China's August scare is a false alarm as fiscal crunch fades

The recession in China has been and gone. The housing market is picking up as stimulus revives, putting off the day reckoning again

By Ambrose Evans-Pritchard


The situation in China is desperate but not serious, to borrow an old Viennese saying.

Countries with a tight exchange controls and state banking systems may come to grief in the long-run, but they do not face the sort of financial collapse seen in the US and Europe in 1931 or 2008.
 
China's central bank (PBOC) has already warned that it will deploy the coercive might of the Communist regime to stop anybody smuggling money abroad under false pretexts, invoking laws covering "money laundering and terrorist financing."
 
It said violators will be "severely punished". They will be sent to the proverbial asbestos mines of Sichuan. This is the sort of liberalisation that Xi Jinping does best.

Given the sanctions and given that China has a trade surplus of $600bn or 6pc of GDP - and is therefore accumulating foreign exchange at blistering pace, ceteris paribus - there is no chance whatsoever that reserve losses will spin out of control.

Jens Nordvig from Nomura says China has $3.65 trillion reserves to cover foreign currency debts of $1.135 trillion, a ratio of 322pc.

This a far cry from the East Asia Crisis in 1997-1998 when the ratio was 59pc in Malaysia, 33pc in Thailand, 27pc in Indonesia, and 22pc in Korea. All these countries had current account deficits. China most emphatically does not.

"We think the authorities will remain in control of the situation. This may mean that the worst shock effect is behind us, although ultimately the economic data will provide the final verdict," he said.


 
On cue, the economy is already coming back to life after hitting a brick wall over the winter. Credit growth jumped to a 31-month high in July. The monetary base has grown at a 20pc rate over the last three months, implying an economic spike later this year.

It is worth remembering what has just happened in China. The country is recovering from a ferocious monetary and fiscal shock. The authorities refused to react as falling inflation caused one-year lending rates to ratchet up to 5pc in real terms from zero in late 2011.

This was deliberate, of course. Premier Li Keqiang intended to break the back of the property bubble and wean the country off its $26 trillion credit dependency. But pricking bubbles is no easy task. The authorities overshot.

The crunch came just as fiscal policy went awry. Budget spending contracted in the first quarter. This was certainly not intended.

While details remain murky, it appears that banks refused to roll over short-term loans used by local governments to finance a raft of existing projects. They feared that these loans were no longer covered by a state guarantee under new rules. "It caused huge disruption," said Capital Economics.

At the same time, the regions saw a sudden-stop in lending for new projects as well. Local governments were prohibited from fresh bank borrowing in January. Under the so-called "debt swap" plan there was supposed to be a seamless transition from loans to bond issuance, but the bond market was not up and running until May. This is why China crashed into a recession in the first half of the year.

Wisely or not - depending on your economic religion - the Communist Party has now reverted to stimulus as usual. The local governments issued almost $200bn of bonds over the two months of July and August. Beijing coyly describes its fiscal spending as "proactive". Turbo-charged would be another way of putting it.

The property crash is already a memory. House prices have risen for three months. Sales were up 18.9pc in July. This matters more than anything happening on the Shanghai stock market. Moody's says real estate in all its forms makes up a quarter of Chinese GDP.

The 'Tier I' cities led by Beijing have risen 6.5pc over the last year, and Shenzhen is up by 25pc.

"The authorities may soon be forced to cool the property market again. Otherwise they risk another destabilising asset bubble," said Oxford Economics.

It is no mystery why property is picking up. The government has abandoned its assault on speculation. It slashed the minimum downpayment from 60pc to 40pc in March for second homes. Interest rates have been cut four times.

Housing in the smaller cities has bottomed out but is still deeply depressed. The International Monetary Fund warned in its latest Article IV report that inventories for the 'Tier 3 & 4' cities have risen to three years' supply, and these account for half of all construction. "Working off the excess will require a multiyear adjustment," it said.


At the risk of sticking my neck out, I think that Gothic warnings of a Chinese collapse this year will look silly by Christmas. The reckoning has been delayed again.

The "devaluation" saga this month is a red herring. The PBOC has switched from a dollar peg to a 'managed float' to protect itself from any further surge in the US dollar as the Fed tightens policy.

This is not a devaluation. It is an insurance policy against at further rise after a 22pc jump in the trade-weighted exchange rate since mid-2012.   There is a fashionable suspicion that the PBOC is hiding behind a "market-led" exchange rate to disguise what is really a beggar-thy-neighbour policy to hold onto export share, but it is far from clear whether China has anything to gain from doing so.

It would risk setting off the very capital flight most feared. It would send a deflationary shock through a fragile global economy, and risk a further escalation in Asia's simmering currency wars. It would invite an iron-fist response from Washington. The costs are high: the benefits scant.

True, Chinese exports are languishing, though over half of the 8.3pc fall in exports in July was due to base effects. Yet the "trade intensity" of China's economy is plummeting as the country moves beyond export-led catch-up growth. World bank data shows that exports peaked in 2006 at 36pc of GDP. They fell to 22.6pc last year. 


Exports as a share of GDP

China is becoming a fortress economy like the US, moving to its own internal rythm. This is unpleasant for countries like Brazil that make a living supplying China with raw materials, but not for China itself. As Stephen Jen from SLJ Macro Partners puts it, the Chinese downturn is "soft on the inside and hard on the outside."

Nor is there any need to risk a currency war. The economy has been generating 1.2m jobs a month this year. There are still more vacancies than candidates.

The offers-to-seekers ratio has risen from 0.65pc in the early 2000s to 1.06pc. It has come down sharply this year - and needs watching - but the flood of migrant workers from the countryide has dried up as China's passes the "Lewis Point". The wages of migrant workers are still rising at a rate of 10pc. The labour market is tight.



None of this is to say that China's economy is healthy. Credit still rising by seven percentage points of GDP each year, pushing the debt ratio ever further into the danger zone. It will be 270pc by next year. This will end badly.

But China is not in immediate crisis. The Reserve Requirement Ratio (RRR) for banks is still 18.5pc. The PBOC can slash this to 6pc - as did in the late 1990s - flooding the system with $3 trillion of liquidity. It can even go to zero in extremis.

The time to worry is when China has exhausted this last buffer. This August scare of 2015 is a false alarm.


The devaluation of the yuan

The battle of midpoint

China initiates market reforms of its currency, then backtracks

Aug 15th 2015

   

TRICK question: did China’s central bank intervene over the past week to weaken the yuan or to strengthen it? Given all the headlines about devaluation, weakening would seem the obvious answer. In fact, the opposite is true: it first tried to stand aside, giving the market more say in the yuan’s value, and then backtracked, intervening to stem the ensuing decline. The volte-face reveals much about both the oddities of China’s economy and the difficulty of reforming it.

Every morning, marketmakers such as the big state-owned banks submit yuan-dollar prices to the People’s Bank of China (the central bank). It then averages these to calculate a “central parity” rate, or midpoint. Over the course of the day, the PBOC intervenes to keep the exchange rate from straying more than 2% above or below the midpoint.

In theory, it is the marketmakers, not the central bank, that set the midpoint and thus the trading band. In practice, the PBOC gets marketmakers to submit rates that will yield its preferred midpoint, irrespective of market sentiment (state-owned banks are pliant, after all).

Critics in America and elsewhere have long alleged that China has manipulated the market in this way to keep its exchange rate cheap. They had a point up until 2012 or so.

For much of the past year, however, the central bank has in fact tipped the scales in the opposite direction, preventing a depreciation even as the Chinese economy weakened and the dollar surged. In recent months especially, trading of the yuan has regularly swung towards the weak end of the 2% band, but the central bank has nudged it back up by orchestrating stronger midpoints.

The reform the PBOC announced on August 11th sought to change this. From now on, the central bank declared, the midpoint would simply be the previous day’s closing value. Given that traders had been selling and buying yuan at a big discount to the manipulated midpoint, the new market-determined midpoint immediately fell by 1.9%, the biggest single-day drop in the yuan’s modern history.

That led to an even weaker market-determined midpoint on August 12th, whereupon the yuan fell yet again, sparking fears that the currency might be on the brink of a rout. It was at this point that the central bank intervened. It ordered state-owned banks to sell dollars and buy yuan, propping up the exchange rate at the very time that it was being accused of devaluing it.

This tug-of-war could play out for weeks, with traders repeatedly testing the limits of the PBOC’s tolerance for depreciation.

This raises the question of what the central bank is hoping to achieve. The most popular explanation is that it wants to stimulate its sluggish economy by cheapening its currency. The depreciation, after all, came just a couple of days after a surprisingly big drop in exports. However, the scale of the yuan’s weakening belies such a motive (see chart). The initial 2% devaluation only undid the previous ten days’ worth of appreciation in trade-weighted terms.

The yuan remains more than 10% stronger against the currencies of China’s trading partners than it was a year ago. Much bigger falls would be needed to make a difference. But Chinese officials have forsworn a large one-off devaluation, believing it would undermine faith in the yuan and would do little to help the economy, since it would just persuade others to let their currencies weaken too.


Instead, another event seems the main trigger for the central bank’s actions. Later this year the IMF will decide whether to include the yuan in the select group of currencies it uses to calculate the SDR, its unit of account. Inclusion would amount to declaring the yuan a global reserve currency. Just last week the fund hinted that the yuan is still too heavily controlled.

For the PBOC, getting into the SDR has never been just about prestige. Rather, it has been using this objective as a means to push for reforms that remove some of the policy distortions still hobbling the economy. Introducing a truly floating exchange rate is an essential part of its programme.

Yet there is another complication. Some $250 billion of “hot money”, equivalent to roughly 2.5% of GDP—an unprecedented amount—has left China over the past year as the economy has slowed. Strong inflows via the trade surplus have allowed the PBOC to absorb these losses so far, but it is wary of doing anything that might accelerate capital flight. A sustained devaluation would do just that, inviting speculators to short the yuan. Hence the central bank’s apparently contradictory actions, in letting the yuan fall and then trying to make it stop. As ever, China’s willingness to trust market forces extends only so far.

Financial Engineering, Not Fundamentals, Is Driving Markets

by: Bret Jensen     
                                             

Summary
  • The market continues to hold its own despite dismal revenue and earnings growth so far in 2015.
  • Equities are being buoyed by massive "financial engineering" on myriad fronts. However, the levels of current valuations have to be making value and fundamental investors a bit squeamish.
  • Despite massive financial engineering supporting equities at this time, the fundamentals of the market are telling me this is a time for caution - not greed.
Markets rallied hard on Monday, gaining back most of last week's losses. However, it was hardly a convincing rise for this primarily value-oriented and fundamental investor. A large part of the increase on Monday was triggered as Fed Governor Fischer made comments giving investors optimism that the Federal Reserve will not raise rates when it meets in September as expected. This would put off, once again, the first interest rate hike since 2006. The fact that the Federal Reserve is still debating whether to lift interest rates off of zero six years after the recession "officially" ended in June 2009, and with "official" unemployment at just over 5%, says all you need to know about the strength of what remains the weakest post-war recovery on record.

Chinese stocks also had big rally, but that had more to do with intervention from Chinese authorities than any change in direction for the fundamentals or economy in the Middle Kingdom. Today, markets were set to open much lower as the same Chinese authorities have decided to officially to devalue their currency to make their exports more competitive.

This is understandable from a couple of points of view. The yuan has lost some 10% against the euro since the European Central Bank started its own quantitative easing program late in the first quarter of this year. This has been a key factor in the dismal readings coming from China's export sector, where exports were reported as being down 8% year over year in the last report month. Imports were down even further, so the trade balance with the rest of the world still grew. But these negative readings leads to me to doubt China is growing anywhere near their "official" 7% GDP growth target. I think leadership knows this as well, which helps explain this latest currency move and the extraordinary measures taken to keep their stock market from falling any further.

I think I must be getting old. I vaguely remember a time when the market was driven by such trivial things like earnings and revenue growth, valuation, and the prospects for accelerating GDP growth. It seems that since the financial crisis, the main focus has been on what this or that central bank may or may not do in the near future.

(click to enlarge)

Certainly, the liquidity provided by these institutions has been a key factor in driving up asset values all over the world -- whether in global stock markets, real estate, or even the art market.

It certainly has not been the economy, which has been stuck in the 2% growth range over the past six years. Europe and Japan have performed even worse despite the best efforts of their central banks.

The "financial engineering" driving the market has now extended into the private sector.

Global M&A levels are expected to come in at just under $4.6 trillion at current run rates for 2015. This would be $300 billion over 2007's peak levels, which not coincidentally marked the last top of the cycle in the market.

(click to enlarge)

Buoyed by low financing rates and the dearth of any organic growth opportunities, I expect M&A levels to be robust until something causes the music to stop. Even the Oracle of Omaha can't resist a big deal as Berkshire Hathaway (NYSE:BRK.A) snapped up Precision Castparts (NYSE:PCP) for better than a 20% premium on Monday. At over $37 billion, it was by far Buffett's largest purchase ever. Venture capital funding levels in 2015 are also at levels not seen since just before the Internet bust. For instance, Uber (Pending:UBER) was recently valued at over $50 billion during its last funding round, despite generating less than $500 million in revenues over the prior 12 months and being years away from being profitable.

Not to be left out, corporations are spending record amounts on stock buybacks with over $140 billion in stock repurchase authorizations announced in April alone. This is happening even as business investment levels remain tepid, a key factor behind an economy that continues to struggle to achieve more than 2% growth. As can be seen below, the number of buybacks expected to executed in 2015 is rapidly approaching 2007's peak levels.

(click to enlarge)

These levels of various forms of "financial engineering" have managed to keep the market just above flat line for 2015, which is by far equities' worst annual performance since the recession ended in 2009. However, if an investor actually looks at the fundamentals of the market right now, it is hardly encouraging. Revenues year over year are down for the S&P 500 so far in the first two quarters of 2015.

(click to enlarge)

Earnings are slightly down this quarter, helped even as they have been helped considerably by stock buybacks as the collapse in profits in the energy sector and a poor performance from industrials take their toll. Equities basically trade at the same ~18 times trailing earnings that they did to start the year, as there has been no earnings growth. Factset thinks these dismal earnings numbers will persist into the third quarter as well, with its forecast of an approximate 2% year-over-year decline in profits in the upcoming quarter.

It's hard to get excited about the market given these poor fundamentals, despite the robust financial engineering that is continuing to support the market. I continue to lean toward the cautious side and have some 30% of my portfolio in cash, as it's hard to see the market breaking out through year-end -- and the danger of a 10% correction seems to be increasing by the day. I will use any significant dips in the market to incrementally put some of my "dry powder" to work if that decline does occur. My strategy for this deployment will be pretty much along the lines of what I plan to do in the biotech sector, which I outlined the other day.

I wish I could be more sanguine on the market. However, despite massive financial engineering from myriad sources, the fundamentals of the market are telling me this is a time for caution, not greed.

jueves, agosto 20, 2015

GOLD MINERS´$1200 COST FALLACY / SAFE HAVEN

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Gold Miners' $1200-Cost Fallacy

By: Adam Hamilton

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The entire gold-mining sector was crushed last month, suffering a full-blown panic. This was triggered by an extreme shorting attack on gold by American futures speculators. As fear-blinded traders rushed for the gold-stock exits, they claimed their selling was rational because gold miners' very existence was threatened by such low gold prices. But that's a total fallacy, this sector has no problem weathering sub-$1200 gold.

The recent pain in gold stocks has been excruciating. This sector's benchmark of choice these days is Van Eck Global's Market Vectors Gold Miners ETF, better known by its symbol GDX.

It closely mirrors gold stocks' long-time leading sector index, the NYSE Arca Gold BUGS Index that trades as HUI. The carnage in these two gold-stock metrics has been incredible, shattering the resolve of most contrarian traders.

In just two weeks in mid-July, GDX plummeted 22.7% on an exquisitely-timed shorting attack on gold futures late one Sunday evening. A panic is formally defined as a 20%+ plunge in a major index in 2 weeks or less. Nearly half of GDX's panic losses hit that Monday morning immediately after that gold attack. That battered GDX to a new all-time low, the worst levels seen since it was born in May 2006!

Gold-stock investors and speculators were so terrified that they kept on selling, forcing GDX another 5.0% lower on close by early August. While such horrendous levels had never before been witnessed in the relatively-young GDX gold-stock ETF, they had been in the venerable HUI. Gold stocks were last trading at these recent lows 13.0 years earlier in July 2002, when gold was still meandering near $305!

Having deeply studied and extensively traded gold stocks over the past 15 years, I argued in late July that those panic gold-stock levels were fundamentally absurd. There was simply no way to justify gold-stock price levels being so darned low given the far-higher prevailing gold prices. In an essay I showed that gold stocks had never been cheaper relative to gold, the metal that drives their profits and ultimately stock prices.

These recent epically-extreme gold-stock lows certainly weren't righteous fundamentally, they were the product of wild fear run amuck. Yet as always in a panic-selling situation, the investors and speculators who succumbed to their own emotions to flee at extreme lows didn't want to hear the truth. Right after deluding themselves into selling at the worst possible time, they're convinced their decision was rational.

These traders had sold gold stocks as if gold was trading at just over a quarter of its recent lows, which was the height of folly. They sure didn't like me pointing that out several weeks ago, and unleashed a blizzard of angry feedback. That's par for the course at extremes when you're a rare contrarian fighting the groupthink herd. After writing 665 of these weekly essays over 15+ years, I really know how traders think.

Their main argument on gold stocks' panic-grade selloff being rational surrounded the costs of mining gold. There's a universal belief out there that the gold-mining industry isn't profitable under $1200 gold. I have no idea who started this, but I come across it constantly. And if $1200 is indeed the breakeven point, then $1100 or sub-$1000 gold would surely lead to widespread bankruptcies and a gold-stock apocalypse.

After 15 years of researching this sector more deeply than almost anyone else on the planet, I certainly didn't believe that $1200-per-ounce industry cost level was correct. But I couldn't prove it right away, as the gold miners hadn't released their second-quarter operating and financial results yet. But since the great majority finally reported Q2'15 in the last couple weeks, now we can dispel that $1200-cost fallacy.

Since these prevailing gold-stock prices are so ludicrously undervalued, we've aggressively redeployed capital into this sector in recent weeks. We've bought and recommended to our newsletter subscribers a bunch of elite gold miners with very low production costs than can survive gold prices far under recent lows. I could easily cherry-pick these elites to show gold mining remains very profitable at today's gold levels.

But a far-superior read on this industry's current cost structure comes from this sector as a whole. That flagship GDX gold-stock ETF currently holds 39 major miners. This week I waded through the latest quarterly results of all of them. Collectively GDX's component stocks account for the vast majority of the world's gold mining, so they effectively are the gold-mining industry. And their costs are far lower than thought.

I built a couple tables that could fit in the top 34 of GDX's 39 components. Collectively they account for a whopping 97% of this entire leading gold-stock ETF, essentially all of it. To get an idea about the survivability of this sector, I looked at each miner's cost structure, cash on hand, debt levels, cash flow generated from operations, debt payments, and more. The key results are summarized in these tables.

A couple notes before we shatter that myth that gold miners' very existence is threatened at prevailing gold prices. GDX holds a wide range of gold miners trading around the world. Since foreign markets have different financial-reporting standards than the United States, not all data was available for every company. When any miner didn't report a specific data point, I had no choice but to leave that field blank.

GDX also contains royalty and streaming companies, which have very different cost structures than the miners. They generally offer miners large up-front payments to help finance mine builds. And in return they're entitled to collect small recurring payments on these miners' production over the lives of their mines. They don't report costs the same way producers do. This gold-stock ETF also oddly contains silver miners!

But here are the latest quarterly results of the leading companies in the gold-mining industry. Each stock's symbol and exchange is noted, along with its weighting in GDX and its market capitalization.

Then the particular 2015 quarter the data is taken from is noted, followed by miners' costs per ounce produced. These include cash costs and all-in sustaining costs for that quarter, and full-year 2015 AISC guidance.

Gold miners' cost structures greatly affect their cash positions and cash flow, which are obviously critical for their survivability. Here each miner's cash in the bank at quarter-end is listed, with the percentage of their current market capitalizations that represents. That is followed by the cash flows generated from operations. Companies with strong positive cash flows have virtually zero risk of facing bankruptcy.

Finally, each miner's quarterly production is noted. My spreadsheet to evaluate this sector had many more columns with other metrics, but these are the key ones that fit in these tables. Taken as a whole, the gold-mining industry is much stronger financially than virtually everyone believes today! This is super-bullish for gold stocks given the choking cloud of extreme fear that is still suffocating this sector.

GDX Component Companies' Fundamentals
GDX Component Companies' Fundamentals

Since the 1990s, cash costs have been the dominant measure of gold-mining cost structure. That is what it actually costs to mine each ounce of gold. Cash costs include direct production costs, onsite administration, regulatory, royalty, and tax expenses, along with smelting, refining, and transport costs. Cash costs are the acid-test measure of what it costs the gold miners to bring their product to market.

And cash costs remain far below current gold levels, averaging just $649 and $620 in Q2'15 for the actual gold miners among GDX's top 17 and next 17 component companies! That's way lower than even today's dismal prevailing gold prices, which means the gold-mining industry will have no problem at all weathering $1100 or even $1000 gold. Their current mining operations could easily survive even at $800!

Now I certainly don't expect gold prices to slip under $1000, let alone plunge to $800. Gold's recent lows were totally artificial, the product of unsustainable extreme record gold-futures shorting. But since these low gold prices breed endless hyper-bearish commentary, realize that even if the bears miraculously prove right the gold-mining industry is not at risk. Today's mix of major gold miners could keep right on producing.

And the whole notion of sector-wide bankruptcy risk is silly given the way large gold miners operate. They run multiple gold mines, all with their own cost structures. So when times get tough, they can simply mothball the mines with cost levels too high for prevailing gold prices. And even within individual mines, they have a lot of leeway in choosing to mine higher-grade ore if necessary to lower per-ounce costs.

During this year's second quarter where gold prices averaged $1172 before gold was attacked by the futures short sellers in July, the gold miners' cash costs were much lower than widely assumed. In theory, gold miners can survive as long as the gold price exceeds their cash costs along with general corporate expenses. They are not included in cash costs like mine-level administrative expenses are.

But gold mines are depleting assets, with all deposits finite. So in order for gold miners to continue to be viable going-concern businesses, they need to constantly discover new gold to mine. This involves lots of exploration, which is very expensive. So back in June 2013, the World Gold Council introduced a new gold-mining cost measure known as all-in sustaining costs. They include far more than cash costs.

In addition to all the direct cash costs, all-in sustaining costs include all corporate-level administrative expenses along with all costs required to maintain and replenish existing production levels. The major items included are reclamation and remediation along with all the exploration, mine-development, and capital expenditures necessary to sustain current production levels. This is definitely a superior cost measure.

When gold-stock bears claim the gold-mining industry needs $1200 gold to survive, it's these all-in sustaining costs they are referring to. Yet in Q2'15, again before the recent shorting-fueled gold woes, industry-wide all-in sustaining costs per ounce were far below that $1200 threshold. GDX's top 17 component gold miners had average AISCs of $936, while the next 17 looked even better averaging $857.

So even $1000 gold, which again is super-unlikely as gold rebounds dramatically on massive futures short covering, isn't a problem at all for gold mining's survivability. While there are certainly higher-cost and lower-cost gold producers, as an industry current production levels are sustainable at well under $1000 per ounce. That's not a threat at all, despite being falsely implied as one in today's gold-stock prices.

And Q2 certainly wasn't an anomaly on the AISC front. Most gold miners provide AISC guidance for the entire year. And since gold-stock investors are so focused on costs these days with gold prices so low, the gold miners tend to be conservative in their AISC outlook to avoid disappointing. And the full-year-2015 AISC projections from these major gold miners are right in line with their actual second-quarter results!

The gold miners' current low cost structure relative to prevailing gold prices was reflected in their cash positions too. Most are sitting on cash hoards so large that they are equivalent to big fractions of these companies' total market capitalizations! That means they could actually afford to lose money from their operations for many quarters, although that certainly isn't in the cards anywhere above $950 gold levels.

Even better, these cash positions were growing fairly rapidly in the latest quarter due to high positive operating cash flows in this industry. When any business is generating large cash flows in its ongoing operations, it has virtually no risk of going bankrupt. And many of the elite GDX gold miners reported operating cash flows that were large relative to their current cash positions and even market capitalizations.

Positive cash flows from mining are exactly what you'd expect when prevailing gold prices are well above current costs. I didn't come across a single miner in these tables that was actually losing money in operations. Amazingly given the extreme bearishness on gold stocks out there, this industry is still strongly cash-flow-positive. Gold miners aren't just surviving under $1200 gold, they're actually thriving!

But unfortunately few investors and speculators realize this, for a couple key reasons. Since popular fear remains so extreme, traders are seeking out bearish analysis and commentary in order to rationalize their own pessimism. They don't want to admit they were fools to flee gold stocks near fundamentally-absurd 13-year lows reflecting gold prices around a quarter of today's levels! They want to think that was smart.

Popular bearishness is always most intense and extreme right near major secular lows, when traders are wrongly convinced an already-devastated market will keep spiraling lower indefinitely. And for the hardened contrarian traders who can overcome this groupthink orgy of gold-stocks-to-zero nonsense, they are often scared away by gold miners' accounting earnings. Many if not most are showing losses now.

But these nonexistent price-to-earnings ratios are very deceiving. As gold miners' Q2 results proved, they are generating large positive cash flows by mining gold today. The negative accounting earnings are not from operating losses, which would indeed threaten the viability of gold-mining companies. These losses are from huge write-offs of gold-mine and gold-deposit asset values sometime in the last four quarters.

Since gold in any particular deposit essentially has a fixed cost to mine, lower gold prices erode future potential profit margins of that deposit. Accounting rules force gold miners to write down the value of these properties even if the recent gold lows are temporary anomalies. These non-cash impairment charges can be very large, overwhelming normal operating profits until the write-downs roll off the books.

In any other sector in all the stock markets, such large one-off write-downs would be ignored by analysts since they don't reflect ongoing profitability. But since virtually no professional analysts follow this despised and forgotten sector, there is no analysis to separate ongoing operations from one-off events. So until four quarters after large write downs, they greatly skew P/E ratios and scare investors away.

But as long as the gold price recovers from its recent artificial extreme-shorting-spawned lows, which is already starting, write-offs are really irrelevant. Taking impairment charges not only has zero cash impact, but it certainly doesn't affect the gold contained in any deposit. That gold in the ground is all still there and waiting for higher gold prices, which will quickly restore its economic value and mineability.

The gold-mining industry's existence certainly isn't threatened with today's $1100 gold, let alone that false $1200 number always thrown around. The vast majority of the world's gold production today would be profitable on a sustaining basis at $1000, and could easily survive a temporary panic-grade plunge under $800. Thankfully the odds of that happening are virtually zero since gold traders already capitulated.

Gold is overdue to mean revert sharply higher as American speculators are forced to cover their extreme record gold-futures shorts, and the usual massive Asian seasonal buying ramps up. These higher gold prices will not only greatly boost gold miners' profitability, but more importantly traders' confidence in this left-for-dead sector. And as we've witnessed recently, that's going to lead to the gold stocks just soaring.

As of the middle of this week, GDX had rocketed 18.6% higher in just 5 trading days since its all-time record lows of early August! The notion that gold stocks priced as if gold was near $305 was righteous was ridiculous, and investors and speculators are finally starting to overcome their crippling fear and understand that. So they are returning to gold stocks, which will accelerate the rally and beget more buying.

The gold miners' latest quarterly results just reported in the last couple weeks decisively prove that this industry is far healthier than universally assumed. Production costs are still way below current gold price levels, in both cash-cost and the more-importantly all-in-sustaining-cost terms. This has left these miners with massive cash war chests and large positive operating cash flows, revealing surprising financial strength.

With the gold stocks still trading near all-time lows relative to the price of gold which drives their profits, there's never been a better time to throw heavily long this contrarian sector. GDX is a great ETF which offers exposure to the world's biggest and best gold miners. Nevertheless, the best opportunities in gold stocks are in the smaller miners. Many have lower costs and higher profits, leading to low actual P/Es today.

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The bottom line is the gold-mining industry's cost structure is far lower than that $1200 number often thrown around. The world's biggest gold miners are producing gold on an all-in-sustaining basis for well under $1000 per ounce. And on a cash-cost basis, they could weather an $800-gold anomaly for many quarters. Gold miners' survivability is not in question at today's gold prices, they have zero bankruptcy risk.

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Up and Down Wall Street

By Devaluing the Yuan, China Escalates the Currency Wars

As growth falters and its stock market tumbles, Beijing resorts to competitive devaluation. The SDR can wait.

By Randall W. Forsyth 

Ending years of non-combatant status, China has succumbed to the global currency wars.
 
The Peoples Bank of China Tuesday announced its sharpest-ever devaluation of the yuan, also known as the renminbi. That followed news the previous day of an utterly stunning 8.3% year-over-year plunge in exports, which are still the main source of growth for the nation’s economy.
 
Expectations of such drastic action had helped send the Shanghai Composite soaring nearly 5% Monday. Various other more apparent measures, such as merging some state-owned enterprises in order to boost their value, got credit for the pop.
 
But easing the vise of tight money -- evidenced by an overvalued yuan -- is the surest tonic for equities, especially when they are faltering. As usual, it was another case of buy ahead of the news; the Shanghai market failed to extend its advance and was basically flat at midday Tuesday.
 
While the PBOC has maintained a steady exchange rate for the yuan of 6.2 to the U.S. dollar, that has meant a steep appreciation versus other currencies. That’s because the redback -- the nickname of the Chinese currency for the color of its notes -- has risen in tandem with the greenback.
 
The result has been a sharp increase in the yuan’s value against major trading currencies such as the euro and the Japanese yen -- in no small part because of their own policies. The European Central Bank and the Bank of Japan are both engaged in quantitative easing to expand domestic liquidity and cheapen their currencies, all designed to spur their respective economies.
 
At the same time, currencies from the Brazilian real to the Australian dollar have suffered as the declines in the prices of their key commodity exports have fallen, especially as demand from the key customer -- China -- has faltered. Other exporters in the region, from South Korea, Indonesia, Malaysia and Taiwan have seen their currencies slump as their competitiveness has suffered.
 
The net effect has been a real 20% appreciation in the yuan in the past year, when inflation differentials and trade flows are taken into consideration, according to Reorient Capital. Since 2009, China’s currency has increased some 60% in real, trade-weighted terms -- a stealth increase while Chinese authorities have maintained stability versus the U.S. dollar, the Hong Kong-based firm writes.
 
Continuing to allow this currency appreciation would have been a case of keeping up appearances while circumstances deteriorated. And for a time, the PBOC has managed to so even as it took steps to ease domestic monetary conditions through a series of interest-rate cuts and reductions in the reserve requirement ratios.
 
But to keep up the appearance of a stable currency amid plunging exports and the exodus of capital, the monetary authorities were selling some $180 billion of U.S. Treasury securities in March to May, according to U.S. data, and using the dollars to buy up yuan to prop up its value.
 
So, why now to stop keeping up appearances? As colleague Wayne Arnold wrote last week on Barrons.com’s Asia Edition, the International Monetary Fund last week suggested pushing back decisions on revising the Special Drawing Right from this January to next September.
 
Having the yuan included in the SDR was a matter of prestige for China’s government and part of its campaign to have its currency take its place alongside the dollar as a main medium of exchange and store of value. But with exports plunging, the economy faltering and the stock market plunging, practicalities apparently took precedence over appearances in the PBOC’s decision to let the yuan fall.
 
A boost for China’s flagging economy, to be sure, which can use it. While official gross domestic product data magically hit Beijing’s 7% target, other data -- most notably the latest export numbers -- fall far short. A cheaper currency is just the prescription for what ails China’s economy.
 
But for the rest of the world, not so much. A cheaper yuan serves to export deflation to China’s competitors and trading partners in the form of lower prices. Which Vietnam, Malaysia, Indonesia, Taiwan, India et al have to match.
 
China’s priority is to keep its factories humming -- both to employ its population to maintain social stability and to service its massive debt. Total household and corporate debt has soared past 200% of GDP, up from 125% in 2008, according to Bloomberg. Debt denominated in foreign currencies just got even more burdensome as a result of the yuan’s devaluation.
 
The bull case on China has been that its deft officials will be able to pull off the feat of bringing its billion-plus population into the modern age from their previous primitive existence in one great leap forward, to use Mao’s term. That there will problems along the way in performing that feat -- mainly on credit -- shouldn’t be surprising.
 
Adjusting China’s currency’s exchange rate should be a small matter. But it is the latest salvo in the war of competitive devaluation, and from the biggest gun.



Strain Building for Some Emerging Market Central Banks

By Jon Hilsenrath
 

China, the U.S. and Europe are stealing many of the economics headlines in 2015 with China’s economic slowdown and currency devaluation, an impending interest rate increase in the U.S. and Greece’s perpetual fiscal crisis. Perhaps, however, it is time to look beyond these three large economic forces to the challenges building among the broad array of emerging markets around them.

Their economies aren’t growing very fast, in part because of the slowdown in China, a major consumer of their goods and services. At the same time, they face limits on what they can do to provide stimulus because of the Fed’s move toward raising interest rates. If they cut interest rates to boost their domestic economies when the Fed is moving toward raising rates, they face a risk of investment outflows and currency instability. If they don’t respond, they run the risk of even worse growth outcomes.

In an interview with my Wall Street Journal colleague Ryan Tracy last week, Augustin Carstens, governor of the Bank of Mexico, pointed to the dilemma.

“Mexico is growing below its potential and therefore we have a negative output gap, and that, together with the monetary policy that we have conducted, has allowed us to not only comply with our objective, which is 3% inflation, but to have an inflation below our objective. Right now our inflation is 2.76%, so that is quite comfortable.” Despite slow growth and low inflation, however, he has been talking about raising interest rates, not cutting them.

“We have prepared ourselves to pretty much adjust interest rates when (U.S.) liftoff takes place, but if the conditions in the peso market require, we can act ahead of the Fed,” he said.

In a recent research report, J.P. Morgan economist Bruce Kasman shows how this isn’t just a problem for America’s southern neighbor.

“First-half global growth disappointed broadly, but it is the weakness in (emerging market) domestic demand that has represented the central shock to the global economy this year,” Mr. Kasman said.

Domestic demand in emerging economies (which comes from consumer spending and in-country investment, as opposed to trade) grew at a pace of less than 2% in the first half of the year, Mr. Kasman estimated. That is half of last year’s pace and less than the pace in developed economies. In an email exchange he pointed to second quarter contractions in Brazil, Russia, Singapore, Thailand, Taiwan and Chile. South Africa is estimated to have been flat.

China’s devaluation now gives emerging market central banks an incentive to let their own currencies depreciate. But they quickly expressed trepidation about taking this too far.

A Bank of Korea official reminded my Wall Street Journal colleague Kwanwoo Jun that a too-weak won could lead to capital flight. “A weaker yuan is not a simple but a complex issue that can have simultaneously conflicting ramifications on Korea. We will keep an eye on it,” the official said.

Bank Indonesia’s senior deputy governor, Mirza Adityaswara, said the yuan devaluation won’t lead to greater weakness as the country’s currency, the rupiah, is already trading at 17-year lows and is undervalued.

Mr. Kasman notes that monetary authorities in South Africa have hiked rates to stem a pass-through from foreign exchange depreciation to inflation and sees similar pressures to stabilize the currency and inflation in Russia, Colombia and Chile.

In short, China’s slowdown and U.S. liftoff could lead to a failure to launch in much of the rest of the world.

China Goes to (Currency) War! What it Means to You ...

By Mike Larson


China is going to war! Not over islands in the South China Sea, but over the value of its money.

The People’s Bank of China launched an aggressive salvo overnight, devaluing the country’s yuan currency by 1.9%. That may not sound like much, but in the world of currencies, it’s huge. As a matter of fact, it’s the single-biggest devaluation since China adopted its current monetary system in 1994.

The devaluation comes as China’s economy and financial markets are increasingly on the rocks. Growth is slowing. Bad debts are rising. Exports just plunged by more than 8%, more than five times as much as economists expected. And the stock market has been tanking, suffering a series of huge swings the likes of which we haven’t seen in years.

Why is China taking this step? The PBOC claims it’s part of an effort to make the yuan’s pricing more market-based, and increase currency market flexibility. It said it would be a one-time move.

China is looking to give its exports a lift on international markets.

But that’s hogwash. The real reason it’s devaluing is the same reason several other combatants in the ongoing global currency war are doing it: To give their exporters a competitive advantage.

Think about it this way. Cutting the value of your currency is like running a sale on your goods.

You’re telling the world: Buy from us … everything we sell is now 1.9% cheaper.

The problem, though, is that it also makes goods from all your competitors relatively more expensive. So all your Asian neighbors panic, and are forced to launch their own competitive devaluations to avoid suffering a competitive disadvantage. That’s why a basket of Asian currencies tanked the most since 2008 after China’s news hit.

At the same time, think about what signal you’re sending to global investors by devaluing.

You’re basically telling them your economy stinks. Not only that, but you just made every bond, stock, or other asset those investors own that’s denominated in your currency worth 1.9% less.

So what are those investors going to do? They’re going to sell, that’s what. One estimate in this Bloomberg story is that every 1% decline in the yuan against the dollar alone leads to roughly $40 billion in outflows.

China has a huge pile of foreign exchange reserves – around $3.7 trillion. So it can withstand the pressure for a while. But those reserves have already dropped for four straight quarters, by about $300 billion in total. Worries over accelerating capital flight could reverberate through global capital markets.

“I can remember distinctly what happened the last time a major Asian currency crisis broke out in 1997-98.”

Moreover, I’ve been around the block for many, many years. I can remember distinctly what happened the last time a major Asian currency crisis broke out in 1997-98.
 
A wave of competitive devaluations swept through Thailand, Indonesia, Malaysia and South Korea.

Then the crisis spread to Russia, and ultimately to U.S. stocks. The Dow Industrials plunged almost 2,000 points, or more than 20%, in just a few months in 1998 alone. And that was when the U.S. economy was in fundamentally much stronger shape than it is now.

Finally, this move is sure to worsen U.S.-China relations. U.S. manufacturers have already been suffering from a rising dollar, and politicians have lambasted China in the past for manipulating its currency to give its companies a relative advantage. This is going to increase those tensions significantly, and raise the possibility of retaliatory “trade war” type actions.

Bottom line: The capital markets were already getting more volatile and risky, as I’ve been warning for a few months. Now China is launching its most aggressive currency war in decades – threatening to add even more uncertainty and risk to the mix. So if you haven’t taken protective action, now may be a very good time to do so.

So what do you think about this move by China? Is the global currency war going to get worse now? What does it mean for the U.S. dollar, U.S. stocks, and your investments? And how about the politics of the move? Will U.S. officials (and presidential candidates) threaten retaliatory action in response? What will that mean for the markets?


Why Did China Devalue Its Currency? Two Big Reasons

Neil Irwin


Here are two things that China’s government wants very badly: first, for its economy to remain on an even keel, keeping growth and employment high. Second, for its currency, the renminbi, to become a pre-eminent global currency that helps promote the country’s diplomatic goals and solidify the country’s centrality to the global economy.
 
Frequently those goals are in conflict. But Tuesday, China did something it thinks will advance both at once.
 
That’s how to make sense of some blockbuster news out of Beijing that the country will adjust how it manages the renminbi to make the currency’s value respond a bit more closely to market forces.
    
The immediate result was a de facto devaluation, with the Chinese currency falling 1.8 percent versus the dollar and 2.2 percent versus the euro Tuesday. Those are big moves for the renminbi, considering that the government had a policy of maintaining a strict trading band — enforced with both legal restrictions on the transfer of capital and the government’s trillions in reserves. Usually, the renminbi will move only a few hundredths of a percent against the dollar in a given day; the largest move this year was 0.16 percent.

  A fruit vendor in Beijing on Tuesday. China's central bank devalued the nation's currency. Credit Rolex Dela Pena/European Pressphoto Agency 
                   
But a roughly 2 percent shift in the value of a currency, even a major one, is not that big a deal, and certainly not the kind of thing that would earn blaring headlines about a devaluation. The dollar has risen 22 percent against the euro in the last year; the Japanese yen plummeted 24 percent against the dollar in late 2012 and early 2013. What makes the Chinese move fascinating is what it says about China’s approach to its currency and economy, and about the country’s role in the global financial system in the future.
 
The Chinese economy is unquestionably in a rough patch, and maybe something worse. Growth is downshifting from the double-digit rate of a few years ago, and the country’s investment-and-exports-driven growth model is looking exhausted after driving a generation of prosperity.

A stock market crash in the last few months hasn’t helped.

But a hidden cost of the Chinese government’s strategy of keeping the renminbi within a narrow trading band versus the dollar has been that China has been unable to use one of the crucial tools most countries use when they’re in an economic slowdown.
 
The renminbi on Monday was at about the same exchange rate versus the dollar that it was in mid-December. But in that span, the dollar index was up 8.7 percent, meaning the dollar — and by extension the renminbi — were up that much against the currencies of other advanced nations like the euro, the Japanese yen and the British pound.
 
Linking the value of its currency to the dollar has had benefits, but in the last year has come at a big cost: It has resulted in the renminbi’s rise against competitors and trading partners at a time the economic fundamentals of China would argue for it to fall.    
 
Meanwhile, China is looking to assert more of a leadership role in the global economy, and an important piece of that is establishing the renminbi as a reserve currency. The dollar and the euro have a reach and usefulness far beyond the borders of the countries that issue them, and China would like the yuan to have a similar sway in global trade and finance, especially within Asia.

But you can’t really be a global reserve currency when you maintain all the restrictions that China insists upon in the interest of keeping control of its domestic economy. The dollar wouldn’t play its central role in global finance if the American government made it illegal to exchange it for other currencies in many circumstances or used legal prohibitions and aggressive interventions to keep its value from fluctuating in response to market forces.
 
In other words, China has wanted some of the diplomatic benefits of the renminbi’s becoming a more important currency abroad, without paying the price at home.
 
Just last week, the International Monetary Fund said that the renminbi was not quite ready for prime time for inclusion in the basket of currencies it uses for “special drawing rights,” a reserve asset that currently is a mix of dollars, euros, yen and pounds. Christine Lagarde, the I.M.F.’s managing director, said China needed to make its currency more “freely usable.” And the policy change on Tuesday, by moving closer to a world in which markets determine its price, is a step in that direction.
 
That doesn’t mean it was without cost. The cheaper renminbi will mean higher inflation and will create an even greater burden for Chinese companies that owe money in dollars, potentially setting off a new round of failures. Perhaps more important in the long run, as China liberalizes its currency, it gives up a crucial tool that the government has used to manage the economy for years and protect itself from being buffeted by global economic forces. China’s leadership has been reluctant to give up that power, and that’s why Tuesday’s announcement came as such a shock across global markets.
 
But it isn’t often that a policy choice helps achieve two big national goals at once. And when faced with one, it appears China’s leaders were willing to give up a little bit of power for, they hope, better economic results at home and a bigger role in the global financial system abroad.

jueves, agosto 20, 2015

I´M TOO OLD FOR THIS / THE NEW YORK TIMES

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First Person

I’m Too Old for This

By DOMINIQUE BROWNING


Credit Juliette Borda


There is a lot that is annoying, and even terrible, about aging. The creakiness of the body; the drifting of the memory; the reprising of personal history ad nauseam, with only yourself to listen.
 
But there is also something profoundly liberating about aging: an attitude, one that comes hard won. Only when you hit 60 can you begin to say, with great aplomb: “I’m too old for this.”
 
This line is about to become my personal mantra. I have been rehearsing it vigorously, amazed at how amply I now shrug off annoyances that once would have knocked me off my perch.
 
A younger woman advised me that “old” may be the wrong word, that I should consider I’m too wise for this, or too smart. But old is the word I want. I’ve earned it.
 
And let’s just start with being an older woman, shall we? Let others feel bad about their chicken wings — and their bottoms, their necks and their multitude of creases and wrinkles.

I’m too old for this. I spent years, starting before I was a teenager, feeling insecure about my looks.
 
No feature was spared. My hairline: Why did I have to have a widow’s peak, at 10? My toes: too short. My entire body: too fat, and once, even, in the depths of heartbreak, much too thin.

Nothing felt right. Well, O.K., I appreciated my ankles. But that’s about it.
 
What torture we inflict upon ourselves. If we don’t whip ourselves into loathing, then mean girls, hidden like trolls under every one of life’s bridges, will do it for us.
 
Even the vogue for strange-looking models is little comfort; those women look perfectly, beautifully strange, in a way that no one else does. Otherwise we would all be modeling.
 
One day recently I emptied out an old trunk. It had been locked for years; I had lost the key and forgotten what was in there. But, curiosity getting the best of me on a rainy afternoon, I managed to pry it open with a screwdriver.
 
It was full of photographs. There I was, ages 4 to 40. And I saw for the first time that even when I was in the depths of despair about my looks, I had been beautiful.
 
And there were all my friends; girls and women with whom I had commiserated countless times about hair, weight, all of it, doling out sympathy and praise, just as I expected it heaped upon me: beautiful, too. We were, we are, all beautiful. Just like our mothers told us, or should have. (Ahem.)
 
Those smiles, radiant with youth, twinkled out of the past, reminding me of the smiles I know today, radiant with strength.
 
Young(er) women, take this to heart: Why waste time and energy on insecurity? I have no doubt that when I’m 80 I’ll look at pictures of myself when I was 60 and think how young I was then, how filled with joy and beauty.
 
I’m happy to have a body that is healthy, that gets me where I want to go, that maybe sags and complains, but hangs in there. So maybe I’m too old for skintight jeans, too old for six-inch stilettos, too old for tattoos and too old for green hair.
 
Weight gain? Simply move to the looser end of the wardrobe, and stop hanging with Ben and Jerry. No big deal. Nothing to lose sleep over. Anyway, I’m too old for sleep, or so it seems most nights.

Which leaves me a bit cranky in the daytime, so it is a good thing I can now work from home.
 
Office politics? Sexism? I’ve seen it all. Watching men make more money, doing less work.

Reading the tea leaves as positions shuffle, listening to the kowtow and mumble of stifled resentment.
 
I want to tell my younger colleagues that it doesn’t matter. Except the sexism, which, like poison ivy, is deep-rooted: You weed the rampant stuff, but it pops up again.
 
What matters most is the work. Does it give you pleasure, or hope? Does it sustain your soul?
 
My work as a climate activist is the hardest and most fascinating I’ve ever done. I’m too old for the dark forces, for hopelessness and despair. If everyone just kept their eyes on the ball, and followed through each swing, we’d all be more productive, and not just on the golf course.
 
The key to life is resilience, and I’m old enough to make such a bald statement. We will always be knocked down. It’s the getting up that counts. By the time you reach upper middle age, you have started over, and over again.
 
And, I might add, resilience is the key to feeling 15 again. Which is actually how I feel most of the time.
 
But I am too old to try to change people. By now I’ve learned, the very hard way, that what you see in someone at the beginning is what you get forevermore. Most of us are receptive to a bit of behavior modification. But through decades of listening to people complain about marriages or lovers, I hear the same refrains.
 
I have come to realize that there is comfort in the predictability, even the ritualization, of relationship problems. They become a dance step; each partner can twirl through familiar moves, and do-si-do until the music stops.
 
Toxic people? Sour, spoiled people? I’m simply walking away; I have little fight left in me. It’s easier all around to accept that friendships have ebbs and flows, and indeed, there’s something quite beautiful about the organic nature of love.
 
I used to think that one didn’t make friends as one got older, but I’ve learned that the opposite happens. Sometimes, unaccountably, a new person walks into your life, and you find you are never too old to love again. And again. (See resilience.)
 
One is never too old for desire. Having entered the twilight of my dating years, I can tell you it is much easier to navigate the Scylla and Charybdis of anticipation and disappointment when you’ve had plenty of experience with the shoals and eddies of shallow waters. Emphasis on shallow. By now, we know deep.
 
Take a pass on bad manners, on thoughtlessness, on unreliability, on carelessness and on all the other ways people distinguish themselves as unappealing specimens. Take a pass on your own unappealing behavior, too: the pining, yearning, longing and otherwise frittering away of valuable brainwaves that could be spent on Sudoku, or at least a jigsaw puzzle, if not that Beethoven sonata you loved so well in college.
 
My new mantra is liberating. At least once a week I encounter a situation that in the old (young) days would have knocked me to my knees or otherwise spun my life off center.
 
Now I can spot trouble 10 feet away (believe me, this is a big improvement), and I can say to myself: Too old for this. I spare myself a great deal of suffering, and as we all know, there is plenty of that to be had without looking for more.
 
If there can be such a thing as a best-selling app like Yo, which satisfies so many urges to boldly announce ourselves, I want one called 2old4this. A signature kiss-off to all that was once vexatious.
 
A goodbye to all that has done nothing but hold us back. That would be an app worth having.

But, thankfully, I’m too old to need such a thing.