Booms, busts and a bottom?

Boom, Bust, Repeat (NYT book review): For the past two decades, Michael Lewis, the most charming and one of the shrewdest guides to America’s raucous money culture, has displayed a knack for being at the right place at the right time. He was a young trader on the Salomon Brothers bond desk during the 1987 crash; the experience led to “Liar’s Poker.” His boss at Salomon, John Meriwether, a decade later became a central figure in the downfall of the hedge fund Long-Term Capital Management. Lewis spent a chunk of the 1990s in Silicon Valley, where he profiled the serial entrepreneur Jim Clarkin “The New New Thing” and happened on to his next great subject, the Oakland A’s (“Moneyball”). Now, just in time for the Great Credit Debacle of 2008, Lewis has curated “Panic,” a prose exhibition on the past 20 years of monetary madness.

Michael’s most recent article in Portfolio is a fantastic profile of an investor who bet on the housing bust and is traumatized by how awfully right he was. It’s quite amazing how he’s still able to milk the story of his job 20 years ago for profits.

Mobius Says Emerging Markets Are Bottoming, Will Jump (Bloomberg): Emerging-market stocks are “bottoming” and will begin a new bull market next year as interest-rate cuts spur economic growth in developing nations, investor Mark Mobius said.

Be careful with advice that is not supported with evidence. Mobius sounds confident that the low interest rates will be enough to bounce stock prices off their bottom.  Low interest rates spur BUBBLES not organic demand. There may be bargains, but this may not be the bottom. In the same article,  Arnab Dasof Dresdner Kleinwort said emerging markets may not recover next year.

“Possibly the whole year will be a very difficult year for the entire global economy, especially emerging markets,” Das, the global head of emerging-markets research at Dresdner Kleinwort.”


Lessons from India and China

Talking Business How India Avoided a Crisis (NYT): “What has taken a number of us by surprise is the lack of adequate supervision and regulation,” Rana Kapoor was saying the other day. “This was despite the fact that Enron had happened and you passed Sarbanes-Oxley. We don’t understand it. Maybe it’s because we sit in a more controlled economy but ….” He smiled sweetly as his voice trailed off, as if to take the sting off his comments. But they stung nonetheless.

India has avoided direct exposure to the credit crisis with a cultural aversion toward credit and with an anti-inflation, anti-Greenspan central banker, Y.V. Reddy.

China to the Rescue? Not! (NYT): I had no idea that many of those oil paintings that hang in hotel rooms and starter homes across America are actually produced by just one Chinese village, Dafen, north of Hong Kong. And I had no idea that Dafen’s artist colony — the world’s leading center for mass-produced artwork and knockoffs of masterpieces — had been devastated by the bursting of the U.S. housing bubble. I should have, though.

We’re going to have to get out of this crisis the old-fashioned way: by digging inside ourselves and getting back to basics — improving U.S. productivity, saving more, studying harder and inventing more stuff to export. The days of phony prosperity — I borrow cheap money from China to build a house and then borrow on that house to buy cheap paintings from China to decorate my walls and everybody is a winner — are over.”

Thank you Mr. Friedman.

Emerging markets undervalued, analysts say, but ignore oil

Emerging Market Stocks to Outperform, Garner Says: Chart of Day (Bloomberg): Emerging-market stocks are a better buy than those of more developed regions because their economies will rebound more quickly from the global slowdown, according to Jonathan Garner, a strategist at Morgan Stanley.

Since October, emerging stocks have begun to close the gap on developed-market stocks, a trend that will continue next year, Garner says. But where? And how will the relationship with oil affect these stocks?

Looking Ahead: Emerging markets remain attractive (The Economic Times): Given the steep market decline, investors have begun to shift their focus to the increasingly attractive valuations in emerging markets. Many markets are trading at single-digit price-to-earnings ratios, with many companies trading at below their net asset value. Stock prices rebounded in December, as investors sought to benefit from the attractive investment opportunities in the asset class.

Dr. Joseph Mark Mobius and Garner both say the emerging markets are undervalued, but so is oil right now. These guys don’t even mention oil or other commodities for that matter. Obviously some countries aren’t relying on oil (China and India) and will benefit from the low prices. But do we need an equilibrium before stocks rebound?

EMERGING MARKETS-Bond advance narrows spreads, stocks sink(Reuters): Investors dipped deeper into their cash horde on Friday, buying selectively in emerging market sovereign bonds but stopped short when it came to stocks and currencies in thin pre-Christmas holiday trade.

Brazil Bank Estimates Cut at Goldman Sachs on Rates (Bloomberg): Brazilian banks had their 2009 and 2010 earnings forecasts cut by Goldman Sachs Group Inc., which said a drop in lending rates will lower profits while an economic slowdown curbs loan growth.

Oil’s Crash Stirs Unrest in Russia as Slump Hits Home (WSJ): Russia’s oil-fired economic miracle is unraveling as industry shrinks and job losses mount. Now the first stirrings of social unrest have the Kremlin groping for a response.

Exhibit A: The emphasis on oil here is clear. If oil prices remain depressed, then it is difficult to justify Garner’s  and Mobius’ thesis.

Emerging-market stock allocation lowest since 2001, survey (Dow Jones): Global fund managers slashed their allocation to emerging-markets equities in December to their lowest levels since 2001, according to Merrill Lynch’s latest fund-manager survey.

Emerging-market stocks reach six-week high on Fed rate cut, oil (Bloomberg): Emerging-market stocks rose to a six- week high on speculation that near-zero interest rates in the U.S. and rising commodity prices will boost economic growth in developing nations.

Amid recession, select assets attractive, says Barclays Capital (Marketwire): Barclays Capital, the investment banking division of Barclays Bank PLC, today said in its latest quarterly research publication, “Global Outlook: Positioning for an Uncertain Recovery,” that amid the most severe global recession in decades, the risk/reward trade-off has begun to look attractive in select areas, particularly for some credit assets.

The Treasury Department urged China to allow its currency to appreciate and estimated global growth will slow in the first half of 2009 in a report to Congress released Wednesday.

The biannual report on International Economic and Exchange Rate Policies describes the currency policies and exchange situations in 19 individual counties plus the Euro countries and the Gulf Cooperation Council Counties.

The report calls on China to diversify its economy by promoting internal spending. So far Treasury’s urgings have been unpersuasive as the report details how China has built a massive surplus on its export trade. Chinese leaders have indicated recently that they are satisfied with the economic model.

In the report, the Treasury states that China “needs to rebalance its economy by relying more on domestic private consumption rather than exports and by further developing its financial markets.”

Expeditious movement toward a market-determined exchange rate is an integral part of this process. As a first step, the pace of appreciation in early 2008 needs to be resumed. Treasury continues to use every opportunity to impress upon Chinese authorities the importance and urgency of exchange rate reform.”

One dollar bought 6.86 Yuan in trading today. The Yuan has appreciated about 17 percent against the dollar since China removed its currency peg to the dollar in 2005. China continues to keep its currency cheap relative to other currencies so that its exports are less expensive globally.

The report comes after Paulson visited China last week and said he was “distressed about the movement of the Yuan.” China, which owns $1 for every $10 of U.S. debt, said it is “highly unlikely” to change its currency policy, according to Yu Yongding, a former adviser to the Chinese central bank.

China has built a dominant surplus fueled by its exports despite the global economic downturn, the report showed. In the first ten months of 2008, China’s global trade balance grew to a record high of $216 billion, with exports growing by 22 percent over the same period in 2007.

Chinese imports grew by 30.7 percent in the first half of 2008 from the first half of 2007, in part due to rising import prices, but import growth in the second half of 2008 has decelerated on a monthly basis, down to a sixteen-month low of 15.6 percent in October versus October 2007.

China’s global trade surplus in the first three quarters of 2008 declined slightly to $181 billion (6.6 percent of GDP) from $186.1 billion (9 percent of GDP) in the first three quarters of 2007.

The report estimates that emerging market growth will fall to 5.7 percent in 2009 from 8.0 percent in 2007. Middle East countries, which are still profiting from high oil prices this summer, are likely to maintain high growth next year, the report said.

The report also includes an appendix on sovereign-wealth funds. The Treasury estimates that $2-3 trillion dollars are under management in SWFs and that the amount will increase to $7-11 trillion by 2013. The report said SWF representatives he met and agreed on policies to promote greater financial disclosure and macroeconomic policies to insure investment health. The report emphasized the need for SWFs to be financially, not politically motivated.

Russia’s Debt Rating Cut by S&P on Outflows, Reserves (Bloomberg): Russia’s long-term debt rating was lowered for the first time in nine years by Standard & Poor’s, which cited capital outflows and the “rapid depletion” of the foreign currency reserves.

Brazil Real Falls as Inflation, Trade Reports Fuel Rate-Cut Bet (Bloomberg): Brazil’s real declined, extending a four-month slide, as an inflation gauge slowed more than expected last month and the country posted its biggest weekly trade deficit in three months, the latest evidence the economy is faltering amid a rout in commodities.

Latvia’s IMF Bailout Plan Maintains Currency Peg, Trading Band (Bloomberg): Latvia’s International Monetary Fund- led bailout package will involve loans from other European governments and will maintain the country’s currency peg to the euro, the IMF said.

Look Homeward (The Economist): The “wall of money” argument is a hardy investment perennial. Back in the 1980s, it was the Japanese who would sweep in and push up stock markets. In recent years, sovereign-wealth funds have assumed the role of sugar daddies, with cash readily available to support asset prices.

SWFs will obviously grow a little older and wiser as a result of the U.S. mortgage collapse. They are likely to invest in their own backyards from now on spelling trouble for U.S. companies desperate for foreign relief. Why invest in the Big Three when you can start your own car company for less?

Emerging Market week – Weak Commodity prices to hurt EM (Reuters): Emerging markets are likely to continue their downward spiral this week, pressured by a slump in commodity prices as demand wanes due to the intensifying U.S. recession.

This summer, U.S. stock indices were tightly correlated to oil prices. As oil futures rose, stocks fell. Now as oil prices have fallen, the the emerging market indices are retreating. The correlation goes both ways.

U.S. Sees China Intent On Yuan Gaining Value (Washington Post): Treasury Secretary Henry M. Paulson Jr. said Friday that China remains committed to market reforms and to allowing its currency, the yuan, to appreciate in value even though it fell steeply this week.

U.S. Treasury securities are the only major export to China. If the yuan appreciates then piddly return China is already getting will weaken even less.

Paulson sought to play down American concerns about China’s growing financial influence in the United States, particularly its position as the world’s top holder of Treasury bills. “It’s a fact that China is an investor in the U.S.,” the Treasury secretary said. “But as I look around the world, I don’t see any country with a stake so big that I consider it a threat.”

I don’t know if I understand this right, but how does China gain as its currency appreciates?