Ashish Advani - Advani's Market Advantage

US China Trade War to Erupt?

Hi Guys,

My friend and mentor Chuck Butler has made a comment on the latest development in the ongoing US China Trade War...

 

____________________________

The

U.S.

will impose duties on $2.8 billion in steel-pipe imports from China after saying subsidies on the products may harm American steelmakers, a move that threatens to escalate trade tensions between the two countries.

 

Now... don't get me wrong here... I'm not against US Steel makers... but isn't this akin to biting the hand that feeds you?

 

OK... I've said this before on many occasions, but any time a country

implements protectionism measures, it's a bad thing for that country's

currency...

_____________________________

 

Back to me again....

 

This was tried before as well. Last time the US imposed tariff on Steel, was during the George Bush days. This is not quite the same as this tariff is based only on the "Round Steel Tubes for Oil". Last time the tariff was on most steel products.

 

When that had happened in 2007, USD had fallen big time over the next 9 months. And that along with political and economic pressure had made Bush reverse those tariffs quite quickly.

 

This time while the tariff's are not as broad based, the problems can be compounded due to the significantly weakened position of the US Economy. So it will now depend on how the Chinese respond to this. But if the past few months is any signal, we could see a firestorm emerge early next year.

 

It is truly regrettable that Bush Obama has followed such protectionist policies. First tires and now steel tubes!!!

 

How would we feel if the Chinese imposed a tax on its banks and funds buying US Treasuries??

 

Ashish

 

Will China Overheat and Crash in 2010

A lot of folks are talking about China overheating and the economic data indicating a potential crash in 2010. While I am not sure if that will happen in 2010, I do want to address the issue of the property bubble that has formed in China.

I do believe that the prices of property (retail and commercial) in many cities of China are in a bubble zone. But I do not believe that the Government is oblivious and is not doing things to manage the bubble and control it before it explodes. Now I am not saying that they will succeed. All I am saying is that it is trying its hardes and may have some chances of scussess.

Let's take a gander at their latest attempt:

There was a recent announcement about Land Purchasing Policies in China. In my opinion, this will have limited macro implications. I do not believe that we will see a serious control in the rising prices. But I do believe that many more tightening measures on property sector are on the way.

So what happened:

The Chinese government circulated a new policy direction to strengthen the control on land transfer payments. Specifically, the government requires developers to either make the land transfer payment within one year after signing the contract, or pay in two years but pay a down payment of 50% in advance. Developers found violated these rules will not be allowed to purchase land in the future.

What does this mean in my view? 

I believe this policy change is aimed at dampen

(1) speculative activities in the land market and

(2) hoarding of existing properties by property developers by making the cash flow tighter for them.

I view the rise in land prices and hoarding activities by developers as a reflection of rising inflationary expectations amid highly constrained quantity of land. I do not believe that this is a root cause of rising property prices in recent months.

Without addressing the fundamental issues, measures such as this are more likely to create winners and losers among property developers as those larger and cash rich developers are less cash constrained, rather than achieving the government’s stated goals of reasonable property prices and sufficient supplies for households.

At the macro level, I cannot see this policy having any major implications for the overall economy as the overall property demand and supply will unlikely to be changed in any meaningful way.

What I do expect is that we will see the government to continue to roll out additional measures aimed at cooling down the property sector. The government will be very careful with the pace and magnitude of such policy changes, not least because of the recent experience of the over-tightening in 2008 which partially contributed to the dramatic economic slowdown.

Unlike government controlled fixed asset investment activities, the real estate market is much more difficult to fine tune. On the other hand, previously untested measures are likely to be used only after that if used at all because of their potentially dramatic implications on the market. I believe the risks of an over-tightening on the sector which will lead to a double dip in the economy are limited.

On the flipside if the government is not able to able to maintain it’s attempt to control monetary policy and monetary conditions, overall inflationary risks, including that related to the property market, will remain on the upside.

Ashish Advani

Equality in the Workplace - India Miles Ahead of US

Can you guess how many CEO's of the Fortune 500 companies in the US are women?

If you guessed - LOW, you are correct. Women who are CEO;s of large US Corporations number about 3%.

Now guess that this number is in India. And remember, the myth is that India is rather male dominated and that women do not have equal rights there.

I sort of gave it away with the headline, but in India, 11% of CEO's of large corporations are women. While it is nowhere near real equality as far as sexes in the work place is concerned, it is still miles ahead of the US.

And once again, that tells you something about the advancement of a society that treats women equal as men. India as a culture may appear harsh on women, but in reality behind the scenes, women have a very large role to play in the family and in important decisions including financial decisions. And this role is growing as women are breaking the shackles of playing second fiddle to men and becoming more and more independent.

Just look at my case - I have three women at home (wife and two daughters) and they spend most of our money. They have complete control of my bank account... (I only jest in good humor).

I always like to invest in advanced cultures as they always accompany sound and solid companies that have great innovative products.

Stay long India!

Ashish Advani

PS: Do not believe me? Take a look yourself:

http://timesofindia.indiatimes.com/biz/india-business/Women-CEOs-India-Inc-beats-US-hands-down/articleshow/5332921.cms

Forces of Progress Gaining Strength in India

India continues to march forward!

And this growth story is being seen in all the right places. This progress has gone further than the pre-crisis levels of September 2008 when it comes to Industrial Production.

Let’s take a look:

% ↑   YoY	Aug 09	Jul 09	Jun 09	May 09	Apr 09
Headline IP	10.4	7.2	8.2	2.1	1.1
Capital Goods	8.3	1.7	13.3	-3.6	-5.9
Consumer Goods	8.5	9.8	4.4	-1.1	-4.6

As you can see we have seen increase in the Industrial production in the consumer sector during the early parts of summer. This is an essential part of the growth story of India.

One of the problems plaguing China has been low internal consumption. This low consumption has forced China to become overly reliant on exports. As I have mentioned to you in previous blogs, India has been self reliant except for its need for Oil. And the internal consumption story continues to be robust in India.

In the latest release of data, this time the Industrial Production relating to Capital Equipment is now on a tear. This means that Capital Goods, the bane of existence of growth of Industrial Production in any society is now moving along at a fast clip. This is a very healthy sign as it clearly indicates that Industries are confident of continuing growth in the economy and are spending on long term capital equipment.

Within the industrial classification - manufacturing, mining and electric components each have shown double digit growth rates of 10.2%, 12.9% and 10.6% on a year over year basis.

And this is not the only story in the Indian economy. There are expansionary signs all over the economy:

• The August Infrastructure Index shows a robust growth rate of 7.1% YoY.
• The Purchasing Managers Index (PMI) printed at 55 for September (remember a print over 50 indicates expansion).
• Motor Vehicle Sales have continued to remain very strong, growing at 22% YoY.

In my opinion, these factors will mitigate any slowdown that Indian economy would be facing due to a poor monsoon there this year.

I would continue to believe that the Indian Growth for 2011 will come in around 7.8% after a robust growth of around 6% for 2010.

Stay long Indian Rupees and Indian Economy!

Ashish Advani

China – The Politics of Oil and US Dollar

I often read the UK's Independent Newspaper and one of my favorite authors is Robert Fisk. He is a veteran of the Gulf Wars and the relationships between the Arab / Iran World with the US and the Western countries.
 
He recently published an article that has me wondering if this is true or another rumor. I am inclined to believe it as true, but I will let you be the judge:
 
Robert Fisk is suggesting that China, the Gulf, and other major economies, are in negotiations to sign non-USD denominated oil contracts.  But Robert has also been linked with more radical thoughts and theories which are tending to make even devoted readers like me question his credibility. 
 
I cannot think that the Gulf countries are ready to ditch their dollar pegs. Often challenged, the USD has survived the onslaught so far. Don’t get me wrong - I do believe the demise to the USD is certain. I just don’t believe it will be now or here. If Robert's story is true, the non-USD denominated oil contracts would only add volatility to the Gulf countries already volatile oil revenues.
 
As long as Saudi Arabia is the leader in the Gulf and is strongly linked to the US for security, it will enforce the restraint towards the USD challenge.
 
But whatever the truth may be, even such rumors of Non USD denominated Oil contracts can be devastating on the strength of the down-trodden Dollar.  Moreover, even if oil contracts remain USD denominated, there will be growing speculation that other contracts between China and its major commodity suppliers will not, especially in emerging economies looking to attract more Chinese investment. Proof of this is in the several bi-lateral agreements that China has signed in the past nine months.

China has begun to find ways to buy its commodities in Non USD terms. This is highlighted in Africa whereby raising the prospect that its pays for its commodity imports in CNY. Non-convertibility of the CNY is an issue, but the recent swap agreements and trailing of CNY-settlement in Hong Kong offer potential solutions.
 
Robert's article is though provoking though. And it rises what are increasingly complex global linkages with the potential to shake financial markets.

I am wondering is there is a lag between the financial markets where such global linkages are been seen clearly vs. the military and political arenas.
 
The issue of Palestine and Israel is not to be forgotten here. While it may not be occupying the headlines around the world, it is certainly not forgotten. Most intelligence agencies are overburdened with Iraq, Iran and even Afghanistan. No one is paying any attention to the advances that China is making and how China fits into the global equation anymore.
 
The other major problem I can anticipate is that most agencies in the Middle East are not in any position to invest heavily into developing new programs to watch China. There is a lot of time and money spent in developing a new program to watch countries such as China. And as long as the US and other developed nations do not anticipate a direct threat from China, and are short on funding, they will not rush to develop such programs.
 
So whether China is in the process of signing non USD Oil contracts or not, there is no doubt in my mind that the onslaught on the USD and its status as a non-reserve currency is seriously under threat and is a on-going challenge.
 
Stay short USD and long Emerging Markets!!
 
Ashish Advani

Obama now joins the 'Dollar Hater's Club'

The US Dollar is becoming one of the most hated currencies around the world. We have everyone taking pot shots at it from time to time. The Reserve Status that US Dollar has enjoyed for decades is under question.

You have statements made by China, then rescinded. You have Russian Prime Minister Putin whip out a coin at a global meeting as thenew SDR (Special Drawing Rights) coin. For those new to the party, the SDR is a artificial currency that is created by the IMF (International Monetary Fund) which allocates lending lines to various countries in the world.

None of this is new. Lets recap the list of US Dollar haters in this world:

The Technical traders, Gold and Silver Buyers, The United Nations (At least one committee there). Global Reserve Diversification's at various Central Banks, the G 20 Members (BRIC at the front of the line there) and other fund managers.

And here are some of the reasons why they hate the US Dollars:

1) US Interest Rates – The FED is expected to hold the rates at near zero levels for a very long time. The USD is now a carry currency like JPY and CHF.  The risk of USD weakness extending beyond usual factors remains a rate play. 

2) US Current Account Deficit – which has been narrowing and the trade data has proven the power of USD weakness in exports.; So USD weakness may actually be very beneficial as others may begin to realize.

3) Commodity Prices -  The global growth story continues with the US lagging the world. As the 3rd world countries grow, their demand for commodities will intensify. and this will lead to higher commodity, energy and base metal prices.  Fiat currencies suffer together and the largest one will suffer the most.

4) The US Federal Deficit – TheHealth Care speech by Obama was oneexample of how the US will continue to spend on entitlement programs without real stress on how the US will pay for such programs. the compromise bill will ensure no real accountable ways of funding the additional spending, if this whole bill is even passed.

I suspect something will be passed to save face, but will hardly qualify as a 'reform' bill. It will just be a "BILL".

But, here is the new member to the US Dollar Hate Club: The Obama Administration!

The new trade war that Obama decided to start with China is the new main cause of the Obama Administration's  attempt to weaken the US Dollar.

Why would this trade war help decline the Dollar? Ah! Welcome to FX 102!

Any country that adopts a protectionist stance is always headed for trouble as far as its currency is concerned. And the reason for that is primarily based on the fact that with protectionism comes loss of productivity and savings which will hamper the growth of the country's economic progress. In this case, the Obama Administration has levied higher taxes on tires being imported from China. This will restrict imports of tires from China. The local manufacturers will be able to charge higher prices. And they will lack the incentive to become more efficient. And true economic growth will be halted as inefficient companies will continue to prosper artificially.

And when this continues with both sides doing battle, the problem gets worse. China has retaliated by investigating Chicken products as well as Car Parts being dumped in the Chinese Markets. 

Net result could be that both ban or impose high tariffs on each others products - leading to lower exports on each side and raising inefficiencies in respective industries internally. 

And that is how such protectionist measures are bad for the currency.

Just look at the last time George Bush raised tariffs on Steel Imports to protect the US Steel industry. On March 5, 2002, the then US President, George W Bush imposed steel tariffs on imported steel. The currency markets interpreted this as very negative for the US Dollar and the Dollar fell by 26.72% when measured on a monthly basis using the Dollar Index (DXY). This protectionist measure was lifted on December 3, 2003.

And now the new President is at it again....

Run for the Hills folks! (Get out of the USD)

Ashish Advani  

 

 

China - Balance of 2009 and 2010 - What to expect?

Folks,

Top of the morning to you! Break of another beautiful week in sunny Florida. This weekend I spenta few hours pondering over China and its role in the global economy for the remaining of 2009 as well as early 2010. I wanted to share these thoughts with you:

The way I see it, China has slowed down from its breakneck speed of the first half of 2009. The growth in China was rather un-sustainable and was greatly helped by the massive stimulus package announced by Premier Wen JiBao (RMB 4 Trillion). While I do not believe government spending has ever gotten anyone out of the hole economies dig for itself, I do believe given where we were in late 2008, this was a necessary evil. At least the spending was done rapidly rather than the dragging of the feet that we have seen here in the US.

The benefit of dragging of one's collective feet is that the spending will be done in a regulated manner and done properly. Unfortunately, so far the US Government has not really set a good example for this. On the Chinese side, the spending was un-regulated and some of it has ended up in the wrong places creating a trilogy of effects that will plague the Chinese this year and next year.

Chinese Stimulus Mis-Spent

1. Rapid Loan Growth

2. Asset Bubbles

3. Fiscal Deficits (State Level)

Rapid Loan Growth

There has been an explosion of loans during 2009. Nearly RMB 7.2 Trillion of loans were issued in 2009. Obviously in order to do this, the lending standards were lowered, and many safeguards ignored in order to fuel the growth targets set up by the banks on the instructions of the Government.  

Hm-mm.. Where have we heard this story before?

Obviously due to these lax standards, we will be seeing significant spikes in Non-Performing Loans (NPL) as well as personal/small business bankruptcies as the year progresses. But a serious spike will be seen next year (2010) when many of the banks will have to report on the performance of the loans at the first year anniversary.

Asset Bubbles

Rapid Loan growth without strict standards have led to asset bubbles in several places. The Shanghai Stock market is up over 60% in 2009. Real Estate values have sky-rocketed and we are seeing clear signs of over-inflated asset valuations everywhere. Yes, we can count on China Growth story and that will mean economic growth, but significantly higher valuations for companies on the Stock Exchange can only remind me of the NASDAQ in 2000.

Real Estate purchasing patterns in China have to be understood with an emphasis on cultural differences. Chinese buy real estate with an intent of longer term buy and hold attitudes as a general statement. they also have habits of buying entire floors of commercial real estate properties when one or two offices would have sufficed. But despite such oddities, the real estate valuations are looking over-blown at best. 

As I had said about Real Estate in the US in 2006 when I was looking for a home to buy - "This cannot end well." I have still not bought a home and I estimate I have saved about $ 75K on falling home values that I would have lost had I made a purchase.

Fiscal Deficits (State Level)

Here is a rather unknown fact about China - The Chinese budget law does not allow local governments to run budget deficits. When the federal stimulus plan was announced, this law of 'no' local deficits was relaxed. The central government budged to spend RMB1.2 Trillion of the RMB 4 Trillion announced. That is about 30%; the rest would have to be financed by local governments and investment projects.

The local governments cannot raise this capital as they face increasing pressure inraising capital from their tax and non-tax revenues because of economic slowing down and the weak property market since 2008. In order to raise equity capital, it is reported that by June this year more than 3,000 local investment companies were set up across the country. Raising capital has become the toppriority in the local government agenda. And with the lack of sophistication needed as well as the recklessness that will be adopted in raising such capital, there are bound to be serious negative consequences of such borrowings.

And I am not sure this will have a happy ending either.

Finally, let us not forget the omni-present fear of Inflation due to a huge amount of increase in the Money Supply in China. The M2 (measure of cash in the economy) has reached a growth level of 28.4% when the normal levels historically had been 11-12% each year.

All in all, I am optimistic about the growth that will come out of China over the next few years. But I am not sure that the current trajectory of growth will continue for too long and I certainly expect negative consequences of this rapid expansion.

I would continue to stay long China but with caution, tight stop losses and be selective as to sectors for investing in China.

Ashish Advani

 

 

Indian Consumption Story

A picture is worth a thousand words...

In this case, a graph would have to do when I really wanted to get some pictures of me shopping in Mumbai. But rest assured, I have my spies on the Ground in Mumbai who are feeding me reports on shopping, personal consumption and all other stories that the media here in the US seem to miss.

As I have mentioned in my previous blogs, Skip investing in India at your own peril. If you are the one who believes in stereo-types and wants to follow the "pundits" of CNBC (Half Truths and All), please stop reading now!!

If you are still reading, you wish to learn about intelligent diversification of your portfolio and desire to know the truth.. Welcome!

The Indian economy has been much ignored and mis-understood. Even on somewhat unbiased media outlets such as NPR, I always hear about "In overseas markets, Japanese Nikkeiand the Shanghai Composite, but almost never about the Bombay Sensex. And I would urge you to keep this a secret between you and I. This way we will get in well ahead of the herds..

The common mis-conception relating to India and Indian economy is that it is broad brushed along with perceptions about China. The Indian economy is growing rapidly (5.9% GDP Q1, 6.1% GDP Q2) but is growing despite falling exports. Indian economy has a significant in-house consumer that China does with its GDP. Not many people have realized that a very large part of the GDP is generated by Internal Consumption in India. 

Indian markets (not just stock markets alone) are crowded with shoppers and restaurants are full any time of the day and any day of the week. People are not afraid of the slowdown and are continuing to expand their desires on materialistic items. Now this is a blow to the spiritual teachers of India, but from a growth story point of view, I cannot get Indian businesses to call me back when i am offering them business opportunities in the US. The common response is, "We will call you back!"

The Indian shopper is on the prowl for bargains! The average Indian is always trying to beat the sellers price and actively scouring markets for deals. And let's see what the Chinese Chopper is doing...

   

Now you be the judge here!

Stay Long India!

Ashish

Chinese Stimulus and Yuan's Continued Stealth Like Moves on the Dollar

Folks,

I have been writing to you about the the rise of China and its steady move up in the Business World. Its influence has been steadily growing. Growth in China in the past year have been very strong (above 7% GDP growth) and promising to continue this trajectory. The entire Chinese Government machinery has been geared to using the massive stimulus money to build and construct infrastructure in China.

While the US stimulus is about 8% used since announcement 6 months ago, the Chinese have used over 50% of their stimulus already. The other major distinction has been China is starting their stimulus spending from a position of immense strength (massive reserves of over $ 2 Trillion) while the US cannot really afford the stimulus based on the massive deficits it has accumulated. Also, in magnitude, if the US were to attempt to match the Chinese stimulus based on the size of their economies, the US would need to spend about $ 2 Trillion in stimulus compared to the $ 780M stimulus announced.

Folks, do not get me wrong here. I am not an advocate of stimulus spending and Government influence or meddling in economic policies and growth. I do not believe that the stimulus spending will sustain economic growth in the long run. My point here is that if a stimulus package needs to be done, China has had significantly better results and pace of activity and has started this from strong position compared to the US.

Yuan the New Reserve Currency? Not Yet But......

Also, I have been talking to you about the rise in importance of the Yuan (Renmimbi) in the world. I have written several pieces on this subject in the past. China started increasing the prominence of the Yuan since September last year in small moves and under the radar to undermine the US Dollar's Reserve Currency Status in the world. I don't see this happening this year or next year, but three years form now????

The announcement yesterday from China blasted the  stealth like moves and brought this effort out in the open. My colleague and mentor, Chuck Butler over at EverBank covered this best. Lets see what he had to say:

The South China Morning Post had a very interesting story in it this morning regarding the Chinese renminbi becoming an international currency. Let's go to the tape! "Vice-Premier Wang Qishan has been put in charge of a task force to make the renminbi (yuan) a currency for international trade. The recession has encouraged Chinese officials to speed up the currency program. As the downturn erodes U.S. influence, China is losing faith in the dollar and sees the time coming for the renminbi to become a major world currency.

The renminbi is not convertible for purely financial purposes, ruling it out as a reserve currency for now, but China has started to carve out a bigger international role for it, beginning with the currency swap agreements China has put in place."

SEE! I TOLD YOU! I TOLD YOU that was what China was doing when it signed those currency swap agreements with 6 different countries, and is currently working on ones with Brazil and Thailand! China was gaining a wider acceptance for their currency... Slowly but surely (who's Shirley?) China was begin to provide convertibility to the renminbi, and then and only then will it be picked up by currency dealers all around the world! It's all happening right before our eyes folks... Don't close your eyes, this won't go away by closing your eyes!"

Thanks Chuck!

As I have mentioned, China is gradually taking off its gloves in the battle for world supremacy and is not wasting any time while the US is on the mat. The count out has begun... 1,2.3,4.... and continues.

I would continue to stay short on the US Dollar and All assets US..

Ashish Advani

The Indian War (Economic) Continues.....

Good Morning Readers,

Hope you had a great weekend. Mine was excellent with a long weekend coming up. The Sun is shining and the Indians continue their economic war on the buiness world to continue building their dominance over the world.

India just announced their 2nd Quarter GDP growth numbers. The Indian economy grew by 6.1% in Q2 (Economist expectation of 5.8%) of this year compared to last year. This is now the second quarter in a row that they have grown by close to 6%, and this growth has been happening as their exports have been declining at alarming rates.

So anyone who has stereotyped India's growth being tied to IT, Call centers, and exports is going to miss the boat on triple digit gains on this Indian Growth story.

 

 

The agricultural sector grew at 2.4%, The big winner however was manufacturing which picked up rapidly by 3.4% yoy. Construction, trade, hotels, transport and communicationn sectors all have shown growth compared to last quarter. The laggard sectors were finance and insurance sector, slowing by 8.1% yoy, I personally believe this is a very good indicator as it reflects realistic growth patterns, If we saw incredible growth which outpaced other sectors, we would be calling it a bubble. If the growth is excellent one quarter followed by a small pull back and rest period the next, this is called sustainable growth in my books.

 

 

 The services sectors grew by 7.7% yoy compared to 8.4% yoy previously.

And yet the Indian Rupee has not moved up much on this and other continuing positive economic views pouring out of India.

I would be buying Indian Rupees as I have been suggesting my investors to do so since May this year.

Stay long India!!

Ashish