The Chinese Shopping Spree will get stronger

The Chinese Ambassador to Helsinki in Finland has confirmed my predictions during his speech at the luncheon meeting hosted by Finland-China Trade Association in December: among other intereting comments he stated that chinese companies will increase their activity to acquire foreign assets. That will put pressure on the value of USD. The best way for China to change the external value of RMB against USD is putting Dollars into circulation – RMB would get stronger against the USD. The same will happen with other currencies, but the ratio of Euro against RMB, however, will remain untouched. That will help US to reduce imports and increase exports. Also the repatriation of foreign profits made by US corporations abroad will get more attractive. This all will benefit the US.  Certainly there is the risk of inflation looming behind the corner, but the weapon is also near – interest rates. When the FED starts to increase the interest rates, more investments will flow to the US again. The seed for growth in the USA  is nurtured by all these measures – intended or unintended.

The path towards protectionism is open

The worldwide downturn is not yet over, however US companies show strenght. Also investing has slowly started. A good sample is Texas Instruments in Richardson, Texas.  Another sign about corporate moves can be seen in NCR returning back to the USA with manufacturing. It is good to remember even Jeff  Immelt’s talk about keeping manufacturing in the US – to have jobs and a strong middle class that can consume.  So far so good – if  the jobmarket improves during 2010 or at latest in 2011, the inland market will start to grow again.

Despite of these slight positive notes there are still plenty of issues that make the life complicated. The amount of US dollars printed during this year has increased at least 4 fold like stated in prior comments. The value against other currencies hasn’t dropped in relation to that but much less. This means that someone is hoarding dollars like never before. Let’s assume that Japan, China, and OPEC-countries are holding those dollars now. The pressure to correct exchange rates is increasing. It is expected that China will revaluate its currency RMB during 2010 around 6%. That is not what US expects but anyhow something. The thing is that some Chinese banks need to downgrade their assets at the same time or get the dollars exchanged to stable currencies like Euro prior to the devaluation. This is likely because China’s revaluation will go against USD only. Another alternative is that Chinese companies will increasingly fast acquire lots of assets in foreign locations and pay them with USD prior to the revaluation of RMB. My prediction is that China will continue, also after the revaluation of RMB, investing in US assets and buying natural resources, land and companies around the whole world. That means that sellers of those assets will at the end of the day have dollars in they hands which less value. So, the wise man doesn’t sell assets against USD  outside of the USA.

The US must however keep on printing dollars in order to ease exports, reduce imports, improve cost competitiveness, pay debts, and balance out the trade deficit.  I have already discussed earlier the risk and effects on inflation and interest rates, so I disrecard them here. All these things make the USA an attractive location for manufacturing again. The USA is a growing nation with all resources and knowhow. So, what will happen? If and when the USA can handle energy question through nuclear, wind, water, coal, gas, oil, solar and hydrogen, it can start to live more independently from the world than today. It is essential for the USA to get Canada, Mexico and some South-American countries to form a single currency and free trade zone – to enlarge the NAFTA. I furthermore expect that the USA will start to withdraw its military presence (requiring the EU to step up), repatriate corporations and attract investments in a big way.

When the external value of USD drops enough this game can begin. It causes a situation where the worldtrade and material flows will get changed. Many projections of the future must get revised drastically. My assumption is that the world will see three major blogs – Asia, Europe, and Americas. There are also some other areas which are dealing with these, but it is not yet clear whether they can remain neutral. Mainly they could be the oil producing countries. Asian and European countries cannot keep up exporting to the USA when the value of USD drops enough. The US will boom through repatriating companies and foreign companies investing in the US. That generates jobs and increases consumption – the GDP will grow nicely. With a growing population this will be a huge success story. In turn, jobs are lost in Asia and Europe. The competition gets so hard and tough that the EU must start to protect its industry and common market by setting up custom duties or some kind of sanctions, fees or charges. This will lead to a situation where China and the USA will retaliate and do the same.  My vision is the end of global free trade.  There are only a few things that can be done by corporations: to get established in every geographical area, and to focus only on one georaphical area or a specialty niche.  There are certainly other options as well, but not in a big way.

The banking and monetary system will face a hit that must get discussed separately. My advise: get special knowledge and knowhow that is valuable in all conditons.  Study, learn, get assets, and stay debt free.

More pressure on Greenback – is there any exit in sight?

The price of gold is on the top and the value of USD is down. According to the Middle East Online the Golf states are joining BRIC-countries and France in a move away from dealing oil for US Dollars. This will be a sign to follow carefully.  I therefore see my earlier statements confirmed and keep my projection of long-term devaluation of USD.  It is exactly what is needed in the US to start economic healing and balancing the trade.  USD reserves are melting when measured in foreign currencies. If you haven’t done yet, now is the time to move your USD assets to the US, where the lower value of greenback doesn’t hurt so much – dollar remains a dollar anyhow. On the other hand holdings of other currencies might bring huge wins in the future, when exchanged to USD at a latter day.

World Economy in Crossroads

Let’s look at the hard facts again before going deeper. The amount of USD in circulation is the driving factor now. Like discussed earlier the USA must get the external value of USD down, which means devaluated against other currencies. The key here is the money supply. The history data shows that money supply and inflation are directly related with each other. This is of course debated amongs scholars, but we accept this relationship here as a basic fact.  Therefore, one of the major tasks of any central bank is to control inflation and therefore the money supply. This is valid also for the FED. The Central Bank controls physical currency and governmental money which is called M0. In 2008 the total amount of USD in circulation was around $ 833 billion, of which 70% outside of the USA.

Now it has been estimated that the money supply in the USA will grow during this and coming yerar from $ 262 billion to around 4 trillion – 15 fold. This is a lot! Therefore, we are going to see two major things happening: first the devaluation and secondly inflation.  The problems outside of the USA will start because of the devalution, but the inflation will hit on inland. In order to control inflation, the FED must start to break development at certain point through curbing interest rates up. When will that be – most likely during 2010 when employment starts to pick up again.  Whatsoever, the prices will go up and the average John Doe must look more carefully how to spend his dollars – the consumption might suffer from inflation. A part of consumtion will anyhow get cut off through a higher savings rate than in the past. This is certainly good, but slows down the economy a bit.

Now to the problem that will come up outside of the USA. The USA has a negative trade balance and deficit in the federal budget. These both must get compensated some how. That has been done by borrowing money by printing bonds and selling them to foreign institutions like other central banks, and attracting foreign investors to the USA. Investment capital has flown to the USA in expectation of higher return than outside of the USA. Now it is getting cheaper to buy assets in the USA, but low interest rates are not helping. So in this respect the interest rates should go up  at least for two reasons: to hinder inflation and to attract investments. This is self evident.

However, foreign central banks, governments, institutions, and companies are sitting on a hoard of greenbacks already. They don’t want to hear about devaluated USD. When the value of USD goes down, so will do their reserves on USD and receivables in dollars as well. The parties outside  the USA want to see a gradual and controlled drop in the external value of USD – a crash would be a horror story for them. At that moment when the USD gets truly devaluated, the assets must get depreciated to their true value, and that would mean huge losses in Japan, China, Europe, Brazil, South-Afrika, Arabic countries, and Russia. We can estimate that other nations are printing more of their currencies as well, but most like not in the same pace with the FED. I have projected an exchange rate of 1,6 USD to 1 €, but now I wouldn’t be surprised of a 1 to 2 ratio. A drop of 40-50% in dollar’s external value is like poison to lenders and foreign reserve banks holding USD assets. My estimation is that on the long-run the USD will have only 25% of the value it has today.  This would be around 2,4 dollars per 1 €!

The outcome would include national disasters in several countries by crashing banks and financial system, loss of jobs in tens or even hundreds of millions globallay etc. In order to linder effects something must happen up-front. BRIC-nations (Brazil, India, Russia, China) have demanded a new world currency, some OPEC (oil producing countries) consider to change from dollar to euro, more nations are joining EU and euro-zone, and China has demanded the USA to hold the value off USD stable. This is controversial then all these nations have lots of dollars in their reserves, have lended to US, or have USD receivables. On the other hand they want to keep up supplying and selling goods and services to the USA. At the same time they want to sell their assets in USD in order to reduce the risk of devaluation. By selling USD they increase the amount of USD in circulation – the money supply (M0). There are no easy ways out. The hard medicine is know to everybody and the time is near to start to take it. It is very difficult with USD assets – their value will drop anyhow,  so a write-offs must happen now or later.

All nations who have large surplusses in their trade with the USA must now find a way to balance the trade. The lower value of USD will automatically reduce imports by US companies and helps exports from the USA at the same time. The task is to increase trade between other nations and balance it out with the USA. Every nation must look at their home markets and their neighbor countries and focus on those relationships. Any dependence on exports to the USA is highly risky now and in the future as well. I’m saying both sides need the balance! The US economy will heal steadily, but it cannot be based on borrowing any longer.  The same is valid for others – the growth and wealth cannot be made only by selling to the USA and financing that by borrowing to them. In the meantime the USA will become again a very cost competitive and growing nation, and that is good for the whole world.

As a base-line the trade balance and growth of global economy can get handled somehow, but  avoiding the write-off of assets in USD is close to impossible. The headache is predicted and the medicine linders only, but doesn’t remove the cause. The change is irresistable.

The external value of USD must go down substantially

The Central Bank is printing dollars and US bonds. The Secretary of  State Mrs. Clinton is rallying around the globe to promote the sales of the bonds to secure the inflow of  dollars to finance the deficits. This seems to work for the moment. The path for lower external value of USD will get prepared. The USD must get devaluated against other currencies in order to let US economy to heal towards a trade balance on the long run.

It is obvious that an ever deeper trade deficit and foreign debt cannot be sustained forever. The biggest hurdle might be found in the USD/Yuan exchange rate. The Chinese government will control the value of Yuan (reminbin) against USD in order to guarantee the continuation of the status of China as the number one manufacturing location in the world.

China  hasn’t downgraded its receivables from the USA yet. That’s because the USD has been so heavily weighted in the currency basket of Yuan. When the external value of USD drops the PRC, banks and other Chinese lenders must correct the value of their assets down. That would mean huge losses in hundreds of millions or even billions of USD, and that they are trying to avoid now. China has demanded USA to hold the external value of the USD. However, this will become a task or mission impossible in the near future.  When USD looses its external value there is a risk of inflation because imported goods and service will cost more by then – like oil, gas, and other imported goods etc..

Like stated in prior blogs the USA needs jobs, stability, trade balance and therefore growth. The growth is guaranteed by growing population, but it must be able to consume. That is not possible without jobs and a strong middle class.  The Jobs are created by small and mid-size companies mainly. They must be able to produce, make, trade and especially sell their products in order to hire and make investing decisions.  Because the US economy is about 70% driven by inland consumption the FED cannot increase the interest rates too much – even if the inflation would pick up a bit. Now, I think the demand for goods and service is best generated in the USA by low external value of USD. And this devaluation untraditionally not because of  increasing the exports but to make returning of manufacturing possible!

What is that? US based corporations have outsourced and tranfered manufacturing to low-cost countries (LCC)  like China, India, Vietnam etc. Now, when the external value of USD goes down, the gap – cost difference – gets smaller between manufacturing costs in LCC (or other countries)  and the USA.  When taking into consideration the level of minimum wage of $ 6,- per hour in the USA (equals to 4,2 € per hour). At China’s west coast an average worker gets around $ 1,10 to $ 1,60 per hour in a Chinese owned company and up to $ 5,77 in a foreign owned company.  There is still a difference, but that is not the case when counting with total landed costs. Depending on the product the freight, handling, export and import related costs like duties and taxes come on top of that. We might estimate that around 25% must get added to the cost – material cost is seen here as a constant factor and therefore not considered. By doing like this $ 1,60 gets to $2,-  and $ 5,77 gets even to $ 7,21.When the exchange rate of USD drops against Yuan this gap gets narrower. When USD / Yuan ratio changes 30-40% then the remaining gap is only 6-2,80 = $ 3,20 per hour for manufacturing in real Chinese company and negative $ 1,21 in a western company. The final outcome would be that manufacturing in the USA would make sense again.

When US corporatoions start to bring manufacturing back home, a boom in investing, job creation, and growth will happen. The middle class begins to feel right, federal income would rise, and even foreign companies would begin to invest heavily in the USA. The nation would prosper again and easily pay back the foreign debt. The trade balance would get positive when imports drop and remain on a lower level. Inflation would go up and therefore also the interest rates, but that would be ok, when the whole world invests and believes in the USA again.

What that would mean for other nations and foreign corporations will get discussed next time.

A New Scenario starts to unfold

There is a good chance for a completely new scenario about world economic development. It’s not about BRIC-countries, but more about the USA and its impact onto others.

Let’s start with the good old greenback. The whole US economy will heal the most when the external value of USD is drastically lower than today – imports getting more expensive and exports lukrative. BRIC countires want to get rid off USD as a reserve and trade currency anyhow. So, on the long run others want to reduce their USD risk position (and sell their USD reserves) and the USA itself needs a lower USD value. I bet this will happen when now all parties want it – but steadily. USD will drop down to 1,7 or even to 2 against one Euro.

Now let’s think about countries having high reserves on USD: they hate to loose the value, but will accept it in small steady portions – China, Japan, India, Russia, Brazil, OPEC countries and the EU will all agree when the value of USD drops in small steps over a course of time. And they will write off assets or at least revaluate them down. That will burst some banks, financial institutions, even countries, and companies around the globe, but not the US ones – they will be dancing out of the trouble. This will be the phase one. Continues…

Backbone of the US economy

The upswing has started in the USA. Times are still somewhat rough though. The USA is still the single largest economy in the world – just not to forget it, and it is a flexible economy. So, it will adapt – resistance is futile!

The latest statistics from the U.S. Census Bureau show that 98 % of all U.S. firms have fewer than 100 employees. But here the real news: 90% of all firms in the U.S. have less than 20 employees and carry for over 97 percent of all new jobs created in the U.S. of America! When this engine starts to hum, what seems to happen step by step now, we will see growing investment values, higher hiring rates and growing economy again.

The US government will need to make sure that these SM enterprises will get all possible support like tax cuts and less bureaucracy.

One nation, small enterprises with employment and prosperity for all!

Business conditions in the USA are improving

According to the Tatum survey all but two indicators show an upward trend already! The lowest point of recession was reached in November 2008, and since then the condition has been improving. Only capital expenditure and employment are still weak or getting slightly weaker. This is similar to the message what Mr. Prof. Holmberg from MIT carried over in his NYC breakfast briefing. The brighter side is gaining momentum! Also certain industries are more lucrative in the future like nutrition, renewable energy, care of elderly etc.  It’s getting time to make investment plans again, and avoiding debt. Welcome spring and summer 2009!

Sniffing economic winds in the US

I came to NYC to get a feel for the impact of economic downfall on the big apple. However I couldn’t avoid reading the latest on the whole nation: cities and counties are reporting a sharp increase in homeless families! In NYC shelter beds have kept the number of people living on the street or in their cars low. The report on consumer loans (home, car, credit card) is also alarming – 4% of them are in default, which means that consumers are paying late or not at all.The unemployment rate is at 8,5% according to Labor Department. More than 2 million jobs have been cut in 2009 totaling 5,1 million since the recession began. And CEO’s are still getting extraordinary perks in form of bonuses, stock options etc. compensation. This is pretty much interesting then in Japan CEOs are cutting their own salaries, too,  when cutting for the people they lead. I bring this up, because I have cut my own salary by 25% this year as well. In my opinion this is well in line with shareholders’ interest as well. Certainly companies have to fire and lay off employees and workers as needed, but why that would not impact CEO pay? If the company does well and is making profits and keeps on growing, the perks are ok, but if the net result is not positive and growing (after all CEO compensation) there is no reason whatsoever to give extraordinary perks to CEOs. One way to increase profits is to do more on-line and in home offices.

In the big apple stores are laying off and closing – only few are opening. There are spaces for rent in good locations. Most of the shoppers look and sound like foreign tourists. Property values have dropped. The city is still better than it has been some years ago, but it might turn worse soon. Restaurants are having customers in Little Italy and cafes are more or less full at the Time Square. People in Central Park look happy and are excercising. The subways and public transportation are busy with people.

Despite of these facts I don’t see any soon ending for recession neither in NYC or in the US overall. My personal understanding is that the turn might begin late in 2009 or spring 2010. The bottom line result will be a huge number of people staying without income for a long period of times. Values for homes will not gain back their previous levels for years. People who have lost their investments in 401k, 529, or stocks etc. have to work longer, look for something else and when having something left to trust in stocks again in order to gain some of their losses back. The ride will be bumpy however. There are still two major questions left: the level of interest rates and the exchange rate. When interest rates remain low some activity in investment field will begin sooner or later, but printing of dollars will bring the value of greenback down and that is in the interest of the USA – less imports and more exports. Also paying foreign debt (taken in USD) with dollars having a lower value is easier after all. Also an inflation is healthy, if it is not out of control. That latter might happen only when Japan, China and Arabs start to sell their dollars at once. The best medicine now is to remain calm, consider investing carefully, and act with determination.

Hello world!

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