China...Revisited
I am going to china in less than a month now and just got my visa today and was thinking about a couple things China related. First, the reason for my trip is to go get on the ground floor and figure out how bad the inflation coming from China is going to be next year...Yes, that is correct my friends inflation from China. I currently run a customized inflation check through a specialized research boutique we employ called OTR that interviews buyers / mgrs/ execs at major textile manufacturing companies and my first two checks have indicated that prices will be rising by 6% to 12% in 2008 vs. 0% in 2007. The first major driver here is wage inflation due to higher food prices causing employees to demand more money and to a lack of supply of cheap labor. The chinese gov't has materially increased regulation and has ended the practice of taking in hundreds of workers from the fields in favor of more skilled laborers (this is due to huge pressure from trading partners after massive acceleration in product defects / recalls - THINK Lead Painted toys fucking up salvation army's xmas toy drive). The second major driver is a reduction in the VAT tax rebate from 15% to 10%. You have to realize that these manufacturers gross margins are only about 10% to 12%, sga is about 7% to 8% and is now rising and so net margins are razor thin - circuit city styles. The one reprieve these companies have had is this VAT rebate but now its being cut by 33% in response to europe's complaints about currency manipulation as a ploy to hold off on increasing the value of the Yuan vs. the Euro (btw, this is the short story on the euro as all dollar weakness has been absorbed mainly by an extremely strong euro as China is utilizing a crawling peg currency policy with the US but is completely fixed with europe).
So, the point is that the "productivity increases" / globalization benefits that have fueled deflation / disinflation in the US over the last 17+ years (look at the trade deficit with China and it matches up perfectly with CPI price charts for clothing and apparel etc) and allowed us to expand credit so massively without ubfkatuib reprecussions is now going to reverse ... as it always does. AND, after having talked to numerous executives, former executives, consultants from all of the largest firms in the clothing and apparel, footwear, and general textiles industries they all say the same thing....that prices are being pushed onto them aggressively and that they are pushing those prices onto the retailers. The other thing they all say is that they have nowhere to go right now...that maybe Africa down the road but that for at least the next couple years they are stuck with China producing the majority of their products....Please don't anyone respond vietnam to me as their country is out ahead of china on the learning curve and is in a huge bull market right now making the likelihood of new cheap paying jobs attractive to them very low.
Why is this a bad thing you ask if it would appear to make comps sales gains much easier? Because, consumption per capita has almost doubled since the early 90s and most of that is due to the retailers only taking small portions of the margin growth from the deflationary effects from china and passing the rest on to customers (THINK EVERYDAY LOW PRICES). What is interesting is that 10% price increases may have worked in the 70s but remember income was growing at a High Single Digit / Low Double Digit rate back then, savings rates were double digits, debt service levels were only about 5% / 6% of income vs. 18% today and those people didn't have an estimated $1.5 to $2 trillion in mtg. debt set to ratchet up to materially higher rates over the next 5 years. Also, employment wasn't horrible. Wait and see what happens in Q108 my friends - i have done a bottom up study of layoffs coming post holidays and it is going to be huge (Auto Industry, Gov't Jobs - especially at state and local levels, Housing industry, Wall Street, Retailers, all of Hollywood / entertainment industry isn't working in 1H08 at minimum, hotels are cutting people, restaurants are cutting people, pharmaceuticals is cutting alot of people, and it goes on) Really the only industry maintaining forum is the defense industry. The industries still hiring are tech / materials / energy. Healthcare is cutting jobs in front of election year. Don't believe me, ask a senior in college or final year grad student about the job market...trust me you are glad we graduated in 2006.
The big problem with job losses other than loss of income is a loss of confidence and this is especially bad in a period of UNPRECEDENTED credit tightness. In addition, job losses will accelerate the housing downturn further pressuring asset prices triggering distressed selling etc. etc.
The US consumer has had flat income growth basically since 1999 and anemic job growth of about 1%. The so-called expansion came from credit and asset price gains that were a result of the easy credit. Now that the credit expansion is definitely over and asset price gains are a thing of the past + job firings coming and higher debt service costs and higher taxes lie on the horizon then how do you think that consumption will be financed? Savings are dwindled, US HH have been huge net sellers of both equity and debt since later 90s, and the RE mkt is tanking erasing the liquidity / MEW funds present only 18months ago. The answer is that people are going to spend less, which will cause a major recession as consumption is 6% higher as a % of GDP than it has been historically and trade deficit is still above 6% of GDP. So, I don't think consumers are just going to take a 10% price hike like its nothing. Instead, I am looking for major margin compression as retailers fight with each to drive sales. Remember the entire country is at peak margins right now and historically when we reach peak margins then earnings growth is flat to down for the next two or three years afterwards.
I am short US retail, US importers, all western banks - both commerical, investment, and central, I am short autos and long railroads, I am short Dry Bulk SHIPPERS IN A LONG WAY, I strongly believe that the entire mtg. industry will go bankrupt like it did between 1928 and 1935. I am short stocks in general actually, I sold all my stocks post the first Fed cut and haven't even thought about buying one since. Stocks are expensive on earnings yield basis, on a real dividend yield basis, and especially so given my view that 08 estimates are WAY TOO HIGH. I think earnings are flat to down next year vs. 16% growth estimate. The US DOLLAR is a Short, most all fiat is a short actually, I think the YEN and the Yuan - if you can get some - are the only fiat I would consider going long...maybe the austrailian dollar as well. I am neutral on energy and industrial metals but am long for a long time agricultural commodities.
More than anything, I am long GOLD. GOLD IS THE ONLY SAFE INVESTMENT RIGHT NOW. GOLD went up by 5x between 1927 and 1935.
Finally, i included former china post...guess that short call didn't work out.
Chinese Markets...
Does anyone have a view on the chinese market? Record highs, time to go short???
posted by MillerLite22 at 3:17 PM
Chinese Markets..."
12 Comments - Show Original Post
Collapse comments
Le SilVerAdo said...
You need to go back and look at charts of the internet bubble and realize that record highs can continue to be set for a long time.
Chinese market is NOT, and I repeat, IS NOT, going down prior to the olympics. The BoC will take a cue from the US PPT and infuse liquidity when the market dries up.
I am short your short china idea.
8:46 PM
MattKelly54 said...
I think China has zero competitive advantage.
I'm short it.
9:15 AM
MattKelly54 said...
Everyone thought Wokash was an idiot. Now he is laughing all the way to the bank.
The9.com is in the 40s.
10:16 AM
Robert Guiscard said...
I have to side with Silver with regards to China and the olympics. Relative to the US, they put a lot of importance on appearances and symbolism. I think they view the Olympics as their coming out party as a Global power. Unless someone has another catalyst in mind (credit issues, general flight from emerging markets etc), I would stay out of the way of that freight train. It might wreck after after the Olympics but before then? In honor of the Oracle's recent party in Omaha, that is a pitch I wouldnt swing at from either side of the plate.
11:16 AM
Le SilVerAdo said...
But what this does mean, is that US treasuries could likely be shorts as the money that has been supporting treasuries may be going less back into the US and more into the chinese market.
I think 10yr bond is a massive short.
1:45 PM
MattKelly54 said...
I'll take the treasury and I'll give you whatever Venzuala's bonds are denominated in. You can also keep your renimbi.
8:41 AM
Rich said...
Go ahead. Short China. I double-dog dare you. Better yet, take all your money and buy the longest-term puts on a Shanghai stock index you can find.
8:02 PM
Robert Guiscard said...
One benefit I got from going through ASAP is that it rid me of the idea that investors have to follow certain defined conventions such as value investing or growth investing, blah, blah, blah. That is not to say they dont exist but rather their are limits to the applicabilities of these generalizations.
Using that as a backdrop, Rich, you are one of the biggest momentum investors I have ever seen. I dont know if you are still clinging to the value definition like you did a couple of years ago or not. Doesnt matter. You are pure mo. I hope you got a job at Janus, Fred Alger or one of the many growth shops around. You will be outstanding there. I mean that in all genuine sincerity.
10:33 AM
Fresh said...
I think everyone's right. China is going higher in the interim. Or at least it isn't going down.
I don't see a competitive advantage in China either. When costs get to high there, companies will shift production to Vietnam, Korea, the Philipines, South America, Africa, the moon, or wherever else.
5:21 PM
Le SilVerAdo said...
Greg is right, Rich you are momentum. Doug you are right in that China won't go down in near term but will in LT.
One tidbit I heard when I was out in LA last week talking to a guy who was in Bejing a week earlier. He told me that Bejing is so dirty you can't even see the tops of buildings and that as a result they are going to SHUT DOWN the entire city for 2 to 3 months prior to the olympics. This seems like something that will support short thesis in quarter right after summer olympics.
LT, I think India is better as it has 1) better education system, 2) is democratic and not communist, 3) honors its commitments unlike china who just allows companies to invest and then materially alters terms to their advantage half way in as a fucking bum would, 4) THEY SPEAK ENGLISH!!!
I am not necessarily long india quite yet, but as a relative bet I would take them in a 5yr horizon over china.
I agree with fresh also that their only competitive advantage is huge labor resources, which is abundant elsewhere in the world like India and Africa. Only thing is that they will have major investment head start in terms of capital in place, but there is alot of money in the world looking for high ROI projects so this is but a ST advantage.
Only one bullish counter on China; if the world really goes after this global environment clean up it may not be eager to just bust into new countries and destroy their environments - especially in Africa w/ the rainforests there. However, this is hardly an investment counter point just something to keep in mind; maybe every one will just look to china as our dump that makes everything?
Jerry what do you think of that idea?
8:17 PM
Paul said...
for the record, i definitely backed Wokash on the9.com. i even bought some of it for a while. Wokash knows ballet class and video games.
10:41 PM
rvb1977 said...
Maybe I am pure momentum. I'm still just getting to know myself. I know I'm not deep value very often (once in a while I guess)
3:02 PM
So, the point is that the "productivity increases" / globalization benefits that have fueled deflation / disinflation in the US over the last 17+ years (look at the trade deficit with China and it matches up perfectly with CPI price charts for clothing and apparel etc) and allowed us to expand credit so massively without ubfkatuib reprecussions is now going to reverse ... as it always does. AND, after having talked to numerous executives, former executives, consultants from all of the largest firms in the clothing and apparel, footwear, and general textiles industries they all say the same thing....that prices are being pushed onto them aggressively and that they are pushing those prices onto the retailers. The other thing they all say is that they have nowhere to go right now...that maybe Africa down the road but that for at least the next couple years they are stuck with China producing the majority of their products....Please don't anyone respond vietnam to me as their country is out ahead of china on the learning curve and is in a huge bull market right now making the likelihood of new cheap paying jobs attractive to them very low.
Why is this a bad thing you ask if it would appear to make comps sales gains much easier? Because, consumption per capita has almost doubled since the early 90s and most of that is due to the retailers only taking small portions of the margin growth from the deflationary effects from china and passing the rest on to customers (THINK EVERYDAY LOW PRICES). What is interesting is that 10% price increases may have worked in the 70s but remember income was growing at a High Single Digit / Low Double Digit rate back then, savings rates were double digits, debt service levels were only about 5% / 6% of income vs. 18% today and those people didn't have an estimated $1.5 to $2 trillion in mtg. debt set to ratchet up to materially higher rates over the next 5 years. Also, employment wasn't horrible. Wait and see what happens in Q108 my friends - i have done a bottom up study of layoffs coming post holidays and it is going to be huge (Auto Industry, Gov't Jobs - especially at state and local levels, Housing industry, Wall Street, Retailers, all of Hollywood / entertainment industry isn't working in 1H08 at minimum, hotels are cutting people, restaurants are cutting people, pharmaceuticals is cutting alot of people, and it goes on) Really the only industry maintaining forum is the defense industry. The industries still hiring are tech / materials / energy. Healthcare is cutting jobs in front of election year. Don't believe me, ask a senior in college or final year grad student about the job market...trust me you are glad we graduated in 2006.
The big problem with job losses other than loss of income is a loss of confidence and this is especially bad in a period of UNPRECEDENTED credit tightness. In addition, job losses will accelerate the housing downturn further pressuring asset prices triggering distressed selling etc. etc.
The US consumer has had flat income growth basically since 1999 and anemic job growth of about 1%. The so-called expansion came from credit and asset price gains that were a result of the easy credit. Now that the credit expansion is definitely over and asset price gains are a thing of the past + job firings coming and higher debt service costs and higher taxes lie on the horizon then how do you think that consumption will be financed? Savings are dwindled, US HH have been huge net sellers of both equity and debt since later 90s, and the RE mkt is tanking erasing the liquidity / MEW funds present only 18months ago. The answer is that people are going to spend less, which will cause a major recession as consumption is 6% higher as a % of GDP than it has been historically and trade deficit is still above 6% of GDP. So, I don't think consumers are just going to take a 10% price hike like its nothing. Instead, I am looking for major margin compression as retailers fight with each to drive sales. Remember the entire country is at peak margins right now and historically when we reach peak margins then earnings growth is flat to down for the next two or three years afterwards.
I am short US retail, US importers, all western banks - both commerical, investment, and central, I am short autos and long railroads, I am short Dry Bulk SHIPPERS IN A LONG WAY, I strongly believe that the entire mtg. industry will go bankrupt like it did between 1928 and 1935. I am short stocks in general actually, I sold all my stocks post the first Fed cut and haven't even thought about buying one since. Stocks are expensive on earnings yield basis, on a real dividend yield basis, and especially so given my view that 08 estimates are WAY TOO HIGH. I think earnings are flat to down next year vs. 16% growth estimate. The US DOLLAR is a Short, most all fiat is a short actually, I think the YEN and the Yuan - if you can get some - are the only fiat I would consider going long...maybe the austrailian dollar as well. I am neutral on energy and industrial metals but am long for a long time agricultural commodities.
More than anything, I am long GOLD. GOLD IS THE ONLY SAFE INVESTMENT RIGHT NOW. GOLD went up by 5x between 1927 and 1935.
Finally, i included former china post...guess that short call didn't work out.
Chinese Markets...
Does anyone have a view on the chinese market? Record highs, time to go short???
posted by MillerLite22 at 3:17 PM
Chinese Markets..."
12 Comments - Show Original Post
Collapse comments
Le SilVerAdo said...
You need to go back and look at charts of the internet bubble and realize that record highs can continue to be set for a long time.
Chinese market is NOT, and I repeat, IS NOT, going down prior to the olympics. The BoC will take a cue from the US PPT and infuse liquidity when the market dries up.
I am short your short china idea.
8:46 PM
MattKelly54 said...
I think China has zero competitive advantage.
I'm short it.
9:15 AM
MattKelly54 said...
Everyone thought Wokash was an idiot. Now he is laughing all the way to the bank.
The9.com is in the 40s.
10:16 AM
Robert Guiscard said...
I have to side with Silver with regards to China and the olympics. Relative to the US, they put a lot of importance on appearances and symbolism. I think they view the Olympics as their coming out party as a Global power. Unless someone has another catalyst in mind (credit issues, general flight from emerging markets etc), I would stay out of the way of that freight train. It might wreck after after the Olympics but before then? In honor of the Oracle's recent party in Omaha, that is a pitch I wouldnt swing at from either side of the plate.
11:16 AM
Le SilVerAdo said...
But what this does mean, is that US treasuries could likely be shorts as the money that has been supporting treasuries may be going less back into the US and more into the chinese market.
I think 10yr bond is a massive short.
1:45 PM
MattKelly54 said...
I'll take the treasury and I'll give you whatever Venzuala's bonds are denominated in. You can also keep your renimbi.
8:41 AM
Rich said...
Go ahead. Short China. I double-dog dare you. Better yet, take all your money and buy the longest-term puts on a Shanghai stock index you can find.
8:02 PM
Robert Guiscard said...
One benefit I got from going through ASAP is that it rid me of the idea that investors have to follow certain defined conventions such as value investing or growth investing, blah, blah, blah. That is not to say they dont exist but rather their are limits to the applicabilities of these generalizations.
Using that as a backdrop, Rich, you are one of the biggest momentum investors I have ever seen. I dont know if you are still clinging to the value definition like you did a couple of years ago or not. Doesnt matter. You are pure mo. I hope you got a job at Janus, Fred Alger or one of the many growth shops around. You will be outstanding there. I mean that in all genuine sincerity.
10:33 AM
Fresh said...
I think everyone's right. China is going higher in the interim. Or at least it isn't going down.
I don't see a competitive advantage in China either. When costs get to high there, companies will shift production to Vietnam, Korea, the Philipines, South America, Africa, the moon, or wherever else.
5:21 PM
Le SilVerAdo said...
Greg is right, Rich you are momentum. Doug you are right in that China won't go down in near term but will in LT.
One tidbit I heard when I was out in LA last week talking to a guy who was in Bejing a week earlier. He told me that Bejing is so dirty you can't even see the tops of buildings and that as a result they are going to SHUT DOWN the entire city for 2 to 3 months prior to the olympics. This seems like something that will support short thesis in quarter right after summer olympics.
LT, I think India is better as it has 1) better education system, 2) is democratic and not communist, 3) honors its commitments unlike china who just allows companies to invest and then materially alters terms to their advantage half way in as a fucking bum would, 4) THEY SPEAK ENGLISH!!!
I am not necessarily long india quite yet, but as a relative bet I would take them in a 5yr horizon over china.
I agree with fresh also that their only competitive advantage is huge labor resources, which is abundant elsewhere in the world like India and Africa. Only thing is that they will have major investment head start in terms of capital in place, but there is alot of money in the world looking for high ROI projects so this is but a ST advantage.
Only one bullish counter on China; if the world really goes after this global environment clean up it may not be eager to just bust into new countries and destroy their environments - especially in Africa w/ the rainforests there. However, this is hardly an investment counter point just something to keep in mind; maybe every one will just look to china as our dump that makes everything?
Jerry what do you think of that idea?
8:17 PM
Paul said...
for the record, i definitely backed Wokash on the9.com. i even bought some of it for a while. Wokash knows ballet class and video games.
10:41 PM
rvb1977 said...
Maybe I am pure momentum. I'm still just getting to know myself. I know I'm not deep value very often (once in a while I guess)
3:02 PM
posted by Not Sure if Al Gore or Global Warming is a Bigger Joke at
4:02 AM
1 Comments:
Silver,
I am interested in any insights regarding Chinese monetary and currency policy. The gist of my short call is between raising rates and letting the yuan continue to rise, their economy is set to decelerate sometime this year.
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