Week in Review with Jerry Robinson (8/23-8/29)

By Jerry Robinson | FTMDaily.com

Federal Reserve Confusion… Last week offered much in the way of understanding how things may be beginning to unfold at the Federal Reserve. After the August 10 Fed Board meeting where tensions reportedly flared among members over when to begin a new round of quantitative easing, came the Fed’s annual retreat to Jackson Hole where Bernanke undoubtedly revealed the Fed’s stance as a deflation fighter. You can read his entire speech here.

Five Facts That Every Investor in China Should Know… Money manager Puru Saxena joined me on my radio show last weekend from his office in Hong Kong to talk about why he is more bullish than ever on investing in China. He talks about the specific areas and sectors in China where he and his clients are investing. Listen to the two-part interview below.

Tail-spinning USD… In other news, China’s drive to provide its currency with international reserve status got a boost last week. Many of the world’s biggest banks – including JP Morgan and Citibank – have launched international roadshows promoting the use of the renminbi (the Chinese currency) instead of the U.S. Dollar to their corporate customers engaging in trade deals with China.

Citibank also made news last week when a foreign exchange report was released warning that another round of quantitative easing from the Federal Reserve was be the “endgame” for the U.S. Dollar. Here’s a brief excerpt from the Citibank report:

A second round of QE will likely put sharp downward pressure on the USD, to some degree versus the euro
and other G10 currencies, with potential for a broader USD sell-off. Foreign investors are likely to view the renewed direct intervention as indicating that the Fed’s balance sheet expansion and implicit monetization of fiscal expenditures are first line approaches to dealing with disappointing recovery prospects, rather than the exceptional measures they were meant to be initially. This could have severe implications for foreign perceptions of the quality of the US assets that they are accumulating in private and official portfolios, and may lead them to draw the conclusion that USD weakness is less a by-product than a desired outcome of these measures.

Inside Job… A new film about the 2008 financial crisis that looks excellent. Watch the trailer below.

Housing Crisis Deepens… The  residential real estate market took it in the chin in July. According to a report conducted the National Association of Realtors:

Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, dropped 27.2 percent to a seasonally adjusted annual rate of 3.83 million units in July from a downwardly revised 5.26 million in June, and are 25.5 percent below the 5.14 million-unit level in July 2009.

For a good article about the July home sales report with some startling charts, click here.

How Hyperinflation Will Happen… Gonzalo Lira wrote an interesting blog post called “How Hyperinflation Will Happen.” It is an enlightening article. You can read it here.

China Will Force the World Off Oil… The Council on Foreign Relations warned last week of China’s growing demand. You can read the report here.

401(k) and IRA Confiscation? I have been warning you for some time that government-controlled assets like 401(k)’s and IRA’s are ripe for seizure by the Federal government. This seizure will likely take the form of higher distribution taxes on the income received from these qualified plans. Here’s a new article about the topic from the European press.

Still Bullish on Silver… Silver continues its price rise. And when you consider the fundamentals driving the metal, the future looks even more bright. Here’s five trends that will drive silver even higher in the coming years.

About Jerry Robinson

Jerry Robinson is an economist, published author, columnist, international conference speaker, and the editor of the financial website, FTMDaily.com. In addition, Robinson hosts a weekly radio program entitled Follow the Money Weekly, an hour long radio show dedicated to deciphering the week’s economic news.

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G20 looks to Beijing to drive global growth

By Geoff Dyer in Beijing | Financial Times

Published: July 11 2010 16:54 | Last updated: July 11 2010 16:54

A girl playing on a  Beijing back road
A girl plays on a Beijing back road on Sunday. China has announced a big push to build public housing, including flats that can be rented by low-income families

The G20 appears to be placing a large bet on China’s policymakers. At their summit last month, one developed country after another, bar the US, said they would cut fiscal deficits.

If these economies all decide to reduce their budget deficits, what will drive global growth?” asked Simon Johnson, the former IMF chief economist. “The answer in Toronto was obvious: China.”

As a result, there will be unusually keen interest in China’s second-quarter growth figures, which are expected on Thursday.

China’s economy needs to slow from the turbocharged growth in the second half of last year and first quarter of this, which was fuelled by a huge increase in bank lending. But the second-quarter figures will be one of the early signs of whether China can pull off a measured cooling or whether the economy will slump when stimulus is taken away.

The Chinese economy is going through two delicate transitions. Worried about overheating, Beijing has applied the brakes in the two sectors that helped propel the recovery from the financial crisis last year, ordering a clampdown on property speculation and limiting lending to local government infrastructure projects.

At the same time, it is trying to find a growth model that relies less on the 20 per cent-plus increases in exports that it enjoyed for most of the past decade.

“The economy is not facing a hard landing but the current slowdown is leading China into growth below 10 per cent in the years ahead,” Mark Williams at Capital Economics says.

Chart: China  exportsOne of the keys to whether China will avoid an abrupt slowdown is the performance of the property sector. Since the introduction of policies to limit speculation in mid-April, the market has almost come to a standstill. Standard Chartered reports that sales are down 60 per cent in 14 big cities.

Although house prices have yet to fall much the bank estimates that they will drop 10-20 per cent in most cities and 20-30 per cent in Shanghai, Beijing and Shenzhen, which had the bubbliest markets. Others are even more pessimistic. Yi Xianrong, an economist at the Chinese Academy of Social Sciences (Cass), estimates that there are 64.5m empty flats and houses in China, many of them bought by speculators – the reflection of “an outsize property bubble”, he says in an article in People’s Daily last week.

If falling prices cause a building slump, it will have a big impact on the economy. However, Beijing has a fallback plan. Facing mounting discontent at high house prices, it has announced a huge push to build public housing, including flats that can be rented by low-income families. Local government officials are under heavy pressure to comply. The central Chinese municipality of Chongqing has announced plans to build 10m square metres of social housing a year – equivalent to more than a third of its residential construction in 2009.

“In the future 30-40 per cent will live in low-income government housing,” says Huang Qifan, the mayor of Chongqing. “The government should provide more land and housing, otherwise property prices will be driven up. We should use the supply side school of thought from former president Ronald Reagan.”

Local governments have a poor record in meeting commitments to build social housing but if they come anywhere near the targets this time, it will take up some of the construction slack left by weak sales.

The authorities are also concerned at the possibility for widespread bad debts among local governments that borrowed heavily last year for infrastructure spending. Some economists believe the reduced growth in imports over the past two months is a sign that weaker lending to local governments is already starting to cause a big slowdown in investment – although the announcement last week that Beijing will double infrastructure spending in underdeveloped western regions over the next decade could provide some form of buffer.

Some critics are more relaxed about the outlook. Yu Yongding, another economist at Cass who issued a stark warning last year about the risks of overinvestment, says the situation is now more stable. “In the long run, we need to make deep reforms in the economic structure but in the short run the government has effectively used monetary policy to bring down investment,” he says.

Ultimately, if the economy does slow too quickly, the government has the choice of reversing course – making it easier again to get mortgages and to borrow for construction and infrastructure. The risk, though, will be creating an even bigger future bubble. Chinese investors might conclude that the authorities will never let house prices fall too far and plunge into property investing like never before. It is an option that Beijing will not use lightly.

Additional reporting by Patti Waldmeir, Chongqing

Top 20 Global Banks by Market Capitalization: The Decline of American Banks & The Rise of Goldman Sachs

(Jerry’s Comments: This post is courtesy of the Shocked Investor blog. Notice the rise of the Chinese banking system in the charts below.)

The Financial Times has a very interesting shockwave application showing how the top banks by market capitalization have changed for the last few years. You can clearly see the Goldman Sacks ascension and the decline of the American banks.

– In 2005 GS was ranked 19th out of the 20 largest. Today it is ranked 8th.
– In 2005 there were no Canadian or Brazilian banks in the top 20, today there are 4.
– In 2005 there were no Chinese banks, today there are 5.
– In 2005 there were 10 US banks in the top 20, today there are 3.

Please click on images to enlarge. $ shown are in Billions.

2005:

2006:

2007:

2008:

2009:

Asian millionaires overtake Europeans

Jerry’s Comments: Here’s more proof of the fact that global power shift is gaining speed. The West is suffering a slow and painful death. The Far East is the direct beneficiary. The Middle East can also benefit dramatically if they can learn how to better harness their immense oil wealth as well as to integrate economically and politically. In the meantime, China’s rise to status of global empire is not surprising. They are no stranger in the history of empires.

By Ellen Kelleher in London

Published: June 22 2010 20:32 | Last updated: June 22 2010 20:32

The net wealth of Asian millionaires has eclipsed that of rich Europeans for the first time, largely because of the relative health of stock markets in Hong Kong, India and China last year, according to a new survey.

The annual Merrill Lynch Wealth Management /Capgemini analysis of investors with $1m or more in assets found that as of late last year, there were 3m millionaires in both the Asia-Pacific and Europe. The survey quantified the wealth held in Asia at $9,700bn, compared with $9,500bn in Europe.

Nick Tucker, head of Merrill Lynch Wealth Management’s operations for the UK and Ireland, said: “It’s not a bubble. Asia has caught up with Europe in terms of its high-net worth population and their wealth.”

The survey defines millionaires as people with net financial wealth of more than $1m, excluding their primary residence.

The rise of Asian millionaires is being tracked by the industry that manages the fortunes of rich individuals, with banks moving senior staff to Singapore and Hong Kong to chase new clients.

After taking a hit in 2008 during the financial crisis, the wealth of the world’s millionaires recovered last year with the upswing in stock markets, rising 19 per cent to $39,000bn.

North Americans are still the best-off. At the end of last year, the continent was home to 3.1m millionaires worth $10,700bn.

The US, Japan and Germany produce about half of all millionaires, who were numbered at 10m in 2009. China was ranked fourth, boasting 477,000 individuals with $1m or more in their accounts. India is catching up, having seen the number of millionaires rise more than 50 per cent to 126,756 in 2009.

Though the UK economy shrank, British millionaires swelled to 448,100, up 24 per cent from 2008. Russian millionaires also saw their ranks rise to 117,700.

The Middle East struggled, with the United Arab Emirates losing 19 per cent of its millionaires in 2009 as the Dubai property crisis took its toll.

Investments by the wealthy in fixed-income instruments crept up to 31 per cent from 29 per cent in 2008 and allocations to equities also increased slightly to 29 per cent from 25 per cent in the previous year.

Cash holdings dropped, meanwhile, as investors grew dissatisfied with the poor rates on high street banks’ savings accounts.

Demand for art, coins, antiques and wines picked up again toward the tail end of last year, as the wealthy sought out collectibles with “tangible, long-term” value, the study said.

China to Overtake U.S. as World’s Top Manufacturer

By Peter Marsh

Published: June 20 2010 17:43 | Last updated: June 20 2010 17:43

The US remained the world’s biggest manufacturing nation by output last year, but is poised to relinquish this slot in 2011 to China – thus ending a 110-year run as the number one country in factory production.

The figures are revealed in a league table being published on Monday by IHS Global Insight, a US-based economics consultancy.

Last year, the US created 19.9 per cent of world manufacturing output, compared with 18.6 per cent for China, with the US staying ahead despite a steep fall in factory production due to the global recession.

That the US is still top comes as a surprise, since in 2008 – before the slump of the past two years took hold – IHS predicted it would lose pole position in 2009.

However, a relatively resilient US performance kept China in second place, says IHS, which predicts that faster growth in China will deny the US the top spot next year.

The US became the world’s biggest manufacturer in the late 1890s, edging the then-incumbent – Britain – into the number two position.

Hal Sirkin, head of the global operations practice at Chicago-based Boston Consulting Group, said the US should not despair too much at the likelihood that it would lose the global crown in manufacturing to China.

“If you have a country with four times the population of the US and a tenth of the wages, it is fairly obvious they will pull ahead at some time in productive capabilities,“ he said.

Last year, according to IHS, goods output by the US totalled $1,717bn, ahead of China at $1,608bn.

However in 2011, on the basis of IHS’s estimates, China’s factory output will come to $1,870bn, a fraction ahead of the projected US figure for the year.

If China does become the world’s biggest manufacturer, it will be a return to the top slot for a nation which – according to economic historians – was the world’s leading country for goods production for more than 1,500 years up until the 1850s, when Britain took over for a brief spell, mainly due to the impetus of the industrial revolution.

The IHS figures are worked out on the basis of current-year output numbers, translated into dollars, with no adjustments for inflation. If the figures are calculated in inflation-adjusted, constant price terms, then I HS believes that the US will keep its top role in manufacturing for a little longer.

On an inflation-adjusted basis, which is based on a forecast that US inflation will be lower than that in China over the next few years, China is forecast to take over the number one position in manufacturing in 2013-14.

According to the IHS numbers, world manufacturing output last year came to $8,638bn (€6,979bn, £5,825bn) or 16.7 per cent of global gross domestic product.

Follow the Money Weekly Radio Show w/ Jerry Robinson – June 11, 2010

CLICK HERE TO LISTEN NOW

Time to Buy the Euro?: On this week’s program, Jerry Robinson provides his insights concerning the U.S. National Debt, the price of gold, along with an in-depth look at the other important headlines of the week. Our special guest interview is with Tim W. Wood, CPA (Cycles News and Views newsletter). Mr. Wood discusses his unique approach to investing using technical analysis, market cycles, and Dow Theory. Also, precious metals expert, Tom Cloud gives his Precious Metals Market Update and your Question of the Week..

Special Guest Interview: Overview of Cycles and Dow Theory

Tim Wood, Certified Public Accountant
(Cycles News and Views newsletter)
Tim W. Wood, CPA is author of the newsletter Cycles News and Views. His website, http://www.cyclesman.info, provides investors with a place where they can obtain truthful, non-biased, factual information about the financial markets. The information presented in his website is based on technical analysis and not on the Hope and Hype heard by the so-called mainstream “analysts.”.

Precious Metals Market Update

Tom Cloud, Precious Metals Expert
(Turamali, Inc., President)

Thomas Cloud is the Chairman of the Board of Turamali, Inc. and has a long and successful advisory track record in both financial planning and tangible assets. His expertise as an financial counselor and thorough knowledge of the products he recommends has attracted an impressive list of individuals and major institutions from across the United States. Since 1977, Mr. Cloud has devoted his attention to all areas of tangible asset investing offering a “hands on” approach to each and every Turamali, Inc. client..

Steel, The Number One China Indicator, Is In Deep Trouble

(Business Insider) China’s Baoshan Iron & Steel (60019 CH), the largest listed steelmaker, has cut its steel prices for the first time in eight months.
You know demand has to be pretty weak for them to cut prices, since they’re being squeezed from the cost side due to higher iron ore prices at the same time.
China Daily: “Some steel producers are already tottering on the brink of losses. They will have to make output cutbacks or resort to maintenance shutdowns, if the prices continue to fall,” said Zhang Lin, an analyst with the Beijing-based Lange Steel Information Research Center.
Baosteel cut prices of hot-rolled products for July by 300 yuan ($44) per ton and cold rolled prices by 500 yuan per ton.
“We’ve seen orders dwindling in downstream sectors like auto, shipping, home appliances and property,” said Zhang.
Chinese mills across the board have reportedly cut prices in June. We can’t think of a better indicator for a China slow-down than steel demand.