(FXI) Archives

How US Job Losses Will End

I was researching comparative Asian wage data the other day and was astounded with what I found. Textile workers earn $2.99 an hour in India (PIN), $1.84 in China (FXI), and $0.49 in Vietnam (VNM). This is an 18 fold increase in labor costs from ten cents an hour since Chinese industrialization launched in 1978.

This compares to the $8 an hour our much abused illegals get at sweat shops in Los Angeles, and $10 in some of the nicer places. What?s more, the Indian wage is up 17% in a year, meaning that inflation is casting a lengthening shadow over the sub continent?s economic miracle. A series of strikes and a wave of suicides have brought wage settlements with increases as high as 20% in China.

This is how the employment drain in the US is going to end. When foreign labor costs reach half of those at home, manufacturers quit exporting jobs because the cost advantages gained are not worth the headaches and risk involved in managing a foreign language work force, the shipping expense, political risk, import duties, and supply disruptions, just to get lower quality goods. Chinese wage growth at this rate takes them up to half our minimum wage in only five years.

This has already happened in South Korea (EWY), where wage costs are 60% of American ones. As a result, Korea?s GDP growth is half that seen in China. These numbers are also a powerful argument for investing in Vietnam, where wages are only 27% of those found in the Middle Kingdom, and where Chinese companies are increasingly doing their own offshoring. This is why I have pushed the Vietnam ETF (VNM) on many occasions. I know every time I do this I get torrents of emails bitterly complaining how difficult it is to do business there, and how the hardwood trees are still full of shrapnel left over from the war, and why I shouldn?t buy a 50 acre industrial park there.? But, the numbers don?t lie.

August 23, 2013/by Mad Hedge Fund Trader

India vs. China

Diary, Newsletter

When I first visited Calcutta in 1976, 800,000 people were sleeping on the sidewalks, I was hauled everywhere by a very lean, barefoot rickshaw driver, and drinking the water out of a tap was tantamount to committing suicide. Some 35 years later, and the subcontinent is poised to overtake China?s white hot growth rate.

My friends at the International Monetary Fund issued a report predicting that India will grow by 6.5% this year. While the country?s total GDP is only a quarter of China?s $6 trillion, its growth could exceed that in the Middle Kingdom as early as 2014.

Many hedge funds believe that India will be the top growing major emerging market for the next 25 years, and are positioning themselves accordingly. Investors are now taking a harder look at the country ETF?s, including India (INP) and China (FXI), which have recently suffered gut churning selloffs.

India certainly has a lot of catching up to do. According to the World Bank, its per capita income is $3,275, compared to $6,800 in China and $46,400 in the US. This is with the two populations close, at 1.3 billion for China and 1.2 billion for India.

But India has a number of advantages that China lacks. To paraphrase hockey great, Wayne Gretzky, you want to aim not where the puck is, but where it?s going to be. The massive infrastructure projects that have powered much of Chinese growth for the past three decades, such as the Three Gorges dam, are missing in India. But financing and construction for huge transportation, power generation, water, and pollution control projects are underway.

A large network of private schools is boosting education levels, enabling the country to capitalize on its English language advantage. When planning the expansion of my own business, I was presented with the choice of hiring a website designer here for $60,000 a year, or in India for $5,000. That?s why booking a ticket on United Airlines or calling technical support at Dell Computer gets you someone in Bangalore.

India is also a huge winner on the demographic front, with one of the lowest ratios of social service demanding retirees in the world. China?s 30-year-old ?one child? policy is going to drive it into a wall in ten years, when the number of retirees starts to outnumber their children.

There is one more issue out there that few are talking about. The reform of the Chinese electoral process at the next People?s Congress could lead to posturing and political instability which the markets could find unsettling. India is the world?s largest democracy, and much of its current prosperity can be traced to wide ranging deregulation and modernization that took place 20 years ago.

I have been a big fan of India for a long time, and not just because they constantly help me fix my computers. In the past, I recommended Tata Motors (TTM), which has since doubled, making it one of my best, all-time single stock picks (click here for ?Take Tata Motors Out for a Spin?). On the next decent dip take a look at the Indian ETF?s (INP), (PIN), and (EPI).

Better to Own This Pyramid

Than This Pyramid

Taxi! Taxi!

August 13, 2013/by Mad Hedge Fund Trader

The Future of Consumer Spending?

Diary, Newsletter

As part of my never ending campaign to get you to move more money into emerging markets, please take a look at the chart below from Goldman Sachs. It shows that the global middle class will rise from 1.8 billion today to 4 billion by 2040, with the overwhelming portion of the increase occurring in emerging markets.

The chart defines middle class as those earning between $6,000 and $30,000 a year. Adding 2.2 billion new consumers in these countries is creating immense new demand for all things and the commodities needed to produce them. This explains why these countries will account for 90% of GDP growth for at least the next ten years. It's all a great argument for using this dip to boost your presence in ETF's for emerging markets (EEM), China (FXI), Brazil (EWZ), and India (PIN).

Of course, you don't want to rush out and buy these things today. Emerging markets have been one of the worst performing asset classes of the year. But the selloff off is creating a once in a generation opportunity to get into the highest growing sector of the global economy on the cheap. I'll let you know when it is time to pull the trigger.

In the meantime, store this chart in your data base so when people ask why your portfolio is packed with Mandarin, Portuguese, and Hindi names, you can just whip it out.

June 20, 2013/by Mad Hedge Fund Trader

The China View from 30,000 Feet

Diary, Newsletter

I have long sat beside the table of McKinsey & Co., the best management consulting company in Asia, hoping to catch some crumbs of wisdom. So, I jumped at the chance to have breakfast with Shanghai based Worldwide Managing Director, Dominic Barton, when he passed through San Francisco visiting clients.

These are usually sedentary affairs, but Dominic spit out fascinating statistics so fast I had to write furiously to keep up. Sadly, my bacon and eggs grew cold and congealed. Asia has accounted for 50% of world GDP for most of human history. It dipped down to only 10% over the last two centuries, but is now on the way back up. That implies that China?s GDP will triple relative to our own from current levels.

A $500 billion infrastructure oriented stimulus package enabled the Middle Kingdom to recover faster from the Great Recession than the West, and if this didn?t work, they had another $500 billion package sitting on the shelf. But with GDP of only $5.5 trillion today, don?t count on China bailing out our $15.5 trillion economy.

China is trying to free itself from an overdependence on exports by creating a domestic demand driven economy. The result will be 900 million Asians joining the global middle class who are all going to want cell phones, PC?s, and to live in big cities. Asia has a huge edge over the West with a very pro-growth demographic pyramid. China needs to spend a further $2 trillion in infrastructure spending, and a new 75-story skyscraper is going up there every three hours!

Some 1,000 years ago, the Silk Road was the world?s major trade route, and today intra-Asian trade exceeds trade with the West. The commodity boom will accelerate as China withdraws supplies from the market for its own consumption, as it has already done with the rare earths.

Climate change is going to become a contentious political issue, with per capita carbon emission at 19 tons in the US, compared to only 4.6 tons in China, but with all of the new growth coming from the later. Protectionism, pandemics, huge food and water shortages, and rising income inequality are other threats to growth.

To me, this all adds up to buying on the next substantial dip big core longs in China (FXI), commodities (DBC) and the 2X (DYY), food (DBA), and water (PHO). A quick Egg McMuffin next door filled my other needs.

June 13, 2013/by Mad Hedge Fund Trader

Why Jim Chanos is Wrong on China

Diary, Newsletter

Hedge fund titan, Jim Chanos, is well known for his extremely bearish views on China. He says that the cracks are spreading on the fa?ade, real estate sales are falling, and that the economic engine is starting to sputter.

This will be bad news for the rest of us, as China imports 50%-80% of the world?s commodities. Commodity exporting countries will be especially hard hit, like Canada, Australia, and parts of the US. Modern China has only seen a bull market, and he doubts their ability to manage a true crisis.

There is a widespread misperception that the government will step in and provide any bailouts that will be needed. The domestic Chinese banking system has in fact already been bailed out two times. The harsh reality is that while Chinese companies are selling billions of dollars? worth of new stock issues in the US through IPO?s, a privileged elite is getting their money out of the country as rapidly as they can. Jim says that he already has short positions in the Middle Kingdom that are profitable. There is no way that even a wrinkle in a market of this size is without global implications, and on that point Jim is right.

However, I think that Jim, who confesses to having never visited China, is missing the broader long-term picture here. China has literally been building a Rome a day, the ancient kind, and the modern size every two weeks. In a year, it builds the equivalent of the entire housing stock of Spain, and in 15 years the equivalent for all of Europe.

While a lot of apartment buildings have been constructed, the country is rapidly creating the middle class to fill them. Even allowing for a pull back from its past blistering 11% per annum GDP growth rate to only 7.7%, urban disposable income per person is expected to grow by 2.5 times to $7,500 by 2020.

Over the same time frame, some 160 million are expected to move from the hinterlands to urban areas. Rising standard of livings mean that residential floor space per person will jump from 270 square feet to 369 square feet, still tiny by Western standards. That is a lot of housing demand.

China has already taken steps to head off a housing crisis, unlike the US. The People?s Bank of China has raised bank reserve requirements five times, taking them to among the most stringent levels in the world. That is almost Canadian in its conservatism. Many banks are now demanding cash deposits of 40%, well over the official requirement of 30%. The government is in effect forcing the banks to deleverage before hard times hit. Too bad they didn?t think of that here.

I think China still has several good years ahead of it, and I am going to pile into the stock ETF (FXI) and the Yuan ETF (CYB) as soon as the current bout of malaise selling exhausts itself. The Country?s real challenge arises when its demographic pyramid starts to invert in about five years, the result of a then 35 year old ?one child? policy, when too many single children have to start supporting two retiring parents.

China: Not Enough Demand?

May 31, 2013/by Mad Hedge Fund Trader

Five Stocks to Buy for the Second Half

Newsletter

Take a look at the chart below for the S&P 500, and it is clear that we are at the top, of a top, of a top. How much new stock do you want to buy here? Not much. Virtually every technical trading service I follow, including my own, is now flashing distressed warning signals. Maybe we really were supposed to ?Sell in May and go away.?

All RSI?s are through the roof. We have not had a pullback of more than 3.2% in six months, the longest in history. It has been up 19 Tuesdays in a row. Some 67% of this year?s gains have been on Tuesdays, and 83% since the 2012 low. So buying Monday afternoon and selling Tuesday afternoon is the new winning investment strategy. It?s a day trader?s paradise. The market is clearly cruising for a bruising here.

A 5%-10% correction seems imminent. After that, we will probably power on to a new high by the end of the year. The Vampire Squid, Goldman Sachs, posted a 1,750 target for (SPY). Why not? Their number seems as good as any. Who knew that the top market strategist for the year would be perma-bull Wharton business school professor, Jeremy Siegel?

The smart money is sitting on its hands here, maintaining discipline, and waiting for better opportunities. It is also pounding away at the research, building lists of stocks to pounce on during the second half. It is still early, but here is my short list of things to watch from the summer onward.

Apple (AAPL) ? Rotation into laggards will become the dominant theme for those playing catch up, and the biggest one out there is Apple. Buy the dips now for a 25% move up into yearend. An onslaught of new products and services will hit in the fall, and the company is still making $60 million an hour in net profits. Look for the iPhone 5s, Apple TV, and new generations of the iMac, iPad, and iPods. It will also make its China play, inking a deal with China Telecom (CHA). The world?s second largest company is not going to trade at half the market multiple for much longer, especially while that multiple is expanding. Technology is the last bargain left in the market. QUALCOMM (QCOM) might be a second choice here.

MSCI Spain Index Fund ETF (EWP) ? Look for the European economy to bottom out this summer and recover in the fall. In the end, the Germans will pay up to keep the European community together. The reach for yield and the global liquidity surge will drive interest rates on sovereign debt down as well, accelerating the move up. Also, the more expensive the US gets, the more you can expect other parts of the world to play catch up. Spain is the leveraged play here.

iShares FTSE 25 Index Fund ETF (FXI) ? Now that the new Chinese leadership has their feet under the desk, look for them to stimulate the economy. China will play catch up with the US, which should start topping out by yearend. It is also an indirect play on the reviving Japanese economy, the Middle Kingdom?s largest foreign investor. Japan has gotten too expensive to buy, so consider this a second derivative play.

Proshares Ultra Short 20+ Year Treasury ETF (TBT) ? The Treasury market bubble is history, and it is just a matter of time before we break down from these elevated prices. Look for the ten-year bond to probe the high end of the yield range at 2.50%. I don?t expect Treasuries to crash from here, but you might be able to squeeze another 25% from the (TBT) in the meantime.

Citicorp (C) ? Look, the financials are going to run all year. Use the summer dip to get back into this name, the most undervalued of the major banks, and a hedge fund favorite. A multidecade steepening of the yield curve is a huge plus for the industry. Now that real estate prices are rising, some of those dud loans on their books may actually be worth something.

May 22, 2013/by Mad Hedge Fund Trader

China?s View of China

Diary, Newsletter

I ran into Minxin Pei, a scholar at the Carnegie Endowment for International Peace who imparted to me some iconoclastic, out of consensus views on China?s position in the world today.

He thinks that power is not shifting from West to East; Asia is just lifting itself off the mat, with per capita GDP at $5,800, compared to $48,000 in the US. We are simply moving from a unipolar to a multipolar world. China is not going to dominate the world, or even Asia, where there is a long history of regional rivalries and wars.

China can?t even control China, where recessions lead to revolutions, and 30% of the country, Tibet and the Uighurs, want to secede. China?s military is entirely devoted to controlling its own people, which make US concerns about their recent build up laughable.

All of Asia?s progress, to date, has been built on selling to the US market. Take us out, and they?re nowhere. With enormous resource, environmental, and demographic challenges constraining growth, Asia is not replacing the US anytime soon.

There is no miracle form of Asian capitalism; impoverished, younger populations are simply forced to save more, because there is no social safety net. Try filing a Chinese individual tax return, where a maximum rate of 40% kicks in at an income of $35,000 a year, with no deductions, and there is no social security or Medicare in return. Ever heard of a Chinese unemployment office or jobs program?

Nor are benevolent dictatorships the answer, with the despots in Burma, Cambodia, North Korea, and Laos thoroughly trashing their countries. The press often touts the 600,000 engineers that China graduates, joined by 350,000 in India. In fact, 90% of these are only educated to a trade school standard. Asia has just one world-class school, the University of Tokyo.

As much as we Americans despise ourselves and wallow in our failures, Asians see us as a bright, shining example for the world. After all, it was our open trade policies and innovation that lifted them out of poverty and destitution. Walk the streets of China, as I have done for nearly four decades, and you feel this vibrating from everything around you. I?ll consider what Minxin Pei said next time I contemplate going back into the (FXI) and (EEM).

China: Not All it?s Cracked Up to Be

April 25, 2013/by Mad Hedge Fund Trader

Rampant Wage Inflation Strikes China

Diary, Newsletter

I rely on hundreds of 'moles' around the world whose job it is to watch a single, but important indicator for the world economy. One of them checks for me the want ads in the manufacturing mega city of Shenzhen, China, and what he told me last week was alarming.

Wage demands by Chinese workers have been skyrocketing this year. The biggest increases have been at the low end of the spectrum, where migrant workers from the provinces are earning up to 40% more than a year ago. Wage settlements of 20% or more for trained workers are common. One factory that gave staff only a 10% increase saw many of them fail to return after the recent Chinese lunar New Year.

Of course China's blistering 8% GDP growth is to cause, which has pushed inflation well beyond the government's 4% target. So the cost of living in the Middle Kingdom is rising dramatically. The problem has been particularly severe with imported commodities, such as in food. Hence, the increased demands.

This is important for the rest of us because low wages have been the cornerstone of the Chinese economic miracle. In just the last decade, average monthly Chinese wages have climbed from the bottom rung to the middle tier. That seriously erodes the country's cost advantage, which has gained such enormous shares in foreign markets, like the US. Take away the country's price advantages, and demand will wither, slowing growth globally.

What will they be demanding next? Collective bargaining rights? In the meantime, keep checking those Craig's List entries for Shanghai.

Average Monthly Salary

$3,099 Yokohama, Japan
$1,220 Seoul, South Korea
$888 Taipei, Taiwan
$235 Shenzhen, China
$148 Jakarta, Indonesia
$100 Ho Chi Minh City, Vietnam
$47 Dhaka, Bangla Desh

$1.25 an Hour? You Must Be Joking!

March 14, 2013/by Mad Hedge Fund Trader

How U.S. Job Losses Will End

Newsletter

I was researching comparative Asian wage data the other day and was astounded with what I found. Textile workers earn $2.99 an hour in India (PIN), $1.84 in China (FXI), and $0.49 in Vietnam (VNM). This is an 18-fold increase in labor costs from $0.10 an-hour since Chinese industrialization launched in 1978.

This compares to the $8 an hour our much abused illegals get at sweat shops in Los Angeles, and $10 in some of the nicer places. What?s more, the Indian wage is up 17% in a year, meaning that inflation is casting a lengthening shadow over the sub-continent?s economic miracle. A series of strikes and a wave of suicides have brought wage settlements with increases as high as 20% in China.

This is how the employment drain in the US is going to end. When foreign labor costs reach half of those at home, manufacturers quit exporting jobs because the cost advantages gained are not worth the headaches and risk involved in managing a foreign language work force, the shipping expense, political risk, import duties, and supply disruptions, just to get lower quality goods. Chinese wage growth at this rate takes them up to half our minimum wage in only five years.

This has already happened in South Korea (EWY), where wage costs are 60% of American ones. As a result, Korea?s GDP growth is half that seen in China. These numbers are also a powerful argument for investing in Vietnam, where wages are only 27% of those found in the Middle Kingdom, and where Chinese companies are increasingly doing their own offshoring.

This is why I have pushed the Vietnam ETF (VNM) on many occasions. I know every time I do this I get torrents of emails from that country bitterly complaining how difficult it is to do business there, and how the hardwood trees are still full of shrapnel left over from the war, and why I shouldn?t buy a 50 acre industrial park there.? But, the numbers don?t lie.

August 26, 2012/by DougD

The Next China Boom

Newsletter

The call was scratchy and barely audible. I was instructed to not mention any names. I should only use the prearranged code words when talking about political parties. You never know when the phones in China are tapped. I was just about to get a heads up that the People?s Bank of China was going to lower interest rates for the first time in four years.

Of course, we knew this was coming. Three relaxations of bank reserve requirements over the past six months telegraphed that the Middle Kingdom?s economy was slowing and that some serious monetary easing was on the way. But it appears that the things were now starting to get out of hand, possibly taking the GDP growth rate below the government?s 7% target.

Chinese companies were canceling contracts to buy imported commodities left and right, including for corn, sugar, copper, and iron ore, causing much distress among foreign counterparties. Now we learn that there are two dozen ships sitting off the Chinese coast fully loaded with coal, with no takers. The Chinese are walking away from contracted deliveries and refusing to pay, much as they did at the height of the 2008 financial crisis.

The really fascinating point that my friends in Beijing were trying to hammer home is that the current round of weakness is setting up the buying opportunity of the century. China is in the midst of changing government for the first time in a decade. The new president, Xi Jinping, is expected to take power in March, 2013, and will owe a broad range of constituents favors for his successful ascent. To solidify his position he will engineer a broad rise in the country?s standard of living that will benefit everyone in the country.

The first order of business will be to clean house and install loyal cadres across the upper tiers of the bureaucracy. Then he will launch a massive stimulus package designed to accelerate the growth of the domestic economy and wean the country off of its dependence on low waged export industries. The goal will be to move the Middle Kingdom?s economy inland, away from the coast where it is now concentrated.

That will enfranchise more of the 400 million of the rural population who have yet to participate in the modern economy and enjoy its benefits. The ultimate goal will be to raise Chinese per capita incomes from the current $3,000 to the $10,000-$20,000 range. A spin off advantage of this policy will be that it improves relations with the US, which until now has been drowning in Chinese exports in many politically sensitive industries. The economy will boom.

To finance this effort, the government will embark on a large scale privatization of state owned assets. Targeted is the government?s ownership of wide swaths of the banking, insurance, railroad, telecommunication, and energy industries. The effort will mirror the privatization policy that Margaret Thatcher imposed on the United Kingdom from the early 1980?s and the one the Japanese initiated a few years later. I participated in both, and the trading profits I took in were more than generous.

The funds that the Mandarins in Beijing will raise from this campaign will be used to pay off its enormous domestic debts. It will also be spent on repairing China?s badly tattered social safety net, with huge expenditures earmarked for health care and social security.

Stock markets will enjoy a major bull market for a decade, both in China (FXI), surrounding Asian emerging nations, like South Korea (EWY), Taiwan (EWT), Thailand (TF), Indonesia (IDX) and in Australia (EWA). Their currencies will rocket too, including The Australia (FXA), Singapore, Hong Kong, and Taiwanese dollars, as well as the Korean won.

The industry plays here won?t be the big infrastructure ones that worked so well in the last bull market, but instead will be focused on the country?s nascent consumer sector. I obviously need to do more work in this area, and when I get specific names, I will let you know.

Investments made near the current lows should see tenfold to twentyfold returns in coming years. This will also pave the way for full convertibility of the renminbi which could lead to the same sort of 300%-400% appreciation that we saw with the Japanese yen from the 1970?s to the 1990?s. That will create a double leveraged, hockey stick effect on the profits on Chinese investments.

What all of this does is to keep the Chinese economy growing at a 6%-8% rate for the indefinite future. While this is a slower rate than seen in years past, it will be off a much larger base, so the impact on the global economy will be substantial. China now boasts the world?s second largest economy, with GDP at $5.5 trillion, still well behind the US at $14.5 trillion.

Needless to say, basic commodities, like copper (CU), coal (KOL), iron ore (BHP), (RIO), all the food plays (CORN), (WEAT), (SOYB), (POT), (MOS), soar in this scenario. Gold (GLD), silver (SLV), platinum (PPLT), and palladium (PALL) also do extremely well. This could be the base case for taking the yellow metal up to my long term target of $2,300 an ounce, or even to the gold bug levels of $5,000 to $10,000.

So when does my friend expect the greatest bull market of all time to begin? After the new government comes in next March you should allow six months for it to get settled and get its ducks lined up. That takes us out to October, 2013. Until then the stock market will continue to bump along the bottom, as we have seen for the past year. Of course, if the markets get a whiff of what?s coming, they could react much sooner. You can take the China crash scenario and throw it in the trash.

I asked my contact if the demographic wall that I expect China to hit in five years will cool his expectations. This will happen with the population pyramid inverts as a result of its 32 year old one-child policy, and a large aging population supported by a smaller generation of young workers creates a large economic drag. He said that demographic effects won?t really impact the financial market for ten years, and could well be what brings the next bull market to an end.