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SEA
CHANGE, THE WEALTH OF THE WORLD IS ROTATING
by Ty
Andros
Editor, Tedbits Newsletter
February 13, 2007
Be
careful what you wish for, powder kegs and the matches have been lit,
the Yen
Time to load up on Commodities, Gold and crude, the train is leaving the
station!!!
Sea
Change, the Wealth of the World is Rotating
This
is one of the most shocking charts (courtesy of the NY times) I can ever
recall seeing, it is one that spells eventual doom for one group of
Global Sovereign market participants, and boom for another!
This is the shifting sand’s of Globalization and wealth.
This is as they say in business the “bottom line.”
This is a major shift of Wealth from the developed economies of
the world to the emerging world. The
developed countries of the world are in position for a real catastrophe,
and the emerging markets are emerging at a far greater rate then
previously believed. Interest
spreads between the two are at historic lows and now we can see why,
they have MONEY in the bank, if a hiccup comes in the global economy
they are prepared to service their creditors.
Their debts are at historical lows, and their savings at historic
highs. The developed nations
conversely are extremely vulnerable to a liquidity crisis, as they are
in the opposite position of debts at historic highs and savings and
investment at historic lows. It
is clear why the G8 is creating liquidity as quickly as possible; debt
is very, very deflationary.
Now
lets look below at the balance sheet of the top emerging nations
courtesy of the financial times, that as a percentage of GDP, debt is
half the levels of the
developed world, where onbalance sheet obligations run from 60 to 150%
of GDP. These figures do not include future pension obligations and in
the case of the United States does not include off balance sheet
borrowing of the Surpluses from the Social Security trust funds.
In 1992 these emerging group
ran a cumulative deficit of 547 billion dollars, but by 2005 ran a
surplus of $248 billion, in 2006 and 2007 these surpluses only grew.
A good example is Nigeria, which is a turbulent nation, but it
has virtually wiped out its foreign debt obligations.
And as you can see the other emerging economies have retired
mountains of foreign debt obligations as well.
Considerably reducing their potential of economic instability
from external borrowing. And
they have Trillions of dollars,
and yen and Euros of savings in the bank.
 Who
hold the CARDS? aka the
creditors of the western world? China,
Russia, India, The Middle East, Venezuela, Iran, etc.
These countries are willing suppliers of goods, raw materials and
services, but I don’t see one of them as actual friends of the West.
In fact, one could argue, that its payback time and the emperor (ie,
Europe and America) has no clothes.
As a example of the power shift look no further than Russia as it
stares down western Europe with regularity.
If these high saving, budget surplus emerging powerhouse nations
ever quit or reduce their appetite for the developed country credit
offerings or currencies, you can expect quite a plunge in bonds and
considerably higher interest rates.
The
credit requirements of the developed world just to keep up the
outstanding obligations and current spending is astronomical.
The external debt payments of the industrialized world to these
emerging markets have more than doubled in the last three years.
And at the rate the developed world are debasing their
currencies, their credit offerings are bombs.
It is one of the principle reasons asset markets are
skyrocketing, a good portion the new money the emerging world are
receiving is not going into these fixed income assets, they are now
going into assets to protect themselves from the global money printing
machines. And those same
assets can just reprice as the currencies they are priced in
debase.
When
looking at the average growth rate in the developed world and then
looking at the credit and money growth in those same countries we can
also see that the developed world is creating almost 4 dollars of new
credit obligations for every dollar of GDP growth.
Borrow four to make one? Is not a recipe for sustainable growth!!
Every dollar of debt must be paid for with future earnings.
Those deficits and credit obligations are calls on future
earnings. The anemic growth
has to service growing mountains of debt in the developed world, and the
roaring growth in the emerging markets services ever dwindling
obligations! The seeds of
growth are savings, they have it, and the developed world doesn’t.
These
are the seeds of Protectionism in the west.
Politicians and their citizens in the west will recoil sooner or
later as they become poorer and poorer, and their suppliers become
wealthier and wealthier. The
politicians in Washington keep encouraging reckless behavior such as
Mortgage equity withdrawals and increased borrowing by consumers to just
keep the party going. It is
a recipe for reelection now and disaster later.
A game of kick the can down the road.
The
developed world is also not prepared to meet the challenge of
Globalization in a number of other areas as well; the US has dumbed down
their schools courtesy of the public schools and teachers unions who
refuse to measure themselves against their global competitors.
The United States has had a negative savings rate for the last
two years, and so has none of the seed corn of capital formation.
Go to www.youtube.com and watch man on the street interviews, on
subjects ranging from Global warming, terrorism, geography, the
constitution, and almost any subject you can imagine, the ignorance of
the US population is frightening, just as the politicians wanted, so as
to better manipulate the population.
But
you better be careful what you wish for, as you might get it good and
hard. The laws of unintended
consequences are kicking in as because of the lack of savings, education
and training the US is totally unprepared to meet the challenges of
Globalization. Of course,
France, Italy, Germany and much of central Europe fall into many of
these categories as well, but at least their populations save money.
But the man on the street is not informed, and mislead by a
liberal media. Politicians can just pin the tail on the donkey of the
foreign devils, not their lack of practical solutions to the problems,
they prefer political ones implemented to pay back their campaign
contributors, to the detriment of the constituents.
For
as long as I can remember since starting my career in 1983 the Developed
world has long wanted the emerging world to reform and open up their
economies and join the global trading system.
Now they have, and the picture isn’t pretty for the developed
world. As they have done
just the opposite, larding up on the social programs, dumbing down their
electorates, raising taxes and regulations in a relentless manner.
Destroying incentives to work, and fostering a “dependence on
government mentality”. Conversely,
people in the emerging world of the ‘former satellites of the USSR in
Eastern Europe”, China, Russia, India are doing just the opposite and
are developing very self reliant and very entrepreneurial segments in
their economies. These
people know first hand that the government is a poor provider of
economic security, and for the most part don’t want to go back to the
way things were in those former “workers paradises”.
LOL. Don’t get me
wrong, there are plenty of problems in the emerging world, but they are
constantly being reduced, while the problems are just increasing in the
Developed world as politicians resist reform, deregulation and tell
their constituents they can fix the problem by passing a law against
whatever is concerning or bothering them that day.
The
Graham Schumer tariff bill a prime example of the belief you can change
reality with a few words on paper, the bill proposes 30% tariffs on
Chinese goods if they don’t revalue their currencies by 30%, what a
laugh, this would be a 30% direct tax on everyone who shops at Wal-Mart
or many of the other superstores. Those
consumers would instantly lose 30% purchasing power of their dollars,
and be very much worse off as the substitutes for these products would
be of far less quality and higher price.
Their lives would be far worse.
The manufacturing base went off shore for one reason, and one
reason only. The federal
governments in Washington DC and Europe who regulated, taxed and
mandated their way to the unprofitability of these domestic ventures.
They can’t compete Globally with the rules as they are today!
The politician’s say that’s OK; we will just pass a law
against these rugged competitors. Do
you believe this will really stop the problems of coping with the
realities of globalization?
The
US and Central Europe have some of the highest Corporate tax rates in
the world. Now having
destroyed domestic manufacturers, the Congress and the European
Commission has set its sites on Multi-nationals.
Senator James Webb the new senator from Virginia speaking on Fox
news Sunday explicitly set his sites on these companies and plans to
raid the profits from their overseas operations.
Why does Intel build plants in Viet Nam?
Soon Intel will move their global headquarters out of the US
before these idiots are through.
As we look for the reasons of industrial decline in the developed
world look no further then the fools on Capital hill, in Brussels, in
Berlin, in Paris, in Madrid, and in Rome.
The
emerging world is sitting on trillions of dollars of reserves, and as
sure as savings are the seed corn of capital formation and wealth, new
local capital investment opportunities are emerging at a breakneck pace.
Homes, offices, Factories, roads, infrastructure, cars, and power
generation are just a few of the items needing to be built.
Many analysts believe the Commodity bull market over because of
the auto and housing slumps in the United States, NO WAY.
Just because 300 million people in the United States reduce their
expenditures on housing and cars, this isn’t a good case for a
commodity bear market as 3 billion new entrants onto the world stage are
quite willing to step in to cover the weakening demand for materials in
the developed world.
And
who will be the drivers of these new opportunities, it is the new crop
of graduates these emerging economies are churning out in astounding
numbers. The Internet has
democratized education and the wealth that has been created in the
emerging economies is driving the creation of a tsunami of
college-educated workforces. Take
a look at this chart from a recent report by Steven Roach of Morgan
Stanley.
China,
Asia and India are turning towards their hungry and hopeful new
graduates to lift their populations out of poverty, 10’s if not
100’s of millions of people are emerging on an annual basis.
These emerging economies have emerged and the rate which the
wealth of the world is being transferred to them, soon they may be our
masters.
Be
Careful What You Wish For-
Powder
Kegs and the Matches Have Been Lit!! (aka the “YEN”)
With
markets on their highs worldwide, Politicians memories in Europe and
America have become very short. Just
Last May a waterfall in equity and bond prices caused the Central Banks
and Sovereign Financial authorities to see the horror of falling asset
prices in an Asset dependent world.
The Central Banks tried to tighten money and credit conditions
and quickly realized the systemic threat to the Global financial systems
of their actions. They
immediately went to work and the result was an average growth worldwide
in money and credit expansion of 14 to18% in 2006, depending on whose
report you read.
The
results of their actions can be seen today in every asset class, every
stock index, every private equity deal, and commercial and residential
real estate market in the world (except the residential housing market
in the US which went through a tulip like mania, and got far far ahead
of itself), these assets have exploded in price to the upside.
The recent private equity battle over Sam Zells equity office
properties is a good example of the liquidity available as the Return on
Equity of the final deal was only 4.5%, talk about priced for
perfection, this is a disaster waiting to happen for the funders of this
deal. Unless, they have the
financials authorities at their back inflating away the value of the
base currencies, which they do!!!
Recent
reports indicate that in general pension funding levels have recovered
the ability to meet their future liabilities on the back of this asset
price growth. This health is the direct result of an increase in
financial asset values from $113 trillion dollars in 2003 to $140
trillion dollars in 2006. A
23% increase in just three years. A
projected value of 200 trillion dollars by 2010 paints a rosy picture.
Pension liabilities and any debt based liabilities for that
matter will be paid back in devalued currencies.
This sure shores up the old balance sheets…
Now
a new threat to these asset values is rapidly emerging from the newly
elected left leaning government in the United States and the always-left
leaning European Union. They
have long bemoaned the Chinese Yuan’s peg to the dollar, and the
unfair advantage Chinese exporters have over domestic suppliers of
manufactured goods. Not to
mention their natural advantage of low labor costs and high savings
rates. Now these know
nothing politicians that live in the past glory of their economies and
are ignorant of global finance are attacking the Japanese yen and that
is a very two-edged sword.
One
of the little reported causes of the liquidity crunch that lead to the
May thru July Global asset blood bath was the withdrawal of a huge
portion on the quantitative easing by the Central Bank of Japan. During
the February through end of may time frame the bank of Japan withdrew
trillions of Yen from their banking system, and therefore from March 18
through May 15th 2006 the yen skyrocketed from 83.9 to 92.2
against the dollar or about 10% when they withdrew the liquidity.
Less of anything means higher prices; it is the law of supply and
demand.
Notice
the date the yen hit its high? It
is almost the to the day the top in the asset prices in Bonds, stocks,
commodities, etc. The
liquidation of assets was the result of forced liquidation of carry
trades. These trades were
becoming very painful as the 10% gain in currency was wiping out the
gains on the speculative buy side of the equation.
People who play with leverage have to have stop losses, or be
wiped out in these episodes. And
of course they liquidate their most liquid investments first, ipso facto
exchange traded stocks, bonds and commodities.
The
worlds asset prices have now recovered, and guess what?
The Yen as we speak is back at 82.6 against the dollar.
This is no or coincidence or accident.
It is the nature of the underpinnings of Trillions and trillions
of dollars of the aforementioned Global financial asset values.
It is the footprints of the YEN carry trade.
The
Yen carry trade is where global asset managers borrow in Yen at .25 of 1
% and then buy higher yielding assets Worldwide that yield much more,
anywhere from 4 to 5 % in Sovereign bond markets, to more risky high
yield emerging markets, corporate debt issues, stocks, real estate.
(Here’s an example; they can borrow Yen for 5 percent of face value in
the futures market or from a Japanese bank, in other words they sell yen
or yen futures, put up 5% margin for say $100,000 of yen, and pay the
market .25% interest and then spend the 100,000 dollars on another
investment that yields considerably more (junk bonds, stocks, or any
high yield bet, etc.) or buy a futures contract that pays 7.5% on the
Aussie dollar. They make the
spread). As long as the yen
is flat to down they are quite successful investments, and offer huge
leverage opportunities to enhance returns. But a rally in the yen
quickly turns these investments upside down and forces liquidation of
the speculative end of the carry trade, i.e. Stocks, bonds, real estate,
etc.
Thus
when the Yen rallied because of the previously mentioned tightening by
the Bank of Japan last spring it convulsed the Worldwide asset markets
this borrowed money was used to purchase.
Losing 10% in currency terms means, if you make less than 10% on
the buy side then you lose!!! It
was a major reason the global stock, bond and asset markets tumbled and
the markets dived lower. They
had to take their bets off the table and stop their losses before they
were killed….
Heading
into the G8 meeting this weekend politicians in Washington and the
Central European Union are attacking the low value of the Yen as TOO LOW
and a competitive advantage for the Japanese and a disadvantage for the
welfare states. But keep in
mind the Japanese economy is only just beginning to recover from 15 long
years of stagnation, low growth, and deflation.
It is finally beginning to grow, but is weak and prone to set
backs. And Japans
westernized/developed economy is not a high growth, low wage, low
benefit affair like China, India and the emerging world.
Japan is a low growth story, they need to preserve what economic
activity they have and build on it, they are not booming at the expense
of the US and European economies. So
lets see the US and European Politicians are saying; raise the yen, go
from barely positive to negative economic growth and lets bring down the
carry trade and asset values worldwide.
What FOOLS and IMBECILES! The
only voice of reason has been that of US treasury secretary Hank Paulson
who says correctly the value of the currency reflect the economic
fundamentals of Japan, a deflationary slow growth story.
This
is nothing but political ignorance and populist grandstanding at its
worst, Targeted to the most ignorant of their populations and the press.
But a rally in the Yen of even 5 to 10 % will send their domestic
stock, bond, and asset markets skidding lower destroying the wealth
recaptured since the reflation of 2003 began.
The little fraction of trade and business they lose to Japanese
competitiveness due to Yen weakness will be dwarfed by the Tsunami of
lost wealth caused by the drop in asset values.
Now keep in mind that the yen carry trade is responsible for some
of the appreciation of assets worldwide, but many more of those assets
are financed through domestic and international stock or bond issuance,
securitized debt, and old-fashioned borrowing of one sort or another.
Those creditors will be crushed by the loss of value of the
assets they loaned against. Ditto
the holders of the assets. It
will hit the balance sheets of the borrowers and lenders in Europe and
the United States SIMULTANEOUSLY. Debacles
happen at the margin, only a small percentage of players need to forced
to the sidelines like we saw last May through July to cause a large
downswing. All the debt
issuance worldwide is basically collateralized by the inflated asset
values, if the asset values decline below the amount that is owed then
the loans and bonds that they are in what is called negative equity.
This is the kiss of death for the lender.
The
danger of attacking ones emerging market creditors is evident in the
first segment of this newsletter. But
to attack Japan on this subject is to invite disaster sooner than later.
A spastic appreciation of the yen due to political ho ha, truly
could cause a collapse of the financial systems of their own asset based
economies… A domino effect
that brings down asset values and the global financial systems they
underpin. And for no reason,
but to grab a few headlines to mislead their most ignorant citizens, and
to pander to their trade union cronies.
These are the financial and political leaders of the West,
ignorance at the highest levels of our leadership. Talk about pooping
where one eats…
Time
to Load up on Commodities, Gold and Crude the Train is Leaving the
Station
The
next leg of the commodity bull market caused by global money and credit
creation is poised to begin and the charts tell the story.
Just as asset prices in the world have zoomed higher since the
second quarter 2006 meltdown, commodities are now poised to recover as
well; commercials are loaded up on the long side.
Copper has retraced a Fibonacci 62% of its previous move, as has
crude oil. Gold has gone
through a mammoth period of consolidation in both terms of time and
price. And the emerging
economies have never slowed down; their growing appetite for commodities
is set to continue apace. The
grain markets are poised for huge moves with global grain supplies in
relation to demand at record lows. Ditto
for industrial metals, they too are still in short, short supply.
And with liquidity at record levels the capital investment
climate in the world is set to accelerate.
I could go through all the charts but I won’t, lets just look
at one, the point and figure chart of gold;
A nice double bottom similar to the one we saw in stocks late last
summer, in fact it looks like a mirror image of those bottoms.
It projects Gold back through the old highs of May at $730, with
an initial price objective of $790.
This gold chart is evident in every currency in the world.
The crude market is ready to rumble, inventories are lower and
declining, while production in Mexico is collapsing falling over 500,000
barrels a day in 2006 and projected to decline the same amount in 2007.
Add to this the nationalization of Venezuela’s oil fields (a
recipe for declining production) and continued problems in the middle
east and Nigeria, the continued economic booms in the emerging economies
and good growth in the developed world and it says; Its time to reenter
the commodity markets in a big way, the next leg up is set to begin….
In
conclusion, the world is changing, our leaders are not up to the tasks
of managing globalization and preparing us to meet its challenges, as
rather than practical solutions they are devising political ones.
It is a looming disaster for the developed world as our
politicians live in the past. But
until they do hit the law of unintended consequences in a big way the
global money and credit creation will fuel a party for the time being.
You need to learn to have investments which can flow to any part
of the planet in a heartbeat and make money in all market conditions, up
down and sideways. In other
words learn about alternative investments and how they can diversify
your traditional stock, bond and real estate holdings.
If you enjoyed this edition of Tedbits check out our archives at www.TraderView.com
subscriptions are free, or send it to a friend, and if you wish to learn
more about alternative investments and how to create your own custom
made multi approach hedge fund to diversify your portfolios give me a
call or drop me an email. Don’t
miss the next Tedbits and the beginning of the “Fingers of
Instability” series.
Tedbits
is authored by Theodore "Ty" Andros, and is registered with
TraderView, a registered CTA (Commodity Trading Advisor) and Global
Asset advisors (Independent Introducing Broker).
He currently is the principle of TraderView, a managed futures
and alternative investment boutique.
Mr. Andros began his commodity career in the early 1980's and
became a managed futures specialist beginning in 1985.
Mr. Andros duties include marketing, sales, and portfolio
selection and monitoring, customer relations and all aspects required in
building a successful managed futures and alternative investment
brokerage service. Mr.
Andros attended the University of San Diego, and the University of
Miami, majoring in Marketing, Economics and Business Administration.
He began his career as a broker in 1983, and has worked his way
to the creation of TraderView of which he is the sole owner.
Mr. Andros is active in Economic analysis and brings this
information and analysis to his clients on a regular basis.
Ty prides himself on his personal preparation for the markets as
they unfold. Developing a
loyal clientele.
This
report may include information obtained from sources believed to be
reliable and accurate as of the date of this publication, but no
independent verification has been made to ensure its accuracy or
completeness. Opinions expressed are subject to change without
notice. This report is not a request to engage in any
transaction involving the purchase or sale of futures contracts or
options on futures. There is a substantial risk of loss associated
with trading futures and options on futures.
©
2007 Ty Andros
Editorial
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CONTACT
INFORMATION
Ty Andros
TraderView.com
(800) 253-7689
Chicago, IL USA
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