with a pipeline that would takes decades and hundreds of billions of dollars to build?
<<Watch the video here>> to get the full analysis. OTB readers can also access a discount on subscriptions to STRATFOR, plus get a free book. I read them daily, as they are the best source I've found for understanding geopolitical risk.
A true understanding of geopolitics (and therefore geopolitical risk) is an essential piece of the puzzle in managing investments wisely. You're bright people, I know. If you need to know what's going on in China to inform your investments, you sit down in front of the keyboard, and after a few choice web searches, and a half a day's worth of reading, you would be able to formulate an informed and concise summary – and use it to make investment choices.
There's an easier, quicker, and smarter way to accomplish this task. In this special Outside the Box, I'm including a STRATFOR video on Chinese economic strategy and U.S.-China relations. They're my number one source for important global matters, and this is just one slice of what they have on China, for example. Give them 5 minutes of your time, and they'll save you hours in research poking around the internet. Don't depend on my occasional mailouts: sign up for full access to all their reports. Outside the Box readers even get a 63% discount, which you can access after <<watching the video>>. In a game of ROI, these guys are worth every cent.
Your trying to work smart, not hard analyst,
This week we look over the Pacific pond to China and Japan, in an interview with my friend Vitaliy Katsenelson by David Galland, who is the managing editor of The Casey Report. Vitaliy is the chief investment officer of Investment Management Associates, Inc., and author of Active Value Investing. Profiled in Barron’s in September 2009, Vitaliy, who was born in Murmansk, Russia, and moved to the U.S. in 1991, is an adjunct faculty member at the University of Colorado at Denver’s Graduate School of Business.
Long time readers know that I just don’t get China or Japan. I think both are bubbles, but as Vitaliy notes, many bubbles can outlast the reputations of those predicting their demise. Timing is everything.
For those interested in subscribing to the Casey Report, which focuses on special situations and natural resources, you can get a risk-free trial subscription by going to the following link. (http://www.caseyresearch.com/crpmkt/crpSolo.php?id=175&ppref=JMD175ED1110A) It is one of my favorite reads.
Have a great Thanksgiving week!
My internet went out today, and after chewing out my service provider for a good half-hour, I got to thinking about how we accomplished work in the good old days, before the age of information, when a mouse was just a furry varmint chased by cats. My thoughts snowballed, as they often do, and I began considering technology - the hard reality that makes the soft, virtual world possible. What is a laptop made of?
In a miracle I can't begin to understand, my connection to the world wide web was resurrected. Upon making my routine visit to STRATFOR.com to check out their latest geopolitical analysis, I stumbled upon this article on China's reported manipulation of the market of rare earth elements--used in the production of everything from petroleum to laptops to hybrid cars to radar--and how that will affect everything from importing nations to industries to consumers in the next 2-5 years.
The technology boom could have been predicted decades ago by next to no one. The few individuals who had that kind of foresight are doing very well for themselves now, I'm sure. That brings me back to STRATFOR - a company that specializes in forecasting. I'm sending you the piece I referenced above, but you can also join their free mailing list here, or become a premium member to access their just-published Q4 forecast.
On a lighter note, did you catch the Rangers game Tuesday night?
Your gloating in the thrill of victory (while it lasts) analyst,
The Chinese have a bit of a challenge on their hands. One could reason that as the world's most populous country, China would also have the highest number of individuals living in poverty. However, I was shocked to learn that the number is over 600 million. Talk about a mess. If you do any sort of business, or just have a general interest in the Far East, I recommend you get a heads up on the leadership changes we'll see in the next year.
Today I'm including an article and a video from STRATFOR, a global intelligence company. I watched the video first - it's an overview of China's new leadership and what that means for the next generation. If you want more analysis (which I definitely did), read the article below too. You'll learn about the deep structural reforms that may be required to prevent China's economy from overheating, as well as the rising influence of the military and how the new leaders will address the flaws in China's economic model.
Be sure to check out the graphic of the leadership hierarchy, which you'll find in the article. It's just the sort of information STRATFOR provides that you won't find that anywhere else.
So, <<click here to watch the video>> , and then scroll down to sign up to receive STRATFOR's free intelligence reports.
Today I'd like us to think about sustainability. The Mayfly is a species of insect that goes from egg to death sometimes in as little as 30 minutes, and never more than a day. Take note, because as investors we have to be wary of the same rapid fluxes in economies. I'm of course speaking of the hype surrounding the Chinese economy lately. Everyone is talking about China this week, and rightfully so, as its GDP is nearing Japan's and could become the second largest in the world. But is it sustainable? Or a boom-and-bust similar to the Mayfly?
I'm sending you an interview with a STRATFOR analyst who, unlike the hype, says China's economy is weak and unsustainable. Find out what indicators he's looking at by <<watching this video>>. While you're at it, sign up to receive their free weekly intelligence reports. You'll enjoy the unique & global perspective.
The key to being a great chess player is to think ahead. True grandmasters think ahead not by just one or two steps, but a full game. The key to winning is determining the most likely moves of your opponent, among what seem at first glance to be hundreds of possibilities. The same can be said of finance. Knowing what to expect from key world players is critical to investing.
STRATFOR is an intelligence agency available to the public. If you want to know what to expect from different nations and leaders around the world, you read these guys. Founder George Friedman has developed a methodology for predictive intelligence that gives his readers a clear understanding of what to expect. While at first glance there seem to be dozens of options for nations and leaders, once you evaluate each option logically, it becomes easier to predict their actions. Today I'm including a video analysis, one of STRATFOR's many daily reports, that provides insight on what's next for the players in the Far East and their relationships to the United States. Click here to watch the video, and don't forget to sign up for their free weekly email reports and special offers.
This week we turn our eyes to Asia as my friend Louis Gave of GaveKal gives us a very thought-provoking piece on the problems of investing in Asia, with a focus on China. While there are real opportunities, Louis also sees some speed bumps. Those Asian ETFs may not be the winners a lot of people think for structural reasons.
I was to thank the team at GaveKal for letting me reproduce their research as typically it is only available to their clients who pay a rather hefty sum.
This has been a productive weekend book writing wise. I am down to finishing 2 chapters which are mostly written and two long flights to Vancouver in front of me. Then the hard part of re-writes but I can see the end of the race. Have a great week, and if you are in Vancouver be sure to say hello.
Your writing machine analyst,
It has been a busy day in Rome, doing the Vatican Museum, St. Peter's and the Trevi Fountain. But I have to find time to get you your Outside the Box and have I got a great one for you. David Galland of Casey Research was kind enough to let me use an interview he did with two of his energy research staff normally only available to his subscribers. A big thank you to David.
This is a special treat for Outside the Box readers, as they talk about the future of the energy markets. I have been following their work for some time and I think they are the real deal if you are looking for an energy letter to regularly read. You can subscribe at here.
I am going to sign off as the "kids" are waiting. One quick observation. Stop lights in Rome seem to be more of a suggestion than an actual statement. Oh, but what a city!
Your in the city of restaurants analyst,
A quick introduction for this week's Outside the Box. This is from my London Partner Niels Jensen, talking about the problems with long only commodity funds. This is something I discuss frequently but have not written about in some time. Quite simply, many of the commodity ETFs do not deliver what they promise and in fact many of the inverse funds can lose you money even when you make the right macro call.
Niels gives us a very good explanation of why this is so. So for those of you who have "diversified" into commodity ETFs (not actively managed funds!) or are thinking about it you might really want to read this.
Your running our the door for dinner in NYC analyst,
Before we get to this week's Outside the Box, a quick note about my writing on Greece in last Saturday's letter. I made the point that if Greece defaults it does not necessarily mean they have to leave the EU, any more than if Illinois defaulted they would have to leave the United States. Greece could still use the euro and life could go on. EXCEPT. The markets would no longer lend the Greek government money at anything close to a livable rate. Greece would be forced to balance its budget. Since they are part of the euro, devaluing the currency is not an option. The results of controlling their fiscal deficit would not initially be pretty and would almost insure a serious prolonged recession or depression in the Greek area, with fall out in the region. It would be a sad decade for Greece. But in the long run, it is a better option than default.
Further, and more important to the rest of Europe and the world, the results of a Greek default would be financial turmoil. 250 billion euros (and maybe 300!) of Greek debt is in international bond funds, pension and insurance companies, and above all at banks. Think German banks. Already undercapitalized banks. Also, think of all the investment banks who have been selling relatively cheap (given the apparent risk) credit default swaps on Greece, in an unregulated market, exposing their balance sheets. What should be a simple, if sad, matter for the Greeks, becomes a problem for the world, just as subprime debt in the US caused a world credit crisis. And the risk of contagion from Portugal, Spain, et al is serious. 2 trillion euros of debt could get downgraded by the bond market in very short order. It could be a replay of the last credit crisis, just with new actors as the prime problem.
Bailing out Greece without serious and credible deficit reductions by their government over the next few years would simply delay the problem, and it is not altogether clear the bond markets would go along for very long. At the end of the day, it may be the bond market which forces the Greek government and its people to take some very bitter medicine. Stay tuned. This is just the beginning of what will be a series of sovereign debt crises over the coming decade. It is important for the world that we get this one solved right, or the consequences will be quite severe.
Now, this week's Outside the Box is from my friend Simon Hunt, based in London. Simon travels to China many times a year, is an authority on copper and the Long Wave theory of cycles. When we are together, and often over emails, we have some fairly interesting debates. I generally don't follow Long Wave analysis, but Simon does make me think and check my own views carefully. And as I often write, the point of Outside the Box is not to send you material that I agree with, but ideas from smart people which make us think. So, enjoy my friend Simon's latest forecast and ideas.