Wall Street's Best Minds
Byron Wien on ‘Only Way to Make Serious Money’
The Wall Street veteran interviews a wise colleague who argues that tech and biotech is where the action is.
By Byron Wien
July 1, 2015
Japan is an exception. They already have the highest debt to Gross Domestic Product (GDP) of any major country and they are willing to add more. China is an exception on the other side. They are in a position to take on more debt because their debt to GDP ratio is low. Without more fiscal stimulus, demand will be tepid and growth will be disappointing. This is the state of the world now, and it is likely to endure for some time. In the near term, I don’t see a calamity, just sluggish economies and many equity markets not doing much.
The United States is dominant, however. You should spend your time trying to understand what these companies are doing. The returns for picking the winners could be huge. What’s more, the pace of innovation is quickening. The rewards for proper asset allocation will be very modest. I like Facebook ; Salesforce.com; biotech ETFs; an industrial company, CS Industries ; Visa; Apple, of course; Alibaba; and Palo Alto Networks. I am out of Google.
These numbers could signal problems for American competitiveness going forward, so there is a downside to what is happening in technology.
European exports are doing well at that level. I do not see a break below par. Everyone is looking for a big correction in the U.S. equity market, but while it looks somewhat expensive to me, so much money in the world wants to have a position in American stocks that I don’t think the indexes will decline much. The vigorous merger and acquisition activity will continue, and I think that will help the markets.
Wall Street's Best Minds
Why China's Stock Markets Matter
- Beijing will continue to intervene where possible to prop up markets and market sentiment.
- A collapse of the stock market would likely increase deposits in ordinary bank accounts.
- This would compel Beijing to rely more heavily on banks to fuel growth and pressure China to accelerate financial liberalization efforts as a way to cultivate household consumption.
The Shanghai Composite Index fell 6 percent on July 3, rounding out a 28 percent decline since June 12, when the country's stock markets peaked. The deterioration occurred despite intensive government efforts to stabilize prices and revive investor sentiment. Overt attempts by Beijing included cutting benchmark interest rates and reserve requirement ratios and loosening restrictions on investor access to margin loans, in addition to less overt moves, such as direct interventions to prop up the market with government-backed purchases of blue chip stocks. On Friday, in a clear bid to win investor confidence in its oversight abilities, the securities regulator announced it would investigate signs of potential market manipulation. Yet so far, Beijing's efforts have failed to achieve the desired effect of stimulating, or at least stabilizing, China's leading stock markets.
In the days and weeks ahead, Beijing will not meekly accept the natural winding down of the past year's stock boom turned bubble. Rather, it will continue to work, both overtly and covertly, to prevent prices from collapsing outright — all while seeking to reshape investor sentiment and expectations through investigations, like those recently announced. The question of why Beijing feels compelled to take action remains, especially when any intervention risks exacerbating whatever financial and political fallout may come from an eventual market decline or crash. The answer to this question lies in understanding the role of stock markets in China's economy and Beijing's broader policy priorities, as well as evaluating the potential effects of a stock market crash on both.
Nurturing Consumer Growth
The Chinese government's core policy goal — the crux of its entire economic reform and rebalancing program — is to cultivate a domestic consumer base capable of supporting nationwide growth that is stable, sustainable and less exposed to fluctuations in external demand. To do this requires a boost in average incomes to a level where non-essential purchases become feasible for ordinary people. Additionally, China needs to instill in its citizens a sense of financial security adequate enough to convince them to spend — rather than save — their disposable income.
China has struggled on both fronts over the past two decades. Until recently, China was a country of near-universal poverty. Its post-1978 economic growth model, grounded as it was in low-cost exports and state-led investment into infrastructure construction, necessitated two policies: the systematic repression of manufacturing wages to maintain the competitiveness of exports and the suppression of interest rates on savings deposits. Keeping interest rates low ensured cheap financing for China's state-owned sector, which was responsible for the vast majority of infrastructure development and which survived on credit from state-controlled banks. These factors, more than any supposed cultural inclination to save, explain China's extraordinarily low levels of private household consumption relative to other parts of its economy — and compared to consumption levels in other countries.
For China's leaders, a key question over the past two decades has been how to cultivate greater household consumption without undermining the low-cost export and government investment-led economic growth model. Doing so required creating investment avenues by which ordinary Chinese citizens could achieve returns on their savings that outpaced inflation, but which did not direct those savings away from domestic export and construction industries. Allowing ordinary Chinese to invest their savings overseas was clearly not an option — not only would it direct those savings away from the domestic economy, but the free flow of capital in and out of China would constrain the government's ability to manage the yuan's value. Bearing this in mind, China's leaders in the early 1990s settled on two approaches: commercial real estate markets and stock markets. Both would give ordinary Chinese new opportunities to invest their savings and reap the rewards while simultaneously directing those savings into key industries and sectors, including housing and infrastructure construction and the state-owned sector, which enjoys disproportionately higher representation on China's largest stock exchange.
The Real Estate Boom
For most of the past 20 years, commercial real estate was by far the dominant avenue for ordinary Chinese to invest their savings, with stock markets playing a minor and unsteady second fiddle. Real estate and related industries formed the single largest component of China's economy. As long as home sales and prices rose, as they did with extraordinary consistency for two decades, real estate provided an unrivaled investment opportunity, one firmly backed by the Chinese government. This was especially true after the 2008-2009 global financial crisis decimated China's low-cost export sector, amplifying the importance of construction-related industries for employment and social and political stability. In comparison, China's stock markets, bedeviled by opacity and poor regulations, floundered. By 2009, most ordinary Chinese viewed investing in stocks as akin to playing the lottery.
To the extent that real estate was the primary means for ordinary citizens to increase their wealth, it also became critical to Beijing's efforts to stimulate domestic consumption. This in part explains the government's hesitancy to implement the kinds of policies that in the long run would contribute to cultivating domestic consumption. In the near term, however, bringing in policies such as deposit rate liberalization would raise costs for the state-owned companies largely responsible for real estate-related construction.
Yet now, after peaking, China's housing has entered a period of protracted decline. With real estate-related investments no longer promising the returns they once did, and with China's economy slowing, Beijing must find new tools for supporting domestic consumption. This is especially critical given that China is no longer able to rely on low-cost exports or the housing sector.
Beijing must now look to private household consumption and consumption-driven industries as the primary drivers of national economic growth.
This is the backdrop against which the sharp, government-supported surge in China's stock markets over the past 12 months should be understood. It also helps explain why the government continues to support the stock market even as it becomes clear that the market is a bubble, and even as investor leverage rises, alongside the financial risks of a market collapse. In short, a collapse in the stock market, in a climate of stagnant-to-negative growth in real estate, would almost certainly lead to a drop in household consumption and thus in consumption-driven industries. This is exacerbated by an environment that lacks substantial alternative investment avenues, in a period of slowing economic growth, slowing wage increases and rising unemployment.
Private consumption is increasingly critical, not only to Beijing's long-term reform goals but also to maintaining economic growth, employment, and social and political stability in the near term. Beijing seeks to avoid, as long as it must, any actions that infringe on private consumption. If stock markets collapsed tomorrow, the most immediate effect — beyond widespread but containable ire over lost savings and a significant hit on business cash flows — would be a surge in state-backed bank deposits as ordinary investors move their capital to the only place offering safe, if modest, returns.
This is not necessarily a bad thing for Beijing. After all, China's state-controlled banking sector would be flush with capital and in a stronger position to pump credit into the economy as needed. At the same time, it would likely cut against the underlying thrust of China's reform and rebalancing program — specifically, the need to curb wasteful state-led investment, reduce the state-sector's reliance on artificially cheap financing and improve the ability of banks to price risk. All of this could ultimately combat the widespread capital misallocation that has characterized every prior instance of massive state-backed credit expansion in China. Over the past year, banks have become an increasingly important source of corporate financing. Amid a collapse in the stock market, a rapid surge of deposits into banks would force Beijing to turn once again to the financial sector to support the economy. In all likelihood, this would lead to a repeat of the same speculative bubbles that attended the post-2008 stimulus drive.
Alternatively, Beijing could try to compel banks to hang onto the surge in savings rather than expanding lending. This would realistically be done by raising deposit interest rates. Such a move would almost certainly trigger an economy-wide crisis as the state-owned sector, already suffering falling profits and hefty debt repayment costs, collapses. It would also be an enormous boon to ordinary Chinese citizens, who continue to park the vast majority of their funds in savings deposits.
By forcing a broad restructuring of Chinese industry, this would substantially accelerate the central government's long-term reform plans. It remains doubtful that the Communist Party government could survive such a crisis intact. At any rate, it is highly improbable that Beijing would raise interest rates, a policy that stands a strong chance of undermining state security in the immediate term.
A Choice of Evils
This is the basic conundrum China's leaders face in determining whether and for how long to sustain the current stock market boom. Barring a radical lifting of restrictions on overseas investment or a sharp increase in deposit rates, China effectively lacks channels for ordinary citizens to generate wealth beyond investment in real estate and stocks. Real estate is slowing, weighed down by years of accumulated oversupply. It no longer promises the returns it once did. If stocks decline, it is unclear what else ordinary people can rely upon to generate returns.
The impact of a stock market decline on private consumption growth would only compound its effects on corporate balance sheets and investment, and thus on employment and economic growth.
The bottom line is that Beijing has an underlying interest in ensuring that China's stock markets do not collapse. Therefore, the government will likely continue to intervene to the best of its ability, propping up markets and market sentiment whenever the risk of a major sell-off becomes too great. This does not mean that stock prices won't slide further, or that the market will stabilize — indeed, it could well become even more volatile over the coming months. But it does reinforce the fact that until Beijing invents more avenues for investment, or unless it embraces interest rate hikes and any post-crisis restructuring, it will have to rely on the few tools available to ensure that citizens can generate the wealth and financial security they need to consume. Beijing's reform goals, as well as the ability to manage China's slowdown, depend on this.
07/08/2015 10:58 AM
Fixing Puerto Rico Could Provide Answers for Europe
An Essay By Barry Eichengreen
The Greek crisis could have been stopped years ago if European politicians hadn't been so stubborn. They should have followed the example set by the United States in dealing with Puerto Rico's problems.
In Puerto Rico, the United States now has its own version of Greece. The territory's debts are unsustainable. Public employment and pensions are swollen. Work in the underground economy, where taxes are evaded, is rife. Modern infrastructure is lacking. The commonwealth exports little for an economy of its size. Many of the best and brightest have decamped in search of better opportunities. Since these problems were a long time in the making, fixing them will take years.
So Puerto Rico is, in a literal sense, Greece in another guise. But can you imagine the United States putting all other domestic and foreign policies on hold while it attempts to resolve the crisis? The idea is ludicrous. But that is precisely what Europe has done.
Europe has been unable to broker a comprehensive agreement on how to handle its Mediterranean boat-people problem. It has been unable to effectively counter Vladimir Putin's incursions in Ukraine and veiled threats to Eastern Europe, while watching Athens drawing closer to Moscow's orbit. It has been unable to mount a coherent response and even pay sustained attention to events in Syria.
Part of the problem is that European leaders and their publics are preoccupied and exhausted by the endless sequence of euro-crisis briefings and late-night emergency meetings. To be sure, the Greek government has been difficult and erratic. But European leaders, by their own obstinacy, have helped to create this problem.
They allowed the interests of their banks to trump those of the Greek people, refusing to contemplate serious debt reduction for Greece when this was called for in 2010. As self-justification, they elevated the idea that debts must be paid to the status of a theological belief.
Five years later they are still refusing. Greece still requires debt reduction. Eventually it will get it, German Finance Minister Wolfgang Schauble's opposition notwithstanding. There will be no resolution of the crisis until then. Unfortunately, Europe may have to experience yet more months, even years, of unproductive negotiations in order to get there.
The idea of "ever closer union" enshrined in the Treaty of Rome is the most regrettable casualty of these events. The belief of Helmut Kohl, among others, was that deeper monetary integration would lead, logically and ineluctably, to deeper political integration, and that deeper political integration would make possible not just a common economic growth strategy but also a common European foreign policy.
Tragically, the opposite has turned out to be true: The travails of the euro have driven European governments and their publics further apart. While leaders continue to talk the language of cooperation and deeper integration, their publics are having none of it. Across Europe, narrow national interest is reasserting itself.
In fact there was nothing inevitable about this disastrous turn. It is a result of the catastrophic way the crisis was managed. With a little bit of intellectual flexibility, the crisis could have been resolved in 2010, had Greece been offered debt reduction in return for deep structural reform.
The country would have avoided the 25 percent decline in gross domestic product it has experienced since 2007.
Disaffected voters would not have felt obliged to punish their political class by electing a set of radical neophytes. Europe would have been able to put the Greek crisis behind it and get back to business.
The US Congress will now pass legislation giving Puerto Rico access to American bankruptcy courts. Its debt will be restructured, and all those reckless enough to have lent it money will see their claims radically written down. Once the island's government, relieved of its crushing debt burden, responds with reforms, the US will provide further aid.
But Puerto Rico will be at most a sideshow. The real focus for policymakers will be growing the US economy. They will offer suggestions for how to deal with the country's inequality and violence problems. They will pursue a foreign policy agenda intended to cope with a more assertive China, a more aggressive Moscow and a more destructive Islamic State.
As for whether they succeed, we will have to wait and see. One should not underestimate the ability of US politicians to get it wrong. But Puerto Rico will remain only a minor distraction.
One wishes the same could be said of Greece.
Greece Enters Its Crack-Up Boom
By: John Rubino
Thu, Jul 9, 2015
The Austrian School of economics has a concept called a "crack-up boom" in which a critical mass of people conclude that their government is actively trying to devalue its currency.
Consumers respond by front-running the government, spending their paychecks immediately in order to convert their soon-to-be-less-valuable money into real things. Merchants, not happy about the sudden influx of suspect currency (and sensing the panic of their customers) hold out for ever-higher prices, causing inflation to spike. But it's a special kind of inflation, driven not by a sudden increase in the money supply but by collapsing confidence among holders of the currency.
In a very short time, so goes the theory, the supply of stuff available for purchase dries up, prices hyperinflate, and the economy collapses.
Welcome, in other words, to Greece:
(CNBC) - Business has been so brisk in the giant Kotsovolos appliance and electronics store in this upper-middle-class suburb of Athens that you might think a sale was on.
But, no. It is panic buying, those who work here say. Increasingly concerned that greater economic trouble lies ahead of them, and limited in how much cash they can take out of banks, Greeks have been using their debit cards to buy ovens, refrigerators, dishwashers -- anything tangible that can hold its value in troubled times.
"We have sold so much," said Despina Drisi, who has worked in the store for 12 years. "We even sold display models. People have been pulling at my sleeves. We're spacing things out now to cover the holes on the shelves.
To the casual observer, the bustle of everyday life looks unchanged here. Greeks, many of whom long ago traded in their cars for cheaper motor scooters, clog the streets at rush hour on their way to and from work. Tourists pack the Acropolis.
Friends meet, greet and sit in cafes, looking for shady spots against the heat.
But beneath the surface, Greeks are struggling with growing fear, the strange ramifications of closed banks and the mounting potential for much worse. They could face the unknown consequences of being pushed out of the eurozone within the next week if Greece and its creditors cannot come to an agreement.
Some are watching television and checking their smartphones constantly. Others refuse to follow what is going on in Brussels at all. But either way, many are doing what they can to protect themselves financially, buying appliances and jewelry or even prepaying their taxes so they will have taken care of one financial obligation if they end up losing some of their savings to a bank failure, as happened to depositors in Cyprusunder a bank rescue plan there in 2013.
"Panicked doesn't begin to describe how people feel," said Antonis Mouzakis, an Athens accountant. "I have a huge number of customers wanting to file their taxes right here, right now, to have the tax calculated and paid instantly before a possible haircut. Even if the tax is 40 to 50 thousand euros, they pay it off in one go."
A Greek jeweler, George Papalexis, said a customer had approached him on Wednesday wanting to buy a million euros -- about $1.1 million -- worth of merchandise. But Mr. Papalexis, the chief operating officer of Zolotas, said he had refused because he was more comfortable holding on to the jewels than having money in Greek banks.
"I can't believe that there I was, turning away a million-dollar offer," he said. "But I had to turn down the deal. It's a measure of the risk we face."
Mr. Mouzakis said that many companies were also trying to settle their debts quickly, not wanting to owe money if their deposits are hit in a deal to rescue Greek banks.
Others do not want to accept payments for the same reason. When banks in Cyprus had to be bailed out in 2013, depositors with more than €100,000 lost about 40 percent of their money.
A contractor at a Greek energy company, who spoke on the condition of anonymity, said his firm had paid all its taxes for the year last week to whittle down the funds that could be subject to a deposit tax.
"I'm even thinking about buying a car, although I don't need one, to get my cash balance lower," he said. "People want their money in physical assets, not in the bank."
But some who are unlikely to be troubled by losing a percentage of their bank deposits are spending, too. Vassilis Bekiaris, 29, said he knew two brothers who had gone on what was probably an ill-advised spending spree, fearing a cut to their savings. One who had just €1,000 in his account bought an iPhone. The other had €10,000 euros but, thinking he could lose 20 percent, bought €2,000 worth of clothes. "All they managed to do was prop up the economy a bit," Mr. Bekiaris said.
While pensioners and others in need of cash struggled, some employers who were behind in paying their employees surprised them by digging into their safes and producing cash rather than risk losing money to the terms of a bank bailout.
A few companies, prepared for the bank closings, were ready to pay cash to their grateful employees. The family-owned Petsas group, which manufactures a range of products from biodiesel to cotton clothing, paid all of its workers, about 130 people, in cash.When Greeks start clamoring to pre-pay their taxes, you know the end is near.
But viewed through a Keynesian rather than Austrian lens, this process actually looks kind of positive, like really effective stimulus. The Greeks appear to have discovered the secret to convincing an over-indebted people to keep borrowing and spending: Just telegraph the destruction of their savings and watch the little folks consume.
In an era when new and wild economic theories are being tested on a weekly basis, Greece is perhaps the most interesting laboratory of all. If this sudden burst of consumption and tax compliance results in "growth" and "a balanced budget" then don't be surprised if the people running the eurozone, Japan and maybe the US come to the comical but from their point of view logical conclusion that far from screwing up, Germany actually did something right in Greece. And that maybe the rest of the world should pre-announce capital controls and bank bail-ins to get their citizens off their butts and into the mall.
Which, when you think about it, might be exactly what the war on cash is setting up.
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Las convicciones son mas peligrosos enemigos de la verdad que las mentiras.
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
No soy alguien que sabe, sino alguien que busca.
Only Gold is money. Everything else is debt.
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Quien no lo ha dado todo no ha dado nada.
History repeats itself, first as tragedy, second as farce.
We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.
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