Charting around Asia
Hypocrisy and Hot Air
by John Needham, The Daniel Code Report | June 25, 2008
PrintHere’s Heresy! All profits are a function of mispriced resources.
Western investors love affair with Asian markets has ended. The global rush to be part of the great energy and diversity offered by Asian markets is quickly turning to disappointment and disillusionment with the dawning realisation that the glitter from superior returns was not so much part of an economic miracle as another branch of the flooding tide of global liquidity.
Needham’s Law (#1) says that all profits are a function of the mispricing of resources usually created by legislative action. Miners and fisheries profit because they are not paying the natural economic rent for the asset they extract; value added industries profit because they do not pay the natural rent for the products they produce and service industries profit only because barriers to entry maintain artificial prices. The easiest way to look at this law is by a couple of simple examples. Fisheries are in the news as America's west coast looks set to lose almost all of its wild salmon harvest this year, depriving fish retailers and restaurants around the world of one of their key sources of high-quality fish, and raising long overdue questions about the viability of commercial fishing.
United States government regulators have already closed down the early fishing season along swathes of the west coast and are expected to issue a season-long ban in California and Oregon, in response to an unprecedented collapse in the region's salmon population. The most startling data comes from the Sacramento river, the source of more than 80 per cent of all the mature salmon caught off California. Last year, only 90,000 spawning adults returned to the river, the second lowest figure on record, and the projections for this year, based on sightings of two-year-old fish during last autumn's spawning run, are for fewer than 60,000. To put those figures in perspective: the Sacramento River once saw spawning populations of 800,000.
Globally, only 10 percent of all large fish—both open ocean species including tuna, swordfish, marlin and the large ground fish such as cod, halibut, skates and flounder—are left in the sea, according to research published in the 2003 issue of the scientific journal Nature, and things have only got worse in the intervening years. National Geographic introduced the finding this way:
"From giant blue marlin to mighty bluefin tuna, and from tropical groupers to Antarctic cod, industrial fishing has scoured the global ocean. There is no blue frontier left," said lead author Ransom Myers, a fisheries biologist based at Dalhousie University in Canada. "Since 1950, with the onset of industrialized fisheries, we have rapidly reduced the resource base to less than 10 percent—not just in some areas, not just for some stocks, but for entire communities of these large fish species from the tropics to the poles."
Fish as a cheap source of protein is rapidly disappearing. UK, European and Asian fisheries are depleted and whole species have been wiped out with monotonous regularity. So long as the fisheries turn a profit the plunder will continue and those profits arise only because the fishing businesses are not paying the natural economic price for their harvest. What is the natural economic price? The cost of maintaining or replacing the resource in the same state as it was pre-plunder. This is not an argument on global warming. It is a simple statement that natural resources are limited and absent the payment of the natural price which in economic terms means the cost of the alternate foregone, the resource will be used until it is depleted. That is the rapacious nature of the human animal. Capitalism is based on the exploitation of under priced resources.
The idea that all the oil in the world can be sucked up to use for energy is attractive only so long as the resource is available and the day must by definition be approaching when there is simply no more Oil recoverable. Since no natural rent has been paid for the resource, no alternate has been developed. Consider the automotive industry. If manufacturers had to pay the true cost of their product including the disposal of tyres, dirty oil, smoke and noxious gases, cars would long ago have passed from being the biggest single polluter on the planet.
In Asia this idea is having its consequences although few could give you the true argument behind the dramatic fluctuations in fortune that the major Asian power houses, China and India are undergoing, but the long swing cycles, often too long for economists to notice and certainly not within the ken of CEOs focused on annual balance sheets are gradually emerging, as the growth stage of the cycle wanes and the contractionary phase begins its unalterable course.
The Asian “miracle” is being revealed as a generational movement of labor arbitrage accompanied by technology transfers either to optimise the use of cheap labor or more often at the behest of savvy host governments who almost unanimously required partnerships with local corporations or citizens as the price of entry to their economies. In a decade Asia has achieved technological equality if not ascendancy with the west. The price of the labor arbitrage has been the improper pricing of labor which is the default setting for all governments. This practice not only applies to the west. It is an art form in the more technologically developed Asian economies.
Absent an understanding of natural economic rent, all assets including labor will be systemically mispriced. In China and India, the mispricing of labor has meant family dislocation, hardship and economic slavery at the factory level, tolerated only because the largely rural alternatives are worse. Market pricing and transfer manipulation by western trading blocs ensures that the agrarian peasant culture that built these nations for centuries can no longer sustain those dependant on a traditional lifestyle.
Hypocrisy and Hot Air at Trade Talks
It is curious that the greatest promoters of free market access are themselves the most abusive manipulators of artificial trade barriers. The UK Telegraph on 6 June reported on the latest abortive round of negotiations to salvage a result from the seven year long saga of the Doha round of trade liberalisation talks. Mention of the Doha talks usually serves to put the remaining audience to sleep but the choreography of this session is important for several reasons, and in particular the inclusion of China and India in this negotiating block called the G6 group of nations. Let’s follow the Telegraph’s report to see what is really happening.
Negotiators from the G6 group - the EU, the US, Brazil, Japan, China, and India - failed to break the deadlock over both industrial and farm tariffs at crisis talks yesterday. They agreed to keep the process alive into next week but experts warned that the seven-year drive for trade liberalization known as the Doha Round is close to collapse when the chair of the World Trade Organisation working-group on industry suspended all further meetings, saying the talks had gone backwards and that key parties were no longer even trying to reach a deal.
Peter Mandelson, as the EU External Trade Commissioner, is the main voice for exploitation of Asia and the third world. Mandelson started life as a journalist/economist for the British Trades Union Congress before becoming a TV producer. His ascension to high political office arose out of his Labour party affiliations where he is credited with helping Blair shape “New Labour”. He is a creature of the British left, an apparatchik with a pan European view. Writing in the Guardian on June 9 Mandelson says: But the open markets and economic integration that drive it are still by far the best tool we have for increasing global economic welfare. That is an essential contribution to global stability. Only stable, cooperating states can manage the coming squeeze on resources. For 60 years, the US has underwritten economic internationalism with openness of its own. A crisis of American confidence in globalisation could knock it off course.
If nothing else Mandelson is the master of disinformation. This little barb at US was prompted by the new US Farm Bill which also rankled China’s WTO ambassador Sun Zhenyu who said that the new $290 billion farm bill approved by Congress had sent negative signals by raising subsidies when WTO members were trying to negotiate a reduction in farm support. Reducing tariffs in the emerging economies in India, China and elsewhere has been one of the chief conflicts in the talks, pitting U.S. and European negotiators against developing world officials who say they need to protect their poor from the whims of the global economy. Meanwhile, in the height of hypocrisy, EU maintains a scandalous level of farm subsidies that adversely affect developing nations.
Because of the subsidies that farmers in Europe receive, the market price of a bag of potatoes produced, for example, in France is cheaper than a bag produced anywhere in the developing world. And since the EU produces too much food, this bag of potatoes lands in the shops in the developing world, whether as aid or trade, and costs less than the local produce…finally because the farmers in the developing world cannot compete with the incoming artificially cheap subsidised produce, they walk off the land. (Goodtalking’s weblog.)
You can add sugar, milk powder, eggs and a host of other food items to the list.
Peter Mandelson was also in Asian news lately complaining that Japan’s hostility towards foreign investors was a “globalisation paradox” that could lead to companies turning their backs on the world’s second-biggest economy. Mr Mandelson described Japan as
“the most closed developed market in the world and that imbalances of investment between the EU and Japan were “truly staggering”. Many foreign funds cite growing despair that Japan will ever embrace the principles of shareholder capitalism, or drop its scepticism of foreign investors. Takao Kitabata, the top bureaucrat in the Japanese Ministry for the Economy, Trade and Industry, recently described short-term stock investors as “greedy, irresponsible fools to whom voting rights should never be given”. Asia Business Correspondent 21 April 2008.
Mr Kitabata is quite right.
In Geneva, diplomats said India and Brazil (representing the developing countries) were reneging on pledges to open their markets to industrial goods, while Washington was happy to let the talks die since Doha would force the US to dismantle the great nexus of subsidies passed under the Farm Bill. Charlene Barshefsky, the former US Trade Representative, told a panel in London that the outsourcing revolution this decade has begun to threaten middle-class jobs in the US and sap support for globalisation. "Everybody understood in the Golden Nineties that we would shed blue-collar jobs, but now white-collar jobs are going too, and that makes the politics more volatile," she said. (Reuters)
Meanwhile at the UN’s crisis conference on soaring food costs and the conversion of food stuffs to bio fuel held in Rome on 3 June, all participants agreed that the lavish lunch menu was fine. That was all they could agree on.
Asian Markets
Back in the real world of financial markets, the latest survey of investors by Merrill Lynch shows that there has been a sudden change of view by western funds on the emerging powers of Asia. The vast majority of fund managers think earnings forecasts have lost touch with reality. The exodus from China reached fever pitch this month as investors slashed their net "weighting" position to -58, down from -14 in May. Surveyed funds reported their India weighting fell to -63 as investors took fright at the country's budget and trade deficits.
When you get to the China chart below, in particular, you will see that as usual the news, including surveys are only reflecting what markets spoke months ago. Markets do what they do and the news (and surveys) follow.
The chart above is the NIFTY 50 stock index from the National Stock Exchange of India. This market ran up from under 1000 in 2003 to 6357 in January 2008! The red line at 3151 would only be a normal correction if the whole bull market from 2003 was being corrected and I sincerely doubt that what we are going to see will be a normal correction! More detailed daily and weekly charts are available to subscribers at the Danielcode Online.
The chart below is China’s Shanghai Composite Index which has lost more than 63% of its bull market run up and is working its way through its Daniel price sequences with precision. There are two degrees of DC support at 2700 where the market now is, and further price levels in the DC sequence are marked on the chart. You can see how the bar for April reversed off its DC number at 2964. This turkey knows its Daniel numbers.
China’s other Index, Hong Kong’s Hang Seng is in a stronger position, holding well above its March lows which dipped to near the 50% retracement of the whole bull market.
Japan’s Nikkei dived 60% into its March low but is trading well above that level having just been turned back by the 50% retracement at 14590. Large cap indices often find 50% retracements of ranges as a convenient parking lot.
Australia’s SPI 200 index retraced 43% in its dive to the March lows and is holding above that level on strength in the mining sector. Australia’s belief that “China will save us” is still strong.
As our yardstick for Asian markets, here is the Dow Jones index which barely retraced 35% at its January low. The divergences are striking and it seems in times of stress, US remains the safe harbor. It is interesting that all of these markets ran up together and were highly correlated in shape if not degree. The stress testing is what makes the divergences.
To underscore international fiscal stress levels, Comex Gold barely retraced 38% of its last leg up from October 2006 and is holding a strong position. US Federal Reserve starts a two day meeting on Tuesday and will make its next policy statement on Wednesday afternoon. World markets are waiting.
I invite you to visit the Danielcode Online where we analyse a wide range of markets including commodities, forex and Gold and Silver and where a variety of Asian indices are posted for Financial Sense readers.
CAUTION-The Daniel numbers on these charts are from historic sequences that may not be current at the time of publication. They are appended for historic interest only. Do NOT use these numbers to trade markets. Current Daniel sequence numbers for most currency crosses are available to subscribers at the Danielcode website.
Copyright © 2008 John Needham
Asia Editorial Archive
John Needham is a Sydney Lawyer and Financial Consultant. He publishes The Danielcode Report and writes occasionally on other markets. He lives with his family in Australia and New Zealand.
“The fox knows many things, but the hedgehog knows one big thing. A Hedgehog Concept is not a goal, intention or strategy to be the best. It is an understanding of what you can be best at. The distinction is absolutely crucial”. ~ Isaiah Berlin, The Hedgehog and the Fox
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John Needham | The Danielcode Report | Taupo, New Zealand | Email | Website
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