More GST woes

It has been brought to my attention that estimates for Malaysia GDP are way too high with 4 percent GDP growth from the government and world bank.  We can see a -9 percent GDP growth when Australia first introduced a GST of 10 percent.  

Likely a positive GDP will be considered lucky with a hefty 6 percent levy in Malaysia.  Similar countries such as Japan also experienced -3 percent GDP growth at only a 3 percent increase in GST.  Extrapolating a similar ratio, Malaysia will be likely get -1 percent GDP going forward for 2016 (5 percent -6 percent = -1 percent GDP growth).  I imagine the end of 2015 will likely record a 1.5 to 2 percent GDP growth.

Australia is one of those countries who was a pioneer in instituting GST.  The stock market didn't do too well in the period following GST implementation.

Malaysia also has major problems with instituting the GST.  They've created almost a brand new GST system after studying a few countries' GST programmes and likely a new system will almost lead to major confusion.

Why Malaysia needs maids more than they want to admit

From Bernama:

With 34 per cent of management positions held by women in Malaysia, the Southeast Asian nation is only slightly behind China which, at 36 per cent, remains the region's diversity leader.

According to recruiting expert Hays' 2015 Hays Asia Salary Guide, the figure for Malaysia was up from 29 per cent last year.

Malaysia was followed by Hong Kong (31 per cent, down from 33 per cent the previous year) and Singapore (27 per cent, unchanged year-on-year).

 The excerpt above is from Bernama regarding the high percentage of women in the work force.  Malaysia is one of the exceptions when it comes to work place diversity.  But our high work place diversity isn't possible without some help from other countries.

Maids in Malaysia have gotten a bad rap.  Indonesia now doesn't want to send us maids and agent fees have increased by a large amount.  A lot of Malaysians say we don't need maids in Malaysia.    But Malaysia as a whole needs them as an economic backbone.

One of the main reasons for the outstanding diversity in the work place is that if you take a sample of working mothers with children, in top management, a large portion of them will have maids for help on home matters.  It is extremely difficult for women to be in the work force if maids were scarce in Malaysia.

On economics terms, Malaysia take note, maids help the nation grow its revenues.  If families don't have maids, likely one of the parents will have to stop working and women leaving the work force is never good

A bit of forex: the Yen

Usually forex is outside the scope of this blog, but I will comment occasionally since we have many forex traders in Malaysia.  Furthermore, being Friday, not much is happening in Malaysia.  So I want to comment about the Yen.

Probably everybody and his mother is short the Yen at this point.  But One big reason not to be is the Euro.  Probably one of the bigger contrarian trades this year is to long the Yen.  or at least to take off the position.  Why?  After all Japan is still implementing QE, etc.

When everyone is doing it, it becomes the status quo.  What is different then, when the Yen started collapsing ,and now?  One major difference is Europe.  Europe hadn't implemented their QE program then.  Now that they have, the Yen is a lot more appealing than before.

As of the moment, the 10 year bonds from the US are also rising to an all time high due to QE from Europe.  The bear case for the Yen is no longer applicable unless Japan doubles its QE program. From a Yen standpoint Japan's QE program probably won't destroy their currency as badly as many people are anticipating.

Zeti speaks on strong ringgit fundamentals

From the Star:

PUTRAJAYA: Bank Negara Malaysia governor Tan Sri Dr Zeti Akhtar Aziz says the ringgit is fundamentally strong and “it will reflect the underlying fundamentals when the global events settle down”.

She also said on Tuesday Malaysia’s financial system can ride out the capital inflow and outflow.  Zeti added Malaysia's GDP for 2014 was also within the forecast.

She also said BNM would not allow any “systemic” effect from any individual company to affect the country’s economy.

The Edge weekly also commented on a speech by Prime Minister Najib regarding the Ringgit fundamentals.  But if the fundamentals were so good, why is the Ringgit is suffering the most in the region?

Even Zeti is becoming more vocal about the "fundamental" strength of the Ringgit.  Is the Central Bank going to put its money where its mouth is and shore up the weakening Ringgit?  probably not.

It seems panic is spreading a bit as no matter what either leader says, the Ringgit just won't wake up.  Ever since the capital controls statement on Reuters by Zeti, the Ringgit has done nothing but tank.  It's as if the market says keep talking, I'll just keep pushing your buttons.

Reversing the Palm oil hedge

I have decided to do recant my blog post about the USD hedge innate in Palm oil.  While indeed palm oil is priced in US dollars in Europe, a large majority of palm oil customers are European and their currency is having a tougher time than even the Ringgit.  So they will likely turn to their own in state oil products as the palm oil is getting expensive versus the Euro.

A large amount of Malaysian investment is from the Eurozone.  So, a poor euro environment makes Malaysian operations more costly from their perspective.  This is probably one of the more subtle themes underpinning the Malaysian economy at the moment.  They are going to buy less of our exports.

6 percent GST

In the next year, the Malaysian government plans to issue GST at 6 percent.  I have several thoughts on this new tax.

It seems that Malaysia is entering some economic difficulty stemming from poor revenues towards the end of the year.  Generally both consumers and companies are cutting back.  I'm actually surprised that this is the case for Malaysian consumption because like many others, I've done a lot of durable goods purchasing over this year in anticipation that if I didn't buy the big ticket items, I would have to pay 6 percent more next year.

We should expect to see economic weakness NEXT YEAR.  Not this year.  Unless the next few months see an explosion of goods purchased, it's almost guaranteed we will hit an economic slowdown next year.  We haven't had the GST implemented and already the economy is having difficulty.

The 6 percent is actually extremely high.  Malaysia should rethink their rate.  Singapore introduced a 4 percent GST their very first year of implementation and only after some years of the tax regime, moved GST to six percent.

Next year will be tough slogging for many Malaysians.  Any income tax reduction from the government to offset GST won't make up for the increased cost of living most will face.  

Game Theory at work, US and Europe!

Game Theory, more specifically the Nash equilibrium, Prisoners Dilemma is alive and well in the world. Europe is doing what is best for itself and US is doing what is best for itself. They can both cooperate for better gains but they won't even though it may be in their best interest to do so. (i.e. printing money the way US wants it done)

Apparently US needs help outside of itself to get the economy going again. If Europe won't cooperate with money printing, kiss Geitner's and Bernanke's money printing based solutions goodbye. Of course, they could print even more money, but it is hard to justify buying more assets to debase the currency as there is no crisis. Let's see where Bernanke goes with this.

Anyways, like I said before the US swap lines are open, but the ECB isn't using them. The swaps mean the US gets ECB bonds, Europe gets US Treasuries. ECB in turn, buys crap assets such as sovereign bonds with US money. If the ECB is gone sometime in the future, guess who will own the crap sovereign debts!

Central bankers play follow the bernanke, request liberal use of swaps

From the NY times:

South Korea is proposing that central banks set up a permanent arrangement for foreign-currency swaps to help address the type of funding shortages that emerged during the global financial crisis.

“Broadening and institutionalization” of such measures could help establish “a global financial safety net,” the governor of the Bank of Korea, Kim Choong Soo, says in the text of a speech to be delivered Monday in Seoul at a conference of central bankers.

Mr. Kim’s proposal comes five days before finance chiefs from the Group of 20 nations are scheduled to gather to discuss strengthening efforts to prevent financial crises. The U.S. Federal Reserve chairman, Ben S. Bernanke, who is among the officials scheduled to speak at the meeting, has opposed currency swaps as a “permanent service,” seeking instead to pressure banks into better managing their funding needs across different currencies.

Mr. Kim said his proposal could reduce the need for emerging economies to hold large quantities of foreign-exchange reserves as insurance at a “substantial” economic cost.

Wow, we're talking about Korea suggesting to the US to use more swaps. Well, if they want to bail out Europe, other countries are going to ask for their share as well.

But Bernanke isn't in much of a position since he let the genie out of the bottle with use of swaps during his tenure. Not calling him rascist or anything, but what the hell, exports to Asia are just as much as exports to Europe. If Asia is in trouble, it is in US' company's best interest to bail them out. Asian countries won't need to hold as many reserves which is good for US exports.

US Exports to the world by region

That is the main reason why Europe is getting bailed out. I say Asia should hold one currency together so they don't need to carry as many reserves and dump US dollars so Asia currency and wages can go up.

Then people in Asia can take holidays in Europe and US for Cheap!

Quantitative easing, everyone is doing it!

I'm not bullish on US stocks for a major reason, I think growth will slow. The only avenue of growth for companies is through exporting (i.e. Weak dollar) which is what James Altucher of Formula Capital is arguing for a bull market. I agree with him in a perfect world where the world's interest is the US' interest...... however,

James Altucher of Formula Capital is a moron. I watched some of his videos on CNBC. His whole bullishness is predicated on what is going to drive stock market profits is the low dollar. He fails to consider one huge monkey in the room, China. China is NOT going to sit by idly while US and Europe trash their own currency. China will devalue their yuan and join in the race to the bottom.

So, until China decides to devalue the yuan, the markets will do alright. But, once the devaluation happens, the stock markets sell off. The US dollar will appreciate, and guess what, the profits of US companies will go with it. That is why I'm not bullish on US stocks. In this case, there is nothing the FED can do. They can ease even more, but I think they won't once China shows the US they have the gonads to wreck their own currency and go toe to toe with US in the trashing of their own currency.

In simple terms, the Yuan will not go up against the US dollar, stock investors will see this (they don't now) and slash their growth estimates for stocks, thus sending markets back down into correction or a bear market.

Honestly, I don't even think central governments care about gold. So what if it goes to ten or twenty thousand an ounce? Honestly, they will care more about what is happening with their economic well being and whether people are working than what happens if some shiny metal is worth ten or twenty thousand bucks an ounce.

Why housing defaults matter

The US has a problem in over-leverage. The banks are leveraged on a capital ratio of 1:12.5, in other words, they keep some 8% in reserves. If a bank has 10% reserves, housing defaults that would decrease their reserves by 3% would put the bank in seizure territory. If the company is public, the stocks will go to zero when seized.

Looking at the following graph, we can see how quickly the default rate has jumped 2% in over a year. Say, 2% defaults result in decrease of reserves by .75% on average, then it only takes 6% of homes defaulting to get the 3% decrease in reserves. We have some major problems.

Housing default (source: calculated risk)

Bank problem list is at 767, up from 653 in March. This problem list has NEVER decreased. More banks seem to be eligible every time I see the FDIC's press release. They are slow-walking the bank seizure process.

If by now the banks can't get their housing delinquencies under control, this year, another wave of foreclosures is going to happen due to the second wave of housing interest rate resets. I doubt anyone believes with another wave of resets happening that the default rate will get lower.


As you can see, the loans which will experience payshocks start increasing around now, through June and July, then pretty much into next year and into 2012. Option Arms default rates are just as bad as subprime.

Banks will write these assets off..and when they do, rest assured their reserves will decrease, and stock prices will go down. Either that or we will have another 5 trillion of QE by the Fed.

To buy or not to buy, Malaysian stocks

The market is around 1250 right now. I'm not a buyer at this time. Lets see where the next month goes. My feeling is three part-

ONE. Liquidity is still there, so eventually prices will run up in the longer run. Bailouts will keep coming, the second wave of housing problems are starting to hit (hence second round of Quantitative easing), the Euro is facing just the beginning of their member states' problems, and the US will likely need to bailout their states that overspent.

TWO. We will have had only the first negative month. Perhaps it will subside to the upside the next month, but maybe not if momentum players have anything to say about it.

THREE. Equities may not go up forever. They are capped by economic growth, dividends payouts, and input costs. The things that can go up, however are bond yields as investor concerns over the "stealth default" through inflation, and commodities as more money chases fewer goods.

On GST in Malaysia, blinded by other country's GST successes

GST may be just another sales tax, but my opinion is that it is sort of an attack on small company formation and outsourcing. It is true GST is used in a few countries, and rational logic would say, ok it works there without the country going under, therefore, yes Malaysia should be fine.

But the truth is, GST hasn't really been tested in a developing country such as Malaysia which many of its industries are reliant on manufacturing exports. GST is used in Australia, New Zealand, Hong Kong, Singapore, and Canada where the income is relatively high on a Gross national income basis and the economy is fully developed. It is true, Australia and New Zealand do export quite a lot of items, but their products are mainly natural resources and agricultural goods, relatively low on the value chain of manufacturing.

Malaysia does not have a high national income per ca pita and the economy is not developed. Costs do matter as the country is a manufacturing export based economy and is in competition with worldwide exporters.

Services are built around the manufacturing sector. E&E exports are very dependent on the structure of the economy. In A GST structure, companies will outsource less and build up the value chain more to avoid the taxes. A lot of small time vendor services will be much more costly as companies toward the end of the value chain rethink their outsourcing strategy.

E&E will suffer the most cost increases as their whole structure is based on outsourcing. The number of parts involved in the products is quite dependent on outsourcing costs. If the products become too costly, the end manufacturers will vertically integrate, killing thousands of vendors which compete for their business.

If you are in the camp that small businesses drive economic growth, then yes, GST will hinder economic growth.

Zeti hints at higher interest rates, why this is significant

From the Business Times:

Bank Negara Malaysia said it may increase interest rates further to avert asset bubbles and discourage risky investments by people seeking better returns, even as inflation will likely remain "modest" this year.

"We will review the conditions at our next monetary policy meeting and work toward further normalising if necessary," governor Tan Sri Dr Zeti Akhtar Aziz said in a March 12 Bloomberg Television interview in Kuala Lumpur. "Inflation will continue to be modest and therefore it would not prompt us towards tightening, but that does not preclude that we will continue to normalise interest rates."

"Certainly the first half of the year, all the signs are pointing to stronger growth" as domestic demand and investment recover, she said.

Inflation of about 2 per cent would be considered "modest", Zeti said. Malaysia's consumer prices rose for a second month in January, climbing 1.3 per cent from a year earlier from an average 0.6 per cent in 2009.

Should price gains accelerate further to 3 per cent, for example, "we would begin looking at what are the sources of inflation because if it was demand-induced then" the central bank would look at "tightening" monetary policy, Zeti said.

Zeti refrained from raising interest rates in 2008 when consumer prices rose as much as 8.5 per cent in July and August amid soaring oil and commodity prices, saying inflation wasn't driven by higher demand and would ease as global growth slowed.

Malaysia's policy makers aren't "inflation targeters", she said last week.

While the rise in interest rates is not insanely surprising, given many other countries are currently tightening, the tone used in explaining the rationale of the interest rate moves point towards moving in a different direction that other central bank uber money printers.

For one, the bank has openly stated that it is not an inflation target-er, and is willing to repay back the savers who have been sitting patiently financing the Malaysian economy through this difficult time. This is excellent. This is a central bank that is willing to break from the crowd and not just follow inflation and economic data like a mindless lemming.

They are willing to raise interest rates and acknowledge savers which is fantastic given the ridiculous amount of money printing by everyone out there. Countries that have raised interest rates are doing so because of what inflation data tells them, following in the footsteps of the US; not because they want to compensate savers. While interest rate increases do give investors confidence, the knock on these central banks is that they will just as likely reverse actions if the data tells them to. Rarely is data ever stable especially given the current volatile economic conditions, so what currency investors crave is foresight on what a bank will do. Foresight that the bank will act accordingly to data is about as stable as an earthquake.

In a world where every central bank is hell bent tunneling in on economic growth, the Malaysian Central bank has taken a refreshing change in tone. This currency is going up, and the economy should be decent. If you want to break from the pack, Malaysia central bank is a prime example. Nothing says confidence like a country that is willing to acknowledge it will do something different from the money printing crowd and defend the savers and spending power of its currency, even if the economic recovery isn't as strong.

If the US is stock buying futures, what does that mean?

This is to follow up on the previous post that the US government may have been buying futures to artificially increase the stock market. In the following, I give a hypothetical scenario if the government had bought futures, and when the positions expired, what would happen.

Suppose the US government may have put bought index futures at some date a couple of years away. Given a margin requirement of say...10%, 100 billion worth of futures over 6 months would translate into some $1 trillion of buying power.

When people buy these futures, the sellers will have to buy the index to hedge their positions. They would buy 1 trillion dollars worth of stock so they might deliver these to the government some years away.

So, what happens when the government closes out their positions by offsetting at some earlier date. Well, the opposite happens, there will be no buying power and a lot of shorts. In fact, all the institutions which took the other side of the trade don't have to hold their stocks any more and will more likely sell the positions. As we approach the futures date, we will get a lot of selling, to the tune of a trillion dollars of selling power in the stock market.

When closing out futures contract, the government could theoretically take delivery, but that would translate them into putting up even more money for the basket of stocks they take delivery for. This won't happen. I don't know how the treasury could justify a hundreds of additional billions to congress just to purchase stock.

The last option is that they could roll over the futures position to an even further date. The government would close out, the counter parties sells one trillion worth of stocks, and reopen, the counter parties buy another one trillion worth of stocks. Nothing much except a flat and choppy market would ensue in this case.

Either the treasury/fed could perpetuate the positions or close them out.

Views about the stock market and economy

First, the most important point we must establish is that of inflation and deflation. We will probably see a period of deflation, the contraction of credit. Recent headlines (1 , 2) point to contracting debt in spite of the government taking on trillions in debt.

Furthermore, with capacity slack we will unlikely see the tightness in production needed for producers to raise prices. The final piece of evidence is that of rents in the United States are decreasing. This will show in the OER which is a huge weighting on the CPI. This will counteract any CPI increase due to commodities.

Most likely, the path of least resistance is that of deflation. But whether consumer prices go up or down a lot is not the main driver of the market. The main driver is the contraction of credit. We're going to see credit contract and a lot of these debts won't be paid off due to people can't pay for their homes and businesses going bankrupt. This debt destruction will suck up all the extra dollars the fed has pumped in and more. We can see this happening already despite government actions to take on more debt.

What does this mean for the markets? Simply, demand for dollars is outpacing supply due to debt destruction. The dollar will most likely increase in value, and thus risky assets will have a hard time in this environment.

In the future, I don't see the Fed able to increase liquidity without backlash. Already the public is skeptical of the Fed creating more dollars so any more money created will be met with scrutiny. Short of another systemic failure or economic recession, I don't see massive credit creation in the future. Keep in mind, the Fed in it's most recent meeting has indicated that it will be stopping purchase of treasury securities, so it seems as if they are starting to slow down the liquidity programs.

Cash for old cars, similar to Malaysia's, wildly popular in US

From the Star Online:

WASHINGTON: The White House said Thursday it was reviewing what has turned out to be a wildly popular "cash for clunkers" program amid concerns the US$1 billion budget for rebates for new auto purchases may have been exhausted in only a week.

Transportation Department officials called lawmakers' offices earlier Thursday to alert them of plans to suspend the program as early as Friday.

But a White House official said later the program had not been suspended and officials there were assessing their options.

"We are working tonight to assess the situation facing what is obviously an incredibly popular program," White House press secretary Robert Gibbs said of the Car Allowance Rebate System.

"Auto dealers and consumers should have confidence that all valid CARS transactions that have taken place to date will be honored."

Gibbs said the administration was "evaluating all options" to keep the program funded.

A Transportation Department official said the department was working with Congress and the White House to keep the program going.

The administration officials spoke on condition of anonymity because they were not authorized to speak publicly about the discussions.

The CARS program offers owners of old cars and trucks $3,500 or $4,500 toward a new, more fuel-efficient vehicle.

Congress last month approved the program to boost auto sales and remove some inefficient cars and trucks from the roads.

The program kicked off last Friday and was heavily publicized by car companies and auto dealers

Through late Wednesday, 22,782 vehicles had been purchased through the program and nearly $96 million had been spent.

But dealers raised concerns about large backlogs in the processing of the deals in the government system, prompting the suspension.

A survey of 2,000 dealers by the National Automobile Dealers Association found about 25,000 deals had not yet been approved by NHTSA, or nearly 13 trades per store.

It raised concerns that with about 23,000 dealers taking part in the program, auto dealers may already have surpassed the 250,000 vehicle sales funded by the US$1 billion program.

"There's a significant backlog of 'cash for clunkers' deals that make us question how much funding is still available in the program," said Bailey Wood, a spokesman for the dealers association.

The clunkers program was set up to boost U.S. auto sales and help struggling automakers through the worst sales slump in more than a quarter-century.

Sales for the first half of the year were down 35 percent from the same period in 2008, and analysts are predicting only a modest recovery during the second half of the year.

So far this year, sales are running under an annual rate of 10 million light vehicles, but as recently as 2007, automakers sold more than 16 million cars and light trucks in the United States.

General Motors Co. spokesman Greg Martin said Thursday the automaker hopes "there's a will and way to keep the CARS program going a little bit longer." - AP

At an average of $4000 per rebate for a new car, the US government has just goosed auto sales by some 250,000 units in just a week. Just to keep things in perspective, 10 million sales is equivalent to 192,000 units per week on average. This will push up the annual run rate to over 10 million most likely.

Auto sales are a major component for world trade as the US generally imports most of its components for cars. China may sell a lot of cars, but most of the components are made in China. Getting the sales up is a necessary positive to get the world economy back on track.

US Job Report suggests that Green shoots are mostly Yellow weeds

Some excerpts from RGE Monitor:

The June employment report suggests that the alleged ‘green shoots’ are mostly yellow weeds that may eventually turn into brown manure. The employment report shows that conditions in the labor market continue to be extremely weak, with job losses in June of over 460,000. With the current rate of job losses, it is very clear that the unemployment rate could reach 10 percent by later this summer, around August or September, and will be closer to 10.5 percent if not 11 percent by year-end. I expect the unemployment rate is going to peak at around 11 percent at some point in 2010, well above historical standards for even severe recessions.

The other element of the report that must be considered is that, for the summer, the Bureau of Labor Statistics (BLS) is still adding between 150,000 and 200,000 jobs based on the birth/death model. We know the distortions of the birth/death model – that in a recession jobs created within firms are much smaller than those created by firms that are dying. So that’s distorting downward the number of job losses. Based on the initial claims for unemployment benefits, it’s more likely that the job losses are closer to 600,000 per month rather than the figures officially reported.

The other important aspect of the labor market is that if the unemployment rate is going to peak around 11 percent next year, the expected losses for banks on their loans and securities are going to be much higher than the ones estimated in the recent stress tests. You plug an unemployment rate of 11 percent in any model of loan losses and recovery rates and you get very ugly losses for subprime, near-prime, prime, home equity loan lines, credit cards, auto loans, student loans, leverage loans, and commercial loans – much bigger numbers than what the stress tests projected.

There are also signs that there may be forces leading to a double-dip recession, sometime toward the second half of next year or towards 2011. If oil prices rise too much, too fast, too soon, that’s going to have a negative effect on trade and real disposable income in oil-importing countries (US, Europe, Japan, China, etc.). Also concerns about unsustainable budget deficits are high and are going to remain high, with growth anemic and unemployment rising. These deficits are already pushing long-term interest rates higher as investors worry about medium- to long-term stability. If these budget deficits are going to continue to be monetized, eventually, toward the end of next year, you are going to have a sharp increase in expected inflation - after three years of deflationary pressures - that’s going to push interest rates even higher.

For the time being, of course, there are massive deflationary pressures in the economy: the slack in the goods markets, with demand falling relative to supply-and-excess capacity. The rising slack in labor markets, which are controlling wages and labor costs and pushing them down, implies that deflationary pressures are going to be dominant this year and next year.

But eventually, large budget deficits and their monetization are going to lead – towards the end of next year and in 2011 – to an increase in expected inflation that may lead to a further increase in ten-year treasuries and other long-term government bond yields, and thus mortgage and private-market rates. Together with higher oil prices driven up in part by this wall of liquidity rather than fundamentals alone, this could be a double whammy that could push the economy into a double-dip or W-shaped recession by late 2010 or 2011. So the outlook for the US and global economy remains extremely weak ahead. The recent rally in global equities, commodities and credit may soon fizzle out as an onslaught of worse- than-expected macro, earnings and financial news take a toll on this rally, which has gotten way ahead of improvement in actual macro data.

I pulled some interesting sections from RGE Monitor's article by Nouriel Roubini regarding the current US job numbers.

Last month's job losses were quite decent at 360k compared to the trend of 500k job losses a month. But this blip might be explained by the distortions caused by the birth/death model that the BLS is recently employing. Adjust 360k by 150-200k jobs a month, we are back at 500k job losses a month, about where the trend currently is.

Higher unemployment has a huge effect on the stress tests., so bank losses will get larger. Analysts using the stress test results for their earnings projection will need to adjust for higher unemployment.

Deflationary pressures will be around for this year and next, adding on to the idea that the recent commodity rally looks like a head fake.

And this "W" shaped recovery a lot of economists are talking about seems more like a recovery with ups and downs instead of a double bottom. The recovery will be weak, recessions will now be weak, basically, a stagnant economy. Inflation might rise further into the future.

Roubini comments about China

From Roubini's RGE Monitor:

Roubini had recently been in China and met officials there. We talked about the bind that the world economic slowdown had created for China’s leadership—not despite but because of its huge trade surpluses and foreign-currency holdings. Many Chinese commentators have blamed American overborrowing and excess for dragging them into a recession. But even they realize that the very excess of American demand has created a market for Chinese exports. Chinese leaders would love to be less dependent on American customers; they hate having so many of their nation’s foreign assets tied up in U.S. dollars and subject to the volatility of American stock exchanges. But for the moment, they’re more worried about keeping Chinese exporters in business. To do that, they want to prevent their currency from rising. And for reasons laid out in detail in a previous article (“The $1.4 Trillion Question,” January/February 2008 Atlantic), the mechanics of finance require them to keep buying U.S. dollars and entrusting their savings to the United States. “I don’t think even the Chinese authorities have fully internalized the contradictions of their position,” Roubini said.

I agree. But I can report that for these past six months, virtually every economic conference I’ve heard of in China and every special supplement in a Chinese business publication has been devoted to the changes the country would have to make in order to reduce its vulnerabilities.

This was released on June 25, 2009 coinciding with what I wrote on how I doubt the export model will change. From what I highlighted, it's obvious the Chinese are just huffing and puffing, even Roubini acknowledges. I think China will be all talk until they actually do something substantial which could involve lifting the currency controls and not buying so much US debt.

Lets see if they will be able to take the tough medicine. If not, I see no reason to change my outlook. All this talk about a new super currency may help, but it all comes back to whether China will continue to grow through pushing exports. Nothing wrong with growing through exports, but keeping output artificially higher by manipulation has consequences.

Furthermore, China has not shown signs of trying to stop securing cheap sources of commodities evidenced by their pursuit of large multi-national commodity suppliers such as Rio Tinto. They must think that they can buy entire value chain and keep all the profits for themselves! I think it's not so easy. This is a good thing because the world needs to help keep China in check from overproducing. The world needs sustainable, healthy growth as opposed to the binge-style of growth over the last few years.

Why commodities will do well over a longer horizon (but not now).

Currently, China has been buying up lots of commodities. I believe they think that commodities is one of the most important investments they can make. But likely most of the purchases at this point is speculative and probably unneeded unless they are willing to let the supplies sit their for years.

The major reason commodities will do well over a longer period of 5+ years is mainly because nothing has really changed. China will continue to dump exports and piggy back on the the US and other developed nation's economies. They will find it harder to do so as time goes on as they will have to manage their currencies with other developing nations besides the US.

As you can tell, this is not a really healthy or effecient way of running an economy. By force feeding products to developing nations, we have a problem. The other economies don't really need the exports. By making exports cheaper than they are supposed to be through currency manipulation, quantity of products supplied to the world grossly exceeds what is effecient.

But alas, nothing is perfect. If nations can't play fair with each other, it will show with commodity prices. To keep this oversupply of products gravy train going requires an equally sizable oversupply of commodities. So this is a nice gutcheck against those countries who piggy back through export oriented economies.

The export model has taken a gut check, but there are no indications that countries will change their growth through exports philosophy so the picture for commodities is still strong. Also contritbuting to this is monetary abuses by nations. So once the monetary abuses abate or the world has an oversupply of commodities, we will probably see the commodity prices come back down.

The other way the commodity picture might turn bad is for world nations to start paying down debt. Most nations, though aren't doing the right thing as all they can think about is spending their way out of a recession. Most countries' leadership lack the mettle to take the tough medicine and would rather put it off for later. As long as we have this, the outlook for commodities looks good.

Can't have your cake and eat it too in export dependent economies

"Live by the sword, die by the sword" prevails as a prominent theme throughout the recent financial crisises. China has its part to blame in fattening the US economy by providing cheap exports and fueling their consumption binge.

No one should really depend on China to bring their economies back from the brink. China's prosperity depends in large part on the US prosperity. Their whole financial system is basically built on exporting everything they possibly can to the US. So whoever would depend on China utlimately also depend on the US. I can think of several southeast asian countries that fit the mould.

The countries which piggy back on others through exports enjoyed some fantastic propserity will also share some fantastic pains during this global recession. Those countries will never be decoupled from global growth as long as exports make up a large portion of their gdp.