Friday, January 31, 2014

Korea to devalue yen to compete with Japan

Japan’s deliberate efforts to devalue the yen will probably induce retaliation by other nations. South Korea, which competes with Japan in many export markets and has a history of currency manipulation, may be the next to competitively devalue, given the recent strength of the won.

Tuesday, January 28, 2014

Gary Shilling on Korea work and education

South Korea also doesn’t have a lot of unemployed people who can be put to work to increase output. The unemployment rate remains low, and the labor force participation rate has been rising recently despite the aging of the population, as is the case with many advanced countries except the U.S. and Canada. As with other highly industrialized lands, South Korea’s population growth has slowed to almost zero.

Meanwhile, the South Koreans’ legendary work ethic and zeal to get ahead continue to be apparent in the emphasis on education. The goal is to get into prestigious universities that lead to jobs in chaebol. Parents incur huge debts to pay for cram courses for their children’s entrance exams. These efforts seem to pay off. With the exception of China, South Korea ranks highest in reading and math, and is behind only Finland and Japan in science.

Nevertheless, with seven of every 10 high school graduates attending a university, there is a surplus of educated people. Estimates show that there are 50,000 more college graduates each year than the labor market needs, but there is a shortfall of 30,000 people for jobs requiring just a high school degree. Estimates are that 40 percent of college graduates are redundant.

South Korean youths pursuing an education are delaying raising families, contributing to the low fertility rate of 1.2 per woman and to low population growth. This compares with 1.4 in Japan and Germany, 1.6 in Canada and 2.1 in the U.S. Excluding immigration, a 2.1 fertility rate is needed merely to replace the population.

Also, because they are delaying their entry into the labor force while attending a university, young people’s contribution to GDP has been negative since 2009. They added about 2 percent a year from 1970 to 1990.

Monday, January 27, 2014

South Korea has a huge income disparity between rich and poor

South Korea is essentially divided between members of the upper class who are involved with the chaebol and are politically well-connected, and the rest who earn relatively low incomes and operate small businesses, largely in the service sector.

A larger problem is the huge income disparity in South Korea.

 According to the Organization for Economic Cooperation and Development, 45 percent of old people live in poverty, three times the average of wealthy nations, and the social safety net is one of the weakest. The chaebol are widely blamed for doing very little for the underclass.

Friday, January 24, 2014

South Korea still dependent on Chaebol's

The family-run conglomerates known as chaebol are very powerful, with annual revenue equivalent to the nation’s GDP. They were central to the efforts of Park Chung Hee, the military ruler from 1962 until his assassination in 1979, to propel the nation from war to prosperity in one generation. The chaebol were granted tremendous economic power and near-monopoly control in autos, electronics and other industries.

Ironically, Park’s daughter, who is now president herself, was elected in part on her pledge to restrain and clean up the chaebol. So far, she has little to show for her efforts: Last year, sales of the largest 30 conglomerates accounted for 82 percent of GDP, up from 53 percent in 2002.

Thursday, January 23, 2014

Gary Shilling praises South Korea

South Korea is one of the few emerging markets to weather the recent storms. This stability is the legacy of 60 years of forced industrialization imposed by authoritarian governments and tightly controlled monetary and fiscal policies.

South Korea’s growth has been fueled by exports, which accounted for 58.7 percent of nominal gross domestic product in 2012.

Wednesday, January 22, 2014

Why China supports North Korea

One reason China supports North Korea is probably the desire to keep a buffer between China and South Korea and to force the South to maintain an expensive military establishment to counter the belligerent North.

Monday, January 20, 2014

South Koreans yearn for North Korea's collapse

Consider what would happen if the totalitarian regime in North Korea collapsed and that vastly underdeveloped country of 25 million was absorbed by South Korea, with its 50 million highly motivated and industrious citizens. Despite the huge initial costs, South Koreans yearn for this opportunity.

Gary Shilling via

Thursday, January 16, 2014

Japanese yen devaluation is a danger to South Korea, no winners in devaluations

The competitive devaluation of the yen is a considerable threat to South Korea’s export machine because it competes with Japan in many export industries, including automobiles. Competition is also fierce in electronics, especially parts and components and machine tools.

Adding to the pressure of recent cost increases and the strong won is the lack of innovation in South Korean manufacturing. Samsung Electronics Co.’s smartphones accounted for 29 percent of world demand in 2012, but the mobile phone industry is reaching saturation, with new demand centered on low-priced models in developing countries.

Japan’s competitive devaluation comes at a critical time for South Korea. Despite huge monetary and fiscal stimulus, most economies around the world are experiencing slow growth. The obvious alternative to domestic-led economic growth is export expansion, but the question is, to whom? For decades, the U.S. has absorbed the world’s excess goods and services. Slower growth in real wages and incomes means Americans are no longer able to occupy that role. Indeed, U.S. trade and current account deficits are shrinking. These trends will probably persist as the rising consumer saving rate continues to damp demand.

So promoting exports requires making them cheaper to gain market share from other exporting countries. Yet when countries resort to tit-for-tat competitive devaluations, no one wins.

Wednesday, January 15, 2014

China middle class not as big as US middle class

China’s economy could shift to being domestically driven if its middle class were big enough and inclined to spend freely. But Chinese consumers save a third of their income to cover old age, health and other costs no longer provided for by the government. The stock market bubble there attests to huge savings with few investment alternatives.

And although there are an estimated 110 million people in China’s middle and upper classes, that represents only 8 percent of the 1.4 billion population, and these elites control just 25 percent of GDP. In contrast, the U.S. middle and upper classes make up about 80 percent of our 300 million people, with incomes that equal 80 percent of GDP.


Tuesday, January 14, 2014

South Korea dependent on exports

South Korea rebounded from the most recent recession as exports leaped. Growth has subsided, however, and will probably be held back by the slow recovery in Europe, the slowdown of growth in China, the competitive devaluation of the Japanese yen and a tepid U.S. economy. Industrial production is barely rising. Business conditions continue to be subdued, and the consumer sentiment index has been little changed in the past year.

Dependence on exports, however, has left South Korea vulnerable to global volatility, as was evident from the nose dives in real GDP caused by the 1997-1998 Asian crisis and the 2008-2009 global crisis and its aftermath. The relatively low level of consumer spending, 53.5 percent of GDP in 2012, was inadequate to offset the collapse in exports.

Monday, January 13, 2014

Shilling on what 2014 could bring to stocks

Will the negative effects of the government shutdown and debt ceiling standoff, coupled with the confusion caused by the rollout of Obamacare, be a sufficient shock? The initial Christmas retail selling season may tell the tale, and the risks are on the down side. Besides the consumer, we're focused on corporate profits, which may not hold up in the face of persistently slow sales growth, no pricing power and increasing difficulty in raising profit margins.

Nevertheless, we are not forecasting a recession for now, but rather more of the same, dull, slack 2% real GDP growth as in the four-plus years of recovery to date.


Sunday, January 12, 2014

Emerging markets not ready to decouple from US, Euro Zone, Japan and UK

After the global recession of 2007-2009, growth has been sluggish in the U.S., the euro area, the U.K., Japan and other developed lands. Meanwhile, the economies of China, South Korea and many other developing countries revived and grew much more rapidly.

This convinced many equity investors that the real action was in emerging markets, where equities rose much more than in developed countries from March 2009 until mid-2011. Once again, investors forgot that those economies are all driven by exports that are bought by developed countries, principally the U.S. and Europe. So if mature economies are growing slowly, rapid expansions in developing countries are unsustainable.

Thursday, January 9, 2014

Why stocks could disappoint

Furthermore, from a long-term perspective, the P/E on the S&P 500 at 24.5 is 48% above its long run average of 16.5, and we're strong believers in reversions to well-established trends, this one going back to 1881.

The P/E developed by our friend and Nobel Prize winner, Robert Shiller of Yale, averages earnings over the last 10 years to iron out cyclical fluctuations. Also, since the P/E in the last two decades has been consistently above trend, it probably will be below 16.5 for a number of years to come.

This index is trading at 19 times its companies' earnings over the past 12 months, well above the 16 historic average. This year, about three-fourths of the rise in stock prices is due to the jump in P/Es, not corporate earnings growth.

Even always-optimistic Wall Street analysts don't expect this P/E expansion to persist in light of possible Fed tightening. Those folks, of course, are paid to be bullish and their track record proves it. Since 2000, stocks have returned 3.3% annually on average, but strategists forecast 10%. They predicted stock rises in every year and missed all four down years.‎

Monday, January 6, 2014

Gary Shilling says inflation has dissapeared

Inflation has virtually disappeared. The Fed's favorite measure of overall consumer prices, the Personal Consumption Expenditures Deflator excluding food and energy, is rising 1.2% year-over-year, well below the central bank's 2.0% target and dangerously close to going negative.

There are many ongoing deflationary forces in the world, including falling commodity prices, aging and declining populations globally, economic output well below potential, globalization of production, growing worldwide protectionism including competitive devaluation in Japan, declining real incomes, income polarization, declining union memberships, high unemployment and downward pressure on federal and state and local government spending.

With the running out of 2009 federal stimulus money and gas tax revenues declining as fewer miles are driven in more efficient cars, highway construction is declining and construction firms are consolidating and reducing bids on new work even if their costs are rising. Highway construction spending dropped 3.3% in the first eight months of 2013 compared to a year earlier. Also, states are shifting scarce money away from transportation and to education and health care. We've noted in past Insights that aggressive monetary and fiscal stimuli probably have delayed but not prevented chronic deflation in producer and consumer prices.

Why does the Fed clearly fear deflation? Steadily declining prices can induce buyers to wait for still-lower prices. So, excess capacity and inventories result and force prices lower. That confirms suspicions and encourages buyers to wait even further. Those deflationary expectations are partly responsible for the slow economic growth in Japan for two decades.


Thursday, January 2, 2014

Stock market rally tells politicians all is well

In our many years of observing and talking to Congressmen, Senators and key Administration officials of both parties, it's clear that Washington only acts when it has no alternative and faces excruciating pressure.

A collapsing stock market always gets their attention, but the ongoing market rally, in effect, tells them that all is well or at least that it doesn't require immediate action.

Wednesday, January 1, 2014

A slow global growth and lowered forecasts

The ongoing sluggish growth in the U.S. is indeed a global problem. It's true in the eurozone, the U.K., Japan and China. Recently, the International Monetary Fund, in its sixth consecutive downward revision, cut its global growth forecast for this year by 0.3 percentage points to 2.9% and for 2014, by 0.2 percentage points to 3.6%.

It lowered its 2013 forecast for India from 5.6% to 3.8%, for Brazil from 3.2% to 2.5% and more than halved Mexico's to 1.2%. For developing countries on average, the IMF reduced its 2013 growth forecast by 0.4 percentage points to 5%, citing the drying up of years of cheap liquidity, competitive constraints, infrastructure shortfalls and slowing investment. It also worries about their balance of payment woes. For 2014, the IMF chopped its growth forecast for China from 7.8% to 7.3% and from 2.8% to 2.6% for the U.S.