The Good, Bad, and Ugly of Emerging Markets

From Zero Hedge:

With Europe now seemingly in exile from even the bravest knife-catcher value-manager, and, despite media protestation, US equities facing weak macro data and a fiscal cliff of epic proportions; it is no surprise that everyone and their mom thinks emerging markets are the place to be. However, as UBS notes today, not all EM balance sheets (whether government, corporate, or private) are the same and they break down the low, medium, and high risk balance sheets across Asia, LatAm, and EMEA. As is evident in Europe, high debt levels are detrimental to economic growth and equity returns. Solid government accounts generally reward policymakers in such markets with valuable policy flexibility, while healthy consumer balance sheets allow credit growth to be a strong domestic growth driver. In a slow and uncertain global growth environment, pillars to support growth are crucial and are market differentiators - especially if global contagion spreads as we suspect.

• Low risk. In sum, Indonesia, Malaysia, Philippines, Peru and Russia appear best positioned. Strong balance sheets that support sustainable growth are rewarded by investors by relatively high multiples, in all cases except Russia, where concerns over corporate governance weigh heavily.
• Medium risk. China, South Korea, Taiwan, Thailand, Chile, Colombia, Mexico, Czech Republic, Egypt, Hungary, Poland and South Africa are all medium risk. They display either one area of remarkable weakness, such as consumer credit in Korea and high government indebtedness in EMEA, or are just average in all categories, like Czech Republic.
• High risk. Those countries with have the highest balance sheet risks are Brazil, India, Morocco and Turkey. In the case of Brazil and Turkey, the risk is reflected in cheap valuations.

http://www.zerohedge.com/news/good-bad-and-ugly-emerging-markets

Charles Hugh Smith: "Big Idea Solution": Radically Lower the Cost Basis of the Entire Economy

From Of Two Minds:

We are constantly told all our problems are too complex to be addressed with simple "big idea" solutions. Complex problems require complex solutions, we are assured, and so the "solutions" conjured by the Central State/Cartel Status Quo are so convoluted and complex (for example, the 2,319-page Dodd-Frank Wall Street Reform and Consumer Protection Act or the 2,074-page Obamacare bill) that legislators say they must "pass the bill to see what's in it." The real "solution" is to see that complexity itself is the roadblock to radical reformation of failed systems. Complexity is the subterfuge the Status Quo uses to erect simulacra "reforms" while further consolidating their power behind the artificial moat of complexity. Over the next three days, I will present three "big idea" solutions that cut through the self-serving thicket of complexity. Nature is complex, but it operates according to a set of relatively simple rules. The interactions can be complex but the guiding principles can be, and indeed, must be, simple. Big Idea One: Radically lower the cost basis of the entire U.S. economy. The cost basis of any activity is self-evident: what are the total costs of the production of a good or service? The surplus produced is the net profit which can be spent on consumption or invested in productive assets (or squandered in mal-investments).

The only way to lower the actual cost basis of the economy is to reduce the role and power of the Central State, dismantle its favored cartels and re-empower community and the market forces of innovation and competition. The Central State and its cartels are incapable of innovation or reducing costs because they dominate the market and the community.

http://charleshughsmith.blogspot.com/2012/05/big-idea-solution-radically-lower-cost.html

Satyajit Das: The Great Pretender – India’s Economic Past and Future

Good discussions in the comment sections.

Part 3: Political Atrophy

From Naked Capitalism:

In the aftermath of the global financial crisis, optimists hoped that the BRIC (Brazil Russia India China) would drive the global economic engine. But China’s economic growth has slowed to its lowest rate in three years. Brazil’s economic growth has fallen from around 7.5% to under 3%. Russia’s economy is heavily dependent on oil and energy prices. India also has stalled. This 3-part paper looks at the development and future trajectory of the “I” in the “BRIC”. The third part looks at the India’s inability to confront its current problems.

http://www.nakedcapitalism.com/2012/05/satyajit-das-the-great-pretender-indias-economic-past-future-part-3-political-atrophy.html

Part 2: “A Sea of Troubles”

From Naked Capitalism:

The second part looks at the India’s current problems.

http://www.nakedcapitalism.com/2012/05/satyajit-das-the-great-pretender-indias-economic-past-future-part-2-a-sea-of-troubles.html

Part 3: “India Shining”

From Naked Capitalism:

The first part looks at the background to India’s recent rise.

http://www.nakedcapitalism.com/2012/05/satyajit-das-the-great-pretender-indias-economic-past-future-part-1-india-shining.html

China Manufacturing PMI Softens Again, in Contraction for 6 Months

From Mish's Blog:

China shows modest deterioration in operating conditions during May according to HSBC Flash China Manufacturing PMI.

Commenting on the Flash China Manufacturing PMI survey, Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said:

“Manufacturing activities softened again in May, reflecting the deteriorating export situation. This calls for more aggressive policy easing, as inflation continues to slow. Beijing policy makers have been and will step up easing efforts to stabilize growth, as indicated by a slew of measures to boost liquidity, public housing and infrastructure investment and consumption.

As long as the easing measures filter through, China will secure a soft landing in the coming quarters.”

http://globaleconomicanalysis.blogspot.com/2012/05/china-manufacturing-pmi-softens-again.html?x#echocomments

China And Japan Dropping Dollar Cross Rate System, Will Transact Directly

From Zero Hedge:

While various three letter economic schools of thought continue sprouting left and right, in an attempt to validate endless spending predicated on one simple thing: transitory reserve currency status, and we emphasize transitory, reality moves on, oblivious of what economic theoreticians believe it should be doing. As Yomiuri Shimbun reported last night, China and Japan are set to launch direct currency trading, bypassing the dollar, and the associated benefits and risks, entirely. "But how can that be?" dollar purists will scream. After all, when one bypasses the dollar, one commits blasphemy to a reserve currency. Somehow we think China gets that. From the AP: "Japan and China are expected to start direct trading of their currencies as early as June as part of efforts to boost bilateral trade and investment, according to reports. With the planned step, exchange rates between the yen and the yuan will be determined by their transactions, departing from the current "cross rate" system that involves the dollar in setting yen-yuan rates, Kyodo News said on Saturday."

http://www.zerohedge.com/news/china-and-japan-dropping-dollar-cross-rate-system-will-transact-directly

John Aziz: Is China Really Liquidating Treasuries?

From Zero Hedge:

Maybe the real reason that the Treasury offered China direct access (thus cutting out the middleman and offering China cheaper access than ever) was precisely because China was selling, and because the Treasury was concerned about the effect on rates, and wanted to give China some incentive to keep buying. As Jon Huntsman noted in a 2010 cable leaked by Wikileaks, the PBOC has felt pressured to keep buying, and as various PBOC officials have hinted in recent months, China is actively seeking to convert out of treasuries and into gold. And that makes sense — treasuries are yielding ever deeper negative real rates. People holding treasuries are losing their purchasing power. No wonder the treasury is willing to cut Wall Street out of the deal. And it isn’t like the Treasury would have taken this move lightly — cutting Wall Street out of the equation is a slap in the face to Wall Street

http://www.zerohedge.com/news/guest-post-china-really-liquidating-treasuries

"As the father has loved me, so I have loved you.  If you keep my commanments, you shall abide in my love, even as I have obeyed the father and abide in his love.  These things I have said, so that my joy might remain, and be completed in you.  This is my commandment: That you love one another, as I have loved you.  Greater love hath no man than to lay down his life for his friends.  You are mine if you abide in my love.  Henceforth I will not call you servants, but my friends."
John 15:9-15

Mish Interview on the "Daily Bell"

Mish's wife, Joanne has passed away.  My deepest condolences to you, Mish.  May she rest in peace.

From Mish's blog:

Daily Bell: What's the future for the EU?

Mish Shedlock: No currency union in history has ever survived without there being a fiscal union as well. Since there will not be a fiscal union, the Eurozone must break up. The ideal way would be for Germany and the Northern countries to exit. The painful way will be a piecemeal exit. I expect this to be long and painful.

Daily Bell: How about China?

Mish Shedlock: China is due for a "hard landing" which I define as less than 3.5% growth for the rest of the decade. I expect commodity prices will likely crash and the commodity producing currencies such as Australia and Canada will take a big hit as well.  

The Economist believes China will be the world's largest economy by 2018. I suggest 2030 may be optimistic and Chinese growth will average 3% or less for the rest of the decade. For a discussion of the implications, please see "12 Predictions by Michael Pettis on China; Non-Food Commodity Prices Will Collapse Over Next Three to Four Years; Nails in the Hard Landing Coffin?"

Daily Bell: If China goes into a meltdown, the world faces a full-scale depression. What's your take?

Mish Shedlock: The US will actually fare relatively well in a collapse of China. It is the trade surplus nations and commodity produces that will take the biggest hit as noted in the previous link.

Daily Bell: Where is the US headed?

Mish Shedlock: The US is headed for recession. The US recession will not be as bad as Europe, but corporate earnings will sink like a rock. The US dollar will strengthen much to the dismay of the hyperinflationists. Then, after Europe, China, and Japan take big hits, then and only then will the final plunge in the US dollar occur.

Daily Bell: Where is Japan headed?

Mish Shedlock: Japan is all but guaranteed to blow up before the US. A mere rise in long-term interest rates from 1% to 2% would consume nearly all government revenues. Ironically, I like Japanese equities but only hedged against a plunge in the Yen. After 20-plus years of deflation, Japanese companies have almost no debt but the currency risk is huge.

Daily Bell: Are you thinking of traveling abroad?

Mish Shedlock: Personal difficulties make overseas travel problematic. I am now involved in a fundraiser for ALS research (Lou Gehrig's Disease). My wife is in the late stages and nearly immobile. She has been on a feeding tube for over a year and cannot eat or drink anything, including water. So far, people from at least 22 countries have made donations. I ask everyone to please consider making a contribution. To learn how you can help, please read "My Wife Joanne Has ALS, Lou Gehrig's Disease."

Daily Bell: What do you think of US monetary policy?

Mish Shedlock: It's hopeless. We should get rid of the Fed specifically and all central bankers in general. As noted earlier, central bankers are nothing but serial bubble blowers. The irony is they purport to be "inflation fighters." In reality, central banks are the very cause of inflation. Bernanke even wants a 2% inflation target. Economically speaking, it's crazy. Eventually asset prices and wages do not follow consumer prices and all hell breaks loose, which is precisely where the global economy is today. I have some nice charts of inflation targets and real disposable income in "Huge Problem With Bernanke's 2% Inflation Target Explained in Pictures."

http://globaleconomicanalysis.blogspot.com/search?updated-max=2012-05-15T17:48:00-05:00&max-results=3&start=9&by-date=false

Michael Pettis: Revisiting 12 Predictions on China

Michaeol Pettis is a finance professor at Peking University’s Guanghua School of Management.

From Zero Hedge:

In 2006, Michael Pettis (one of the best known on-the-ground academic-and-practitioner experts on China) started making a number of predictions based on what he thought was the necessary and logical development of China’s growth model. Some of these predictions seemed fairly outlandish, especially to China analysts – Chinese and foreign – who had very little knowledge of economic history or other developing countries, but many of them so far have turned out quite well. As more and more analysts are beginning to understand the constraints of the Chinese growth model he thought it might be useful to list some of these predictions to get a sense of what might be still to come.

http://www.zerohedge.com/news/michael-pettis-revisits-12-predictions-china

From China Financial Markets:

1.       China will be the last major economy to emerge from the global crisis.

2.       Chinese consumption will continue to stagnate or decline as a share of GDP until the growth model is abandoned.

3.       Although there were many factors that explained both rapidly rising GDP and the contracting consumption share, financial repression would eventually be recognized to be the key factor.

4.       Investment is being misallocated on a massive scale and this was not due to any special Chinese characteristic but was rather a fundamental requirement of the way the system operated.

5.       Debt is rising at an unsustainable pace and debt levels will become unsustainable well before the end of the decade.

6.       When specific debt problems are indentified, resolute attempts by Beijing to resolve them would be warmly welcomed by analysts but wholly irrelevant – because the problem of debt was systemic, not specific.

7.       Privatization, a topic all but forbidden in polite company, would become a very hot topic of conversation by 2013-14.

8.       As some policymakers gradually became aware of the problem with the growth model and the risk of crisis, a fundamental political split would emerge between those that demanded rapid reform and those that wanted to maintain control of resources.

9.       Chinese government debt will continue to balloon through the rest of this decade.

10.    If the transition is not mismanaged, average Chinese GDP growth rates will drop to 3% for the 2010-20 decade.

11.    If China rebalances correctly, then much slower GDP growth rates will be accompanied by only slightly slower growth rates in household income.

12.    Non-food commodity prices are set to collapse over the next three to four years.

http://www.mpettis.com/2012/05/03/revisiting-predictions/

Hugh Hendry: More Bullish on US growth, Bearish on China Growth and Japan

Many have discussed the looming U.S. sovereign insolvency.  After all, the U.S. carries the world's largest sovereign debt.  And yet, Hugh Hendry is more concerned with China and Japan.  The U.S. has exported its problems to the emerging markets.  The rise of the economices of the emerging markets has come with a cost.  In a sense, it has been profitable for MNCs to raise the standard of living of workers in the emerging markets and then strip their wealth.

From Zero Hedge:

Hugh Hendry is back with a bang after a two year hiatus with what so many have been clamoring for, for so long - another must read letter from one of the true (if completely unsung) visionary investors of our time: "I have not written to you at any great length since the winter of 2010. This is largely because not much has happened to change our views. We still see the global economy as grotesquely distorted by the presence of fixed exchange rates, the unraveling of which is creating financial anarchy, just as it did in the 1920s and 1930s. Back then the relevant fixes were around the gold standard. Today it is the dual fixed pricing regimes of the euro countries and of the dollar/renminbi peg."

In the letter the most surprising insight from the perpetual contrarian is his almost predictable contrary view of the dominant investing meme at the moment. To wit: "We are, as a result, long the debt saddled west and short the vastly over vaunted and over owned BRICs." More on this: "There is a near consensus that China will supplant America this decade. We do not believe this. We are more bullish on US growth than most. The momentous nature of recent advances in shale oil and gas extraction and America's acceptance of the unpleasantness of debt and labour price restructuring looks to us as if it is creating yet another historic turning point. By embracing his inadequacies and leaping on his luck, the strong man may have finally broken the binds that had previously held him back. We are also more pessimistic on Chinese growth than ever. This makes us bearish on most Asian stocks, bearish on industrial commodity prices, interested in some US stocks, a seller of high variance equities and deeply concerned that Japan could become the focal point of the next global leg down. On the plus side we also believe that we are much closer than before to the beginning of a bull market of perhaps 1982, if not 1932, proportions. We just need the last shoe to drop."

We will let readers combs through the narrative that shapes Hendry's most recent outlook, although one chart worth pointing out is The Eclectica boss' visual summary of the "New Economic Order" which presents precisely the tenuous relationship between the Fed and the PBOC we have been decrying for so long, and which so many commentators (ooh, ooh, the PBOC is easing any minute now... oh wait, it isn't) fail to grasp:

http://www.zerohedge.com/news/hugh-hendry-back-full-eclectica-letter

Joseph Stiglitz: "Politics Is at the Root of the Problem"

Joseph Stiglitz is a professor at Columbia University.

From the European:

The European: Four years after the beginning of the financial crisis, are you encouraged by the ways in which economists have tried to make sense of it, and by the ways in which those insights have been taken up by policy makers?

Stiglitz: Let me break this down in a slightly different way. Academic economists played a big role in causing the crisis. Their models were overly simplified, distorted, and left out the most important aspects. Those faulty models then encouraged policy-makers to believe that the markets would solve all the problems. Before the crisis, if I had been a narrow-minded economist, I would have been very pleased to see that academics had a big impact on policy. But unfortunately that was bad for the world. After the crisis, you would have hoped that the academic profession had changed and that policy-making had changed with it and would become more skeptical and cautious. You would have expected that after all the wrong predictions of the past, politics would have demanded from academics a rethinking of their theories. I am broadly disappointed on all accounts.

The European: So let’s take a longer view. Do you think that the crisis will have an effect on future generations of economists and policy-makers, for example by changing the way that economic basics are taught?

Stiglitz: I think that change is really occurring with the young people. My young students overwhelmingly don’t understand how people could have believed in the old models. That is good. But on the other hand, many of them say that if you want to be an economist, you still have to deal with all the old guys who believe in their wrong theories, who teach those theories, and expect you to believe in them as well. So they choose not to go into those branches of economics. But where I have been even more disappointed is American policy-making. Ben Bernanke gives a speech and says something like, there was nothing wrong with economic theory, the problems were a few details in implementation. In fact, there was a lot wrong with economic theory and with the basic policy framework that was derived from theory. If your mindset is that nothing was wrong, you will not demand new models. That’s a big disappointment.

The European: You have written that the challenge is to respond to bad ideas not with rejection but with better ideas. Where is the longest and strongest lever to bring new economic thinking into the realm of policy?

Stiglitz: The diagnosis is that politics is at the root of the problem: That is where the rules of the game are made, that is where we decide on policies that favor the rich and that have allowed the financial sector to amass vast economic and political power. The first step has to be political reform: Change campaign finance laws. Make it easier for people to vote – in Australia, they even have compulsory voting. Address the problem of gerrymandering. Gerrymandering makes it so that your vote doesn’t count. If it does not count, you are leaving it to moneyed interests to push their own agenda. Change the filibuster, which turned from a barely used congressional tactic into a regular feature of politics. It disempowers Americans. Even if you have a majority vote, you cannot win.

The European: We’re looking at six months of presidential campaigning. The role of money has been embraced by both parties. Campaign finance reform seems rather unlikely.

Stiglitz: Even the Republicans have become more aware of the power of money by seeing how it influenced and distorted the primaries. The outcomes are not what the Republican party establishment had hoped for. The disaster is becoming clear – but that will not lead to immediate remedies. Those who become elected depend on that money. It will require a strong third party or civil society to do something about this.

http://theeuropean-magazine.com/633-stiglitz-joseph/634-austerity-and-a-new-recession