Currency Manipulation

There is blood in the streets for the Euro - US Dollar.

The Canadian dollar is weakening, the Taiwan dollar is all over the place.

But one major currency just sits there like a frozen block of tofu.

1 US$ = RMB 6.835

Yeah, China is not manipulating their currency. They are just really, really stable compared to the rest of the world. Well, except for the falling stock market, the increasing domestic inflation, and the collapse of the real estate market.

Granted, if the Yuan was going to depreciate, then I praise the ChiCom financial engineers for being paragons of monetary virtue. But the fact that their currency just sits there like a frozen block of tofu raises suspicions that it would more than likely be appreciating. When times are tough, the exporters keep their currencies low.

China Real Estate Bust is happening now

Compared with the week ended April 11, the average transaction price of commercial residential properties in Beijing plunged 31.43 percent or 7,744 yuan per square meter.

But, the "good" news I think is that there will not be too much contagion (knock on wood.) Here is why:

May 13 -- Rich people making up 10 percent of China’s total population accounted for 50 percent ofreal estate transactions conducted in China, reports Beijing Morning Post, citing Wang Xiaoguang, researcher from the Chinese Academy of Governance.

According to Wang, demand by speculators for real estate in China accounts for more than 50 percent of the market. In cities such as Shenzhen, speculators account for between 80 percent to 90 percent of the demand for real estate.

So, essentially its speculators and rich people who will take losses on their investments. Since you need a 20% or more down payment for a mortgage in China and many people actually buy in cash, the real estate bust will simply result in some rich people losing some value on their house.

Plus, we know Chinese folks and houses...they never sell or even rent half the time. They will quietly just take the loss and raise mosquitoes..."yang wen-tz"

Any bank that got in trouble in China would just get bailed out by the central government (sound familiar?) I doubt Citibank is exposed to this sort of stuff.. probably not allowed to lend to locals.

Oh, and China just had a 33% increase in tax revenues, so they could actually afford to bail someone out without printing money.

If the Yuan devalues somehow, I am going to be pissed though. I had some second thoughts on my last trip when I made another bank deposit in Yuan...

China

Funniest Idea Ever

How could you get some extra growth in Europe without raising taxes or spending?

MAKE THE EUROPEANS WORK DURING AUGUST.

Analogy

Reading about the sup-prime mortgage bubble's boom and bust,,the reason the bubble could continue for the final few years was that the mortgage originators were relying on higher home prices allowing their borrowers to refinance their crazy all interest loans before the teaser rate stopped and they lost the ability to repay.

So:

Rising house prices allowed sub-prime borrowers to refinance their homes and stave off collapse. Once house prices became flat, fell, or even just grew at too slow a rate, the game was up for the sub prime borrower and they defaulted on their loan.

leads to this possible analogy of government deficit spending...

Growing economies and populations allowed governments to use deficit spending and to roll over government debts and ignore unfunded liabilities. Once the economy falls enough or population growth becomes too low, the game will be up for government deficit spending and using debt to pay out for unfunded liabilities.

This is what is happening in slow motion (unless economic growth surges soon.)

I am not talking about small deficits here or there or some debt to build a road, but deficit spending for bail outs, health care, a couple of expensive wars, etc. and more importantly, borrowing planned to pay for unfunded pensions and entitlements.

UPDATE:

"What Europe needs is a growth pact because without growth, public finances aren't going to be sustainable," Tilford said. "The bond markets are going to be forcing them to make those kind of changes."

Even EU president Van Rompuy warned that the bloc risks irrelevance and the end of its expensive welfare programs if it can't speed up economic growth, forecast to expand by just 1 percent this year.

"With 1 percent growth we can't finance our social model any more. With 1 percent structural growth we can't play a role in the world," he told the World Economic Forum in Brussels. "We need to double the economic growth potential that we now have."

http://finance.yahoo.com/news/Trilliondollar-euro-rescue-apf-644989406.html?x=0&sec=topStories&pos=3&asset=&ccode=

How do you increase economic growth without changing any tax rates or cutting/adding any government expenditure?

They can't cut taxes because they already have a revenue problem. They can't raise taxes because that will not promote growth.

They can't cut because firing employees or reducing their salaries won't help a fragile economy, and they can't increase spending because that's the problem to begin with.

This explains these expressions....

HERE WE GO AGAIN

Steel prices have been rising in Taiwan since February.

Iron ore pricing for China is now going to be adjusted every quarter, and has gone up 80-100%.

Oil is up past 80 bucks a barrel, and the summer is approaching.

I am having a bad, bad feeling that we are about to repeat the infamous summer of 2008 where instead of creating new products, every effort was made simply to re-quote old items at new, higher prices, and to tear cost out of every product.

Oh, and we have major currency instability world-wide.

UPDATE: Paper also has gone up the last few months - just had to increase a price for an item primarily due to packaging cost! Up 36%. Amazing.

Yahoo News

OTTAWA (Reuters) – U.S. Secretary of State Hillary Clinton delivered a rare public rebuke to close ally Canada on Monday, criticizing it for excluding key nations from a meeting to discuss the resource-rich Arctic.

Good. I really don't know anything about the issue. Sec. Clinton may be wrong, but I bet it felt so right.

Rebuke Canada. Daily.

I bet Canada was silent.

Head hung low.

Its ears turned red in shame.

As red as the marijuana leaf they brazenly have on their flag.

Obama Stuff

Lost in the big debate over healthcare reform, I have been noticing and meaning to note about some stuff Pres. Obama has been doing...like

Nuclear missile reduction with Russia (don't think we should disarm completely but paring it down is fine.)

Green lighting some nuke plants (which I thought should have been a big part of the stimulus - hell, we should have 100 of them pre-planned and approved for truly shovel ready action if we are to do stimuli at all...stimuli ha ha)

Green lighting some offshore oil drilling Is that part of his Obama = Bush plan? I dunno.

White House officials hope Wednesday's announcement will attract support from Republicans, who adopted a chant of "Drill, baby, drill" during 2008's presidential campaign.

Put this with the Afghan surge and I see some stuff I like.

Oh, and the Volcker rule which I think is great, but that is not law, so we will see how Congress can fuck that up.

Economic Convergence

Samson/Laquercraft a very large furniture manufacturer originally from Taiwan is opening a factory in Bangladesh. The reason they chose Bangladesh?

It will be Samson's first plant outside China. The company says it can fill some of its product needs at a lower expense in Bangladesh.

The 500,000-square-foot plant will be in the port city of Chittagong in southeast Bangladesh, along the northern coast of the Bay of Bengal. Company officials have been working on the project for about two years. Construction began in October and initial production is set for July.

The plant will produce a line of lower-medium to medium-priced solid and veneer casual dining sets for Samson's U.S. marketing companies, Legacy Classic and Lacquer Craft USA. The company isn't currently producing such sets in China that hit the price points it can achieve in Bangladesh, said Lacquer Craft President Mohamad Amini.

While China remains its main manufacturing hub, the company said it chose Bangladesh because of its lower-cost labor. Amini estimated that labor costs are about 40% of what they are in China.

Of course, they are bringing over Chinese managers and technicians to start the plant up, but that's not new as they did that when they moved to China, too. Laquercraft was one of the first Taiwanese factories to move to China to take advantage of lower labor costs there.

Since furniture is a relatively new industry to Bangladesh, it will take time to train workers and also to get the supply chain in place, Amini said. This includes anything from finish to hardware suppliers.

"There is no furniture presence there," he said, adding that the lack of a furniture infrastructure reminds him of China 15 years ago. "Although we are very optimistic about what we can do there, we will have our share of challenges. But we have done this in China so we know what to do to accomplish our task."

Amini said a team of supervisors, technicians and engineers from China will help get the plant running and train workers.

Prediction: In 20 years, it will be Bangladeshi supervisors, technicians and engineers flying into Somalia to set up the next factory.

Health Care Costs

Assume: The US healthcare system is more expensive than other systems in other countries, some of which have government healthcare.

Does this mean that governments can deliver products or services at cheaper prices than the "free market" system?

In other words, would you place a bet that a US government agency could compete on quality, price, and timeliness with Walmart in delivering products, or Supercuts for haircuts? Or, if you think healthcare is more like a sports car than a T-shirt - could they beat Mazda, Porsche, etc.?

I doubt anyone would take that bet - even assuming some tax payer subsidy. If Bill Gates wanted to provide a free t-shirt to every American, would you advise him to talk to Wal Mart or the Department of Defense for the best deals?

So, either healthcare is very different from everything else in the world, where free enterprise usually does much better than government, or, maybe there is something "wrong" with the "free market" system in US healthcare.

It could be the way its set up. It could be the rest of the world free-riding on our drug prices. It could be mandates. Whatever. The US healthcare market is huge - you would think someone would want to be the WalMart of this market - providing cheap care for the masses. Actually, they are opening clinics with nurse practitioners, so maybe Wal Mart wants to be the Wal Mart of healthcare.

Note, this has nothing to do with the uninsured, or paying for poor folks medicine. That's just a money question. A very important money question, true. (I think the main battle there is where is the cut-off for subsidy. I may be willing to pay for the hard-working family that makes 20,000 a year. I am not so sure about paying for the same family if they make 40,000.)

But why the hell are our costs higher than other countries? That seems strange. Even if we went single payer tomorrow, I'd like to know why we are paying so much in the first place.

First step, I'd like to see some things tested to see if they are the problem...for example - mandates. Set up a bare bones plan and let many companies offer that insurance, see if it lowers costs. Another thing, if the rest of the world squeezes prices and the medical companies make up for it in the USA, well, that's not going to be fixed by going socialist (or maybe it would be if the companies then had to average their pricing out.) Require global pricing and re-importation for all products - we should not pay more for an MRI machine than Japan does, or buy drugs for more than the Canucks pay.

I think if you want to bend the cost curve - you need to test some of these ideas out. Informed decisions are better than guess work*. I would personally imagine that the private sector could beat the pants off the government, even maybe when it had monopoly bargaining power, taking in consideration price, quality, and timeliness.

Now, if I am wrong, bring on the gubmint, but let's not do that as first step and regret it later....remember if America can have such a different cost in the "free market" it may have the same trouble when its gubmint care.

*Since Obamacare has passed, we should see what really happens when the system is tweaked -even if you oppose Obamacare, it would be useful to see what the hell actually happens. I don't think anyone really knows.

Red Meat

This 60 Minutes story has Red Meat for everybody.

In the video, the man driving the car is Gregg Bergersen. He's a civilian analyst at the Pentagon with one of the nation's highest security clearances. His companion is Tai Shen Kuo, a spy for the People's Republic of China.

Kuo was born in Taiwan, but he's a naturalized American citizen who owns a number of businesses in Louisiana; Bergersen worked at the Pentagon's Defense Security Cooperation Agency which manages weapons sales to U.S. allies.

And the Taiwanese wonder why we won't sell them the most advanced military technology...and our dude was an idiot for falling for a false-flag operation. (Taiwanese spying for China said he was really spying for Taiwan...)

Bergersen knew a secret the Chinese desperately wanted to know: what kind of weapons America was planning to sell to Taiwan, the rebellious Chinese island that mainland China wants to reclaim.

CBS must really want to keep their Beijing office open and think that saying this makes up for the story on their spies. Hmmm, maybe Beijing doesn't care about their espionage being revealed but goddamn you better call Taiwan a rebellious province of China!

CA finally kicks TX ass...

Weatherizing homes was part of the 2009 stimulus bill. Now, weatherizing homes was a great idea: it would employ unskilled labor, save energy, and promote greenness. I am sure our bureaucrats and executive branch made sure to push this program through with maximum speed...and here we can finally see the superiority of CA bureaucrats vs. TX bureaucrats:

TX:

33,908 units to be weatherized.

Units weatherized as of Dec 2009: 0

(as in ZERO.)

CA:

43,400 units to be weatherized.

Units weatherized as of Dec 2009: 12

(as in 0.03%)

WOOOOOHOOOOOO - WE BEAT TEXAS!

This is why Keynesism is ineffective. The paperwork and bureaucracy simply push out the spending years out from when it was needed. Sure, maybe in this particular extremely deep recession where housing is still stuck, the spending will still be somewhat useful.

(Oh, and they were so slow because they have to canvas the nation for average wages before they can spend any money. We wouldn't want someone without a job to earn less than the average wage, right? Its not as if the market sets the average wage by definition.) Why not waive that law in this case? I guess that's just impossible.

Damned Europeans

Just when we need to boost some exports (and I need to keep my Taiwan-Europe sales up) they decide to have some sort of government debt crisis in Greece...didn't they get those royalty checks from Mama Mia yet?

You know what, Europe, two can play at that game! Hey California! Get your ass over here. Now, show your fat, indebted ass to these gentlemen from the bond market. That's it. Now turn around, nice and slow - make those bond market guys feel it. Oh yeah!

State of the Union

Now, this is not a dig at Obama, but more of a dig at the sort of nonsense that probably goes into every SOTU address. I normally never watch them. I did not watch the SOTU this year either, however, I did catch this blurb on the news.

Obama said that the US will double exports over the next 5 years...creating 2 million jobs.

Really? First of all, unless those 5 years are under some new 5-Year Plan ala the Soviet Union, I don't see how he can do that. Is he going to make the Chinese buy GM cars from Detroit or something? And, adding jobs implies a structural move towards a larger export sector.

Oh, and so I did a google search to see if I could pull the exact quote, I find that the NYT and others also have a stories on this. So, its not just me who thought this political vaporware was interesting.

Let's say its NOT vaporware though. It would seem to me that the only way to achieve this goal, within the normal powers of the presidency, would be the devaluation of the dollar. That's sort of been happening slowly over time, but maybe Obama is signalling something more, with regards to Chinese currency?

I'd put the odds at 95% its just vaporware though.

Yahoo Headlines

Rep. Frank: Abolish Fannie Mae, Freddie Mac

This one almost caused me to spit take. I don't know what's been put in the Mass. water supply, but its working.

This from the guy who once said:

"I want to roll the dice a little bit more in this situation towards subsidized housing. . . ."

Yahoo Headlines

Stocks slide as Obama calls for tougher bank rules

That is one vague article.

The most important reform says that if you want to access to money from Uncle Sam, you have to be a plain vanilla bank, and not have your own proprietary trading desk.

Sorry if you own Goldman Sachs stock, but that sounds pretty reasonable to me.

Lender of last resort to prevent bank runs? OK.

Lender of first resort to punt on pig bellies? No thank you. Do that on your own dime.

Good job Obama.

Now get Freddie and Fannie fixed up and dumped off.

Yahoo Headlines

This is actually a very good article about buying products and quality issues in China:

One thing that frequently happens in China is that factory owners will bid extremely low — even to the point where they have no profit — just to win an order. Once they've got the business, they search for ways to cut corners so they can widen their profit margin and recover what they lost with their lowball bid. They might switch to cheaper lead paint or buy inexpensive metal containing cadmium. This is called "quality fade."

Or they simply take the order wait for a while and then raise the price for some reason or other. The buyer is locked into the shipping schedule and eats the cost increase. They may also claim "confusion" as to what was agreed upon and explain that the "extras" the customer wants costs more.

To avoid misunderstandings and deviations, many buyers will create an elaborate "bill of materials" — a document that specifies what kind of materials must be used in the product. A furniture maker might specify the type of foam used in a chair's padding and what size nail will be used. The more experienced buyers will create an elaborate, highly technical bill of materials that is signed by both sides.

But the document doesn't have much teeth if buyers don't hire their own quality control staff to supervise the making of their products. Factories are notorious for making subtle, cost-saving changes to the product.

Part of this problem is that once you have a factory making your product, they pretty much think it is actually their product now and they can make changes as they see fit. Or sell them to other companies, too.

How many times have I told factories to NOT SHOW MY PRODUCTS IN THEIR SHOWROOM and then find my samples sitting in their showroom when I spot check. One factory even printed catalogs with our design in it before our own company had even finished a final sample with them. And this was after signing a contract in Chinese that explained that you could not do this, and that there would be stiff penalties if they did so. I ended up watching the guy destroy 1,000 catalogs in front of me.

I think many Chinese companies (and to be fair, I am sure its not just Chinese who do this stuff) use these "Car Sales" tactics because they actually work. If you are not the low bidder, then the customer is not even talking to you, then what's the point? Get the customer to talk with you, and start the process, then worry about everything else. The logic is workable. I have never tried this technique myself, though, because I think it would not work so well for a westerner. Customers assume the Chinese supplier will be duplicitous but would be enraged if I did that.

And I suppose if you are just a retailer, as the buyers are more and more often, instead of a product creator, designer, etc., then you rather like this style of business. You can get access to new designs, reduced costs versions of product, etc. without any effort by yourself.

Fueled by Jagermeister

1. Free Trade with China: Thought Experiment

Imagine if tomorrow the United States' government declared that all tariffs would be reduced to zero for Chinese made products. Any quotas and all other trade barriers would be removed.

Oh, and the exchange rate for the CNY/USD would 4.0/1.00 rather than 6.85/1.00.

Would you consider this "free trade?" and if you would not, then why do we consider "free trade" with China at an exchange rate fixed by Beijing to be "free" trade?

2. I forgot what else I was going to say. The Jager is hitting now.

p.s. Still for free trade, and technically, yeah, if China wants to subsidize my consumption fine - just worried about secondary effects:

a. Lower interest rates than normal due to Chinese monetary sterilization - and what that entails...

b. Chinese over-investment in production - this is not good for them either.

c. The re-balancing that might have to take place - I am not the man who wants to teach mortgage brokers how to run a CNC-lathe. Now, teachers rich Chinese consumers to buy rounds of Jagermeister, ab-master 2000, and juicers....

Yahoo Headlines

Double Atomic bomb survivor dies in Japan

As we learned from the Final Destination movies, you cannot escape death.

This guy's life since '45 must have been one narrowly averted death after another. Wrecking balls flying right by him, streets collapsing, etc.

Insurance actuaries probably hate those movies.

semi-related, I listened to a podcast where they discussed how atomic bombs are not really that powerful (at least the basic kinds.) I remember the example of NYC, they said if one was set off in Central Park, it would not really destroy anything outside of the park.

Why the Yuan will not appreciate soon...

I had been hoping for the past several years the Yuan would be revalued up again. I am now feeling very doubtful about that occurring for the following reasons:

1. The poor world economy scares Chinese leadership, not just economically, but politically. Thus they will not attempt any policy that would hurt China's exports, even if it was a short term hurt for a long-term gain. Politicians everywhere seem to always take the short-term pain-killer policy. So, why not just juice up the loans from the state run banks and keep the exports for bonds model going?

2. I suspect the Chinese view is that even with the weird imbalances and exposure to US bonds, they are getting tons more in benefits, like a massive industrial base, foreign-investment (much of it in joint ventures that end up with technology transfer.)

Thus, my prediction is that the RMB sits at 7.85 for a long, long time. I'd say 2011 at the earliest for something to happen. Its also possible for a devaluation to happen.

So I see lots of downside and not much upside.

There still is the interest rate that is higher in China than the US, though. Not sure how high interest rates are in China.

.....

I have no idea what happens if the US has serious inflation. Do the Chinese keep the currency pegged then? Do they keep buying bonds?